The U.S. economy is sending mixed signals about the pace of growth going forward, said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis,
In a Friday interview with Lindsey Piegza, chief economist at Stifel Financial, Kashkari said the Fed was seeing both good and bad signs of economic activity.
“On one hand, the good news is the vast majority of Americans who want to work have jobs, and wages are slowly picking up so families generally have more money in their pockets, and they are spending that money on their families,” he told Piegza. “So the consumers have generally been strong, but at the same time, businesses appear to be nervous and they’re pulling back on investment and they’re pulling back on hiring. So, while the job market is still growing, and people are still finding new jobs, the rate of job growth has slowed quite substantially from where it was a couple of years ago.”
He added that the global economy appeared to be slowing and if that happens the United States would not be immune.
“My base-case scenario is still one of growth. I’m not forecasting a recession. But I think the risk to the downside has increased quite a bit in the last six months,” he said.
In response to a question from Piegza about what he market was signaling, Kashkari said he paid close attention to the indicators.
“I take the yield curve signal seriously,” he said. “You know, predicting recessions is fiendishly difficult. If we were good at predicting recession, we would all do things to try to avoid the recession and yet you and I know recessions happen. So that means we’re bad at predicting recessions. … Basically in the last 50 years, when the yield curve is inverted, a recession is followed within a year or two. And, by the way, every time that happens there are economists who say, 'Oh, this time is different, don’t worry about it.' And right now, there are economists who are saying this time is different — don’t worry about it.”
Turning to inflation expectations, he said he expected the Fed to miss its target for a while.
“My expectations are that we are going to continue undershooting our 2% target for the foreseeable future,” he said. “ … We basically missed our target on the downside for essentially 10 years, averaging around 1.6% or 1.7%. Even if you strip out volatile food and energy — even if you look at the core inflation — it’s still around 1.6% or 1.7% for the last five or 10 years.”
He said that that was why he advocated for a more dovish policy.
“I don’t see any evidence that we’re getting much closer in achieving our target. So, that’s why I’ve been arguing against the interest rate increases that we’ve implemented over the several years since I’ve been at the Fed — for the last three and a half years — because I didn’t see evidence that inflationary pressures were building and going to push us above our 2% target and I believe there is still slack in the labor market. And so I was simply saying, ‘Why are we tapping the breaks if we’re undershooting our inflation target?’ “
Tuesday’s economic reports
Existing-home sales dropped 2.2% to an annual rate of 5.38 million in September following two straight months of gains, the National Association of Realtors reported on Tuesday. Economists polled by IFR Markets had expected a rate of 5.45 million.
August’s rate was revised up to 5.50 million from the originally reported 5.49 million.
Despite historically low mortgage rates, sales have not commensurately increased, in part due to a low level of new housing options, said Lawrence Yun, NAR’s chief economist.
“We must continue to beat the drum for more inventory,” Yun said. “Home prices are rising too rapidly because of the housing shortage, and this lack of inventory is preventing home sales growth potential.”
The Federal Reserve Bank of Richmond reported Tuesday that manufacturing activity strengthened in October. The composite index rose to eight in October from negative nine in September. All three components — shipments, new orders, and employment — increased last month as manufacturing firms also reported an increase in backlog of orders and improved local business conditions. Respondents were optimistic that conditions would continue to improve in the next six months, the Richmond Fed said.
Many survey respondents saw growth in employment and wages in October and expected continued growth in the near term. However, manufacturers still struggled to find workers with the necessary skills in October and expected this difficulty to persist in the coming months. Growth rates of both prices paid and prices received by manufacturing firms fell in October, as growth of prices paid continued to outpace that of prices received. Survey participants expected the pace of growth of both prices paid and prices received to slow further in the near future.
The Richmond Fed also said that service sector activity was robust in October. The revenue index rose to 24 from six in September while the demand index increased to 17 from 13. Firms also reported increased spending and improved local business conditions, and they were optimistic that conditions would continue to improve in the coming months.
Survey results suggested modest growth in employment in October as well as growth in wages and the average workweek. The Richmond Fed said that companies continued to report that it was hard to find workers with the necessary skills; however, they expected the struggle to lessen and employment and wages to grow in the next six months. The growth rate of prices paid by survey respondents fell in October, while that of prices received increased, narrowing the gap between the two. However, firms expected growth of prices paid to increase and growth of prices received to slow in the near future, the Richmond Fed said.
The Federal Reserve bank of Philadelphia said responses to its October Nonmanufacturing Business Outlook Survey suggest continued expansion of nonmanufacturing activity in the region.
“Although the index for general activity at the firm level fell, the indexes for sales/revenues and new orders both rose. The index for full-time employment decreased,” the Philadelphia Fed said. “The firms continued to report overall increases in the prices of both their own goods and their inputs, but the price indexes moderated. The respondents continued to anticipate growth over the next six months.”
The diffusion index for current general activity at the firm level fell 21 points to 8.7 in October, its lowest reading since January. More than 33% of the firms reported increases in activity, down from 41% in September, and 25% reported decreases, up from 12% last month. Price indicator readings suggest overall increases for inputs and for the firms’ own goods and services, but both indicators fell slightly, the Philadelphia Fed said. The prices paid index declined six points to 20.5. While 62% of respondents reported stable input prices, 25% reported increases and 5% reported decreases.
