There’s a lot to cover, so let’s jump right into a discussion of some of the most interesting insights to glean from the latest public and private sector data releases.
(1) Old grizzled economists, who lived through earlier periods of rapid price inflation, never completely forgot their memories of those difficult times. For nearly two decades, they annoyed their younger colleagues by repeatedly warning of potential inflationary risks when it seemed that the menace of this sleeping bogeyman had been banished from the landscape forever. Turns out they were right. The +8.5% year-on-year increase in the consumer price index (CPI-U) in the United States in March 2020 was the highest in 40 years. The “core” inflation rate, which excludes volatile food and energy items, was +6.5% year-on-year over the past month.
(2) Probably +8.5% y/y for headline and urban consumer CPI looks scary. Historically, however, this is not unique. From January 1950 to December 1981, a period of 384 months, there were 65 months in which general price inflation was faster than +8.5% y/y. March 1980 recorded the highest figure, +14.8% y/y. 1974-1975 was another period of tremendous advances. This resulted from OPEC flexing its muscles for the very first time and implementing a multiple increase in the world price of oil.
(3) There is another measure of inflation that appears in the monthly Personal income and expenses report published by the Bureau of Economic Analysis (BEA). This is the personal consumption expenditure (PCE) price index, excluding food and energy. This is the metric that would be most scrutinized by the Federal Reserve when assessing the need to adjust interest rates. The last advance of the PCE price index (February 2022) was +5.4%, not as spectacular as for the CPI. Nevertheless, the Fed will proceed with gradual increases in its key interest rate, probably until a level close to 3.00% is reached.
(4) Elsewhere in the Personal income and expenses report, there is a set of numbers that many analysts find troubling. The month-to-month change in “real” personal disposable income (ie adjusted for inflation) has been negative every month since August of last year. Expressed as simply as possible, DPI is income minus taxes and is a key driver of the 70% of gross domestic product that depends on consumer spending. GDP growth is healthiest when the DPI is up. The fact that it is currently in trouble is fueling rumors of a possible impending recession.(5) The monthly figures for US foreign trade have taken a decidedly negative turn. February’s annualized deficit in “goods” trade was nearly -$1.3 trillion, the worst ever. Trade in “services”, which generally provides a positive counterweight, was +$220 billion. But it’s important to note that +$220 billion was -13.5% from the February 2021 surplus. The overall goods and services trade balance, annualized, is now slightly above -1.0 trillion of dollars. Normally, this would weigh on the value of the US dollar. But support for the greenback comes from the geopolitical realm. Uncertainty from the fighting in Ukraine has international currency traders looking for the safest haven, which continues to be what Uncle Sam has in his wallet.
(6) US consumer confidence, as calculated by the Conference Board, improved a little in March. Compared to a 1985 base of 100.0, the index now stands at 107.2, compared to 105.7 in February. To give more perspective, however, the index fluctuated between 120.0 and 140.0 for all months of 2018 and 2019, when no thought was given to the possibility of an impending health crisis. The Conference Board’s Current Situation Index climbed in March, but its Expectations Index was hit by the shocking rise in gas prices and concern over the direction the invasion of the coronavirus could possibly lead. Ukraine by Russia. The Conference Board’s CEO Confidence Assessment, conducted in conjunction with the Business Council, fell for a third consecutive quarter in the first quarter of 2022; but there are still more positive feelings than negative ones.
(7) The latest monthly housing starts statistics from ConstructConnect perfectly illustrate the dichotomy that has emerged between strong residential construction markets and weak non-residential construction markets over the past few years. The dollar volume of grand total housing starts in March 2022 was the same (0.0%) as the average of grand total housing starts in March over the previous five years. The dollar volume of residential starts in March 2022, however, was +21.7% compared to its five-year average of March, from 2017 to 2021. The dollar volume of non-residential starts in March 2022 was – 14.3% from its March average. over the previous five years.
(8) Finally, here are a few last words on extraordinary inflation. There is a perverse way in which this can have a silver lining. A lingering problem for the economy, amplified by the pandemic, has been labor shortages. Since the spring of 2020, many older workers have advanced their retirement. Those most affected by runaway price increases are those on fixed incomes. Many recent retirees reassess their financial situation and don’t always feel so confident. Instead, a good number of them will probably conclude that a return to the labor market, even temporary, can put them in significantly better conditions.
Alex Carrick is chief economist for ConstructConnect. He has given presentations throughout North America on construction prospects in the United States, Canada and around the world. Mr. Carrick has been with the company since 1985. Links to his many articles are posted on Twitter @ConstructConnxwhich has 50,000 subscribers.