Jack Rasmus

by Dr. Jack Rasmus, copyright 2024

For months the mainstream media and Washington Pols have been pushing the metaphor that the US economy is a plane on its final approach to a ‘soft landing’. Soft landing is defined as inflation steadily coming down to the Federal Reserve’s goal of a 2% price level AND does so without provoking a recession.

However, as revealed by the inflation statistics in the US Labor Department’s latest Consumer Price Index (CPI), the ‘soft landing’ plane is clearly stuck circling the airport!

The government’s just released January 2024 Consumer Price Index report shows not only that prices are stuck at a level (i.e., ‘circling’?) where they’ve been since last summer 2023, but January’s CPI report shows signs of prices even beginning to rise once again.

Moreover, if one lifts some of the questionable assumptions and methodologies used to estimate inflation in the CPI, inflation may be even higher than officially reported. Perpetually circling for months, the soft landing plane may even be running out of gas.

The CPI is one of several government price indices. The other two are the Personal Consumption Expenditures (PCE) index and the GDP Deflator Index. These latter are produced by the Commerce Department. The PCE typically estimates inflation only two thirds to three-fourths the price level provided by the CPI, using different assumptions and methodologies than the CPI.

Having said that, let’s look at the January CPI report (after which Part 2 of this article will show why even the CPI undershoots inflation and why the PCE and GDP Deflator undershoot even more).

January 2024 Consumer Price Index

The CPI slices and dices inflation in many ways. Its aggregate number is called the All Items CPI-U. It’s the summary of price changes for all the goods and services estimated by the CPI. All means around 450 or so of the most often purchased by households. There are literally millions of goods and services in the US economy but households’ budgets are almost totally spent on the CPI’s 450 or so ‘basket of goods and services’ that are mostly purchased by households.

The All Items category is then broken down into what’s called ‘Headline’ inflation and ‘Core’ inflation. Since food and energy (i.e., gasoline, natural gas, electricity, fuel oil, groceries, food at home, food away from home, etc.) are goods that tend to fluctuate a lot, subtracting food and energy from All Items results in what’s called ‘Core’ inflation. Add back in food and energy goods and that’s ‘Headline’ inflation.

Another important breakdown of ‘All Items’ is Goods vs. Services inflation. The Goods sector of the economy is roughly 20% of GDP (Construction—residential and commercial—is about 8% of GDP and Manufactured goods about 12%). All the rest (80%) of the US economy is Services. So Services contributes a bigger part of the overall CPI and inflation.

So what does the latest January 2024 CPI report show us for ‘All Items’, ‘Headline’, ‘Core’ and the important sub-categories of Goods vs. Services inflation?

The most important takeaway from the January CPI is the ‘All Items’ rate of inflation last month is at the same level that it was seven months ago in June 2023—that is, inflation continued to rise at the same 3% annual rate of change in January 2023 that it was in June 2023!

To continue the ‘soft landing’ metaphor, what that means is the Inflation plane had entered its ‘downward leg’ from January 2022 to January 2023, slowing from a 7.5% annual rate increase at the start of 2022 to 6.4% a year later in January 2023. It then slowed further the following six months from January 2023 to June 2023, from the 6.4% to 3%.

Thereafter, since last June 2023, it has plateaued at a 5,000 foot level above the US economy airport, where it’s been circling ever since.

Peeling the onion of the ‘All Items’ aggregate indicator, and considering just ‘Core’ inflation—i.e. ‘All Items’ minus energy and food prices—It’s a similar picture: Core inflation has also been stuck, at around 3.9%-4% since October 2023.

Slicing ‘All Items’ yet another way, into Goods vs. Services inflation what the latest January CPI stats further reveal is that since October 2023 Services inflation has also been stuck, in this case in roughly the 5% range.

In other words, except for gasoline and some food prices, the CPI has not slowed in the last seven months. The plane has not landed but just keeps circling!

And it may be running out of gas as well. The latest CPI stats, on a month to month change basis, suggest the rate of inflation may now have started to rise again last month. Unadjusted for seasonality (i.e. the actual price changes), January’s CPI stats show a month to month rising trend for the CPI as follows:

• October 2023: 0.0%
• November 2023: -0.2%
• December 2023: -.0.1%
• January 2024: +0.5%

Within the January numbers were some worrisome trends: Services inflation nearly doubled in January compared to December (0.7% vs 0.4%); food prices did double (0.4% vs 0.2%) with grocery prices rising the fastest in the entire previous twelve months. Meanwhile shelter costs rose from 0.4% to 0.6% for January with its biggest component, Rent, rising the fastest in nine months. And other services like hospital and airlines, the prices of which had slowed in 2023, surged again in January.

Forces pointing to higher gasoline and energy Goods inflation in the coming months are appearing as well. The business media in US and abroad report that global crude oil supply problems are mounting—at a time when typically in the spring oil refineries also shut down for maintenance and consumers begin to drive more.

The Goods vs. Services Inflation Conundrum

To sum up thus far: if CPI reports for the past seven months show Services prices are stuck at 5%, Core prices at around 4%, and All Items stuck at 3%. Those numbers suggests Goods prices—gasoline and some food prices—have indeed come down. The January CPI report shows that Goods prices have been either flat or slightly negative over the past twelve months.

But Services inflation remains stuck at around 5% for months now. The main culprits in continuing Services inflation have been Rent services which have consistently been responsible more than half of all the CPI services price increases for several months; Day Care services; Sporting and Entertainment events prices; Auto Repairs; and Auto Insurance services which have risen by 20.6% over the past year. In addition, hospital services costs are now surging anew and rising at the fastest rate since 2015.

So why have Goods (especially gas and food) inflation significantly abated over the past year while the Services price level has barely done so?

There are several explanations. Here’s a couple:

Fed Interest Rates Are Increasingly Inefficient

Federal Reserve interest rate hikes since 2022 have clearly had an effect on Goods inflation—i.e., on energy and food and some other commodities. But so may have other economic forces.

The US economy has slowed due to rate hikes. But so has the global economy slowed. Which has had more impact on dampening demand for oil, commodities and thus US energy related goods prices in general? US rate hikes or slowing global economy? And what about food/grocery prices? Prices for milk and eggs surged in 2021-22 but have since come down. However, processed foods like bakery goods and other processed items like juice and beverages have not. They’re still rising at more than 20% annual rate? The difference likely lies in the fact that milk and eggs are produced locally and are not monopolistic; processed foods are monopolistic and dominated by a handful of companies. That strongly suggests corporate price gouging is going on in the processed foods sector of food prices. Recent media and government are now also talking about ‘shrinkflation’ (a hidden price hike by lowering content) which suggests evidence of processed food corporations’ price gouging as well.

2021-22: Supply Driven Inflation

The big problem in Goods inflation that emerged initially back in 2021 was domestic US and global ‘supply chains’. As this writer discussed back then (see my ‘The Anatomy of Inflation’ Counterpunch article of June 23, 2022), what drove inflation to its 9.1% peak were mostly Supply side forces—i.e. supply chains exacerbated by price gouging by monopolistic US corporations jacking up prices as the US economy reopened in the summer of 2021 from the Covid shutdowns. That’s a topic to which mainstream economists and politicians have paid too little attention of late.

Productivity also collapsed in 2021-22 falling to the worse levels since 1947, which in turn raised business unit labor costs that many companies simply passed on to consumers in higher prices. Like supply chains and price gouging, that too was basically a supply matter.

Inflation at the time in 2021-22, in other words, was thus largely supply—not demand—driven.

The Covid shutdown of 2020-21 was a major shock to much of the US economy, especially supply. Workers laid off did not immediately return. Some businesses like railroad companies found it convenient and profitable not to brink all their workers back but to run on more profitable skeleton crews. Other businesses did not immediately or fully ramp up production once the economy began to reopen in the summer of 2021. They at first waited to see if the reopening could be sustained. But once the economy began to successfully reopen by late summer 2021 many services businesses tried to recoup lost revenue by rapidly raising prices (A typical example was the Airlines companies and Hotels which clearly price-gouged consumers with record prices for travel in 2021-22.

The Covid shutdowns restructured labor, product and financial markets in ways still not fully understood by economists or policy makers. Fiscal and monetary stimulus measures in particular did not work very well or efficiently (a topic for another article). A given amount of monetary and fiscal stimulus simply did not produce an expected magnitude of real economic recovery.

A dramatic fact of the past two years US economic recovery has been its tepid growth rate. In 2020-21 the Federal Reserve pumped $5 trillion into the US banking system and directly to investors via its QE program. Congress provided an additional $4 trillion in government spending and tax cuts. That’s $9 trillion in combined stimulus! About twice that provided in 2008-10 What has resulted, in the first two years 2022-23 after the economy reopened in 2021 was a growth rate in GDP terms of a mere 2.1% in 2022 and unimpressive 2.5% in 2023.

In short, a mountain of $9T fiscal-monetary stimulus resulted in a molehill GDP recovery!

Overlaid on the supply problems that emerged in 2021 and which lingered into 2022 was global commodity prices surging in 2022-23 as a consequence of the Ukraine war and US Russian (and China to lesser extent) sanctions policies and the Ukraine War.

All these factors contributed to the primarily supply side driven inflation of 2021-22. Those supply forces were only partially abated by the demand depressing policies of the Federal Reserve after it began raising rates.

And now since mid-2023 Fed rate hikes have stopped. And with it so too has Services inflation decline. Fed rate hikes to 5.5% appear to have little effect on Services inflation. So how high might interest rates have to go to have an effect? A little history as follows might give some idea.

Volcker’s 1980-82 Solution vs. Powell’s 2022-23

Despite US inflation’s largely supply side character, in 2022 US politicians and the Federal Reserve decided the strategy to address supply side inflation would be to depress consumer demand in the US economy. The Federal Reserve set out to attack consumer demand to dampen inflation. Its main tool was raising interest rates and the Fed commenced in 2022 to raise rates at the rapidest pace in decades. The idea was to create enough unemployment that would reduce wage incomes and thus consumption spending to bring down demand and theoretically prices in turn. In other words: even if the main drivers were Supply side (which the Fed can do nothing about) the strategy was to make households pay the price to abate inflation by depressing household wage incomes and consumption demand. So the Fed raised interest rates to 5.5% over the course of 2022-2023.

After all, the same rate hike strategy to compress demand worked under Reagan in 1981-83 when Paul Volcker was Fed chair. 10%+ annual CPI inflation at the time was lowered via Fed rate hikes that attacked the Goods sector, raised unemployment, and subsequently depressed wage incomes and consumption. It was a demand side approach to price reduction—employed to address a Supply side inflation problem back then as well. Nevertheless it worked. Prices came down, but only after the Fed raised rate to more than 15%! A deep recession in 1982-83 followed the Fed rate hikes of 1980-81. But that was then. The US economy has changed dramatically since. It doesn’t work that way anymore. Indeed, monetary policy hardly works at all.

As in 1980-82, Powell’s Fed rate hikes in 2022-23 have succeeded in dampening goods prices but have NOT succeeded this time around in bringing down services prices very much, as the CPI data for the past seven months clearly shows. Goods inflation has indeed come down, but services prices remain stuck at levels of last summer 2023 now for months and may be rising once again. So why is it that four decades later monetary policy (rate hikes) has not succeeded as it did in 1980-82 in reducing the price level very much?

In his December 2022 press conference following the Fed’s commencing to raise rates, Fed Chairman Jerome Powell indicated the Fed’s strategy in 2023 would be to continue raising rates. He specifically cited his main goal of bringing Services prices down, adding for that more unemployment was needed in Services in order to lower Services consumption. That was the Fed’s inflation strategy for 2023. But that strategy—and lower Services prices—didn’t happen.

Contradictions of Fed Monetary Policy

Halfway into 2023 Powell stopped raising rates. But why? Why didn’t he continue raising rates and stopped halfway through 2023? There are several possible answers, but as this writer has argued before, perhaps the main reason was the crisis that emerged concurrently in the US regional banking system in March 2023. Raising interest rates even higher would have exacerbated that regional banking crisis. So Powell raised rates for the last time in May-June 2023 after the Regional Bank Crisis erupted that March 2023.

By doing so the Fed decided to trade off reducing Services and Core inflation further in 2023 in order to prevent further exacerbating regional bank instability. Powell apparently has placed his bet on assuming the already 5.5% interest rate level will prove sufficient over time to eventually, if albeit slowly, bring down Services prices. Thus far it hasn’t. Services sector unemployment and Services consumption has not abated. Powell has lost his bet. Services prices are ‘stuck’ at 5% and Core at around 4% now.

What this scenario suggests is that the US and global economy has changed in fundamental ways since the early 1980s. The US is a much more Services centric economy today compared to forty years ago. Services don’t respond as efficiently to rate hikes. Nor does the economy in general, it appears. To put that in economists’ parlance: Services inflation has become ‘interest rate inelastic’.

That lack of real economy response to interest rates (i.e. the inelasticity) may be due in part to the US economy becoming more ‘financialized’ today compared to 1981-83. What that means is Fed periodic liquidity (aka money) injections into the economy get redirected from going into real investment and flow relatively more into financial asset markets instead of the real economy. That makes Fed rate policy ‘inefficient’—i.e. more monetary injection is required to get an equivalent stimulus ‘bang for the buck’.

The converse is also true: Fed rate hikes have less effect on dampening inflation and slowing the real economy because it has become more financialized. Rate hikes simply don’t retract as much liquidity (money) from the economy as they used to. And even if they did it wouldn’t matter. Businesses (and consumers) today, forty years later, have access to alternative sources of funds besides bank lending, in the US and worldwide. Or perhaps businesses and investors cut back on investing in the real economy first, before they consider reducing their investing in financial markets. After all, didn’t financial markets and profits boom during Covid while opportunities for investing in the real economy collapsed?

The preceding paragraph suggests globalization may also be resulting in less effective Federal Reserve interest rate policy when it comes to rate hikes dampening inflation. Here financialization and globalization of the 21^st century capitalist economy overlap.

Multinational corporations in particular aren’t limited by Fed interest rate hikes or levels when they need money capital to invest. They can go anywhere in the world for lower rates. That’s presuming they even bother to borrow from banks at all any more. Multinationals raise far more money by issuing corporate bond debt of their own. And they loaded up on bond issuance in the years of near zero Fed rates from 2009-2018 and then during 2020-21 when the Fed injected $5T more of virtually free money into the banks and directly to investors via QE. Corporations just issued mountains of bond debt prior to Covid that they didn’t even need and then just hoarded the cash throughout the pandemic. Or else redistributed the virtually free Fed money to their stockholders in buybacks and dividends and hoarded their own cash earnings. Once the Fed started raising rates in 2022 those rate hikes were irrelevant for many big businesses. They were flush with unspent cash from issuing bonds or new stock.

A good example was Apple Corporation. Sitting on a $252 billion cash hoard, given the Fed’s zero rates in 2020 Apple nonetheless issued multi-billions in its corporate bonds. It then mostly distributed that money to its shareholders in stock buybacks while continuing to hoard its $252B cash pile. Only the smallest businesses are impacted any more by Fed rate hikes, or rate cuts for that matter.

Some Conclusions

In conclusion, in terms of inflation, what all this means is Fed chair Powell will have to raise rates much higher than 5.5% if he wants to reduce Services and Core inflation significantly further. Maybe not as high as Paul Volcker’s 15% in 1981. But higher than the current 5.5% for sure.

However Powell won’t do either so long as Services inflation levels remain stuck at current levels. He’s decided he can live with that level of Services inflation, while betting perhaps rates kept at current levels may yet reduce inflation further over the longer run.

Powell won’t risk higher rates that will certainly exacerbate a regional bank crisis again, which by the way continues to deteriorate slowly and which now faces the threat of commercial property defaults coming in 2025-26, to which already unstable regional banks remain highly exposed.

He also won’t raise rates because the US economy is teetering on the brink of recession already. The US construction sector has fallen one-third and appears stuck at that level while the manufacturing sector has been contracting for the last nine months, according to the Purchasing Managers’ Index (PMI). A deeper recession in 2024 would certainly not help the politicians. And regardless what apologists for the Fed say, Fed policies are politically a-tuned in election years.

So expect CPI and inflation to remain at levels largely similar to what they have for the past half year. Goods inflation will likely stay low (subject to uncertain oil prices). Companies that can, will continue to price gouge. Rents and home prices, Insurance services, processed food items, select services will remain at current levels or even drift up further. So consequently will the CPI, fluctuating perhaps marginally around its January levels month to month.

However, as will be explained in a Part 2 sequel to this article, even reported CPI is a low- balled estimate of the price level, due to the many questionable assumptions and methodologies that go into its estimation of inflation.

So if the US economy plane does decide eventually to descend, its landing may be anything but ‘soft’.

Jack Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, 2020. He publishes at Predicting the Global Economic Crisis

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By Dr. Jack Rasmus
February 9, 2024

The following are my ‘takeaways’ from listening closely to the Tucker Carlson-Putin Interview of this past week. A number of revelations came out of the interview (e.g. repeated role of France, Germany, UK and CIA scuttling a resolution to the conflict) as well as Putin’s deep commitment to continue until Ukraine is no longer a threat to Russia. One comes away from listening to the interview that Putin feels he has been ‘had’ by the US/EU so often he no longer trusts its politicians and doesn’t believe US presidents have the power to decide; he, and Russians in general, have a deep belief that Russia and Ukraine (and Belarus) are ‘one people’ who have been divided by invaders in the past but always re-united again; and that he’s ready to negotiate but Zelensky and US/NATO have ruled it out and would have to initiate it. Finally, US sanctions have failed, the world is changing fast, and many countries have developed to the point they no longer do whatever the US wants and are demanding more independence.

(Note: For another more detailed audio commentary on the Interview, listen to my Friday, February 9, Alternative Visions radio show at:

https://alternativevisions.podbean.com/e/alternative-visions-carlson-putin-interview/

Here’s my “X” (twitter) posts on main points of the Carlson-Putin interview:

1. Putin says he’s ready to negotiate but Zelensky has outlawed discussions and US/NATO doesn’t want to. Zelensky is “head of Ukraine state. He could cancel his decree” and negotiate. Russia’s ready but will not ask for negotiations. Russia’s minimal demands: No NATO. Neutral Ukraine. Nazis out of Ukraine government & military

2. Russia & Ukraine had a signed deal in Istanbul in April ’22 to end war. As part of deal Donbass remained in Ukraine but with some autonomy. Russia asked to withdraw troops from Kiev as sign of good faith during negotiations in Instanbul and did. Zelensky reneged on deal after Boris Johnson flew in and told him to, promising him all the money and weapons he needed.

3. Putin gave long historical introduction on history of Russia & Ukraine since 862. He explained attempts (in 1200s, 1650s, 1918-21, 1941-44) by invaders to split Ukraine from Russia that all eventually failed. (Suggesting current NATO effort would too). A major repeated Putin theme as Ukraine & Russia have always been one people

4. Western Ukraine (Lvov region) before WW2 was Poland-Hungarian-Romanian, but given to Ukraine by Stalin after WW2 after Poland was given eastern Germany. Putin implied the West could have western Ukraine back (as Putin suggested in prior speeches). West Ukraine is not part of historic Russian homeland which is Russia-Ukraine-Belarus.

5. Russia wanted to join Europe after 1991 but was repeatedly rejected by West. Putin described face to face meetings with Clinton & Bush Jr. where they agreed re. Russia joining NATO (Clinton) and stopping US intervention in Chechnya (Bush) but both Clinton and Bush then reversed after conferring with advisors. Putin’s impression US presidents can’t make a deal and are often overturned by other powers in Washington. China’s Xi has same impression, per Putin.

6. After meeting with Bush, Putin gave him proof CIA was involved in Chechnya war. Bush replied “Well, I’m going to kick their ass”. Bush never got back to Putin after. In 2008 US/NATO in Bucharest NATO meeting declared Ukraine & Georgia would soon join NATO. Russia’s 2008 War with Georgia followed

7. Re. 2014 coup, Putin said “CIA did its job” but it was unnecessary. It “could have been done all legally”. Ukraine president at the time (Yanukovich) was warned by US/EU at the time of the coup not to use police or army against demonstrators in Maidan. He didn’t. Yanukovich agreed to a 3rd re-election not provided by Ukraine’s constitution but hey went ahead with coup anyway. US representatives bragged they spent $5B on the coup. Putin would not mention names (Victoria Nuland). Regarding 2015 Minsk agreement: Putin said Ukraine refused to implement it. EU leaders (Germany’s Merkel & France’s Holland) admitted in 2022 Minsk agreement in 2015was ‘just to buy time’ to rearm Ukraine. In Putin’s words: “They simply led us by the nose”

8. When asked by Carlson if current talk in the west that if Russia wins in Ukraine it means it will invade Europe, Putin replied ‘only if they attack Russia first’. US mercenaries are already fighting in Ukraine. And when Carlson mentioned US Sen. Shumer’s statement that the US might have to fight in Ukraine, Putin sarcastically said: “Does the US have nothing better to do than fight in Ukraine”. If US did commit troops to Ukraine, it would push world to “brink of humanity”.

9. When asked by Carlson who blew up Nordstream pipeline, Putin: “CIA has no alibi” and “look at those interested and have capability of doing it” and “beneficiaries are American institutions”. When Carlson asked for more evidence US did it, Putin replied Russia has the evidence but no purpose to reveal it now. Germany has shut down 2 other pipelines that can still be opened & Russia will gladly resume sending gas (naming names might obviously jeopardize that he implied). Germany goes along with US because “German leaders are driven by interests of collaborative west rather than German interests”.

10. Putin: Biden’s Russian sanctions are “a grave mistake”. By weaponizing the US $, the US is undermining its global economic influence. Putin: The dollar is the cornerstone of US of US power. “Do you even realize what’s going on or not? You are cutting yourself off”. He added, before 2022, “80% Russia trade was in $” and only 3% in Yuan. Now 30% is in Yuan, 30% in Rubles and only 13% in $US.

11. Sanctions failed. Russia now 5th largest economy in ‘purchasing power parity’ measure. China 1st. Russia-China trade now >$240B. BRICS economies are now as large in GDP as US/G7. Sanction “tools US uses don’t work”

12. World is changing very fast. US can’t stop it but is reacting aggressively & militarily to the change. Threats from genetics, AI technologies, ‘brain chip’, etc. Much like gunpowder in prior era. There’s “no stopping Elon Musk” (i.e. technological change)

13. Carlson asked if Russia will negotiate. Putin: “They’re options if there’s a will”. Those in power must realize Russia can’t be defeated. West “stopped negotiations”.. “Let them correct their mistake”..”I know they want it; let them think how to do it.” Ukraine is now a satellite of the USA, which spends $72B a year on it

14. Putin: what’s happening “to an extent is a civil war”. Ukraine and Russia will be reunited again. “No one can separate the Russian soul” (once again returning to theme at start of interview that historically) Russia, Ukraine, Belarus are one people

15. Among the various reporting ‘bombshells’ revealed by Carlson’s interview was Putin’s clarification it wasn’t Ukraine negotiators at Istanbul that requested Russia pull back from Kiev in ’22 as show of good faith..it was Macron (France) and Sholtz (Germany) request. And so much for the western media myth of Ukraine’s great military ‘victory’ driving the Russians out of Kiev in April ’22

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There’s lots of spin and talk coming out of Washington that the condition of the US economy is quite ‘good’ and, consequently, workers are doing great with wages rising, prices falling, and jobs expanding. Beltline politicos therefore just can’t understand why all the public polling shows Americans don’t agree. It’s not so great out there. In the following interview with the california internet podcast ‘This Is Revolution’ I peel off the scab of cherry picked statistics to reveal, per other govt stats, that the reality re. Jobs, wages, inflation, US economic growth (GDP) is not as rosy as the politicians and their mainstream media say.

TO WATCH GO TO:

https://www.youtube.com/live/lPkkTTXG0kQ?si=023_7AIy7vQ9RdgQ

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Listen to my two short radio interviews of this past week on topics of tentative $118B border bill, US deficits, social program spending austerity, public v. Washington politicians’ perceptions of the US economy, politicians’ cherry picking of US statistics jobs and wages, the reality of ‘Bidenomics’, Fed rate hikes, real US GDP and real inflation.

1. Critical Hour Radio show, February 5, 2024 (Border bill, jobs numbers, Bidenomics)

https://drive.google.com/file/d/1VUVXugk0Pccu0sp5qTR-pEcWfz9DjlZb/view

2. Critical Hour Radio show, January 30, 2024 (Fed holds interest rates, US inflation, tech layoffs)

https://drive.google.com/file/d/16CClhQHt6LXGrosIq3gaRGkU0aM5uYSa/view

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Listen to my Jan. 26, 2024 Alternative Visions radio show for an breakdown of the US economy and GDP for 2023 in detail.

Go to: https://alternativevisions.podbean.com/e/alternative-visions-2023-us-gdp-analysis-in-depth/

SHOW ANNOUNCEMENT

Today’s show is dedicated to dissecting the just released US first report on 2023 GDP by the Commerce Dept. Dr. Rasmus breaks down the various contributing elements to US GDP (Consumption, Business Investment, Government Spending, and Net Exports) to identify where the changes in GDP in 2023 were strongest and weakest. Explained as well is how the methodology for estimating inflation (GDP deflator price index) serves to low ball price changes and in turn boost the real GDP number of 2.5% for 2023. The methodology behind the GDP deflator is explained, and compared to the CPI (Consumer Price Index) with its higher estimate of inflation. Rasmus explains how changes to definition of GDP a decade ago also artificially boosted real GDP. Consumer spending held up in 2023 due to record credit card spending, drawdowns of savings and a surge in auto buying. Meanwhile, serious negative trends in business spending on equipment and housing construction continued in 2023 offset by a surprise jump in business spending on structures like factories; imports slowed faster than exports, and a sharp increase in 2023 in government spending on defense and state and local government all contributed (along with the low inflation adjustment) to the somewhat unexpected 2.5% GDP rise in 2023. Dr. Rasmus concludes, however, that the weaknesses within GDP do not ensure a ‘soft landing’ in 2024, which forecasts are saying will grow only 1-1.25% with recession in the first half of the year.

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Today, February 2, 2024 the US Labor Dept released its monthly jobs report for January. One of the Department’s two surveys showed +353,000 jobs created in January. But a second report shows a drop in total employment in January of -1,070,000 full time and part time jobs (and an additional -400,000 jobs if one includes unincorporated independent contractors jobs. So, like the Bible, one can find whatever one wants in the government job stats.

So why the discrepancies between the two surveys in the monthly jobs report?

JOBS

One reason is that the two surveys have big differences in their methodologies (and underlying assumptions).

The Current Establishment Survey (which is not really a survey), or CES, is a compilation of reports provided by around 400,000 large businesses to the labor department. Even so, apparently those large corporations have been reducing their participation in the reporting. So maybe half that send in their reports on their hiring, layoffs, etc. to the government.

The second survey, the Current Population Survey, or CPS, is a true survey conducted by the labor department monthly. It actually surveys but mostly smaller businesses. It has a different methodology than the CES and different assumptions.

If one uses the CES it appears (and the Biden administration claims) 3.1m jobs were ‘created’ in all of 2023. But the CPS survey shows only 820,000 (again, counting full time, part time, and unincorporated independent contract workers).

Part of the problem may be that the CES doesn’t count NET job creation just new jobs while the CPS looks at the total level of employment from period (Jan) to period (Jan). The latter makes more sense. Doesn’t one want to determine what the net gain in jobs was over the year? Jobs gained minus jobs lost? And isn’t a survey that considers the millions of smaller companies perhaps more accurate than a partial census with declining participation by bigger corporations? There’s a bifurcated US economy out there. Big businesses may be doing ok; but smaller businesses generally aren’t.

Then there’s the matter of the unemployment rate monthly reporting. Here we keep getting a monthly unemployment rate of 3.7% (for the last three months). But that 3.7% is what is called the U-3 unemployment rate. That rate, unfortunately, is for full time workers only! The US civilian labor force is about 167 million. Maybe 40-50m of that total labor force is part time workers, temps, gig workers (grossly underestimate btw), independent contractors (who are actually workers not small businesses), etc.

And if one looks at the CPS survey again, there’s a statistic called the U-6 unemployment rate. That’s at 8%, not 3.7%, in the January jobs report.

The U-3 concludes only 6m workers are unemployed; the U-6 estimates almost 14m are unemployed.

The mainstream US media likes to hype and report the 353,000 January and 3.1m 2023 jobs, and the 3.7% unemployment rate and 6.1m jobless. You’ll see that published virtually everywhere. But elsewhere in the same government stats there’s the -1,070,000 January and 820,000 2023 jobs and the 8% unemployment rate and the 14m jobless.

It all comes down to what population you’re dealing with, what kind of survey you’re using (or not) and what are the scores of underlying assumptions (typically not noted in the reports) that are being employed in the methodologies chosen.

For example, when estimating U-3 jobs the government takes the raw data on jobs in monthly big business report (CES) then adds a separate set of raw jobs data from what it considers net new businesses created. These two datasets are merged (with certain assumptions about how many jobs on average are associated with a new business when it is created). It combines the two datasets, does a number of operations & manipulations on the raw data, including (but not limited to) seasonality adjustments, and comes up with the 353,000 reported, for example. But that 353,000 is a statistic, a manipulation and transformation of the actual raw data on jobs. Statistics are estimations of the actual data, not the actual number of jobs created in January. But this approach integrating new business formation job creation with the monthly large businesses reporting on jobs has certain real problems:

First of all, it is impossible to estimate net new business development. Why? There’s data on when a new business has formed. It must report formation to its respective state. But businesses rarely report anything when they go out of business. They simply go away. So the government plugs in a number based on historical trends for the number of businesses failing each month, subtracts that from the number newly started, and that’s the new business formation jobs total it then adds to the big businesses reports to the labor department. In other word, the ‘net’ is half made up, a plugged in number! Worse still, the ‘net’ supposedly jobs number is lagged at least six months from the current big business raw jobs number reported. So one’s estimating jobs ‘created’ six months ago and mixing it with current jobs reported.

Not only is this mixing apples and oranges but oranges and potatoes since the latter is not really a fruit.

WAGES & SALARIES

There are similar issues when the government says wages have risen 4.5% over the past year: that 4.5% is for full time workers only. Moreover, it includes ‘wages’ (salaries) of the highly paid occupations, including managers and even CEOs salaries. The fact is these occupations at the top end of the ‘wage structure’ get wage raises much higher than 4.5%. So the 4.5% average is skewed to the top end. And that means workers at the median are likely getting less than 4.5%. Those below median even lower, unless they were at minimum wage and living in one of the States that raised minimum wages recently. If not, and living in the two dozen or so stuck with the federal minimum wage of $7.25 for nine+ years now, they got 0% raise.

In other words, reporting 4.5% is an average and that distorts reality.

There’s also the problem of what is the real take home pay wage and salary. The 4.5% is reported as adjusted for inflation. But what if the adjustment is, once again, only for full time workers, which is the case for the oft-reported 4.5%. Even more important, what if the inflation adjustment is ‘low-balled’? The CPI price index latest results showed inflation of 4% for ‘all items’. That would suggest an average real wage gain of 0.5% last year. But has it been 4%. (Or the even lower 3.4% for the other price index, the PCE)? There are a whole set of other issues associated with the under-estimation of inflation–and thus overestimation of the 4.5% wage gain. That would require a separate article to fully consider and explain. To make it brief, this writer believes the corrected CPI is at least 6%, not 4%. If so, the real wage gain of 4.5% is actually a real wage decline of at least -2% last year.

When one looks at the overall growth of the economy year to year, or quarter to quarter, as measured by the Gross Domestic Product, GDP, another entire set of issues also arise. The official preliminary first GDP report released a week ago indicated GDP in 2023 rose by 2.5%.

GDP vs. GDI

Without considering all the issues why GDP is also over estimated even at 2.5% (another article perhaps), here’s just one: GDP measures the total market value of all the goods and services produced and sold in a given year (or quarter). That total production results in a corresponding total income generated.

After all, if a product or service is sold (the definition), then it produces a revenue which gets distributed among various sources of income: profits, wages, etc. The gross income created from the gross production should be more or less equivalent. But the gross income for 2023 (called Gross Domestic Income, or GDI) was only 1.5% while the Gross Domestic Product, or GDP, was 2.5%! So where did the other 1% go? Either GDI is underestimated or GDP is overestimated, or both. Whatever, the media likes only to report GDP but it seems what ends up in people’s pockets (GDI) is more important.

The preceding is just an overview of some of the real issues behind US statistics on jobs, unemployment, wages or even the economy’s growth in general that get glossed over or even ignored by the media and especially politicians. There’s a lot of ‘cherry picking’ of the statistics going on.

Perhaps that’s why in part the media, pundits and politicians keep scratching their heads recently, lamenting on why the American public doesn’t get it that ‘the economy’s doing really good’.

Maybe, just maybe, John Q. Public is experiencing a different set of statistics (and raw data facts) about the condition of the US economy.

The US political system is badly split we are told. No doubt. But maybe the economic reality the US public deals with on a daily basis differs so much from the selective statistics reported by the media there’s a split in perceptions of the actual US economy as well?

Dr. Jack Rasmus
February 2, 2024

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Watch my January 21, 2024 YouTube presentation to the Niebyl-Proctor Library audience in Oakland, CA. (Q&A discussion afterward included) on the real conditions and prospects for American workers, their unions, and the US economy. What’s the real data and stats on job creation, inflation, wages and economic growth of the US economy vs. the spin called Bidenomics.

GO TO: https://youtu.be/OL3rvge8Q84

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As talk continues of US economy entering a ‘soft landing’, although many mainstream economists & capitalists still say recession 2024, today’s show reconsiders the data on jobs, inflation, etc. and takes an early look at 4th quarter/2023 GDP numbers due out later this week.

TO LISTEN GO TO:

https://alternativevisions.podbean.com/e/alternative-visions-soft-landing-revisited-previewing-2023-gdp/

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Listen to my January 5, 2023 Alternative Visions radio show and my Review of 2023 economic & political events + concluding commentary on latest attack on what remains of US democracy in the Colorado-Maine denial of ballot status for Trump, as well as other Republican-Democrat recent moves to restrict democracy.

TO LISTEN GO TO:

https://alternativevisions.podbean.com/e/alternative-visions-2023-review-colorado-maine-ballots/

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