San Francisco Federal Reserve Bank Summary

Yesterday Atlas sent a note reviewing the latest findings from the Conference Board’s Leading Economic Index.  This forward-looking indicator continues to suggest a recession is coming.  Today we’ll look at the San Francisco Branch of the Federal Reserve’s take on the economy via a brief summary of this research from Adam Shapiro, vice president at the branch.

Given the price shock experienced in America, it is fitting that Mr. Shapiro starts by addressing inflation.  The level of inflation has been dropping, albeit remaining well above the central bank’s 2.0 percent target.  It reached 5.5 percent on a year-over-year basis according to the Personal Consumption Expenditures Price Index from November 2022.  For now, the trend for this inflation measure is back down to a level not seen since October 2021, so progress has been made.  An updated figure will be released later this morning, so look for Atlas’ note on it next week.

Expectations for further inflation are coming off the boil but are elevated compared to pre-pandemic levels.  Currently, consumers expect prices to rise 5.0 percent this year; in contrast, those employed in the field of forecasting are anticipating 3.5 percent.  Rent inflation, which is a large component of the calculation, is expected to remain high over the next year.  Nevertheless, Mr. Shapiro believes inflation will moderate further as 2023 unfolds and will reach the long-run target of 2.0 percent over the next few years.

This Federal Reserve Branch believes consumers can remain relatively resilient in 2023 despite a potential recession.  They estimate half of the $2 trillion in excess savings accumulated during the pandemic is still sitting idle, offering a source for further consumption as the year unfolds.  Currently, Americans are still spending more money on goods than pre-pandemic trends and less on services.

Mr. Shapiro suggests that, while there has been thawing in the system, both material availability and unemployment remain at relatively low levels. These are factors that continue to keep inflation elevated.

Recent changes by the Federal Open Market Committee were historically fast and could be calming demand in housing.  The pace of increases to the overnight Fed Funds Rate from March of last year through December is the fastest in 40 years.  It’s noted that housing starts have fallen, as have existing home sales and their prices.

America’s economy is big and complex, so understanding it moment by moment is virtually impossible.  Just ask the Fed.  They are armed with hundreds of PhDs and have yet to be perfect in their interpretation of the data.  As the year unfolds, Atlas will continue doing our best to help you understand the various indicators we watch and their impact on economic growth, inflation, and the labor market.