Inflation Manipulated Down. Activity?
Macro Perspectives
The banks kicked off the Q3 earnings season with solid numbers (see previous notes), and solid reports on the health of businesses and the consumer.Â
Yesterday, we had more evidence of solid economic activity in the third quarter;
Johnson and Johnson beat on earnings and revenues.
United Airlines had the strongest earnings in three years. The CEO called it "the best operational quarter in company history."
Netflix crushed estimates after the close. Reed Hastings called the first half "challenging," but said now they believe they are "on a path to reaccelerate growth."
It's still early, but so far the retrenchment in S&P 500 earnings that the Wall Street doom and gloomers have been looking for, isn't happening. Add to this, in the morning we saw reports on industrial production and capacity utilization for September - both strong.
Let's take a look at Industrial Production.
Each of the dips in this chart, below zero, was associated with recession, with the exception of 2015 - which was associated with the expectations of the Fed's exit of GFC emergency policies (i.e. rate hikes). As we move to the right of the chart, despite two consecutive quarters of negative real GDP, AND (related) the Fed's exit of emergency policies, the industrial sector of the economy is performing well!
Building on our conversation from yesterday, nominal growth is hot, running at an average annual rate of 8% (averaging the quarterly annualized growth of the first three quarters). This is what happens when you grow the money supply by 40% in two years (10 years worth of money supply in two years)!
With an explosion in money supply, particularly when you put money directly into the hands of consumers, you also get a reset of prices.
We've seen it. The level of prices has reset and the rate-of-change in prices is now moderating.
The Fed has successfully manipulated down inflation. They've done it by talking down the stock market and threatening a Paul Volcker-like inflation fighting campaign. That has crushed the exuberance in the economy, but not the activity - as we can see in the earnings, industrial sector, and in nominal growth.
With the exuberance taken out of the economy, housing prices have started to fall, rents have started to fall, used and new car prices have started to fall. Even global food prices (the FAO food price index) have fallen for five consecutive months.
If we get a split Congress next month (some well needed gridlock), we may have a formula for a period of hot growth and more moderate inflation.
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