– by a New Deal Democrat
In the summer of 2021, looking at the long leading indicatorsI wrote:
“while long leading indicators confirm steady, even strong, expansion through the remainder of 2021, they are neutral by spring 2022, suggesting a much softer economy, though not a recession, before the midpoint of this forecast.”
“Short-term leading indicators now confirm the positive trend in the first half of this year, with very little evidence of a softening at this point.”
“ If 6 months ago the long leading index was predicting a weakening but still positive economy by the middle of this year, they are predicting a complete standstill by the end of 2022.”
As we know now, we got a complete standstill – maybe even a mini-recession – in the first half of this year, and growth accelerated in the second half.
And what happened? This brings us to the three charts that define the economy this year.
By far the most important is this first one showing oil and gas prices:
Prices have already been gradually rising, outside of the lock-in period in 2020, for about 5 years. Then, with the Russian invasion of Ukraine in February, oil prices, immediately followed by gas prices, rose more than 50%, peaking in early June. As the situation there stabilized and Europe’s dependence on Russian gas was successfully weaned off, prices fell almost as quickly. At the end of the year, gas prices are at the same level as they were 18 months ago.
It was a textbook mass shock. It took an economy that was already slowing and threw it briefly into reverse (albeit a slight one). Then, as the shock reversed, economic activity, especially on the consumer side, picked up again.
The second chart is one I’ve run many times for over a year comparing home prices to owner-occupier-equivalent rent in the CPI:
Just as I first predicted more than a year ago, the big increase in house prices has started to show up in the equivalent rent of fictitious owners, with a one-year lag, leading to higher core inflation along with it, even as house prices slowed and then peaked in the summer. At the end of the year, house prices are falling, but the owner-occupier equivalent rent has not yet peaked.
Which brings us to the third chart, which is the year-over-year change in the Fed rate:
While chasing inflationary pressures that were evident in 2021, the Fed raised interest rates by over 4% in just 9 months, the fastest rate of increase since the Volcker recession of 1981. These rate hikes created recessionary sales numbers in the housing industry, caused banks to tighten lending standards and to some extent counteracted the expansionary effect of gas price declines.
With 2022 coming to a close, gas prices are likely to stop falling soon, if not now, until the effects of even the first of the Fed’s rate hikes last spring have fully made their way into the economy. Industrial production and retail sales have stagnated, while real manufacturing and trade sales and personal income less transfer payments are still below their peak levels earlier this year. Only jobs and broader consumer spending haven’t turned around. They are likely to be the big focus early next year.
On that note, my short and long term predictions for 2023 will be published sometime next month.