Introducing

Paul L. Kasriel

Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian.   After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department.   Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002).   Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele).   Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.

Publications by Paul L. Kasriel

• USA| Oct 30 2024

  If Musk Can Return a Rocket to Its Launch Pad, Why Can’t He Cut $2 Trillion from the Federal Budget?

  On Sunday, October 27, 2024, Elon Musk claimed that he could find at least $2 trillion of potential spending reductions in the federal budget if Donald Trump were elected in the upcoming November 5, 2024 presidential election. I assume he could find the same magnitude of budget cuts if Donald Trump were not elected. Well, if Musk can return a rocket to its launch pad, why wouldn’t we expect him to identify $2 trillion in federal budget cuts? After all, in Fiscal Year (FY) 2024, federal net outlays were $6.75 trillion. Surely, Musk could identify $2 trillion of “fat” to trim. Or could he?

  Shown in the Chart below are net federal outlays in FY 2024 minus net outlays for national defense, interest payments on the public debt, Social Security, Medicare and veterans’ benefits/services. The amount remaining of net federal budget outlays after these subtractions is $2.3 trillion. That’s $2.3 billion for Medicaid, SNAP (food stamps), civilian retirement, earned income tax credits and the operating /capital costs of nondefense federal departments, including, but not restricted to, Justice, Agriculture and Transportation. So, if Musk had been able to identify $2 trillion of cuts in FY 2024 federal outlays, net of defense, interest, Social Security, Medicare and veterans’ benefits/services, that would have left him with $300 billion to fund the rest of federal outlays. Would you want to fly on commercial airlines knowing that airline regulations might not be enforced? You might want to start growing your own vegetables and raising your own animal protein, because the FDA might not be able to inspect food. Those Venezuelan gangs might be taking over more towns because of a lack of FBI agents to stop them. You get the picture. Unless Musk is going to cut spending on defense, interest, Social Security, Medicare, and veterans’ benefits/services, cutting $2 trillion from federal outlays would not leave enough to fund the rest of the government adequately. And if Musk, as part of a Trump administration, were to cut Social Security, Medicare and veterans’ benefits, the Democrats would likely win large majorities in the House and Senate after the 2026 midterms. So, although Musk can return a rocket to its launch pad, I don’t think he can cut $2 trillion from federal outlays in one year without causing severe political problems for a Trump administration.

  by:Paul L. Kasriel

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• USA| Sep 30 2024

  Powellomics, not Bidenomics, Caused the 2021-22 Surge in Inflation

  Living in a “swing” state, I am bombarded with political television ads. The GOP ads blame the 2021-2022 surge in inflation on Bidenomics and, by association, Harrisomics. A number of the elements of Bidenomics increased the federal budget deficit. But I will argue that federal budgetary deficits do not cause higher inflation. Rather, the actions of the Federal Reserve and the depository institution system cause higher sustained inflation rates by their combined ability to create credit figuratively out of thin air. The Federal Reserve and the depository institution system are, in effect, legal counterfeiters, i.e., they have the unique ability to create credit, figuratively, out of thin air. (Thin-air credit here will be defined as the sum of the Federal Reserve liability items, reserve deposits and vault cash of the depository institution system, currency held by the non-depository institution system, and the sum of depository institution system items, debt securities and loans. (An equivalent definition of thin-air credit is the monetary base, created by the Federal Reserve plus credit created by the depository institution system.) When credit is created out of thin air, the recipients of this credit are able to increase their spending without necessitating any other entity to reduce its spending. With some exceptions, when an entity other than the Fed/depository institution system lends to another, the lender reduces its current spending, transferring spending power to the borrower. This is called saving on the part of the lender.

  Let us look at some data relating net federal borrowing as a percent of nominal GDP versus thin-air credit growth to goods/services price inflation. The inflation measure I will use in this analysis is the chain-price index for Gross Domestic Purchases. This inflation measure includes the prices of personal consumption expenditures, business expenditures, residential real estate services expenditures and government expenditures on goods/services. It excludes the prices of US goods/services exports. I have tested lead-lag relationships between net federal borrowing and inflation and thin-air credit growth and inflation. For both variables, the highest correlation coefficients occur when both net federal borrowing and thin-air credit growth lead inflation by two years. So, this year’s inflation rate is most highly correlated with net federal borrowing and/or thin-air credit growth two years prior.

  If federal government net borrowing influences inflation, we would expect a negative correlation between the two series. And that is what we observe in Chart 1. The correlation coefficient between the two series is negative 0.14. Although the correlation coefficient has the correct sign, the absolute value of its magnitude, 0.14, is low, suggesting that there is not much association between the two series.

  by:Paul L. Kasriel

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• USA| Jul 19 2024

  Look for Good Deals on Cars and Trucks

  Auto and light truck assemblies sprinted 21.1% month-to-month (not annualized) in June to a seasonally-adjust annualized level of 13.1 million units, the highest level of monthly of production since July 2015. In May, retail dollar inventories of motor vehicles (and parts) relative to dollar retail sales of them continued their upward trend, reaching 1.93, the highest since April 2020, when Covid infections were in their early stage. The retail inventory-to-sales ratio of motor vehicles will artificially rise higher in June due to the surge in June assemblies and the curtailment of sales related to the computer hacking of car/truck dealers last month. But discounting the likely increase in the I/S ratio in June because of the hacked software, retail inventories of motor vehicles are starting to look a bit excessive, albeit below the ratio to sales pre-Covid. (See Chart 1 for these data.)

  by:Paul L. Kasriel

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• USA| Jul 10 2024

  It’s Been a Long Time Coming (With apologies to Sam Cooke, David Crosby and Taylor Swift)

  I thought that by 2023 the US economy would have entered a recession. My favorite recession indicators, the yield spread between the Treasury 10-year security and the federal funds rate and changes in real “thin-air” credit, both suggested a recession was imminent. When the yield spread enters negative territory and remains negative for as long as it has of late (see Chart 1), since 1970, a recession has occurred. But not this time. Similarly, when the yield spread persists in negative territory, typically, real thin-air credit (depository institution holdings of loans, securities and reserves deflated by the Gross Domestic Purchases chain-price index) contracts and a recession is underway (see Chart 1). The percent contraction in real thin-air credit of late has been the largest since the Great Depression. But still no recession. It’s been a long time coming, but I do believe the US economy finally stands on the precipice of a recession.

  by:Paul L. Kasriel

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• USA| May 09 2024

  Just the Facts, Erin

  Yesterday evening, May 8, Erin Burnett, host of CNN’s “Erin Burnett Out Front”, interviewed President Biden. When Ms. Burnett was with Bloomberg News, she was my favorite presenter because her facial expressions indicated whether the person she was interviewing was saying things that were illogical or were fabrications. So, it was with some disappointment when Ms. Burnett made some false or misleading statements when interviewing President Biden yesterday evening about the state of the US economy.

  Ms. Burnett had a lot to say about the higher inflation that exists today compared with February 2020. Yes, as shown in Chart 1, the year-over-year percent change in the Personal Consumption Expenditure (PCE) chained price index was 2.71% in March 2024 compared to 1.64% in February 2020. Ms. Burnett received a BA in economics from Williams College. Did her macro and money/banking professor not teach her that inflation is everywhere and always a monetary phenomenon? And what quasi-government agency in the US is responsible for monetary matters?

  by:Paul L. Kasriel

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• USA| Apr 18 2024

  Another Beautiful Theory Spoiled by Ugly Facts

  In an April 16, 2024 Bloomberg News article entitled “What If Fed Rate Hikes Are Actually Sparking US Economic Boom?”, it is argued that the Fed’s increase in the federal funds rate from 0.08% in March 2022 to 5.33% in July 2023, which, in turn, pushed up other interest rates, stimulated US domestic aggregate demand for goods and services by increasing interest income to holders of fixed-income assets. Wow! This novel hypothesis, if valid, turns monetary policy theory on its head.

  Let’s look at some data. As can be seen in Chart 1, there does indeed seem to be some positive correlation between the level of the federal funds rate and the level of personal interest income. For example, when the Federal Open Market Committee (FOMC) hiked the federal funds rate from the beginning of 2016 through the first quarter of 2019, personal interest income moved up sympathetically. Although personal interest income had started increasing in 2014, before the FOMC had begun raising the federal funds rate. Similarly, as the FOMC began hiking the federal funds rate in 2022, personal interest income starting rising, too. So far, so good for this hypothesis that FOMC federal funds hikes raise personal interest income.

  by:Paul L. Kasriel

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• USA| Apr 01 2024

  April Odds and Ends

  I enjoy examining data. It used to be a hobby that I got paid to do. Now, it is just a hobby. Below are some random sets of data of that I found interesting. Perhaps some others will, too.

  As shown in Chart 1, starting in 2022, household interest payments as a percent of their after-tax income (Disposable Personal Income) started rising after declining in 2020 and 2021. By Q4:2023, household interest payments as a proportion of after-tax income had moved up to 5.4%. This compares with 5.0% in Q4:2019, just before the Covid pandemic hit the US. Notice that the main driver in of this proportional increase in household interest payments has been non-mortgage debt. With many 30-year home-mortgage rates locked in at around 3% in 2020 and 2021, households have been able to increase their spending relative to their after-tax income by increasing consumer loans, such as credit card and auto debt. Although household debt-service ratios are rising, they are a far cry from those that obtained just before the onset of the Global Financial Crisis, but …

  by:Paul L. Kasriel

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• USA| Mar 18 2024

  The Fed Depends on Undependable Data

  In its January 31, 2024 FOMC statement, the Fed said: “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.” The translation of this Fedspeak is that the Fed’s target level of the federal funds going forward would depend on the forthcoming data as they relate to the Fed’s dual mandates of promoting price stability and full employment. But what if the data upon which the Fed were depending to determine the level of the federal funds rate were undependable? In what follows, I will provide examples of “undependable” data and recommend a solution for how the Fed might conduct monetary policy in the face of undependable data.

  In the Bureau of Labor Statistics (BLS) February 2024 Employment Situation, it was reported that the level of January 2024 nonfarm business establishment payrolls was 157,533 thousand, revised down from its preliminary estimate of 157,700 thousand. Mind you, this is just the first revision of January 2024 nonfarm payrolls. When the BLS releases its March 2024 Employment Situation report, there will be a second revision to January 2024 nonfarm payrolls. And then in 2025, there will be annual “benchmark” revisions to 2024 nonfarm payrolls, including those of January 2024. The level of February 2024 nonfarm payrolls reported on March 8, 2024, 157,808 thousand, was said up 275 thousand compared to the first-revised January 2024 level of nonfarm payrolls. However, compared to the first-reported level of January 2024 nonfarm payrolls, the level of February 2024 nonfarm payrolls was up only 108 thousand. And, of course, in the next two 2024 BLS Employment Situation reports, the February 2024 level of nonfarm payrolls will be revised twice. Because of monthly and annual revisions, the monthly reports of nonfarm payrolls would seem to be undependable data upon which the Federal Reserve might use to determine monetary policy.

  On March 14, 2024, the Census Bureau reported that the level of February 2024 retail sales increased 0.6% compared to the revised level of January 2024 retail sales. However, the level of January 2024 had been revised down by $3,581 million or 0.5% from the originally-reported level. So, the level of February 2024 retail sales was up only 0.06%, not 0.6% from the originally-reported level of January 2024 retail sales. Based on revised data in the February 2024 retail sales report, in the three months ended January 2024, retail sales contracted at an annualized rate of 3.8%. Based on the data reported in the January 2024 retail sales report, in the three months ended January 2024, retail sales contracted at an annualized rate of only 1.8%, less than half the rate of contraction exhibited by the data revised in the February 2024 retail sales report. Again, monthly revisions to retail sales data would suggest that these data are undependable for the purposes of guiding monetary policy.

  The next problematic economic report I will discuss is the Consumer Price Index (CPI), more specifically, the Owners’ Equivalent Rent (OER) component of the CPI. At 26.7% of the CPI, OER has the “heaviest” weight in the CPI. That OER has such a high weight in the CPI is understandable given that the US homeownership rate is about 66%. My quarrel is not with the weight of OER but how it is estimated. From what I have read about this estimation process is that a sample of homeowners are asked by the BLS what the respondents think their detached dwelling/condo/townhouse would rent for. How many homeowners, especially owners of detached houses, have a reasonably accurate estimate of what their abode would rent for?

  OER was reported to have increased month-to-month annualized 6.94% in January 2024 compared to a 5.22% annualized increase in December 2023. The CPI excluding OER monthly increase was 2.66% annualized in January 2024 compared to 2.03% in December 2023. The month-to-month annualized change in the CPI-All Items was 3.73% in January 2024 compared to 2.83% in December 2023. The BLS received queries as to why there was such a relatively large percent increase in the January 2024 OER compared to December 2023. On February 29, 2024, the BLS issued a statement saying that there are now annual updates effective in January of a year in the weighting of the OER in terms of owner-occupied detached dwellings versus condos/townhouses. The BLS said that “[i]n January 2024, the proportion of OER weighted toward single-family-detached homes increased by approximately 5 percentage points.” My point, again, is not that OER is unimportant, but that its measurement is, for lack of a better term, “flaky”. Given the difficulty in accurately measuring OER, the European Union excludes OER from its calculation of EU consumer price inflation. Plotted in Chart 1 are the year-over-year percent changes in the All-Items CPI (the blue bars) and the CPI excluding OER (the red line). The year-over-year change in the CPI excluding OER in February 2024 was 2.27%, close enough to 2% for Federal Reserve work.

  by:Paul L. Kasriel

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• USA| Jan 09 2024

  Who[m] Do You Trust, the BLS or the ISM?

  Before he took over hosting The Tonight Show” in September 1962, Johnny Carson hosted an afternoon quiz television show called “Who Do You Trust” (originally titled “Do You Trust Your Wife”). I used to watch it when I came home from school before digging into my homework. Looking at the revisions to the monthly report of nonfarm payroll employment, the show’s title gained more relevance to me now. Billions of dollars, maybe trillions, of transactions in financial instruments take place in reaction to the first estimate of the change in nonfarm payrolls on the day each month that the Bureau of Labor Statistics (BLS) releases its report. That first estimate of the monthly change in nonfarm payrolls gets revised in each of the following two months. But those revisions, although sometimes mentioned by the mainstream financial media, tend to be put aside in the frenzy of trading that takes place in the nanosecond after the BLS releases its monthly report of the Employment Situation.

  I decided to take a look at how much the monthly changes in total nonfarm payrolls get revised from their preliminary estimate to their “final” estimate two months later. (I put quotation marks around final because there are of course, subsequent benchmark revisions.) Plotted in Chart 1 are the BLS first estimates for monthly changes in total nonfarm payrolls (the red bars) and its third estimates (the blue bars). (Ignore the November and December 2023 data points inasmuch as the BLS has not yet reported its final estimates for the changes in nonfarm payrolls for these months.) Plotted in Chart 2 are the monthly differences in changes in total nonfarm payrolls between the third estimate by the BLS and its first estimate. Notice that in the 10 months ended October 2023, there is only one month, July 2023, in which the third estimate is greater than the first estimate. Plotted in Chart 3 are the 10-month cumulative totals in the monthly differences between the third estimates of the changes in total nonfarm payrolls and the first estimates. Attention should be focused on the last data point, October 2023, which reads minus 417 thousand. So, in the first 10 months of 2023, the cumulative total of monthly changes in nonfarm payrolls was 417 thousand less when the third estimate of the monthly change in nonfarm payrolls is compared with the first estimate. But these 417 thousand jobs that got revised away probably had no effect on the analyses of the state of the US labor market made by the talking heads on CNBC and Bloomberg when the November and December 2023 first estimates of changes in nonfarm payrolls were reported by the BLS.

  by:Paul L. Kasriel

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• USA| Nov 30 2023

  Will the True State of the US Economy Please Stand Up?

  The second guesstimate by the Bureau of Economic Analysis (BEA) of Q3:2023 real Gross National PRODUCT’s annualized growth came in at 5.2%, up from the first guesstimate of 4.9%. Along with these data, the BEA reported its first guesstimate of annualized growth in real Gross Domestic INCOME (GDI) , 1.5%. In theory, both GDP and GDI should be the same. Both represent the value of goods and services produced in the economy. GDP calculates this value by adding up the value of expenditures in the economy – personal consumption, business expenditures, including the change in inventories, government expenditures and the change in net exports. Income is earned by some entities for the production of goods and services. So, GDI is the sum of wages, profits, interest income, rental income and taxes minus production/import subsidies.

  As I mentioned above, in theory, real GDP and real GDI should be the same. But, in practice, they are not. Plotted in Chart 1 are the quarterly observations of the year-over-year percent changes in real GDI (blue line) and real GDP (red line) from 2010 through Q3:2023. Also plotted in Chart 1 are the quarterly observations of the percentage point differences between the year-over-year percent changes in real GDI and real GDP (the green bars). Notice that in the three quarters ended Q3:2023, these differences have widened out considerably, widened out to the negative side. The median difference from Q1:2010 through Q4:2022 has been 0.09 percentage points. That’s close enough for government work for saying real GDI and real GDP, as separately calculated, are the same. But in the four quarters ended Q3:2023, the median difference has been negative 1.97 percentage points. In Q3:2023 by itself, the difference between the year-over-year percent change in real GDI and real GDP was minus 3.16 percentage points, the widest absolute difference between changes in real GDI and real GDP in the period staring in Q1:2010 through Q3:2023. Granted, the real GDI data point for Q3:2023 is the BEA’s first guestimate of it.

  by:Paul L. Kasriel

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• USA| Nov 28 2023

  Are Consumers Any Better at Predicting the Rate of Inflation than Economists?

  I don’t have access to the Blue Chip survey of economists’ forecasts of various economic data anymore, so I can’t answer my question. But I do have access to consumers’ inflation forecasts and these forecasts are terrible. Plotted in the chart below are monthly observations of consumers’ forecasts of year-ahead inflation as reported in the University of Michigan Consumer Sentiment Survey (the blue bars). Also plotted in the chart are monthly observations of the actual (until revised) year-over-year percent changes in the All-Items Consumer Price Index (the red line). The CPI percent changes are lagged such that they line up with month in which the consumers’ forecasts were surveyed. For example, in May 2020, consumers were forecasting that the year-over-year inflation rate in May 2021 would be 3.2% (the height of the blue bar in May 2020). As luck would have it, the actual CPI inflation rate turned out to be 4.9% (the height of the red line in May 2020). In October 2022, consumers were forecasting that the year-over-year inflation rate in October 2023 would be 5.0%. In fact, it turned out to be 3.2%. In the latest November survey, consumers are forecasting that inflation will be 4.5% in the 12 months ahead. Given that the sum of the monetary base plus commercial bank credit grew by only 0.7% in the 12 months ended October 2023, my bet is that the year-over-year percent change in the CPI in November 2024 will be much lower than 5.0%.

  by:Paul L. Kasriel

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• USA| Nov 21 2023

  Households’ Extraordinary Cash Holdings Will Thwart Fed Tightening, Part Deux

  Part un was written by me way back on March 14, 2020. I should have paid more attention to my 2020 commentary so that I would not have thought that household spending would be less resilient as it has been so far in 2023. Moreover, I would not have called for a recession to commence in Q2:2023.

  In Chart 1 below are plotted monthly observations of the M2 money supply as a percent of nominal Disposable Personal Income (DPI). From January 2015 through December 2019, the median value of this ratio was 91.8%. Then, after the federal government started writing Covid-aid checks to households and businesses, checks financed by the Fed and banking system, the ratio of M2 to DPI reached a high of 118.9% in January 2022. As of September 2023, the ratio had declined to 102.1%, much below its January 2022 high, but also materially above its 2015-2019 median value.

  by:Paul L. Kasriel

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