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James E Keenan's avatar

What I liked most about this post was the headline -- though perhaps for a connotation which Ms Kelton did not intend.

When I read, "The Rate Hikes Will Continue Until Morale Improves," my first thought was, "*Whose* morale has to improve?"

The average American's? The working class's? No! It's the *ruling class's morale* which has to improve before the Fed can stop hiking interest rates. The stock market as the measure of capitalist morale: I should have had that insight forty years ago!

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Marshall Auerback's avatar

The CPI services inflation data is highly suspect. It has diverged from PCE services inflation in a huge way. These two measures of the same sectoral inflation now diverge by more than 3 percentage points.

If we deflate nominal weekly earnings with CPI inflation, we get a gargantuan decline in real weekly earnings which supposedly have been falling at a 4% annual rate for six consecutive months now. 4%!! There has been nothing like this going back to 1981.

If real weekly earnings have been falling by a four percent annual rate for months now consumer spending should be collapsing. Maybe it has been weaker than the first pass data so far says, but we see no signs it has been collapsing.

If we do the same using the PCE services deflator we get a far more plausible 2 % decline in real income.

We should ask ourselves, why oh why would we be having a gargantuan decline in real earnings recently?

The reason is that because at turning points into recession there are sometimes many grave statistical errors which mislead, sometimes fatally. We have more this time around than in the past:

Payroll growth massively above household survey job growth

ISM services PMI booming and S&P global services PMI crashing

Implied business productivity crashing like never before in a close to constant GDP

A completely off-the-charts statistical discrepancy with net domestic income almost 5 percentage points above net domestic expenditures when in reality they are the same

And now a huge divergence in two measures of services inflation in a basically services economy

I’m spooked by my memory of 2008 when faulty data said the economy was doing just fine when in fact it had entered into the deepest and most protracted economic contraction since the 1930s.

I fear a puerile Fed, trying to be as hawkish as can be for fear the kids on the block will call it chicken, will select faulty data in a way that will support more policy rate increases even though the turning point into recession has arrived. So Stephanie is right to expect a recession and higher unemployment soon.

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