📏 Inflation quirk

Plus: Growth mystery solved | Thursday, September 29, 2022

Open in app View in browser   Presented By AcreTrader   Axios Macro By Neil Irwin and Courtenay Brown · Sep 29, 2022 New revisions to U.S. GDP are in, and they solve a mystery we've been covering in this space: why two different measures of growth in the first half yielded dramatically different results. Unfortunately, it wasn't resolved in a good direction. But first, a look at a surprising factor making inflation data seem more benign than it is. Situational awareness: The labor market continues to look too hot to handle, as weekly jobless claims fell to a mere 193,000 last week, the lowest since April. Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 769 words, a 3-minute read.     1 big thing: Quirk makes inflation look lower Illustration: Sarah Grillo/Axios   Tomorrow morning, the government will release new numbers on incomes, spending and inflation for August. Analysts expect core personal consumption expenditure (PCE) inflation, the Fed's preferred measure, to come in at 4.7% over the last year. But a surprising calculation quirk is pulling those numbers lower. It underscores the importance — and pitfalls — of focusing on the innards of inflation figures. Why it matters: Over the last year, much has been said about why various forces pushing inflation up are one-offs and should be ignored. But that cuts both ways. The details: For PCE inflation, one of the biggest downward forces is linked to purportedly falling prices in the "portfolio management and investment advice" category. They are down 18.5% just since January. But it isn't that investment managers are slashing their prices. Rather, they often charge a percentage of assets under management — and asset prices have plunged. For example, if someone paid their money manager 1% of assets in annual fees, but the value of their portfolio fell 25%, it would show up in the inflation data as the price of money management services falling 25%. Whatever you think of that approach — to the degree plunging asset prices are, in a mechanical sense, flowing through to lower core prices — it means the reported inflation numbers are lower than what most people are experiencing. After all, most portfolio management fees are paid by people with lots of financial assets. Rich people may be saving some money, but for a person with a modest or non-existent portfolio, it doesn't matter. According to calculations by Jason Furman and Willie Powell III at Harvard Kennedy School, prices rose at a 5.3% annual rate in the April through July period if you exclude these services, not the 4.3% rate at which core prices were reported to have risen. What's next: "Given how it is constructed, portfolio management inflation tends to track asset market performance, and is highly correlated with the equity market with a one-month lag," Deutsche Bank chief U.S. economist Matthew Luzzetti tells Axios. Therefore, he doesn't expect much impact on tomorrow's August inflation numbers, since stock prices were relatively flat in July. But it implies that September inflation may be misleadingly high (because stocks rose in August) and October inflation misleadingly low (because stocks plunged this month). The big picture: To get a clear reading of inflation trends, it's important to sweat the details of how indexes are calculated. But you can't look at just the components pointing in your preferred direction. As Furman notes, there has been much coverage of how quirks in the used car market have made inflation look artificially high, yet virtually none (until now!) of how portfolio management quirks may be making inflation artificially low. The bottom line: It's important to look carefully at even the aspects of economic data that don't tell you what you want to hear.     A message from AcreTrader A new way to Invest in an old asset: farmland     Land has historically produced significant wealth with limited correlation to a volatile market, but most investors haven't had access — until now. AcreTrader offers passive ownership in farm and timber properties, helping diversify your portfolio with real assets. Find out how.     2. 🔍 About that economic growth mystery ... Data: Bureau of Economic Analysis; Note: In 2012 chained dollars; Chart: Axios Visuals A big mystery for economic wonks everywhere has been the unprecedented divergence between two growth yardsticks that, historically, have been more aligned. Revised figures today bring the measures more in step, and partly solve the mystery. But the result isn't especially reassuring: Depending on your preferred metric, economic growth was weaker than previously thought. The notable revisions were for gross domestic income (GDI). As the name suggests, the measure sums up all of the income in the economy — business profits, interest payments and wages. It initially painted a rosier growth picture. Why it matters: Lackluster gross domestic product (GDP) didn't seem to square with the gangbusters labor market. That's why some economists were certain GDP would eventually be upwardly revised to better match GDI figures. That outcome hasn't materialized — for now, at least. What's going on: One driver behind the downward GDI revision was slower labor compensation than initially reported. In other words, worker wage growth wasn't as hot as we thought. By the numbers: In Q1, inflation-adjusted GDI increased by 0.8%, lower than the initial estimate of 1.8%. The latest estimate of Q2 GDI shows it increased 0.1%, not the 1.4% the government first reported. GDP, which adds up all the spending in the economy, was unchanged for both quarters. For 2021, the change in GDI was revised down, while GDP was revised up slightly. That brings the gap between the measures to -0.6% last year. That's a much more normal discrepancy than the -2.3% gap previously reported. "There's no question that the record level of subsidies related to the pandemic certainly created challenges for harmonizing the story between GDP and GDI," the Bureau of Economic Analysis' Dave Wasshausen told reporters.     A message from AcreTrader Maybe it's time for a boring investment     Over the past 20 years, farmland has consistently outperformed other asset classes over time with slow and steady growth. Okay, but: What about stocks? Unlike farmland returns, the S&P 500 is down 17.5% YTD. Try something boring like farmland.   Are you a fan of this email format? It's called Smart Brevity®. Over 300 orgs use it — in a tool called Axios HQ — to drive productivity with clearer workplace communications.   Axios thanks our partners for supporting our newsletters. 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