New Fed research highlights auto activity & recession outlook
Two experts from the Federal Reserve Bank of Chicago published a paper this week explaining why they think policymakers raising interest rates not only will curb inflation but will steer the economy away from a recession.
Stefania D’Amico and Thomas King, who are both senior economists and economic advisors at the Chicago Fed, explained the Federal Open Market Committee (FOMC) has raised short-term interest rates more than 500 basis points since early last year. But D’Amico and King pointed out that the committee recently slowed the pace of policy tightening and some participants have signaled that the current tightening cycle might be nearing its end.
“In making the decision to stop raising rates, an important consideration will be the extent to which the actions already taken by the committee have yet to feed through to the economy,” D’Amico and King wrote in their paper.
“On the one hand, if substantial effects of past policy tightening are yet to come, that would argue for an earlier end to rate increases, all else being equal,” the continued. “On the other hand, if we have already seen in the data the bulk of the policy tightening’s effects, the additional restraint that is yet to be realized might not be sufficient to meet the FOMC’s inflation goal; in this case, policymakers may see the need to take further action.”
Further insight into what’s happening in the economy surfaced this week through another Fed research endeavor. The Fed also released its latest Beige Book, which summarizes comments received from contacts within each of the 12 districts of the Federal Reserve System.
Here are a few automotive-connected highlights within those district updates:
From Boston: “New-car inventories normalized further but used cars remained scarce. Discounts on new automobiles returned as inventories approached normal levels, but prices on used vehicles remained elevated.”
From New York: “Auto dealers in upstate New York reported that new car sales edged up slightly as more inventory became available. With solid lingering pent-up demand, new inventory has been turned over quickly. Even so, some auto manufacturers have continued to use targeted incentives — subsidized financing in particular — to boost sales of certain models. Used-car sales increased in recent weeks spurred by softening prices.”
From Philadelphia: “Auto dealers reported a slight decline overall, although sales held steady for some. While inventories continued to improve, interest rates and high prices have excluded some buyers. Several contacts noted that sales of some electric vehicle models had softened.”
From Cleveland: “Auto dealers said that sales slowed because of higher interest rates and that inventories had increased. Moreover, some said that the pent-up demand built during pandemic-era supply shortages had been mostly exhausted.”
From Atlanta: “Automobile dealers reported that rising inventory levels and demand for new vehicles drove robust sales; the pace of growth for used vehicle sales slowed.”
From Chicago: “New and used light vehicle sales rose, helped by greater availability of more affordable models.”
From St. Louis: “A Louisville auto dealer reported both new and used high-end vehicles are seeing a slowdown in demand due to affordability issues. This has been most prominent with full-sized pickup trucks and used vehicles over $25,000.”
From Minneapolis: “A dealership with multiple locations saw new-vehicle sales in July rise by almost half compared with last year; used-vehicle sales have slowed somewhat as a result.”
From Dallas: “Auto dealers noted some weakness in sales, and contacts pointed to inflation and high interest rates denting consumer demand. Several also cited a potential auto workers strike as a threat.”
While part of the Beige Book research mentioned some murky situations, D’Amico and King are bullish about avoiding a recession.
“We estimate that although the majority of the effects on output and inflation have already occurred, the policy tightening that has already been implemented will exert further restraint in the quarters ahead, amounting to downward pressure of about 3 percentage points on the level of real gross domestic product (GDP) and 2.5 percentage points on the Consumer Price Index (CPI) level,” they wrote.
“Tightening effects on the labor market manifest more slowly, so more than half the policy impact on total hours worked is yet to come. According to the model’s forecast, the policy tightening that’s already been done is sufficient to bring inflation back near the Fed’s target by the middle of 2024 while avoiding a recession,” D’Amico and King went on to write.