This evening we will see the latest set of meeting Minutes from the Federal Reserve Open Markets Committee which is the interest-rate and indeed Quantitative Easing arm of the US central bank. Rather like the Bank of England the FOMC has been teasing everybody about a prospective interest-rate rise for some time now but just like it nothing has actually happened. It has remained a mirage in the distance that is apparently just out of reach. You might like to contrast that in these times with interest-rate cuts around the world which flash up across the various media with quite some regularity these days So far this year there have been 30 or so interest-rate cuts in 2015 including China, India,Korea, Australia and a host of others including Switzerland, Denmark and Sweden who have plunged into the icy cold world of either negative interest-rates or further into them. You may note that there is quite an asymmetry there!
What about the US economy?
The latest set of economic growth data were poor.
Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 0.2 percent in the first quarter of 2015, according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent.
So there was not only a very weak reading but quite a slowdown from the end of 2014. This was quite a lurch downwards from the 3% annualised growth that had been doing the rounds in the financial markets not so long ago. Indeed as recently as February the Bank of England made yet another forecasting error.
much weaker than the 0.6% expected at the time of the February Inflation Report (or annualised ~2.5%)
Since then we have seen very poor trade figures thrown into the mix.
The U.S. Census Bureau… announced today that the goods and services deficit was $51.4 billion in March, up
$15.5 billion from $35.9 billion in February, revised
This meant that the quarterly picture for trade was now as follows.
Year-to-date, the goods and services deficit increased $6.4 billion, or 5.2 percent, from the same period in 2014.
Accordingly the latest estimates for that quarter are now in negative territory as we await the later updates. The only hope is that a more complete data set finds a positive nugget or two.
Also as we recall the way that central banks panic at the thought of negative inflation there was this tucked away in the data.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.5 percent in the first quarter, compared with a decrease of 0.1 percent in the fourth.
Ordinary workers and consumers will welcome lower energy and to a lesser extent food prices but of course central bankers are made very nervous by them. What about the banks? What about the debt?
What about now?
Something rather familiar has been happening and I shall take you over to the Atlanta Federal Reserve whose GDP tracker has been on form.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.7 percent on May 19, unchanged from May 13.
Over the past week the number had been pulled lower by weak industrial production data and then pushed back up by strong residential housing numbers. So there is the distinct possibility that over the first half of 2015 the US economy will see no growth at all. This is very different from what is calls the “Blue Chip consensus” which has gone from just above 3% per annum growth to just below it. Quite a gap! Just like last time.
Ominously perhaps today’s Bank of England Minutes remain optimistic for US economic growth.
These effects were likely to be temporary, pushing up on growth in Q2: Bank staff expected growth of 0.7%.
Ah that word temporary again! Has anything actually proved to be temporary after an official claim about bad data?
As recently as the middle of March the Federal Reserve told us that US GDP growth in 2015 would be between 2.3% and 2.7% which means that it will really have to charge ahead in the second half of this year.
Wage growth and productivity
This is a measure which most central banks are tracking closely right now. The latest employment report data is below.
In April, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.87. Over the past 12 months, average hourly earnings have increased by 2.2 percent.
Hardly racing away is it as the last quarter of 2014 saw growth of 2% per annum? If we look back to the pre credit crunch period then depending on which measure you use you would estimate it at being 3-4% per annum.
Also somewhat ominous for possible wage growth is this research from the Atlanta Fed about productivity.
For example, over the past three years, business sector output growth averaged close to 3 percent a year. Labor productivity growth accounted for only about 0.75 percentage point of these output gains.
Thus it is not only the UK which has its concerns about labo(u)r productivity and the new pattern is very different from the past.
Business sector labor productivity growth averaged 1.4 percent over the past 10 years. This is well below the labor productivity gains of 3 percent a year experienced during the information technology productivity boom from the mid-1990s through the mid-2000s.
If these productivity trends are now permanent then real wages are on quite a different path to what people hope they will be and of course the path for interest-rates changes too.
These are hard to read at the moment as highlighted by the latest purchasing managers report from Markit.
The seasonally adjusted final Markit U.S. Composite PMI™ Output Index (covering manufacturing and services) posted 57.0 in April, down from 59.2 in March and the lowest reading for three months.
It would be ominous if there was a slow down from the weak official economic growth data for the first quarter of this year. But as I am sure you have noticed the PMI report had economic growth charging forwards earlier this year!
Monetary Policy has tightened
There is much more to monetary policy than just official interest-rates especially these days. If we look at market interest-rates then the ten-year bond yield has risen from just above 1.6% in late January to 2.27% now. This has pulled mortgage rates back up again after the falls seen in 2014 and January of this year. Whilst the US Dollar is no longer at its highs the trade-weighted dollar index is at 95.5 compared to 80 a year ago which shows how much the US Dollar has risen.
Some care is needed because the US Dollar is the reserve currency and also because the US economy is in proportional terms less of a trade dependent nation than many. But if you were setting US policy you would be wondering if March’s poor trade figures were the beginning of a new weaker trend.
There are many ways of looking at the situation. I have thought for some time that a new version of Forward Guidance is in operation where the Fed (and the Bank of England) promise interest-rate rises but in reality do not actually mean to carry them out. They hope that “expectations” as in market behaviour will do the job for them and make actual rises unnecessary. They of course ignore the dangers of moral hazard and to credibility of crying wolf.
Added to this are signs of weakness from the US economy which are far from alone in the world. For example after a good start to 2015 the Euro area (h/t @markbartontv ) surprise index has not only reversed but gone negative recently. If matters are going so well in China why does it keep cutting interest-rates? Indeed why are so many cutting interest-rates. Now America is often quite insular and may be bothered less by the rest of the world than one might think but it will worry about how much higher the US Dollar would go if it raised interest-rates.
So this is a situation rather like the UK General Election as even those who say they will raise rates are likely to change course when it comes to actually doing so. As Change (with one Luther Vandross) put it.
But now I know
I don’t need you at all
You’re no good for me
I’ve changed my mind