Is the US economy at a turning point?

Yesterday brought us some significant news from the US economy. One segment of this was the testimony given by the new Chair of the US Federal Reserve Jerome Powell as everyone combs his words looking for any signs of a change in policy. The sentence from the written testimony that has drawn most attention is below.

In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. ( PCE is Personal Consumption Expenditure )

The reason for that is the use of the word “overheated” which brings with it all sorts of value judgements and implications. This was added to by the phrase he added to this.

My personal outlook for the economy has strengthened since December.

We also got an explanation of what was driving such thoughts.

 In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative.

The nod to fiscal policy was a change of emphasis from his predecessor Janet Yellen as I am reminded of the analysis of the US Congress on the subject we looked at on February the 8th.

The Joint Committee staff estimates that this proposal would increase the average level of output (as measured by Gross Domestic Product (“GDP”) by about 0.7 percent relative to average level of output in the present law baseline over the 10-year budget window.

The underlying position

The thoughts above added to the existing situation which Chair Powell described thus.

Turning from the labor market to production, inflation-adjusted gross domestic product rose at an annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace in the first half of the year.

So the fiscal policy will add to an already strengthening situation and the emphasis is mine.

Economic growth in the second half was led by solid gains in consumer spending, supported by rising household incomes and wealth, and upbeat sentiment. In addition, growth in business investment stepped up sharply last year, which should support higher productivity growth in time.

The reason I have highlighted that bit is because Chair Powell had explicitly linked it to wage growth.

Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been damped in part by the weak pace of productivity growth in recent years.

If we switch to the section on employment we see a continuing theme.

Monthly job gains averaged 179,000 from July through December, and payrolls rose an additional 200,000 in January. This pace of job growth was sufficient to push the unemployment rate down to 4.1 percent, about 3/4 percentage point lower than a year earlier and the lowest level since December 2000.

Are we seeing a hint of Phillips Curve style analysis which would predict wage growth acceleration? We did get told he likes policy rules.

Personally, I find these rule prescriptions helpful

Also you may note that he hinted at a pick-up in jobs growth in January which comes when the unemployment rate tells us that according to old policy rules we have what would have been considered to be full employment. It was also interesting that he skirted what we might call the missing eleven million or so via the drop in the participation rate.

the labor force participation rate remained roughly unchanged, on net, as it has for the past several years

I am not sure that it all be blamed on retiring “baby boomers” as we were told.

So we are told that the economy is strong and got a pretty strong hint that higher wage growth is expected and of course that follows the 2.9% growth seen in January in average hourly earnings.

Wages should increase at a faster pace as well.

What about inflation?

That is supposed to pick-up as well as we continue our journey on a type of virtual Phillips Curve.

 we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term.

These days it is something of a residual item in speeches by central bankers. This is for two main reasons. The first is that they have really been targeting output and the labour market. The second is that even after an extraordinary amount of QE they failed to generate the ( consumer) inflation they promised and so they are de-emphasising it.

Overheating?

This subject flickered onto some radar screens yesterday as they observed this from the Census Bureau.

The international trade deficit was $74.4 billion in January, up $2.1 billion from $72.3 billion in December.
Exports of goods for January were $133.9 billion, $3.1 billion less than December exports. Imports of goods
for January were $208.3 billion, $0.9 billion less than December imports.

This is something which has been rising as we note this from the Bureau of Economic Analysis or BEA earlier this month.

For 2017, the goods and services deficit increased $61.2 billion, or 12.1 percent, from 2016. Exports
increased $121.2 billion or 5.5 percent. Imports increased $182.5 billion or 6.7 percent.

So we may well be seeing economic growth sucking in imports yet again or a different form of overheating. Thus the words of Chairman Powell above on exports were both true ( they are up) and to some extent misleading as imports have risen faster. This is reinforced with my usual caution about monthly trade data by  the size of the January  goods deficit which is the largest for ten years. If we allow for the fact that the shale oil and gas boom flatters the figures the numbers take a further turn for the worse.

Consumer Confidence

We return to the same theme as we note this.

The Conference Board Consumer Confidence Index® increased in February, following a modest increase in January. The Index now stands at 130.8 (1985=100), up from 124.3 in January. The Present Situation Index increased from 154.7 to 162.4, while the Expectations Index improved from 104.0 last month to 109.7 this month.

So another signal looks strong.

Comment

If we start with the analysis of Chair Powell we see that the US Federal Reserve plans to continue interest-rate rises this year and that it means to do so either 3 or more likely 4 times. This is based on the view that otherwise the economy will overheat as discussed above. Let me add a personal view to this which is the current madness of going along at 0.25%, why not raise by 0.5% in March and then sit back for a while and see what develops? Monetary policy has long lags and if you take ages to act you are at an ever greater risk of being proved wrong.

Another factor in this is the data I have looked at above as I have held something back until now which is troubling. Here is the extra bit from the consumer confidence figures.

Consumer confidence improved to its highest level since 2000 (Nov. 2000, 132.6).

Now if we look at the trade in goods figures the deficit was last higher in January 2008 a time when consumer confidence was high in many places too. What happened next in both instances?

If we continue with that line of thought we find that the oil market may be giving a hint as well.

https://twitter.com/a_coops1/status/968783142717919233

Another reason I think to act more decisively now as after all interest-rates will only be 1.75% to 2% after a 0.5% rise a level I have long argued for and then wait and see. After all we could be seeing a flicker of a road to QE4.

23 thoughts on “Is the US economy at a turning point?

  1. Hi Shaun

    I think your caution at the end of your piece is more than justified. The current expansion is very long in the tooth indeed and these things cannot go on forever.

    Also, and with regard to the jobs figures, many have called this the “waiters and bartenders” recovery as most of the job gains are in this sector; they are not the high wage jobs that provide the bedrock of the economy. In effect they are a false signal.

    Also the US is undergoing a huge fiscal expansion; they appear not to care any more about fiscal deficits even when the economy is supposed to be doing well, remarkable for a republican administration. Deficits of this order will support spending in the short run but in the longer run the danger is currency collapse with all its consequent effects on inflation and, potentially, interest rates.

    Financing deficits of this order ( I believe $1.8Trillion next year) would almost certainly require steep interest rates rises going beyond what is already foreseen. QE4 I would say is almost a dead certainty to avoid this, at least in the short term,but, again, this implies laying the groundwork for major problems down the road and another huge expansion in the Fed balance sheet with any talk of unwinding buried.

    Powell appears to be Yellen Mark2 and just as clueless.

    • Ive seen it called the waiters and bartenders recovery …. then the same people will state bars and restaurants are closing in record numbers!

      Do you not think QE4 will just be helicopter money to boost their ailing infrastructure, once the boost from the tax breaks has died down? This way Trump gets his 3% growth and creates decent jobs so everyones a winner apart from the generation who have to pay the debt back.

      From what i’ve seen America’s news media is far superior to that in the UK/Europe in that they actually debate QE/ZIRP. Certain US politicians openly speak up against it showing it to be the theft that it is thus more people are informed. … In Euroland/UK you’d get someone labelled as a far right nut-job who is talking confusing gibberish for speaking up about it.

      For me the US is slamming its brakes on just before it hits the wall, hoping to minimise the damage, Euros are pressing down the accelerator hoping the drive through the wall, and in the UK Carney is fumbling around with the keys to the ignition not quite sure what to do with them whilst a juggernauts about to hit.

  2. I know this site tries to keep politics out of the discussion whenever possible, but in the fevered atmosphere of the US that is impossible. This place is riven with politics, its split right down the middle. Every utterance by anyone is weighed in political terms.
    Florida , where I sit typing this, is a 50/50 state, so what is happening here is fairly symptomatic of the USA in total. The local economy is ahead of the reported statistics. There are signs all over the place for people to fill jobs. Immigration from the rest of the US is increasing, and its not just ‘grey hairs’. Construction is everywhere. Inflation in foodstuffs and services is increasing. Wages are increasing faster than for years. Federal taxes are down, local taxes ( mainly property based) are up. House prices are up, but excepting Miami, not excessively.
    The impression is of an economy booming, at more than 3% pa.
    What national statistics don’t tell you, are the local factors at work. Irma created a lot of work. Looking around now, there is hardly any sign of damage. Consumer confidence has ratcheted higher, obvious spending on big ticket items has mushroomed, boats, residential docks etc. There has been an ongoing removal of various impediments to development ( ie regulations) by this administration, rarely commented on in the media in the US, and ignored outside the US. Whatever your personal thoughts, it does appear to have unleashed some of the ‘animal’ in the US economy.
    None of this can ignore the $1.2bn extra borrowing in 2017, a 6% increase. The latest US ‘end of year accounts’ show the country under water by over $20bn. Plus an estimated further $50bn due to commitments for medicare and social security. The trade deficit is over £0.5trillion. These are huge numbers. However perspective is required. The GDP is over $20Trillion, the Federal tax take alone is well over $3Trillion. The Florida economy is slightly larger than that of the Netherlands.
    Final ‘political’ point. Its the mid-term elections this year. Trump wants his 4%+ growth rate going into them. Overheating notwithstanding, he will get it.

    • Hi Jim and thanks for the viewpoint.

      If the rest of the US economy is performing anything like what is happening in Florida then I might change my view and say a 0.75% interest-rate hike is appropriate for March as opposed to 0.5%. Why mess around with 0.25% moves which will be too late? Much better in my view to make the move you think is correct and than sit back for a while and see what develops. The only explanation required would be that it is it for a now and possibly a while but not forever.

      • Because of the mid-terms, Shaun. Its a political not economic decision. Will the , ‘full of Dems’ Fed do as you suggest to slam on the brakes; or will the ‘animal spirits’ continue to be let loose? Political considerations will decide, not economic ones.

  3. It seems to me there’s a subtle change in attitude amongst the CB’s.

    Despite all the talk about inflation,I think they’re more worried about the evident distortions to economic activity caused by QE.Even people like Buffet,who’s done quite nicely in the last ten years, are complaining about the fact that CB’s have created a situation where even average businesses have high price tags.

    Carillion,Steinhoff etc have forced a lot of good businesses to overpay for risky assets

    • Hi Dutch

      The more intelligent ones have to be although that does leave a few out. The problem for them is that just like for Depeche Mode they feel this too.

      “We walk together
      We’re walking down the street
      And I just can’t get enough
      And I just can’t get enough
      Every time I think of you
      I know we have to meet
      And I just can’t get enough
      I just can’t get enough”

  4. Shaun, I like your challenge. The taper tantrum seems to be foremost in these peoples minds, must not shock the markets… gently does it. I do agree however with doubling the size of the move and perhaps the cadence with it. As you say there is a lag.

    I posit that the slow incremental progress is more to slap Euroland and Carneyworld out of a stupor.

    Just what the heck would those two areas do if US pushed IRs up 100bps in a single go?

    There was a UK jobs news in the FT suggesting wage inflation however the next article announced a Maplin receivership so I guess Carney will read the two as a cancel and sit on his hands.

    Paul C.

    • Hi Paul C

      We keep getting these articles saying UK wages are rising but so far the evidence is thin and that is when there is some which is not often. As you say it seems far away in the retail industry. The media has kept assuring us a wage rise in Japan is just around the corner too.

      As to the US worrying about the rest of the world it never used to but maybe it does now a little in terms of monetary policy. But if the Fed has anything like the evidence that Jim has written about above then 0.5% and maybe 0.75% should be the next move.

  5. The Fed, just like Carney, will talk the talk, but are petrified of killing the “recovery” by raising rates too soon, if they continue and the stockmarket crashes(housing market for Carney) and tries to call their bluff, will they introduce QE4 as everyone thinks?

    If they were serious, why not raise at 0.5% steps as Shaun says, but this is probably because they have one eye on the stockmarket, and they are waiting for the inevitable hissy fit, so in their eagerness to please their masters, they will only tip toe increases.

    The logic of these people is truly unbelievable, in order to prevent the next recession, they want to be able to cut rates by 3-4%, so they have to raise them first in order to cut them – got that? The best analogy I’ve heard for that nonsense is a fat woman being told she has to gain 10lbs in order to lose it. And these are the Harvard and Princeton educated geniuses that are running the worlds economies, praised and worshipped by the media. Truly frighteneing isn’t it?

    Many have predicted a dollar crash if QE4 is introduced, so this year we will probably see if the Fed is truly a captive of Wall St.

  6. As a postscript to the above entry and my opinion on where we are headed viz a vis interest rates, perhaps we need some “insider information”, well not exactly insider information, but as we no longer have an independent, unbiased media that reports anything like the truth any more, here is a link to the minutes from a Fed meeting way back in 2012. As far as the reporting of such meetings are concerned, it may as well be classified as insider info, but it gives a shocking insight into the degree to which the Fed and central nbanks are now manipulating and controlling markets. In case anyone doubted the people previously described as tinfoil hat wearing, foaming at the mouth conspiracy theorists, who said the Fed’s plunge protection team prevented stockmarket selloffs, just read the words from the new Fed chair Jerome Powell:

    “I think we are actually at a point of encouraging risk-taking, and that should give us pause.

    Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.”

    If anyone thinks the Fed or any central bank is,after bailing out the criminals running the banking system, and ensuring the totally irresponsible, reckless debt monkeys who have fuelled housing bubbles around the world, will now raise rates to 4% they probably need to have sharp objects removed from their vicinity, and have their medication increased.

    The Fed have spelt out that it is their policy and intention to “create wealth” via ever rising stock prices(see above), and so the question is, why would they now threaten to destroy this golden goose by raising rates to 4%???.

    Quite simply they are not, this is why the US stockmarket has now gone parabolic, and is the next in a series of bubbles created by our illustrious masters, people have realised the Fed has this policy and have gone “all in”, they have also realised(probably before the cretins that actually make the decisions at the Fed), that they are now trapped and can never raise rates appreciably ever again, so everyone and his wife are now holding a gun to the head of the Fed and daring them not to raise rates(as have the British house buyers since the 1950’s – it has never failed).

    Click to access FOMC20121024meeting.pdf

    • Hi Kevin

      I wonder from time to time and have written on here that the US Dollar fall in recent times might be as a result of rising expectations and thus pricing in of QE4. Only time will tell. As to your view well Elvis was ahead of you.

      “We’re caught in a trap
      I can’t walk out
      Because I love you too much baby

      Why can’t you see
      What you’re doing to me
      When you don’t believe a word I say?”

  7. The money supply of the US and all western economies are expanding exponentially as is the debt because we have a debt based money system.
    Inflation is rising as inflation is caused by an increase in the money supply chasing the same amounts of goods and services,but they are manipulating the figures as is proved for US inflation by shadowstats.com.
    Prices are increasing earnings are stagnant ,the economies are in trouble as witnessed by the administration todayof ToysRUs and Maplins in the UK this is usually blamed on internet shopping,the real problem is the consumers have no money and are poorly paid and drowning in debt,there is no way out of this.
    Yet the media just like that in North Korea says everything is awesome.
    The US almost $21T in debt an unimaginable sum passes it of by saying it is only 100% of GDP they are only surviving by manipulating interest rates through monetising the debt.
    They eventually have to default or inflate or start WW3 which seems likeliest outcome they are run by the Military Industrial Complex as warned by President Eisenhower.
    If the rate of debt expansion continues which seems likely by cutting taxes for corporations who ifthey follow the previous experience will use it to buyback shares and increased military spending they will soon be over $30 T in debt at some point suppression of interest rates will no longer be enough….they are bankrupt they cannot pay back their debt and soon won’t be able to service the interest other than by QE to infinity.,as the late George Carlin said “Its a big club and you ain’t in it”
    The level of private debt is of a similar trajectory only there is no printing press for the consumer..
    Then again there is Japan the safe haven….I clearly have no understanding of economic solvency .

    • There’s plenty of money being spent in Smyths toy store! Toys R us have lost the plot and even my 5 year old grandson can see that – he much prefers Smyths. TR Us became lazy and failed to follow trends and to update their stores. I remember going in to them with my children when they were new and exciting but the stores still look the same a generation on.
      Maplins have lost out to the internet (it would be interesting to know how their own online sales have done) as people will not travel to buy a simple widget when they can have it delivered with the click of a mouse.
      There are huge retail changes happening with the internet and unless you have a real reason to get consumers into your store and can compete with the internet on price then you are in big trouble. Jessops, Maplin, Currys etc will not be the last to fall (or close stores and go online).

  8. I have been to a few Chartered Institute of Securities & Investment meetings recently to be told by some that the US is good for value companies and (I think as it has been snowed off for tomorrow!) generally, while others say Japan and Vietnam. I asked at the last about whether Japan offset Vietnam as the BoJ is manipulating share prices, while Vietnam has obvious risks and was told not, because they were just looking at the companies. I have some shares in Sylvania Platinum, which are quietly coming up as they have no debt, but they would be recommended by some on the low P/E, yet there is political risk in South Africa and platinum is rather sector dependent in its sales. I am told Australia is a risky bet on bonds as most of its debt is denominated in other currencies, while the US has the ultimate reserve currency (aka printing press) and so, is far less risky. Ultimately, it is all floating on cheap money and nobody really knows what will happen when the music stops.

    We can see the cracks appearing. As unsecured lending with its ridiculous rises, we have in the UK (as in the US as mentioned above) discretionary spending coming under pressure with various food chains going bust. In the report on the UK’s Prezzo chain today, the BBC notes; “Analysts have said fears over the strength of the UK economy have meant consumers have cut back on discretionary spending.” I am not sure what to make of the US (hence my intention to go to tomorrow’s CISI meeting when rearranged!) – why raise rates and reduce the capital value of the bonds the Fed bought? I suppose it does point to QE4 when the tax stimulus runs out as otherwise it would make sense to flog the bonds before hiking rates.

    In normal economic theory, there ought to have been an improvement in US exports after the fall in the USD, but that hasn’t happened and the debt will only rise as the USD falls with the fiscal stimulus,. It is all rather reminiscent of Reaganomics, which built a big US debt and led ultimaltely to the early 90s recession. However, these days, it seems politicians chase short-term popularity and that is feeding into unstable economic policy. Still, i have some extra background for the CISI meeting! .

    • Hi David

      I would add to your US trade point that the world economic situation is also favourable so US exports should be and are rising ( 5% in 2017) but rather like the UK they have a propensity to import even more. They may still be in what is called the reverse J curve ( as prices can change faster than volumes) so only time will tell.

  9. Shaun
    Great article and interesting comments from your readers.
    It seems to me that the USA, yet again, has acted more smartly than we in Europe or the UK. At least the USA is talking about tapering and perhaps will offset the effects through fiscal loosening.
    However, should we not be worried that the only way for western economies to run is through the fantasy of QE or by eye watering amounts of borrowing?
    Both QE and borrowing seem to me to be ways of allowing governments to spend money without anyone having to pay taxes. This doesn’t seem to be a recipe for the long term or indeed for tte short term if hit by an economic shock,
    Have I missed something?

    • Hi James

      I will answer that in the video I will post tomorrow. I recall saying that these moves like Keynesian economics borrow from the future and are therefore time limited. Except it is a decade and counting now so as Muse would say.

      “Our time is running out
      Our time is running out
      You can’t push it underground
      You can’t stop it screaming out
      How did it come to this?
      Oh”

  10. Great blog as usual, Shaun.
    You write that inflation is ignored in central bankers because: “first… they have really been targeting output and the labour market” and “…second…even after an extraordinary amount of QE they failed to generate the (consumer) inflation they promised…” I don’t follow US Fed speeches that much but trust your take is accurate. With regard to your first point, the US Fed never really became an inflation targeting central bank. It is just a bank with an inflation target. Janet Yellen always mentioned the full employment goal ahead of the price stability goal. The chair of the US Fed doesn’t have to write a letter to the Secretary of the Treasury if the PCEPI inflation rate is outside of the target range, as there is no target range for the actual inflation rate to fall short of or exceed. There is only an excessively high target rate which, as Ed Harrison observed, the US Fed seems to treat more as the upper bound of its target range rather than its target rate. From January 2012 to December 2017, the PCEPI had an average annualized inflation rate of less than 1.3%.
    With regard to your second point, while the 12-month rate of change for PCEPI suggests that inflation is well below target, annualized rolling-quarter quarterly changes (e.g. the November rate is based on September-to-November 2017 as compared to June-to-August) show things running a little hotter, with December at 2.8%, down from 3.0% in November. More important, housing price inflation, which is excluded from the dysfunctional PCEPI measure, is high and seems to be going higher. The national Case-Shiller HPI inflation rate was 6.3% in December, up from 6.2% in November, and Zillow Real Estate Research has backcast that January’s inflation rate was 6.4%. In December, the leading cities for housing price inflation were Seattle at 12.7%, Las Vegas at 11.1% and San Francisco at 9.2%, so it almost looks like the US could, if the US Fed doesn’t hike rates, have a new housing bubble that looks a lot like the last one. The other Shaun, Dr. Shaun Murphy of the Good Doctor, is a surgeon in training but rents a flat. When you look at how quickly San Francisco house prices are rising, one can understand why.

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