The US economy is slowing but how quickly?

A feature of recent times has been the way that economic growth forecasts have been trimmed somewhat. This morning has already seen two examples of that as the Swiss National Bank has suggested it will fall from 2.5% this year to 1.5% next, must be awkward that when your official interest-rate is already -0.75%. Next came the IFO Institute in Germany which did a little pruning to 1.5% this year and more of a short-back and sides to 1.1% in 2019. That provides some food for thought for the European Central Bank today as its largest economy slows.

The situation in the United States has been somewhat different, however, at least according to the official data. From the Bureau for Economic Analysis.

Real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the third quarter of 2018 , according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.2 percent.

Yes it has slowed but to a rate most first world countries would currently give their right arm for. We can use the Atlanta Fed now cast to see where we stand this quarter.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2018 is 2.4 percent on December 7, down from 2.7 percent on December 6.

They updated it on the basis of this new information.

The nowcast of fourth-quarter real final sales of domestic product growth decreased from 2.9 percent to 2.7 percent after this morning’s employment report from the U.S. Bureau of Labor Statistics. The nowcast of the contribution of inventory investment to fourth-quarter real GDP growth decreased from -0.23 percentage points to -0.33 percentage points after the employment report and this morning’s wholesale trade release from the U.S. Census Bureau.

So we see that whilst the level of economic growth remains relatively good the US has not escaped the cooling winds blowing.

Money Supply

This has proved to be a good guide to economic trends in 2018 and even better it remains widely ignored. Shorter-term trends are usually best encapsulated by narrow money so let us investigate last week’s monetary base data from the Federal Reserve which incorporates this.

The release also provides data on the monetary base, which includes currency in circulation and total balances maintained.

On the 5th of this month it was US $3.444 trillion but we immediately know that as Alicia Keys would say it has been Fallin’ as it was US $3.508 trillion on the 7th of November. We need to switch to the monthly numbers for an annual comparison and when we do so we see that in November it was 11% lower than a year before. If the phrase was not in use elsewhere this would be a credit crunch or to be more specific a type of cash crunch. Not a pure cash crunch as the currency in circulation has risen to US $1.705 trillion but reserve balances at the banks.

The fall has been driven by this.

For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month…….For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

As you can see it is the central bank which is sucking reserve balances out of the system as indeed it was it who pumped them up. In a broad sweep we see that the QE era took the monetary base from a bit under US $0.9 trillion to US $4.1 trillion and now is pulling it back down.

Personally I think the main effect is coming from the reductions in holdings of mortgage-backed securities so if we pro rata that we get a monetary base reduction of say 5% but that is still a crunch.


These have been rising in the US another 0.25% still seems likely next week. An intriguing way of putting the international perspective on this has been provided by the Bond Vigilantes website.

 the de facto global discount rate, the 2-year US Treasury bond yield, has risen by almost 100 basis points (bps) over the year, and thus repriced global assets.

Higher US interest-rates effect the world economy and thus have a second order effect on the US economy via trade. Then there are the domestic effects.

the US 30-year mortgage rate hit 4.8% recently, up from 3.3% in 2016. Whilst most existing homeowners, like corporates, will have locked in those cheap rates, new borrowers face costlier loans, and this is already having an impact: US housing and real estate data is surprising to the downside at a rate that exceeds that seen even in 2008 and 2009:

So there has been something of a squeeze on the real economy from this source as well, although it will have weakened recently as US Treasury Bond yields have fallen back from their peaks.

Fiscal Policy

As we mull the developments above it seems that the fiscal stimulus provided by President Trump was not as ill-conceived as some have claimed. Of course views vary about fiscal stimuli as for example they are apparently good for France but bad for Italy. But the Donald has provided one into a slow down which has at least some of the textbook rationale. Where matters get more complex is the fact that the US has so far only really seen its boom slow and other countries such as Germany make a stronger case. But if we skip the absolute level argument the Donald does appear to have spotted the direction of travel.


We see that the US has not in fact escaped the economic changes in 2018 but it has had an advantage from starting at a higher level of economic growth. But the monetary data is applying a squeeze as are higher interest-rates and as ever we find it impacting in familiar places.

Whenever you saw the supply of unsold homes reach 7 months, a recession followed. It certainly did in 2008, despite the consensus of economic forecasters believing that economic growth would be 2.4% – it was actually negative. Why should we worry now? Well, the supply of unsold new homes is… 7.4 months (blue line).  (BondVigilantes )

That will trouble the US Federal Reserve as will this development.

BKX not far from yesterday’s low. There’s a real problem with the banks. And I don’t think I’m being an alarmist by simply saying something might be going on here that we don’t know about. ( @selling_theta )

Worries about the housing market and the banks? We know how central banks usually respond to those so no wonder the US Fed has cooled on future interest-rate rises. QE4 anyone?





11 thoughts on “The US economy is slowing but how quickly?

  1. QE4 leading to QE99 and on to infinity, no road back for this insane policy from which there is no escape other than perpetual bailouts of the system.

    Trump has almost outfoxed the Fed by blaming them in advance on several occasions during media interviews where he blames them for ruining his perfect economy with interest rate increases, so by getting in first it is going to be much harder for the mainstream media to pin any crash on him, but don’t think that will stop them trying.

    After saying a few weeks ago that rates “were a long way form neutral” to “just below neutral”, Powell is signalling the Fed’s capitulation in the face of a falling stockmarket.
    It will only need him to utter those dreaded words at the December or future meetings :”future policy will be data dependent” -translation: is the SP500 below 2533?, to confirm that they are back in full re-flation/market manipulation mode.

    Trump is vulnerable to a breakdown in the Chinese trade talks being used to pin the blame on him for further market weakness, then expect the meanstream media to go into overdrive to deflect blame away from the real culprits at the Fed

    • Trump certainly polarizes the MSM – orange man bad !

      you’d think he is actually running the country and the Senate and House don’t exist

      the current President is doing his job well – distracting the media and people

      just another round of bread & circuses


  2. Hello Shaun,

    “There’s a real problem with the banks. ”

    oh not again !

    well considering nothing was changed then it was just a matter of time …… will we see Glass -Steagall act come back ?


    1933 Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the time, “improper banking activity,” or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash.

    According to that reasoning, commercial banks took on too much risk with depositors’ money*

    * today its the CB money , aka the tax payer !

    • Hi Forbin

      The banking bailouts were declared a triumph in the US but they seem to circle a Black Hole and get dragged downwards by its gravity, rather than escape. A turn in the housing market and the economy will tell us how strong they really are.

      Meanwhile in Europe ever more merger rumours saw Deutsche Bank rally above 8 Euros this morning. Remember when a price that low would be proclaimed as just silly? Anyway the air these days is apparently a bit thin and it closed at 7.85.

  3. Shaun, well spotted. The trend has begun and even in the rocket ship trajectory which the trumpster began. I fear that like any curve, with the scale of leverage and potential energy now invested it could fall with some force after its past its peak height.

    I don’t think trump actually mandated the building bridges etc… they are far longer burning fiscal events and economy benefits . Werent the tax cut gifts more for the opiate addicts? Also the repatriation of offshore dollars doesn’t necessarily determine where they get “invested”.

    I can’t see Europe breaking out of the doldrums, China has its own Minsky moment concerns. If USA does dive then…. as everybody says QE to infinity but we wont call it that of course 😉

    • Hi Paul

      Whatever the rationale the fiscal position would look rather exposed if we saw a slow down. The Committee for a Responsible Federal Budget released this later today.

      “This year, the budget deficit is projected to total about $970 billion – 4.6 percent of GDP – up from $666 billion (3.5 percent of GDP) in 2017. This borrowing is virtually unprecedented in current economic conditions.”

      I think they have missed a bit of an open goal on the national debt. This is because they list when the deficit has been this high over the last 60/70 years and the national debt was between 27% and 52% of GDP. Whereas it is now 79% and would rise quickly in a slow down, hence my fears about the launch of QE4.

  4. Great blog as usual, Shaun.
    The US Fed has a 2% inflation target, and inflation seems to be tapering along with growth. Both the PCEPI itself and core PCEPI measures are now showing lower inflation rates, and all are under 2%. Chairman Powell only seems to reference PCEPILFE, the Fed’s exclusionary core measure, in his press conferences, but the US Fed also pays a lot of attention to the Federal Reserve Bank of Dallas’ssssss trimmed mean core measure. Laell Brainard gives it equal treatment with PCEPILFE in her December 7 speech. While the annual inflation rate for PCEPILFE has gone from 2.02% in July to 1.78% in October, the trimmed mean rate has gone from the same 2.02% rate in July to just 1.91% and the trimmed mean rate, more than the conventional core rate, justifies Brainard’s comment that “underlying trend inflation may be close to our target of 2 percent”.
    The BLS experimental US HICP for the total population is very comparable to the UK CPI in its methodology. So it is pertinent that the annual inflation rate for the US HICP ex food and energy went from 1.73% in September to 1.70% in October, versus 1.8% inflation rates in both months for UK core CPI. The November inflation rate for the US index was 1.81%. Britons who watch the business news and see that US core inflation is above the 2% target, unlike UK core inflation, should be made aware that they are not comparing like with like.

    • Hi Andrew and thank you

      One of the problems of so many measures is that as you point out they can lead to confusion as well as insight. How many people know that different CPIs can be very different beasts? Or that the US Fed targets another measure entirely?

      But whilst we are here let us look at yet another measure which at the moment has different direction of travel.

      Meanwhile the trail of people exiting Battersea Park carrying a new Christmas Tree has been going strong for nearly a fortnight now and reminds me of your campaign for seasonal weghts.

      • My wife put up our old artificial tree this year, so we won’t be buying a real tree. I feel bad but about it but money is tight. The fight for seasonal weights for Christmas trees in the Canadian output agricultural price index was won in 2001, and I am optimistic the UK output API will switch to seasonal weights for flowers and plants, the category that includes Christmas trees, in the not too distant future.

  5. Shaun, I know you don’t want politics on this site, and its a good policy. However the run up to 2020 in the US economy is going to be all about politics. Trump wants GDP at 4%, and the DOW up. The ‘resistance’ would be happy to crater both if it meant getting rid of him. You really have to live in the States for some time to appreciate the poisonous atmosphere between the two sides. Of course in the medium/long term thare is only one winner because of changing demographics.
    The 2020 election will be about health costs and the economy; as usual everything else is small fry, including ‘security’. The Dems win on health with the majority and Trump has been winning on the economy.
    The Dems have the Fed, and the House. Trump may decide that its not worth a second term if the Rinos keep fighting him. Ego versus risk of jail. Too close to call.

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