Why I now fear a sharp slowing of the US economy later this year

So far the trend towards economic weakness has by passed the United States much to the glee of President Trump. Some of you may have seen the rap to camera by Larry Kudlow who is the President of the National Economic Council which ended with “we are killing it on the economy.” Hubris is of course a dangerous thing and as I shall explain looks like it has not had the best of timing. It was based on the 0.8% (as we measure it) economic growth for the first quarter and took us through the latest employment numbers. He did not specify actual numbers but on Friday the Bureau for Labor Statistics told us this.

Total nonfarm payroll employment increased by 263,000 in April, and the unemployment rate declined to 3.6 percent, the U.S. Bureau of Labor Statistics reported today.

They were good numbers for this stage of the cycle although these days the numbers continue to have this problem.

The labor force participation rate declined by 0.2 percentage point to 62.8 percent in April but was unchanged from a year earlier.

For those who have not followed this saga the US economy pre credit crunch had a participation rate of 66/67% and thus there are a lot of missing people from the ratios above. Moving back to positives this from Thursday was really something to shout about.

Nonfarm business sector labor productivity increased 3.6 percent in the first quarter of 2019, the U.S. Bureau of Labor Statistics reported today, as output increased 4.1 percent and hours worked increased 0.5 percent.

As ever for US data that is annualised but at a time of the “productivity puzzle” a 0.9% growth in one quarter after annual increases of 1.7% in 2017 and 2.1% in 2018 suggests the US has entered a better phase.


Last night there was a flicker of a warning from Consumer Credit flows. From the Federal Reserve

Consumer credit increased at a seasonally adjusted annual rate of 4-1/4 percent during the first quarter. Revolving credit increased at an annual rate of 1-1/2 percent, while nonrevolving credit increased 5-1/4 percent. In March, consumer credit increased at an annual rate of 3 percent.

To UK eyes used to surges in this area nearly all numbers look low! But as we look at the numbers we see a reduction in quarterly growth from the 5.5% of both the last two quarters of 2018 to 4.25%. Indeed in monthly terms the annual growth rate has gone 5.1%, 4.6% and now a sharper drop to 3.1% in March establishing a pretty clear trend.

If we look further into the March data we see that revolving credit actually fell by US $26 billion or 2.5% and it was this which dragged down the numbers. So let us check what it is.

Revolving credit plans may be unsecured or secured by collateral and allow a consumer to borrow up to a prearranged limit and repay the debt in one or more installments. Credit card loans comprise most of revolving consumer credit measured in the G.19, but other types, such as prearranged overdraft plans, are also included.

Okay so it is  credit cards and overdrafts which on a net basis were repaid in March. At 1.06 trillion dollars they are around a quarter of consumer credit. There was a slight dip in what is called nonrevolving credit but there was no sign of the sharp drop that we saw in UK car loans within it.

Money Supply

This has worked as a reliable leading indicator over the past couple of years or so and this caught my eye. The narrow measure of the money supply or M1 in the United States saw a fall of just over forty billion dollars in March. That catches the eye because it does not fit at all with an economy growing at an annual rate of 3.2%. Indeed we see now that over the three months to March M1 money supply contracted by 2.7%. That means that the annual rate of growth has been reduced to 1.9%. Thus we see that it has fallen below the rate of economic growth recorded which is a clear warning sign. Indeed a warning sign which has worked very well elsewhere.

It may well be something that has been driven by Qualitative Tightening as described by James Bullard of the St.Louis Fed on March 7th.

The Fed has been able to reduce reserve balances (deposits by depository institutions) by about 40 percent from the peak of $2.8 trillion, which occurred in July 2014. (The overall size of the balance sheet has declined by a lower percentage from its peak of $4.5 trillion due to currency growth.)

Actually Mr.Bullard seemed pretty desperate with this bit.

This provides one rationale for why balance sheet policy may be less important today than it was during the period when QE was most effective.

So you claim all the gains but the reverse is nothing to do with you. He might get some support today from the manager of Barcelona football club but I doubt many would allow you to laud a 3-0 win but ignore a 4-0 loss!

More seriously the speech from Mr.Bullard is starting to look like an official denial and we know what to do with those. Perhaps he is a fan of the group Electronic.

I hate that mirror, it makes me feel so worthless
I’m an original sinner but when I’m with you I couldn’t care less
I’ve been getting away with it all my life
Getting away with it … all my life


Going through the numbers a by now familiar problem emerged. Let me remind you that in the United States official and market interest-rates are of the order of 2.5%. The ten-year yield is just below it and the official interest-rate is 2.25% to 2.5%.

Now let us look at the interest-rates faced by many people. If you want a car loan you pay around 5.5% to a bank and 6.7% to a finance company, if you want a personal loan you pay 10.4% and on a credit card you pay 15.1%. Those affected by this may take some persuading that this is an era of very low interest-rates.


This is the clearest warning shot we have seen for the US economy. Outright falls in narrow money supply of this magnitude are rare on a monthly basis. Maybe there is an issue with the seasonal adjustment but if we switch to the unadjusted series we see that March was 37 billion dollars lower than in December which is a very different pattern to the year before. Thus as we move through the autumn I now fear a US slow down and another month or so like this would make me fear a sharp slow down.

Moving to the wider measure called M2 also shows a slowing as the rate of growth over the past twelve months of 3.8% has been replaced by one of 2.8% in the latest three months. It tends to impact further ahead ( 2 years or so) and represents a combination of growth and inflation so as you can see it is not optimistic either. However it is not as reliable as the narrow money signal has been.

Thus in something that raises a wry smile we are facing the possibility that President Trump has been right in calling for an interest-rate cut.




18 thoughts on “Why I now fear a sharp slowing of the US economy later this year

  1. If there’s going to be a sharp slowdown Shaun, and I tend to agree with you, then President Trump better hope that some kind of distraction comes along to either move the public focus away from it or to act as an excuse for it.

    I suspect they may be working on a list of possible distractions and excuses now….

    • Hi Keith

      Exactly what sort of slow down transpires depends on future money supply trends. But that was a pretty grim first quarter for it so it will start from a weak base. We could see a crossover between Euro area and US GDP growth…

  2. So….

    Trump bragging about the US growth isn’t giving the US consumer confidence to spend more as credit growth is decreasing!

    That is why Trump wants a interest rate cut, well worked out Shaun!

    • Hi Peter

      The subplot is whether an interest-rate cut would make much difference. After all if they worked we wouldn’t be where we are would we? Also Lael Brainard of the Richmond Fed seems to think more will be needed.

      “Another idea I would like to hear more about involves targeting the yield on specific securities so that once the short-term interest rates we traditionally target have hit zero, we might turn to targeting slightly longer-term interest rates—initially one-year interest rates, for example, and if more stimulus is needed, perhaps moving out the curve to two-year rates.”

      I have no idea why she thinks that something that isn’t working in Japan would in the US, but of course she is a central banker.

  3. US housing market has been slowing for some time in the ‘hot money’ areas like San Francisco et al.

    The US is overdue a recession and it looks like one is inbound especially when you look at debt saturation across younger high spending demographic deciles.I’m not sure cutting rates will make much difference this time if you look at OZ where house prices are falling without rising rates.

    • Hi Dutch

      As we have discussed more than a few times the central bankers seem terrified of any recession. As I have replied above Lael Brainard of the Richmond Fed wants to control the short-end of the US Treasury Bond market which has not worked in Japan.

      They will be buying equities next…….

  4. “Thus in something that raises a wry smile we are facing the possibility that President Trump has been right in calling for an interest-rate cut.”

    I don’t know about that statement. It sort of depends whether the capitalist system needs a clearout from time to time so that poorly utilised resources are released into the economy to allow better companies and projects access to them.

    That means that rather than trying to keep the show on the road all the time by playing around with monetary policy, you actually need to force this process – and not just wait for CPI to tell you to raise interest rates. It may be just as valid to nurse the capitalistic economic cycle into and out of recessionary periods as much as focusing on fighting CPI inflation.

    • ah thats the point of CPI – if they used RPI rates would have been forced years ago

      the recession is delayed , not stopped


  5. Bitcoin “washing” towards $6000. +/- 100 billion new US $100 bills printed every year (but?!? M1/M2/M3 says?!?). Huh? Gold dead money. Commodities sinking or drinking. My liver. My liver.. My……Liverpool MAGIC!!!!!!!
    (check gremlins in bio)
    We’re like auto emission engineers spotting discrepancies in the supposed results. Happy! Happy!!
    Excellent corraling of “con-nun-drums”!!!!!!!!!!!

    • will readers please note this is what happens after several shots of good single malt whiskey ….

      now there’s an idea 😉


      PS: to wash the popcorn down of course ……

    • The Fed is trapped in more ways than people think(apart from their inability to raise rates), I think Trump has completely outwitted them.
      He realised they were going to crash the market by repeatedly raising rates and rolling off QE, and pin the blame on him(with the help of the rabid anti Trump media) and got in first by saying they should be cutting rates and they were causing the market falls. By getting in first he has ensured the Fed are on the hook for any further falls! Brilliant!
      How are they going to get out of that one!

      • I heard that the Fed stopped raising because the credit markets were freezing up, related to junk bonds. No more share buy backs directly trashes the equities because prices stop being pumped. Of course that led to direct equity falls but the cause was soemthing else.

  6. This is the problem with our current version of capitalism, sooner or later the rentiers run out of people to foist debt on. America’s no.1 priority today should be addressing rampant inequality and wage suppression but it won’t be Trump who does that. I’ve never understood how America functions and probably never will. The first thing any business needs is customers with money to spend, something a supply sider always overlooks.

    • Hi bill40

      I see you are making the Henry Ford point, as he wanted to pay his workers enough so they could afford the cars they built. As to the debt one group have certainly had debt foistered in them in the US.
      2014 $1.24 trillion
      2015 $1.32 trillion
      2016 $1.41 trillion
      2017 $1.49 trillion
      2018 $ 1.57 trillion
      March 2019 $1.6 trillion

      Student Debt which one day will have to be written off I think…

  7. Gгeat blog as usual, Shaun.
    Your prediction looks counterintuitive given the 3.0% annualized growth rate in American real GDP in 2019Q1, up from 2.9% in 2018Q4, but you make a good case for an impending slowdown. The slowdown in the growth of US housing prices has been ongoing for some time. In February 2019 the annual inflation rate for the Case-Shiller National Home Price Index dropped to 4.0% from 4.2% in January, the lowest since October 2012, and Zillow Real Estate Research has backcast the same 4.0% rate for March. While things are still a long way away from the kind of national housing price correction we may be seeing in Canada, it is notable that CoreLogic announced that San Francisco Bay area housing prices dropped between March 2018 and March 2019. The Trump tax reform didn’t get enough credit for gutting, although not eliminating, mortgage interest deductibility in the US. If there is another housing boom and bust in the US down the road it is highly unlikely it will be as severe as the one in the last decade because the US tax system no longer offers the same encouragement to building a mortgage debt mountain that it used to.

    • Hi Andrew

      I had seen many warnings about housing affordability in the San Francisco area so the numbers there are no great surprise. I believe rents went through the roof so to speak as well. But the times they are a-changing and on the face of it with rising employment and positive real wage growth one might expect house price growth to be going the other way. So as you say it is another hint of an economy slowing.

      Do you think the Bank of Canada might act before the US Fed?

      • Thanks, Shaun. The Canadian economy is a lot weaker than its American counterpart, so that would favour the Bank of Canada lowering its rates first. In its January MPR the BoC backcast a 1.3% annualized quarterly growth rate for 2018Q4, versus the actual 0.4%. The BoC projected only 0.3% quarterly growth for 2019Q1, down drastically from its 0.8% projection in January, and 1.3% for 2019Q2, still below the lower bound of the growth rate for potential output. (This was itself downgraded from 1.5% in January to 1.4%.) In the second half of the year, the BoC sees things picking up, so the annual growth rate for 2019Q4 will be 1.4%, mainly due to stronger third quarter growth. This will still be the weakest final quarter growth rate since 2015, the year of the 2015H1 contraction. That being said, the C.D. Howe Institute Monetary Policy Council is still recommending that the Bank of Canada raise the overnight rate to 2.0% in April 2020.

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