Week ending Friday November 3rd 2017
Jerome Powell gets a promotion
As expected, President Trump named Jerome Powell as his nominee to replace Janet Yellen in February of next year. This is one of the better outcomes that was on the table, and although we would have preferred one of the academic economists who talks about nominal income level targeting, none of them were politically positioned for the job.
Powell has tended to be on the right side of issues since he joined the Fed in 2012, and should breeze through Senate confirmation. The best thing about Powell is not what he has said or done, but rather what he has not said or done. Namely he didn’t call for higher interest rates or denounce quantitative easing, unlike oligarchic dimwit Kevin Warsh, or the brilliant but wrong John Taylor; the two leading candidates in the Fed sweepstakes.
The baseline case is that Powell keeps the economy chugging along at 4.0% nominal GDP growth. It might not be too much of a stretch to hope that Trump wringed concessions out of Powell in trade for the big job, as this seems like something Trump would do. In other Fed news, is appears that New York Fed President William Dudley will announce his retirement. Will he be missed? It depends on who takes his place.
The US House of Representatives unveiled a new tax plan. In general, taxes are just not that interesting. Tax reform gives a chance to reward political constituencies and punish foes; standard Machiavellian scheming we should expect as realistic commentators.
Just maybe, tax reform also offers a possibility to clear up outright inefficient deductions and re-test the “Laffer curve” hypothesis. The correct level of government spending relative to nominal GDP is something reasonable people can agree to disagree.
The proposal eliminates deductions on student loan interest and lowers deductions on mortgage interest, both sensible moves, even if they will have small effects.
Perhaps the most interesting component of the proposed legislation is a lower corporate income tax rate, down to 20%. Some think this will result in a torrent of foreign-sheltered money into the US, though as Market Monetarists we know that the Fed would respond to this with tighter money, for no reliable effect. The advantage of lower corporate rates comes in transparency; it’s not obvious who bears the brunt of corporate taxes: workers, capitalists or consumers and of course we all wear these hats to varying degrees.
The general direction of markets was “up” for the week. Our market-sentiment-driven NGDP forecast rose from 4.07% on Monday to 4.11% on Thursday, the latest date which we can fully update our data basket. The yield curve shifted higher for the week, with 3-month, 1-year, 2-year and 5-year yields rising. The dollar index fell on Monday but by Friday had recovered on a week-ago basis. Copper was up 1.5% Friday-to-Friday, while WTI was up 1.2% and the S&P 500 was almost unchanged over the same interval. 5-year TIPS spreads picked up 3 basis points to close Thursday at 1.79%. Markets saw Powell’s nomination at least a week before, so it’s no surprise moves were modest.
Friday brought a big but not unexpected Jobs number. Non-farm payrolls rose 261k or 0.17% monthly in October, following only 18k in the hurricane-beset month of September. Workers who tell government survey people that they’re “in the labor force” are having little trouble finding work, though the ultra-low unemployment rate of 4.1% isn’t anything to get excited about.
The male labor force participation rate for those aged over 20 years, fell slightly on a year ago basis, and is back at a record low. Still-weak labor force participation is no doubt due to complicated sociological problems, but suggests there’s plenty of “slack” in the labor market. The right mix of easy money, opioid interdiction, propaganda and welfare reform might be able to get these citizens back to work.
We also got trade balance data on Friday. The report showed the trade deficit widened just a bit from $-42.7 to $-43.5 billion, monthly. Nearly all economic commentators will tell you that a wider trade deficit is bad but this is a reductionist read and not in line with experience. Typically, a wider trade deficit is associated with greater NGDP growth (simply because when people spend more domestically, they spend more on imports too), so the signal here is essentially neutral.
Next week is light on data though we can expect news on the tax reform legislation.