2018

After the storm, the “ship loses steam”

The Richmond Fed survey makes it now three “current month” regional Fed surveys collapsing … and the Conference Board confidence indicator out today was also poor. What should have been interesting information going into the latest FOMC meeting was that those 5- and 10-year break-even inflation rates were already falling fast BEFORE the meeting! The regional Fed surveys should count for something, or what’s their point? Elsewhere, many see the consumer stepping up their spending…The fact is that is that “after the storm, the economic ship has lost quite a bit of steam”!

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NGDP Christmas Update

We wish you a Merry/Happy Christmas, but regret that the only gift we have is a delayed forecast update, and gloomy one at that. This quarter has been a disaster for the outlook. We started at 4.7% expected current-dollar growth and are ending at 3.4%. This is the biggest drop in a forecast we’ve seen in a quarter. At 3.4%, the NGDP outlook has swung from a post-recession high, to the lowest level since early 2017. If this forecast proves accurate, the weaker NGDP path won’t cause a recession, but it is inexplicably irresponsible of the Fed to in October… Read More

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Sweden´s Riksbank jumps ahead of the pack and raises the Policy rate

The last time they took the lead in raising rates was in 2010-11. The stated reason was they were worried about high asset (house) prices. Today, they “innovated”: The Riksbank said that its decision follows an assessment that “the employment rate is historically high, companies are reporting major shortages of labor and cost pressures are rising.” As the charts show, in 2010-11 the damage was big. Aggregate nominal spending (NGDP) was on the “road to Nirvana”, but the Riksbank raising rates aborted the process. Note that currently, NGDP has flattened. Maybe the Riksbank wants it to come down a bit!… Read More

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Bad Omens

From the WSJ: …With rates now rising, the Fed’s actions have begun shifting investors away from riskier corporate debt. Spreads between 10-year Treasuries and medium-grade corporate debt have hit their widest point in two years, though spreads remain considerably tighter than during periods of market stress seen in 2015 and early 2016. The “Confederate Flag” pattern appears to be reasserting itself! Could be indicating markets expect NGDP growth to keep sliding, i.e. monetary policy tightening (irrespective of interest moves by the Fed). Note: Monthly NGDP to October from Macroeconomic Advisers – 3-mo MA of YoY growth

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The TTC (Trump Tax Cut) & Retail Sales

The “optimist”: A drop in prices at the pump and a pick-up in wages at the low end of the income strata are delivering more broad-based gains in consumer spending. Look for consumers to remain a driver of GDP gains in the fourth quarter, even as overall growth moderates a bit. Trump on signing Tax Cut in December 2017: And just as I promised the American people from this podium 11 months ago, we enacted the biggest tax cuts and reforms in American history. Our massive tax cuts provide tremendous relief for the middle class and small business. Reality: Excluding… Read More

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Are there “variability trade-offs”?

John Taylor put it succinctly: Several years ago, in an effort to more clearly delineate the short-run versus the long-run trade-off, I estimated a different type of trade-off between inflation and output (Taylor 1979). Rather than a long-run trade-off between the levels of inflation and output, I defined and estimated a long-run trade-off between the variability of inflation and of output. Because of this trade-off, efforts to keep the inflation rate too stable would result in larger fluctuations in real GDP and unemployment. Conversely, efforts to smooth out the business cycle too much would result in a more volatile inflation… Read More

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Euro Area NGDP growth rate to keep dropping

It was all cheery waves as the governing CDU party in Germany elected a new leader after Angela Merkel stepped down. Eventually, Ms. Annegret Kramp-Karrenbauer will also take over from Merkel as Chancellor of the country. Well, she may do so, but there is the small matter of crashing German and dropping Euro Area economic growth rates that may derail these plans. We already knew that German economic success had come to a shuddering halt in 2018Q3 with a negative QoQ RGDP annualized growth rate of -0.8% and a YoY rate of just 1.2%. Maybe NGDP growth of 1.7% QoQ (3.1% YoY) will rescue… Read More

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Is the economy headed for recession?

An Allegory The economy is like an old pickup truck, heavily laden with produce. At times, absurdly overloaded with baskets of apples and crates of cabbages. When the truck “hits a bump”, produce might fall off the truck if it is heavily laden and the bump is sufficiently jarring. In this allegory, baskets of produce represent jobs and loans. The bumps the truck hits represent unexpected, downward shocks to NGDP. If the nominal bump is hard enough, some loans will fail and jobs will be lost, think of a crate of cabbages (jobs) sliding from the top of the heap… Read More

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The sad state of the economy

Some “conflicting” comments: Federal Reserve Vice Chairman for Supervision Randal Quarles on Monday brushed off criticism of the central bank’s monetary policy choices and plans and said key remarks from the Fed’s leader last week didn’t signal a shift in the interest-rate outlook. According to him: “The data show we are doing a pretty good job of meeting the employment and inflation goal laid out by Congress”. Vice Chairman Richard Clarida is more nuanced: “In recent decades, the asymmetry has been toward disinflation forces,” Vice Chairman Richard Clarida said in an interview with Bloomberg Television. Asked about the price impacts… Read More

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