2018

Celebration

With the GDP report we hear lot´s of celebratory comments. A typical one: The U.S. appears to have entered a stage of stronger economic growth, years into a historically modest expansion. Unfortunately, that´s not true. Just look at the chart. The “uptake” in 2014 was much stronger, but fizzled. This time, it´s weaker. Will it be more long lasting? The Fed seems to think that if you “drive slowly, you´ll grow longer”! In several other instances, even those characterized by deep depressions, the economy recovered. That simply has not happened this time. Observation: It is said that this expansion is… Read More

Share

"Drive slowly, grow longer"

Maybe Janet Yellen set it off with her comment in December “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this.” It was picked up in Davos: DAVOS, Switzerland—The world is enjoying its broadest, strongest growth in years, and everyone has an explanation, from the U.S. tax cut to the recovery in oil prices. Let´s check. World industrial production may be a good proxy for overall world economic activity. The chart indicates that it is not only the advanced economies such as the US, EZ or UK… Read More

Share

Week ending Friday January 19 2018 Yields rising across the curve is undoubtedly a good sign.  The chances of a March rate rise have consistently risen, as well as further hikes in June and a final one in the fourth quarter some time. The two year yield curve has also risen above 2% but does not yet indicate any rate rises in 2019. This rising short term rate environment has for the first time in a long while been matched by longer term yields. The 10 year yield is now above 2.5% for the first time since before the 2014… Read More

Share

“Peace with honor” regarding inflation?

From reports: Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. “Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.” If that sounds ridiculous it´s because it is! “Even as price pressures are beginning to build”. Inflation may… Read More

Share

Manufacturing Production is becoming irrelevant!

Overall, industrial production was up 3.6% year-on-year. That´s the best since November 2014 (3.7%). That´s however, mostly due to the aftermath of storms, cold winter affecting utilities, and mining. Manufacturing, the lion´s share of industrial production, has been moribund for several years. Impressively, as shown in the chart, while as a highly cyclically sensitive part of the economy manufacturing was traditionally viewed as a classic indicator of current business conditions, in the last five years it has completely lost relevance in the determination of real output fluctuations.  

Share

  The US Senate Banking Committee Jan. 17 voted thumb’s up on Jerome Powell, President Trump’s appointment to the Chair of the Federal Reserve. Barring calamity, Powell should take over in February. With that, a lawyer will supplant Janet Yellen, a dyed-in-the-wool conventional macroeconomist, as leader of national monetary policy. Lamentably, going to a lawyer is arguably a change for the better. The Fed Wants Higher Unemployment In the last two years, Fed staffers have consistently posited the US economy is facing “labor shortages” and is “beyond full employment,” even as wages rise like redwoods in the Sahara. And on… Read More

Share

NGDP Outlook Update January 2018

Our new NGDP forecast, for 2019Q1, is coming in a bit north of 4.1%. This is the first time we’ve started a new forecast above 4.0%, the previous vintage starting a 3.9%. We begin a new forecast every quarter. By convention, we always look one year ahead of the current quarter. The current upward drift in the forecast is driven by WTI oil, stocks and to a lesser extent the yield curve steepness. TIPS spreads have been an erratic force on the forecast. As strong as the forecast is, relative to the outlook in recent years, it’s probably too bearish.… Read More

Share

When the Reagan Boom ended, the Great Moderation began

On July 1 1985, the New Republic published an article by Michael Barker titled “The end of the Reagan boom” Excerpts: What’s going on here? Only a year ago, the economy was racing along at the fastest clip in more than 30 years. Personal income was up, inflation was down, and to many Americans, if seemed positively churlish to deny that President Reagan had succeeded in “laying the foundations for a decade of supply-side growth.” … now, seven months after the election, just when we thought it was going to be “morning in America” for at least another four years,… Read More

Share

Week ending Friday January 12 2018 The damned stock market just won’t stop rising. The yield curve is getting steeper too, and shifting higher, at least that was what happened this week. Markets continue to move in directions that imply an enduring increase in nominal growth. 5-year Inflation indexed bond spreads imply about 1.9% average yearly inflation over the next five years, about the same as the week before, but up from about 1.7% in early December. The dollar continues to plunge, with the “DXY” spot dollar index down 1.7% just this week. It’s not that the dollar is at… Read More

Share

Let´s avoid bad choices

Greg Ip discusses asset bubbles and how they could make Jerome Powell´s life at the Fed difficult: Any central banker watching the stock market today should get a queasy sense of déjà vu. A housing boom preceded the last recession. A tech stock bubble ushered in its forerunner. Today, stock and property prices are once again setting records, in absolute terms and relative to household incomes. That may leave the Federal Reserve and Jerome Powell, nominated to succeed Janet Yellen as Fed chair next month, confronting some agonizing trade-offs in the next year or two: What if low inflation calls for low interest rates but… Read More

Share