2018

Houston, we have a (nominal) problem

Two instances of 3.8% unemployment and the corresponding wage, labor force participation and inflation. It doesn´t seem likely that the 3.8% unemployment today indicates anything close to full employment. The chart is illustrative. One implication is that Fed decisions shouldn´t be informed by the unemployment rate (relative to estimates of “natural”). For example, statements like the following: “Indeed, in the Fed’s forecast such tighter policy is necessary to edge up the unemployment rate and return the economy to a sustainable, non-inflationary path.” Are inexcusable, having no correspondence in reality. The Fed has direct influence over the nominal economy. In the… Read More

Share

Week Ending Friday June 1, 2018 Market movements last week implied modestly lower NGDP growth in the coming year. Our market-driven forecast, which we use to cut through the noise and detect the meaning of aggregate market moves, fell from 4.0% to 3.9%, Thursday-to-Thursday. This small move lower reflected lower copper and oil prices, a stronger dollar, lower stocks, lower 5-year TIPS spreads and a more gently sloping yield curve. The 5-year yield fell from 2.82% to 2.68%, and the two-year from 2.5% to 2.4%, while shorted dated bonds were little changed. There were potentially important data releases last week,… Read More

Share

All (remains) quite on the inflation front

Nonetheless, it seems everything is supportive of the Fed´s rate hikes: U.S. consumer spending rose in April by the most in five months and inflation held at the Federal Reserve’s target, adding to signs of solid economic growth that support the central bank’s plan for gradual interest-rate hikes. The chart indicates that there was nothing exceptional about consumption growth in April. Year-on-year, consumption growth has been quite stable, but low when compared to growth from 1990 to 2007. To say it “adds to signs of solid economic growth” is a fantasy! Or: Inflation remained at the Federal Reserve’s target in… Read More

Share

Monetary & Fiscal Policy shouldn´t mix

Sweden´s finance minister thinks it should: Sweden’s finance minister said it’s time to look deeper into the framework of central bank independence. In an interview on Thursday in Stockholm, Magdalena Andersson argued that more research and discussion will be needed on how central banks and governments can coordinate policy responses in a crisis situation. “Looking back on the wave of reforms that made central banks independent, it’s obvious today that it wasn’t well thought through,” she said. “There might be situations when fiscal and monetary policy need to work together in a way that’s not possible under the present regulation.’’… Read More

Share

Oil Pulls Back Amid Heightened Inflation Concerns

The Week Ending Friday May 25th 2018 This last week was light on outlook-changing information even if it was rich in geopolitical news, with Trump’s North Korea peace summit in doubt, and Macron lauding Russia’s President Putin. Financial Media have focused more than usual on idiosyncrasies of individual firms, canned personal finance stories and geopolitical events this past week, as little of note has happened in markets. Our US NGDP forecast, which runs off recent NGDP growth trends and the signal from several financial markets, is consistent with this take. The forecast has been steady since April, hovering just north… Read More

Share

‘Splitting hairs’ on inflation

When inflation remains low and stable for as long as it has, people get “worried” and start looking for signs that show that cannot be true. The chart below shows inflation of the core variety (which abstains from volatile elements to better show the inflation trend) for the past quarter century. Then, the ‘dumb views’ proliferate. A recent one is telling: Inflation has been a puzzle in the U.S. economy for years, failing to move up much when the unemployment rate tumbled. To resolve the puzzle, it helps to look at the U.S. as two economies: one for goods, another… Read More

Share

Near term inflation expectations rising, Fed to clamp down even at cost of real growth

The Week Ending Friday May 18th 2018 What to make of the 10-year bond yields pushing over 3%. On the one hand, 300 bps is just an arbitrary number. Our NGDP Forecast is showing no sign of any dramatic shift in the rate of nominal growth. There has been a trend for us to show nominal growth around 4% instead of 3.5% for some time. Our NGDP Forecast takes in both recent trends in actual NGDP growth and a range of market indicators, not just 10-year bond yields. 30-year bond yields have not moved much. Oil prices have shifted up… Read More

Share

The US Federal Reserve wants a higher rate of unemployment, at least from reading missives from the San Francisco branch.  And slower economic growth. In its May 10 “Fed Views”, the San Francisco branch posits that 4.7% is the lowest “sustainable” unemployment rate, and 1.8% the maximum “sustainable” real GDP growth rate. “We estimate 2.8% GDP growth in 2018, a full percentage point above our estimate of the long-run sustainable growth rate,” reports the SF Fed. They add, “We expect unemployment to decline further this year and through 2019, and remain below our estimate of the long-run rate of 4.7%… Read More

Share

Things are so bad that the scales don´t register when it gets worse!

This morning, we witnessed the release of industrial production. A typical headline: U.S. industries pumped out more goods in April to meet growing demand from consumers and businesses, another sign the economy is gaining momentum. The so-called “momentum”, however, is just the “recovery” from a slump. The chart illustrates, comparing industrial production in 2014 – 2018 to what transpired around the recessions of 1990/91 and 2001. Note that this time around, the fall in industrial production was bigger and more protracted; nevertheless, there was no recession call. Why is that? One conjecture is that things were already so bad that… Read More

Share

Retail Sales: Not much solace

After the uplift in sales due to the August/September 2017 storms, things have calmed down, despite fiscal stimulus (tax cuts), something clearly indicated by sales ex auto & gas, a measure of core sales. A comparison with another late cycle period (late 1990s) is illustrative. At the 8:30 AM mark, the 10-year yield jumped. Was the retail sales signal that powerful? Will it last? Not likely.

Share