It came exactly as expected, with core CPI clocking 2.2%, so no significant asset price moves. The chart below compares core CPI and core PCE. These inflation gauges have been well behaved over the past several years. Note there is a 40 basis point gap between the CPI and PCE, implying that the May 2018 core PCE will remain below the 2% target. In fact, two or three years ago, inflation, by any gauge, was more ‘calamitous’ than now. Why, then, is the Fed so concerned about ‘overheating’? Maybe because it feels below 4% unemployment is harmful!
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
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
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
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.
According to Bloomberg: U.S. consumer prices rose by less than forecast in April as costs for automobiles and airfares declined, reducing chances that inflation will run significantly above the Federal Reserve’s target in coming months. The “analytical” example comes from above; after all, didn´t the Fed just recently put the “blame” for low inflation on cellphone connections and drug prices? Until the Fed (and pundits) start analyzing inflation from a monetary (not interest rate), instead of from an unemployment or price perspective, not much will be accomplished. The idea that the stance of monetary policy is indicated by the level… Read More
That is, the rise in wages, to the frustration of the Fed, never comes. In fact, there appears to be glaring “inconsistencies”, as the table indicates for wage growth, unemployment and core PCE inflation at selected moments: Wage Unemploym PCE Core Dec 00 4.3% 3.9% 1.8% Oct 09 2.7% 10% 1.3% Apr 18 2.6% 3.9% 1.9% It should also be noted that the drop in unemployment to 3.9% was wholly due to the 236 thousand fall in the labor force. By one measure of labor market tightness – the unemployed plus those not in the labor force but want a… Read More
Some even think “stagflation”: Rising prices and collapsing confidence could portend that both inflation and slowing growth are looming, a sure recipe for stagflation. For the past quarter century, however, inflation dynamics has been tame, and tamer still post crisis! To others, Consumer Spending Bounced Back in March. However, another headline from the same source says Growth Cooled in First Quarter as Consumers Reined In Spending. Consumer spending has done nothing, let alone “bounce”. Compare and contrast consumer spending growth pre and post crisis! The “doomsday march” continues unabated!
While most economic indicators are backward looking, durable goods orders is one that provides clues about what might transpire going forward. That´s because it is about production that will take place in the months ahead. In general, it has conformed to the recent cycle that began in mid-2014. The up leg of this cycle, beginning in mid-2016, has been dubbed “synchronized global growth”. While Harvey & Irma may have helped push DGO (ex-aircraft to minimize volatility), beyond where it would “naturally” go, growth is weakening. The same pattern is visible in new orders for Nondefense capital goods ex aircraft, agood… Read More
From MarketWatch: The U.S. economy is doing quite well right now, but it could falter over the next couple of years as the stimulus fades away, said Paul Ashworth, chief U.S. economist for Capital Economics, and the winner of the Forecaster of the Month award for March. Retail sales data were released today. “The story is not fine”. The panel shows that the August-September 2017 storms gave a boost to sales, mostly for replacement purposes. That boost has petered out, despite fiscal stimulus. When you look at discretionary spending – on such things as Appliances & Electronics and Furniture –… Read More