Data Watch

The GDP report misleads

The latest GDP estimates included a sharp rise in previous numbers that seemed to have made the economy richer. The “shape” of the economy and so its growth rate, however, provide the same economic picture as before. As most people expected, quarterly growth in Q2 was boosted by a single item (the so called ‘soybean effect’). Coming in at 4.1%, this was the best number since Q3 2014 (4.9%). Being boosted by an uncharacteristic contribution from the export sector. After hearing about trade wars and restrictions for most of the year, exporters “jumped the gun” to get ahead. There is… Read More

Share

What´s up with industrial production?

Is this a good description? “Industrial production jumped 0.6 percent in June, rebounding from a 0.5 percent drop in May. Over the past year, industrial production is up 3.8 percent, continuing a modest upward trend in growth.” That appears to be just a rebound from a significant previous drop. We´ll have to wait for more prints to see if an upward trend takes hold (unlikely). In “olden times”, a slightly smaller drop in industrial production was associated with a recession (2001). Why not recently?

Share

Consumer spending: The headlines and reality

The headlines: 1 Consumer spending is bustling and likely propelled strong overall economic growth in the recently completed second quarter. 2 U.S. retail sales rose solidly in June as households boosted purchases of automobiles and a range of other goods, cementing expectations for robust economic growth in the second quarter. Reality: Retail sales remain depressed. Even ignoring the original trend path, the next chart illustrates, considering only the post-recession period, that between late 2014 and mid-2017, retail sales faltered, dropping below the new and lower trend path. The recent “bustling” is the result of sales climbing back to the lower… Read More

Share

The inflation report always electrifies

The release of the CPI report brings forth the usual ‘terrifying’ comments: U.S. consumer prices rose for a third straight month in June, eating away at sluggish wage growth and sending inflation to its highest rate in more than six years. That´s pressing the point too hard, as the chart illustrates. The next chart shows, on the same scale, the stable behavior of the core measure. The comment below exemplifies the degree to which the concept of inflation is misunderstood. The Fed has thus far assumed tariffs were too small to affect inflation. Maybe not much longer. Ian Shepherdson of… Read More

Share

Contrary to popular opinion, the low rate of unemployment does not signal a strong labor market

Comments like this one: “This is a good job-creation number, but on the other hand we see still continued soft wage growth”, should signal that things in the labor market are not as good, or strong, as generally thought. A strong labor market is characterized by a high employment population ratio (EPOP) and a high labor force participation rate (LFPR). The ratio of these two quantities define the unemployment rate. Therefore, a low unemployment rate is consistent with both high EPOP and high LFPR as well as with a low EOPO and low LFPR, as long as their ratio is… Read More

Share

CPI Report: No surprises

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!  

Share

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

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

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