It is a case of harder times for the US economy

by Shaun Richards

A feature of the current world economic slowdown has been that the United States has been outperforming its peers. Some of that has been genuine and some simply because the news flow was slowed by the time Federal workers were unpaid. However the chill winds are now being recorded and reported. From the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2019 is 0.4 percent on March 13, up from 0.2 percent on March 11. After reports on durable manufacturing and construction spending were released by the U.S. Census Bureau this morning, the nowcast of first-quarter real gross private domestic investment growth increased from -2.9 percent to -2.4 percent, and the nowcast of first-quarter real government expenditures growth increased from 1.7 percent to 2.5 percent.

As you can see the latest data nudge things a little higher but only to the giddy heights of 0.1% per quarter as we record GDP growth. It is noticeable that investment growth is is still solidly negative whilst we are seeing the Trump fiscal expansion in play perhaps also. Whilst one may disagree with the details of it the plan is turning out to be anti-cyclical as fiscal policy is supposed to be as opposed to the pro cyclical effort that we observed so devastating the Greek economy only yesterday.

Stuck like glue

However the head of the Atlanta Fed Ralph Bostic wants us to focus on other matters.

The U.S. economy, by most standard metrics, is doing pretty good,” he said. “We’ve been in a growth trajectory for 10 years now coming out of the Great Recession. Unemployment is at historic lows, 3.8 or 3.9 percent — rates we have not seen since the 1960s. Job creation is happening somewhere around 200,000 to 250,000 jobs a month. And we’re not seeing signs of accelerating inflation.

So classic deflection territory as whilst that was true when he made the speech on the 5th by the 8th we had a rather different view on job creation.

Total nonfarm payroll employment changed little in February (+20,000)

That seemed rather extreme so let us look for some perspective.

After revisions, job gains have averaged 186,000
per month over the last 3 months.

So our tentative view is that a slowing economy is now feeding into lower employment growth. Yesterday we saw that this is also beginning to impact on the unemployment situation.

Initial jobless claims data came out worse than expected. Last week it grew from 223K to 229. Continued claims stood at 1776K against 1758K one week earlier. ( fxpro)

So whilst these numbers are much lower than we saw a decade ago we are now facing a situation where the falls in unemployment and the unemployment rate are about to be replaced by rises. Perhaps Ralph meant that with this but it is hard to say as you can see.

 because there are a lot of things going on.

So Ralph as Marvin Gaye would say “What’s going on?”

The Federal Reserve

If we widen the analysis to the chair of the Federal Reserve he has been shifting his position.

 Because interest rates around the world have steadily declined for several decades, rates in normal times now tend to be much closer to zero than in the past. Thus, when a recession comes, the Fed is likely to have less capacity to cut interest rates to stimulate the economy than in the past, suggesting that trips to the ELB may be more frequent.

Odd if a recession is not feared by Jerome Powell why he is so bothered about it isn’t it? Also the question is begged as to why all the interest-rate cuts and the QE below seem to have us more afraid of recessions?

Between December 2008 and October 2014, the Federal Reserve purchased $3.7 trillion in longer-term Treasury and agency securities.

As to the programme to reduce the balance sheet or Quantitative Tightening then as I pointed out on the 12th of February that seems set to be put away in a cupboard and maybe to the back of it.

Current estimates suggest, however, that something in the ballpark of the 2019:Q4 projected values may be the new normal. The normalized balance sheet may be smaller or larger than that estimate and will grow gradually over time as demand for currency rises with the economy. In all plausible cases, the balance sheet will be considerably larger than before the crisis.

Tucked way in there is a potential rationale for the QE to infinity I discussed back on the 12th of February as well. If we switch to Chair Powell a few days later we get a hint of what he is really aiming at. The emphasis is mine.

Low- and moderate-income homeowners saw their wealth stripped away as home values dropped during the financial crisis and have not recovered as quickly or completely as others. Because home equity has been the main source of wealth among low- and moderate-income people, the crisis dealt a particularly severe blow to these households. Most Americans rely on home equity to send their children to college, invest in their own education and training, or start or grow a business. These aspirations are the basis upon which a strong economy is built. 

Also Chair Powell continues to apparently deliberately ignore the countries which have negative interest-rates of which Japan comes to mind today as it has just reconfirmed its -0.1% official rate.

Just over 10 years ago, the Federal Open Market Committee (FOMC, or the Committee) lowered the federal funds rate close to zero, which we refer to as the effective lower bound, or ELB. Unable to lower rates further.

If like in the UK they felt unable to lower interest-rates further due to problems with “the precious” ( the banks) they should say so as otherwise it is simply untrue.

Money Supply

Here the news looks better because the growth rate of the narrow M1 measure has picked up. It has grown at an annual rate of 4.6% in the most recent quarter up to the 4th of this month as opposed to 4.1% over six months and 3.2% over the preceding year. Whilst there has been a rise in checkable deposits the main move has been in money or cold hard cash. Yes the same money we are supposed to neither want nor need! Although of course the US banking system is somewhat backward in electronic developments.

So in the latter half of 2018 the US economy may well see a beginning of a pick-up in economic growth. The only caveat here is that the 2018 numbers were revised lower which flatters the recent growth numbers as we mull whether they might also be revised lower?

Comment

The official data is finally telling us the scale of the US slow down as the Atlanta Fed now cast gives us a running score. We now know it is close to flatlining like so many others although it id fair to point out that as Ralph Bostic hinted out its recovery has been stronger than elsewhere and let me add it was growing more strongly in 2018. Ironically that means it has slowed the most as economics lives up to its reputation of being the dismal science.

The latter part of 2019 may see a bounce but it does not look that strong so we may be in for a period of stagflation of sorts. The of sorts part is that inflation is historically low but then wage growth is no great shakes either if we look at the weekly pattern. This is because whilst hourly wages rose by 3.4% in the latest employment report hours worked fell back by 0.1 so weekly wages rose by less.

So let us end with some lyrics inspired by Ralph Bostic..

Well if you’re stuck for a while consider our child
How can it be happy without its ma and pa
Let’s stick together
Come on, come on, let’s stick together ( Roxy Music)

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