We find ourselves in a curious situation as we wait for ( or for readers over the weekend) mull the speech of Fed Chair Jerome Powell at Jackson Hole. There are several reasons for this and let me start with the pressure being applied by President Trump.
Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!…….The Economy is doing really well. The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries? Be early (for a change), not late. Let America win big, rather than just win!
We can see that The Donald has spotted that the US Dollar is strong with reports that the broad trade-weighted index is at an all time high. Care is needed with that as it starts in 1995 and the Dolllar peak was a decade before it, but the basic premise holds. But the real issue here is of course calling for interest-rate cuts when you are saying that the economy is strong! Is it?
Nowcasting
Let me hand you over to the Atlanta Fed.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2019 is 2.2 percent on August 16, unchanged from August 15 after rounding. After this morning’s new residential construction report from the U.S. Census Bureau, the nowcast of third-quarter real residential investment growth increased from -1.2 percent to 0.7 percent.
That is not appreciably different to the New York Fed which has estimated 1.8%. So let us go forwards with 2% as an average. In terms of past definitions from President Trump ( 3%-4%) that is not doing really well but is hardly a call for an interest-rate cut.
Business Surveys
Something caught the eye yesterday in the Markit PMI survey.
The seasonally adjusted IHS Markit Flash U.S.
Manufacturing Purchasing Managers’ Index™
(PMI™) registered 49.9 in August, down from 50.4
in July and below the neutral 50.0 threshold for the
first time since September 2009.
The eye-catching elements were it going below the neutral threshold and the fact this is the lowest reading for nearly a decade. Some of this is symbolism as the PMI is not accurate to anything like 0.1 but there is also the downwards direction of travel. Also it had a consequence as we look wider.
August’s survey data provides a clear signal that
economic growth has continued to soften in the third
quarter. The PMIs for manufacturing and services
remain much weaker than at the beginning of 2019
and collectively point to annualized GDP growth of
around 1.5%
So we started with ~2% and now are at 1.5%.Prospects look none too bright either.
The past isn’t what we thought it was
Earlier this week we saw quite a revision affecting employment trends.
For national CES employment series, the annual benchmark revisions over the last 10 years have averaged plus or minus two-tenths of one percent of total nonfarm employment. The preliminary estimate of the benchmark revision indicates a downward adjustment to March 2019 total nonfarm employment of -501,000 (-0.3 percent).
This begs several questions as it means the monthly non-farm payroll numbers were too high in the year to March by more than 40,000 a month. The worst problem areas were retailing,,professional and business services and leisure and hospitality.
The change in the picture is covered by MarketWatch.
“This makes some sense, as the 223,000 average monthly increase in 2018 seemed too good to be true in light of how tight the labor market has become and how much trouble firms are said to be having finding qualified workers,” said chief economist Stephen Stanley of Amherst Pierpont Securities
In a sense that is both good and bad as he implies the economy might be at a literal version of full employment, at least in some areas. The bad is that growth was weaker than thought.
Money Supply
Back on the eighth of May I posted this warning.
The narrow measure of the money supply or M1 in the United States saw a fall of just over forty billion dollars in March. That catches the eye because it does not fit at all with an economy growing at an annual rate of 3.2%. Indeed we see now that over the three months to March M1 money supply contracted by 2.7%. That means that the annual rate of growth has been reduced to 1.9%. Thus we see that it has fallen below the rate of economic growth recorded which is a clear warning sign. Indeed a warning sign which has worked very well elsewhere.
That has played out and whilst it is a coincidence that the annual rate of economic growth seems now to be what narrow money supply growth was the broad sweep has worked. However that was then and this is now because M1 has been on something of a tear and the last three months have seen annualised growth of 8% pulling the actual annual rate of growth to 4.8%.
Will it be “Boom!Boom! Boom!” a la the Black-Eyed Peas? Well thank you to @RV3003 on twitter who drew my attention to this from Hosington.
First, Treasury deposits at the Fed, which
are not included in M2, fell dramatically as a
result of special measures taken to avoid hitting
the debt ceiling, thus giving M2 a large boost as
Treasury deposits moved to the private sector.
Once the debt ceiling is raised, Treasury deposits
will rebound, reversing the process and slowing
M2 growth.
Did this affect M1? Well maybe as demand deposits have risen by US $75 billion since the March and since the debt ceiling was raised they have fallen back by US $14 billion.
As you can imagine I will be tapping my foot waiting for the next monthly update. Fake money supply growth?
Comment
We can see that the US economy has slowed but if the money supply data is any guide is simply slowing for a bit and may then pick up. That scenario does not fit with the way that bond markets have surged expecting more interest-rate cuts. In fact bond market analysts are arguing that the Federal Reserve needs to cut interest-rates to keep up and avoid losing control, although they are not entirely clear what it would be losing control of.
So I have a lot of sympathy with Jerome Powell who has a very difficult speech to give today. The picture is murky and I would wait for more money supply data before giving any hints of what I would do next. In short I would be willing to be sacked rather than bowing to Presidential pressure.