One of the features of the modern economic world is that as soon as a consensus builds up something quickly turns up to challenge it. At the moment the present consensus is that the US central bank will raise interest-rates a number of times this year. If you look at the Fed Funds market it is expecting 4 and that is not surprisingly in the middle of the main forecasting range which is 3-5. But yesterday reminded us that life may not be so simple. From the Atlanta Federal Reserve.
LATEST ESTIMATE: 0.1 PERCENT — FEBRUARY 1, 2022
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 0.1 percent on February 1, unchanged from January 28 after rounding. After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the US Census Bureau, the nowcast of first-quarter real gross private domestic investment growth increased from -7.4 percent to -7.0 percent.
A change from -7.4% to -7% is fiddling at the edges as we see quite a plunge in private investment is expected. But the main message here is the fact that the US economy is expected to flat line especially as we note the 0.1% is annualised. This is very different to the quarter just gone.
Real gross domestic product (GDP) increased at an annual rate of 6.9 percent in the fourth quarter of 2021 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.3 percent.
On a personal level it is slightly frustrating as I thought the US economy would slow in the fourth quarter and was thus too early. But the fundamental point is of a sharp slowdown and just to check we see that the Atlanta Fed nowcast was on pretty good form.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2021 is 6.5 percent on January 26, up from 5.1 percent on January 19.
Also whilst the nowcast has only just switched to the first quarter so we do not have much of a trend it does give us its view of so-called blue chip forecasts. These spent early January declining from a bit below 4% annualised to a bit below 3%.
The Labour Market
The above makes me think of the first part of the objectives of the Federal Reserve.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
Should we see any sort of slow down I think that minds at the Fed will switch to this reality.
LFPR fell precipitously at the onset of the COVID-19 pandemic and has only partially recovered (figure 1). Overall LFPR (16+) fell from 63.3 to 60.2 percent in April 2020. It has since risen to 61.8 percent, still about 1 percentage point below the pre-pandemic projection of LFPR by the Congressional Budget Office and its lowest level in 45 years. ( Brookings Institute in December )
Regular readers will know that pre the credit crunch the participation rate ( strictly the Labour Force Participation Rate) was of the order of 66-67% so we had already been noting a decline and a loss of workers. Well now it looks like there has been another move lower. The reason that this matters on a collective level is that unemployment rates only measure those looking for work so they are flattered by people leaving the labour market. As to where they have gone? Well some have retired.
In contrast, older workers—particularly those 65 and older—have remained out of the labor force.
So an implicit lowering of retirement ages which is the opposite of what is supposed to be policy as for example my (state) retirement age has gone from 65 to 67 in the credit crunch era.
We seem to have arrived at a time off lots of job availability combined with people giving up on the labour market.
Private Sector Forecasts
The Purchasing Managers Index seems to have also picked up the slowing vibe.
January PMITM data from IHS Markit indicated a relatively subdued improvement in operating conditions across the US manufacturing sector. The headline figure dropped to the lowest since October 2020, as output growth was muted. Demand conditions also softened further, with new orders rising at the slowest pace since September 2020.
Inflation
This is the other side of the coin and whilst this is not the measure targeted the 7% big figure has I think got into people’s mindsets.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a
seasonally adjusted basis after rising 0.8 percent in November, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index increased 7.0 percent before seasonal
adjustment.
The manufacturing PMI picked the inflation trend up as well.
Meanwhile, inflationary pressures remained marked……Prices pressures eased at the start of the year, as the rate of cost inflation eased to the slowest since May 2021. The pace of increase was still marked, as firms sought to pass on higher costs to clients. Similarly, the rate of charge inflation softened and was the slowest
for nine months.
Actually they had a go at spinning the inflation away but that has rather crumbled this morning. I know the numbers below are not for the US but the theme of it being a lot higher than expected ( 4.4%) will hit home.
Euro area annual inflation is expected to be 5.1% in January 2022, up from 5.0% in December according to a flash estimate from Eurostat, the statistical office of the European Union.
There are differences as domestic energy inflation is more of an issue in Europe than the US but there is still an underlying drumbeat.
Comment
The situation regarding interest-rate rises has been ramped up recently as Reuters point out.
“Every option is on the table for every meeting,” Bostic told FT. “If the data say that things have evolved in a way that a 50 basis point move is required or [would] be appropriate, then I’m going to lean into that . . . . If moving in successive meetings makes sense, I’ll be comfortable with that.”
Mr.Bostic of the Atlanta Fed has put a 0.5% rise in March in people’s minds. Curious just as his own bank tells us that growth has stalled. But whilst we need to note that he does not have a policy vote this year he is involved in the discussions. He seems to have been in the same mood only yesterday.
FED’S BOSTIC: WILL BE FOLLOWING MONTHLY FLUCTUATIONS IN INFLATION TO SEE IF THEY FALL, BUT WILL BE READY TO SUPPORT “MORE AGGRESSIVE” MOVES IF THE PACE RISES. ( @BreakingLive)
Yesterday a voting member joined the party.
Feb 1 (Reuters) – St. Louis Federal Reserve President James Bullard on Tuesday said he favors starting the turn to tighter U.S. monetary policy with successive rate increases at the Fed’s March, May and June meetings, before assessing whether the pace of inflation requires more aggressive steps from there.
But the problem I have with this is the timing issue. If they really believed in what they are saying then they would have already raised US interest-rates several times and they have not. So should we see any further weakening could March be the only interest-rate rise this year? Let us see how the US economy pans out in 2022.