Why I now fear a sharp slowing of the US economy later this year

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by Shaun Richards

So far the trend towards economic weakness has by passed the United States much to the glee of President Trump. Some of you may have seen the rap to camera by Larry Kudlow who is the President of the National Economic Council which ended with “we are killing it on the economy.” Hubris is of course a dangerous thing and as I shall explain looks like it has not had the best of timing. It was based on the 0.8% (as we measure it) economic growth for the first quarter and took us through the latest employment numbers. He did not specify actual numbers but on Friday the Bureau for Labor Statistics told us this.

Total nonfarm payroll employment increased by 263,000 in April, and the unemployment rate declined to 3.6 percent, the U.S. Bureau of Labor Statistics reported today.

They were good numbers for this stage of the cycle although these days the numbers continue to have this problem.

The labor force participation rate declined by 0.2 percentage point to 62.8 percent in April but was unchanged from a year earlier.

For those who have not followed this saga the US economy pre credit crunch had a participation rate of 66/67% and thus there are a lot of missing people from the ratios above. Moving back to positives this from Thursday was really something to shout about.

Nonfarm business sector labor productivity increased 3.6 percent in the first quarter of 2019, the U.S. Bureau of Labor Statistics reported today, as output increased 4.1 percent and hours worked increased 0.5 percent.

As ever for US data that is annualised but at a time of the “productivity puzzle” a 0.9% growth in one quarter after annual increases of 1.7% in 2017 and 2.1% in 2018 suggests the US has entered a better phase.


Last night there was a flicker of a warning from Consumer Credit flows. From the Federal Reserve

Consumer credit increased at a seasonally adjusted annual rate of 4-1/4 percent during the first quarter. Revolving credit increased at an annual rate of 1-1/2 percent, while nonrevolving credit increased 5-1/4 percent. In March, consumer credit increased at an annual rate of 3 percent.

To UK eyes used to surges in this area nearly all numbers look low! But as we look at the numbers we see a reduction in quarterly growth from the 5.5% of both the last two quarters of 2018 to 4.25%. Indeed in monthly terms the annual growth rate has gone 5.1%, 4.6% and now a sharper drop to 3.1% in March establishing a pretty clear trend.

If we look further into the March data we see that revolving credit actually fell by US $26 billion or 2.5% and it was this which dragged down the numbers. So let us check what it is.

Revolving credit plans may be unsecured or secured by collateral and allow a consumer to borrow up to a prearranged limit and repay the debt in one or more installments. Credit card loans comprise most of revolving consumer credit measured in the G.19, but other types, such as prearranged overdraft plans, are also included.

Okay so it is  credit cards and overdrafts which on a net basis were repaid in March. At 1.06 trillion dollars they are around a quarter of consumer credit. There was a slight dip in what is called nonrevolving credit but there was no sign of the sharp drop that we saw in UK car loans within it.

Money Supply

This has worked as a reliable leading indicator over the past couple of years or so and this caught my eye. 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.

It may well be something that has been driven by Qualitative Tightening as described by James Bullard of the St.Louis Fed on March 7th.

The Fed has been able to reduce reserve balances (deposits by depository institutions) by about 40 percent from the peak of $2.8 trillion, which occurred in July 2014. (The overall size of the balance sheet has declined by a lower percentage from its peak of $4.5 trillion due to currency growth.)

Actually Mr.Bullard seemed pretty desperate with this bit.

This provides one rationale for why balance sheet policy may be less important today than it was during the period when QE was most effective.

So you claim all the gains but the reverse is nothing to do with you. He might get some support today from the manager of Barcelona football club but I doubt many would allow you to laud a 3-0 win but ignore a 4-0 loss!

More seriously the speech from Mr.Bullard is starting to look like an official denial and we know what to do with those. Perhaps he is a fan of the group Electronic.

I hate that mirror, it makes me feel so worthless
I’m an original sinner but when I’m with you I couldn’t care less
I’ve been getting away with it all my life
Getting away with it … all my life


Going through the numbers a by now familiar problem emerged. Let me remind you that in the United States official and market interest-rates are of the order of 2.5%. The ten-year yield is just below it and the official interest-rate is 2.25% to 2.5%.

Now let us look at the interest-rates faced by many people. If you want a car loan you pay around 5.5% to a bank and 6.7% to a finance company, if you want a personal loan you pay 10.4% and on a credit card you pay 15.1%. Those affected by this may take some persuading that this is an era of very low interest-rates.


This is the clearest warning shot we have seen for the US economy. Outright falls in narrow money supply of this magnitude are rare on a monthly basis. Maybe there is an issue with the seasonal adjustment but if we switch to the unadjusted series we see that March was 37 billion dollars lower than in December which is a very different pattern to the year before. Thus as we move through the autumn I now fear a US slow down and another month or so like this would make me fear a sharp slow down.

Moving to the wider measure called M2 also shows a slowing as the rate of growth over the past twelve months of 3.8% has been replaced by one of 2.8% in the latest three months. It tends to impact further ahead ( 2 years or so) and represents a combination of growth and inflation so as you can see it is not optimistic either. However it is not as reliable as the narrow money signal has been.

Thus in something that raises a wry smile we are facing the possibility that President Trump has been right in calling for an interest-rate cut.


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