The data coming out of the US have been weak
In his daily commentary today, Andy Lees of the Macro Strategy Partnership noted that, “the US macro surprise index is now -7.90, the European index is -69.20 and the G10 index at -32.8.” What he is saying is that the data are weakening and the surprises are starting to pop up on the downside. Yet again – and for the fourth year in a row – we are headed into another global growth slowdown. And the US has just joined the party. Will this impact Fed policy? If the data stream continues to be negative, the answer is yes.
It should make sense, since almost everywhere you look, governments are reacting. Japan is throwing the kitchen sink at its deflation problem, going full tilt on both monetary and fiscal stimulus. South Korea is adding big stimulus. Even Europe is getting in the act despite the prevailing austerity paradigm. Europe is relaxing targets and the ECB is expected to cut rates to a record low of 0.50% next week. But it’s not a done deal since the US is dealing with the potential for asset bubbles and there has been a lot of concern about the effect of Fed policy in this realm. Moreover, jobless claims recently came in at a five-year low, suggesting that the jobs market has not yet succumbed to the effects of the payroll tax cut and the sequester.
I have been saying I expect a tapering of quantitative easing starting in June and an end to QE about the end of the year. However, the Fed’s policy is wholly dependent on the data flow. And after a series of good data series to begin the year, the flow has turned negative. Economists still expect about 3% growth for Q1 and 1.5% for this quarter.
Below are the news items related to the US and the US economy.
“Today’s update on jobless claims should dampen worries a bit over the outlook for the economy. New filings for unemployment dropped a healthy 16,000 last week to a seasonally adjusted 339,000. Once again, claims are moving close to the post-recession low of 330,000 reached back in January—a five year low. One number doesn’t mean much, of course, but today’s report certainly boosts the case for thinking positively when it comes to the labor market. “
“Factories and related production continued to be an important driver of the lackluster economic recovery, with the industry adding 0.71 percentage point to the U.S. gross domestic product, which expanded just 2.2% overall in 2012.
Manufacturers’ output grew 6.2% in 2012, more than doubling the prior year’s expansion and causing the sector to be the largest contributor to the modest overall growth among 22 industries, according to data released Thursday.
The continued growth in manufacturing shows how some consumers were buying big-ticket products, including vehicles and household appliances, which they had failed to replace during leaner economic times. U.S. auto sales reached 14.5 million cars and light trucks last year, the highest since 2007.
Still, recent government data shows business spending has slowed in recent months, and the manufacturing recovery has led to only a modest employment improvement as factories have become more efficient.”
“The weak report by the Kansas City Fed follows other disappointing manufacturing surveys from regional Fed banks reported in the past two weeks. The problem is falling demand. On Wednesday the Commerce Department reported new orders for durable goods nationwide plunged 5.7% in March. Excluding volatile transportation orders, new bookings were down 1.4%.”
“For four years, during and in the wake of the recession, the federal budget deficit ballooned to more than $1 trillion. But because of belt-tightening in Washington and a strengthening economy, it has started shrinking — and fast.
The number crunchers at Goldman Sachs have lowered their estimates of the deficit both this year and next, on the back of higher-than-expected revenues and lower-than-projected spending. Analysts started the year projecting that the deficit in the current fiscal year would be about $900 billion. Earlier this year, they lowered the estimate to $850 billion. Now they have lowered it again, to $775 billion, or about 4.8 percent of economic output.”
“The IMF notes the stability of inflation expectations and reckons that it is attributable to central bank credibility; from the early 1980s central banks convinced the public (with the help of a honking recession or two) that inflation in future would be generally low and stable. Inflation expectations became so well anchored that not even the worst few months of economic performance since the 1930s could produce deflation. I’ve been thinking about whether that narrative seems right.”
“If you asked economists looking at the data if student loans could be having a macroeconomic effect, especially through a financial burden on those that have them, they’d say that the actual percent of monthly income paying student loans hasn’t changed all that much since the 1990s. They may be making larger lifetime payments, since they’ll carry the debts longer, but that’s a choice they are making, which could reflect positive or negative developments. Certaintly there’s no short-term strain. So there aren’t any economic consequences worth mentioning when it comes to student loans.
I always thought this approach had problems.”
“Free-market economists rarely declare, “We have to do X about unemployment.” Why not? Free-market economists’ standard reply is just, “We expect X to fail.” Their critics, however, have a less favorable explanation: Free-market economists oppose X because free-market economists are cavalier and callous. They cavalierly deny the reality of involuntary unemployment, and callously belittle the suffering of the unemployed.
I know hundreds of free-market economists. They’re friends of mine. Indeed, I’m a free-market economist myself. It saddens me to say, then, that our critics are often right. While some free-market economists merely doubt the efficacy of policies intended to alleviate unemployment, the average free-market economist doesn’t take the unemployment problem seriously.”
“1. Did a financial crisis cause a fall in expected and actual aggregate demand? (With central banks being unable or unwilling to do enough to stop it).
2. Or did a fall in expected and actual aggregate demand cause (or worsen) a financial crisis? (With central banks being unable or unwilling to do enough to stop it).”
This is the market monetarist case in favor of QE. Of course, I am opposed to QE but David Beckworth makes his case as well as it can be made.
“real debt burdens are higher than many households expected prior to the crisis. Look at the dashed line. It shows the average expected dollar income growth rate over the ‘Great Moderation’ period was 5.3%. Now imagine it is early-to-mid 2000s and you are taking out a 30-year mortgage and determining how much debt you handle. An important factor in this calculation is your expected income growth over the next 30 years. If you were average, then according to this data you would be forecasting about 5% growth rate. But that did not happened. Household dollar incomes declined and are expected to remain low. Nominal debt, however, has not adjusted as quickly leaving higher than expected real debt burdens for households.
This is something that the Fed could correct. QE3 is a step in the right direction, but more needs to be done with this program to raise expected nominal income growth. One way to do this is to make the size of the asset purchases conditional. That is, instead of conducting fixed $85 billion purchases every month until the economic targets are hit, vary the size of the purchases depending on the progress of the recovery. For example, if inflation and unemployment are not moving fast enough to their target, then increase the dollar size of the of asset purchase and vice versa.”
Note that the US is expected to grow nearly 3.0% annualized in Q1 and another annualized 1.5% in Q2.
“Durable goods orders slumped 5.7 percent as demand fell almost across the board, the Commerce Department said on Wednesday. The drop in orders for these goods – items from toasters to aircraft that are meant to last three years or more – followed a 4.3 percent rise in February.
“We have seen a considerable loss of momentum in the economy and that has been obvious in the round of data we had over the last four weeks or so,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets in New York.”
This is probably better for the TMT article I just did but here it is anyway.
“The 11.2 percent drop in advertising revenue in the first quarter underscores the pressure that the New York Times faces to increase its subscription revenue, especially for its digital products, and find new veins for money.
The company plans to roll out a line of lower-priced products – including an expansion into e-commerce and games – to attract more readers around the world.”
We should see UPS as somewhat of a proxy for retail in the US.
“United Parcel Service Inc (UPS.N) said it expects the small-package delivery market to grow faster than the U.S. economy in 2013, after reporting a higher quarterly profit on strong post-holiday season demand.”
“Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014. She has worked closely with him in shaping and building support for the Fed’s campaign to stimulate the economy and bring down unemployment.
But some of Ms. Yellen’s critics remain wary. They worry that she would not be sufficiently concerned about the possibility that inflation will accelerate as the economic recovery gains strength. If nominated, she could face opposition from Senate Republicans who have repeatedly expressed concern that the Fed’s campaign would destabilize financial markets and make controlling the pace of inflation more difficult.
“I think people read Janet Yellen’s speeches as saying that she puts a higher weight on joblessness compared to inflation” than the typical member of the Fed’s policy-making committee, said Vincent Reinhart, formerly the head of the Fed’s monetary policy staff and now the chief United States economist at Morgan Stanley. “And that includes Ben Bernanke.””