The stock market will likely continue to rally into April, as fear of an aggressive Fed has been squashed for now and expectations of Q118 corporate earnings are very high. The Treasury market also should be buoyed by a "gradual" Fed and, possibly, by neutral to friendly inflation data.
The markets' newfound positive view of the Fed should be reinforced by Fed Chair Powell's Semi-Annual Monetary Policy Testimony on February 27 (House Committee) and March 1 (Senate Committee). This testimony typically reflects the consensus view at the January FOMC meeting. And, the "dovish" consensus of a continuing gradual approach to policy tightening was reiterated in the already released written portion of the Testimony. (In fact, there was nothing new in it.) Powell's prior support for an easing in bank regulations may come up in the Q & A, as well -- a positive for stocks.
By maintaining its gradual approach to tightening, the Fed is implicitly not pushing for an aggressive "crowding out" of fiscal stimulus. This implicit acquiescence of fiscal stimulus should hold down the markets' tendency to fight against the stimulus. It means that 3 upcoming "market events" will not likely cause a problem -- the March 20-21 FOMC Meeting, upcoming inflation data, and Q218 corporate earnings.
The Fed is not likely to change its course a few weeks after talking it up in front of Congress. So, even if the Fed hikes the funds rate by 25 BPs at the March FOMC Meeting, the Statement will likely maintain a gradual approach tone. It is even conceivable that the "dots" will still show the FOMC consensus of 3 rate hikes in 2018. To be sure, a 25 BP is highly likely, unless the February Employment Report and February Core CPI are very weak.
A consensus-like high January Core PCE Deflator will probably be taken in stride, since Fed officials do not seem to have been moved by the high January
CPI print. Consensus looks for a 0.3% m/m Core PCE Deflator, the same
as the Core CPI. But, even with that relatively high print, the y/y
would be steady at 1.5% -- staying below the Fed's 2.0% target. Some of
the m/m speedup could be viewed as temporary, as well. Indeed, an unwinding of the high January Average
Hourly Earnings is the risk in the February Employment Report, due March
9 -- a potentially significant positive for stocks and Treasuries.
Third, expectations of Q118 Corporate Earnings, due in April, are quite high. The Thompson/Reuters survey puts consensus expectations at a whopping 17.9% (y/y) for S&P 500 earnings, after a strong 14.8% in Q417. Moreover, consensus looks for corporate earnings to get even stronger, at 19.3-21.3%, in Q2 and Q318, respectively. Stocks are not likely to sell off ahead of these corporate reports, and may very well rally in March in anticipation of them.
Sunday, February 25, 2018
Sunday, February 18, 2018
Fighting Fiscal Stimulus on Back Burner For Now?
The stock and Treasury markets may be able to put the need to offset fiscal stimulus on the "back burner"for the next few weeks. This is because economic growth may be moderating. As a result, stocks can continue to recover from the recent one-week plunge
(market still about 3% below the end-of-January highs) and longer-term
Treasury yields can ease back further. The Fed should retain its
gradual approach to tightening.
A slowdown in economic growth is one of the 3 reasons that could eliminate the need for the markets to "crowd out" private spending in order to make room for the boost from tax cuts, increased government spending, and effects of tariffs (see my February 11 blog). A moderation in economic growth also means that the pickup in inflation seen in January can be tolerated in case it turns out to be temporary.
Both Manufacturing Production (part of Industrial Production) and Ex Auto/Ex Gasoline Retail Sales have slowed sharply in the past 2-3 months. The slowdowns may be just pauses after good-sized gains in the prior few months. Nevertheless, forecasts of Q118 Real GDP have come down. The Atlanta and NY Fed models now project about 3.2% (down from about 4.0%), and some Street Economists look for sub-3.0% growth. Nonetheless, this pace is above the 1.2% Q117 Real GDP growth rate, so it would be a positive for Q118 corporate earnings (due in April).
The Claims data also hint at moderation. While Initial Claims are back to their recent lows, Continuing Claims turned up last month. These data suggest few layoffs, but slower re-hiring.
Unemployment Insurance Claims
Initial Continuing
Oct 232k 1.893 Mn
Nov 242 1.914
Dec 241 1.911
Jan 233 1.948
Feb --1st wk 230 na
Although both the CPI and PPI were high in January, they should not be enough to push the Fed to a more aggressive stance in monetary policy. Some of the culprits behind the inflation jumps are likely to ease off in the next month or so. And, the y/y is still below the Fed's 2.0% target. Furthermore, the longer-term inflation expectations in the Mid-February University of Michigan Consumer Sentiment Survey were steady. And, there is a good chance Average Hourly Earnings will soften in February.
This week's Fed speakers will likely emphasize their gradual approach to tightening, without being specific about the number of hikes this year. From their perspective, the normalization of monetary policy, with its attendant tightening, covers not only hikes in the Fed funds rate but also the reduction in the Fed's balance sheet. In a sense, the Fed is trying not to normalize not only the level of short-term rates but also the steepness of the yield curve. The Fed sees the funds rate normalizing to 2.8-3.0% in 2019 from the current 1.5%. The 10-/2-year Treasury yield spread, currently about 0.7% pt, is well below the 1.2-2.75% range seen between 2010 and 2014. So, monetary policy has more room to normalize while still being supportive of economic growth.
A slowdown in economic growth is one of the 3 reasons that could eliminate the need for the markets to "crowd out" private spending in order to make room for the boost from tax cuts, increased government spending, and effects of tariffs (see my February 11 blog). A moderation in economic growth also means that the pickup in inflation seen in January can be tolerated in case it turns out to be temporary.
Both Manufacturing Production (part of Industrial Production) and Ex Auto/Ex Gasoline Retail Sales have slowed sharply in the past 2-3 months. The slowdowns may be just pauses after good-sized gains in the prior few months. Nevertheless, forecasts of Q118 Real GDP have come down. The Atlanta and NY Fed models now project about 3.2% (down from about 4.0%), and some Street Economists look for sub-3.0% growth. Nonetheless, this pace is above the 1.2% Q117 Real GDP growth rate, so it would be a positive for Q118 corporate earnings (due in April).
The Claims data also hint at moderation. While Initial Claims are back to their recent lows, Continuing Claims turned up last month. These data suggest few layoffs, but slower re-hiring.
Unemployment Insurance Claims
Initial Continuing
Oct 232k 1.893 Mn
Nov 242 1.914
Dec 241 1.911
Jan 233 1.948
Feb --1st wk 230 na
Although both the CPI and PPI were high in January, they should not be enough to push the Fed to a more aggressive stance in monetary policy. Some of the culprits behind the inflation jumps are likely to ease off in the next month or so. And, the y/y is still below the Fed's 2.0% target. Furthermore, the longer-term inflation expectations in the Mid-February University of Michigan Consumer Sentiment Survey were steady. And, there is a good chance Average Hourly Earnings will soften in February.
This week's Fed speakers will likely emphasize their gradual approach to tightening, without being specific about the number of hikes this year. From their perspective, the normalization of monetary policy, with its attendant tightening, covers not only hikes in the Fed funds rate but also the reduction in the Fed's balance sheet. In a sense, the Fed is trying not to normalize not only the level of short-term rates but also the steepness of the yield curve. The Fed sees the funds rate normalizing to 2.8-3.0% in 2019 from the current 1.5%. The 10-/2-year Treasury yield spread, currently about 0.7% pt, is well below the 1.2-2.75% range seen between 2010 and 2014. So, monetary policy has more room to normalize while still being supportive of economic growth.
Wednesday, February 14, 2018
High CPI Keeps Downward Pressure on Stocks and Treasury Prices
The high January CPI (+0.5% m/m Total, +0.3% Core) was the risk, with the culprits pretty much in line with those pointed out in my prior blog. It means that the stock and bond markets still need to "work" against fiscal stimulus. Although Retail Sales were soft, they tend to flatten out for a couple of months after a period of strong months. So, their trend is not necessarily weak. But, the Atlanta Fed model is likely to lower its forecast of Q118 Real GDP Growth from 4.0% (The update is due later today).
It is not easy to dismiss the jump in the CPI to one-off spikes. While there were a couple of temporary jumps in components with good-sized weights in the Core CPI, other components fell for reasons that could be attributed to volatility. The large, underlying component -- Owners' Equivalent Rent -- stayed high.
The 1.7% m/m in Apparel prices is an outlier, and to a large extent probably just an end to holiday-related discounting in November-December. But, another good-sized increase in this category is likely in February. Not only is there bi-monthly sampling by the Bureau of Labor Statistics, which spreads out large price shifts over two months, but there is the possibility that the introduction of higher-priced Spring clothing will show up. The January jump looks like it added 0.1% to the Core CPI.
Medical Care Services also were strong, up 0.6% m/m, which added 0.05% pt to the Core CPI. The jump looks like a start-of-year hike, which won't be repeated.
Apparel and Medical Care Services prices are not the only components with an unusual price movement in January. But, other components showed declines. These include new motor vehicles, which dipped after a big increase in December, hotel prices, medical commodities, and airfares. They should move back up ahead.
Importantly, the largest component -- Owners' Equivalent Rent -- remained high at 0.3% m/m. So, the Fed's outlook for a gradual increase in inflation to 2.0% remains intact.
It is not easy to dismiss the jump in the CPI to one-off spikes. While there were a couple of temporary jumps in components with good-sized weights in the Core CPI, other components fell for reasons that could be attributed to volatility. The large, underlying component -- Owners' Equivalent Rent -- stayed high.
The 1.7% m/m in Apparel prices is an outlier, and to a large extent probably just an end to holiday-related discounting in November-December. But, another good-sized increase in this category is likely in February. Not only is there bi-monthly sampling by the Bureau of Labor Statistics, which spreads out large price shifts over two months, but there is the possibility that the introduction of higher-priced Spring clothing will show up. The January jump looks like it added 0.1% to the Core CPI.
Medical Care Services also were strong, up 0.6% m/m, which added 0.05% pt to the Core CPI. The jump looks like a start-of-year hike, which won't be repeated.
Apparel and Medical Care Services prices are not the only components with an unusual price movement in January. But, other components showed declines. These include new motor vehicles, which dipped after a big increase in December, hotel prices, medical commodities, and airfares. They should move back up ahead.
Importantly, the largest component -- Owners' Equivalent Rent -- remained high at 0.3% m/m. So, the Fed's outlook for a gradual increase in inflation to 2.0% remains intact.
Sunday, February 11, 2018
Will Stocks Bounce This Week?
The stock market could bounce this week, after it held a key support level (200-day moving average) on Friday. A consensus 0.2% m/m (or lower) print for the January Core CPI (due Wednesday) is probably critical for this to happen. Such a print is not guaranteed, however. And, a retest of the key support level before then is possible if the market turns cautious ahead of the release. The January CPI also is important with regard to the longer-term question whether the market needs to remain in a downtrend to "crowd out" fiscal stimulus, as discussed below.
This coming week's report on January CPI will be critical for the market. A consensus print of a near-trend 0.2% m/m for the Core CPI would be a relief for stocks, particularly since the y/y would fall to 1.6-1.7% from 1.8%. But, a higher print cannot be ruled out. The CPI always risks printing high this month because start-of-year price hikes may not be fully offset by seasonal factors. This year, there also is the risk that it could show the pass-through of higher oil prices. And, the end of holiday-related discounting could result in a bounce in apparel prices. But, a couple of components with large price increases in November and December -- motor vehicles and medical commodities -- could ease this month.
A downtrend in the stock market is consistent with the idea that the financial markets need to move in ways that, on balance, "crowd out" private spending to make room for the boost from fiscal stimulus. The latest budget deal, with the $300 Bn government spending increase, adds to the stimulus of the tax cut. And, the potential monies needed for the "wall" or infra-structure construction hover above the stimulus already legislated.
From a macroeconomic perspective, there are three outcomes that could end the stock market's downtrend -- /1/ a slowdown in economic growth to the 1.5-2.0% range, consistent with the longer-term trend, /2/ an increase in the economy's potential growth rate, either through a ratcheting up of productivity growth or labor force participation, or /3/ steady to lower inflation, implying that the unemployment rate can fall further without being inflationary. So far, only the 3rd outcome is in play as a near-term possibility, and this week's January CPI report is important in this regard. The 2nd outcome is questionable, but can't be ruled out. Additional evidence is a couple of months away. The 1st outcome is yet to be seen in the data.
There are almost no signs yet of a slowdown in economic growth. Manufacturing and non-manufacturing surveys were strong in January. And, the Unemployment Claims data remain low. The New York and Atlanta Fed models' early projections are 3.4-4.0% (q/q, saar) for Q118 Real GDP Growth. The only hint of a slowdown to trend is the steady 4.1% Unemployment Rate since September. This element of the January Employment Report was ignored by the markets, but it could be important. The Unemployment Rate needs stay at 4.1% into the Spring to indicate the economy is growing near trend.
For stocks, the goal of a slowdown means that strong US economic data are "bad" while weak data are "good." It's instructive that data releases were strong on the two worst market days last week -- Monday (Non-Mfg ISM) and Thursday (Claims). Consensus looks for decently strong prints for January Retail Sales, February Phil Fed Mfg Index, and January Industrial Production in the coming week.
The latest data also don't suggest a pickup in trend productivity growth or labor force participation. The y/y increase in Nonfarm Productivity was 1.1% in Q417, within the range seen in the past few years. To be sure, a bounce in productivity growth is conceivable for Q118, as Total Hours Worked fell in January and early estimates of Q118 Real GDP Growth are strong. If so, the possibility of a higher trend will be back in play -- but this won't be known for a few months. The Labor Force Participation Rate has been fairly steady since 2014. The next observation will be with the February Employment Report on March 2.
Although market commentators have talked up higher inflation as a reason for last week's market sell-off, the evidence is far from conclusive. The jump in January's Average Hourly Earnings could have resulted from a compositional shift in jobs or hours worked -- a possibility mentioned by NY Fed President Dudley in a Bloomberg interview -- and could reverse in February. To the extent that the pickup in AHE reflected the sharing of the corporate tax cut with low-wage workers by some large companies, it should not be passed through to higher prices. The two broadest measures of labor costs -- the Employment Cost Index and Compensation/Hour -- were benign in Q417.
This coming week's report on January CPI will be critical for the market. A consensus print of a near-trend 0.2% m/m for the Core CPI would be a relief for stocks, particularly since the y/y would fall to 1.6-1.7% from 1.8%. But, a higher print cannot be ruled out. The CPI always risks printing high this month because start-of-year price hikes may not be fully offset by seasonal factors. This year, there also is the risk that it could show the pass-through of higher oil prices. And, the end of holiday-related discounting could result in a bounce in apparel prices. But, a couple of components with large price increases in November and December -- motor vehicles and medical commodities -- could ease this month.
A downtrend in the stock market is consistent with the idea that the financial markets need to move in ways that, on balance, "crowd out" private spending to make room for the boost from fiscal stimulus. The latest budget deal, with the $300 Bn government spending increase, adds to the stimulus of the tax cut. And, the potential monies needed for the "wall" or infra-structure construction hover above the stimulus already legislated.
From a macroeconomic perspective, there are three outcomes that could end the stock market's downtrend -- /1/ a slowdown in economic growth to the 1.5-2.0% range, consistent with the longer-term trend, /2/ an increase in the economy's potential growth rate, either through a ratcheting up of productivity growth or labor force participation, or /3/ steady to lower inflation, implying that the unemployment rate can fall further without being inflationary. So far, only the 3rd outcome is in play as a near-term possibility, and this week's January CPI report is important in this regard. The 2nd outcome is questionable, but can't be ruled out. Additional evidence is a couple of months away. The 1st outcome is yet to be seen in the data.
There are almost no signs yet of a slowdown in economic growth. Manufacturing and non-manufacturing surveys were strong in January. And, the Unemployment Claims data remain low. The New York and Atlanta Fed models' early projections are 3.4-4.0% (q/q, saar) for Q118 Real GDP Growth. The only hint of a slowdown to trend is the steady 4.1% Unemployment Rate since September. This element of the January Employment Report was ignored by the markets, but it could be important. The Unemployment Rate needs stay at 4.1% into the Spring to indicate the economy is growing near trend.
For stocks, the goal of a slowdown means that strong US economic data are "bad" while weak data are "good." It's instructive that data releases were strong on the two worst market days last week -- Monday (Non-Mfg ISM) and Thursday (Claims). Consensus looks for decently strong prints for January Retail Sales, February Phil Fed Mfg Index, and January Industrial Production in the coming week.
The latest data also don't suggest a pickup in trend productivity growth or labor force participation. The y/y increase in Nonfarm Productivity was 1.1% in Q417, within the range seen in the past few years. To be sure, a bounce in productivity growth is conceivable for Q118, as Total Hours Worked fell in January and early estimates of Q118 Real GDP Growth are strong. If so, the possibility of a higher trend will be back in play -- but this won't be known for a few months. The Labor Force Participation Rate has been fairly steady since 2014. The next observation will be with the February Employment Report on March 2.
Although market commentators have talked up higher inflation as a reason for last week's market sell-off, the evidence is far from conclusive. The jump in January's Average Hourly Earnings could have resulted from a compositional shift in jobs or hours worked -- a possibility mentioned by NY Fed President Dudley in a Bloomberg interview -- and could reverse in February. To the extent that the pickup in AHE reflected the sharing of the corporate tax cut with low-wage workers by some large companies, it should not be passed through to higher prices. The two broadest measures of labor costs -- the Employment Cost Index and Compensation/Hour -- were benign in Q417.
Sunday, February 4, 2018
Did the Markets Overshoot on Friday?
The stock and Treasury markets have likely begun to shift to an economy-restraining mode as an offset to stimulative fiscal policy in a full-employment environment. But, this does not mean there could be overshoots and reversals of overshoots along the way. And, there is a macroeconomic reason why Friday's plunge may have been an overshoot.
Many commentators attributed Friday's stock market plunge and Treasury market sell-off to the ostensibly strong January Employment Report. The markets were said to conclude that the Report pointed to aggressive tightening by the Fed this year, based on the above-consensus +200k m/m Payrolls and the +0.3% m/m Average Hourly Earnings. However, the Report does not look especially strong behind these headline figures. It looks consistent with a continuation of gradual Fed tightening.
There were 5 parts of the January Employment Report that raise doubt about its overall strength:
The speedup in January Payrolls resulted from volatility in Retail Jobs, most likely stemming from seasonal adjustment. Seasonals look to offset post-holiday layoffs in the retail sector in January after looking to offset holiday hiring in November and December. The -25k m/m decline in December Retail Jobs (seasonally adjusted) shows there was less-than-normal holiday hiring that month. As a result, there was less-than-normal post-holiday layoffs in January, and Retail Jobs rebounded 15k that month. Excluding Retail Jobs, Payrolls rose 185k in both months. Remarkably, stability in underlying job growth occurred in pretty much every sector outside of Retail.
Nonfarm Payrolls (m/m change, 000s)
January December
Total 200 160
Retail 15 -25
Total Ex Retail 185 185
The 180k December-January average increase in Payrolls is in line with the trend seen by the Fed when it agreed on a gradual approach to tightening. The 2-month average essentially equals the 2017 m/m average. It is well below the peak pace seen in 2017.
Nonfarm Payrolls (average m/m change, 000s)
Dec-Jan 180
Oct-Nov 244
2017 181
Q417 216
Q3 142
Q2 190
Q1 177
There may have been a shift to part-time workers, raising a question about the quality of the recent job growth. Part-Time Workers rose for the 2nd month in a row in January, based on the Household Survey. They are up 138k since November, representing about 1/4 of the increase in Civilian Employment over this period. Part-timers said this was the only work they could find. This might reflect holiday-related hiring, but seasonal factors should have accounted for it. Since this figure is derived from the Household Survey, it is not comparable to the Payroll data. Also, the small sample of the Household Survey makes it not entirely reliable. Nevertheless, the upturn raises some question about the substance of the job growth over the past two months.
The Average Workweek fell sharply in January, down 0.2 Hour to 34.3 Hours. While a decline in the workweek is consistent with a shift to part-timers, this is probably not the reason -- the increase in part-timers from the Household Survey is not enough to make such a dent in the average workweek. The drop looks to be a fluke and may be weather related. Nevertheless, it depressed Total Hours Worked in January, taking some shine off the job growth.
The 0.3% m/m jump (with y/y up to 2.9% from 2.7% in December) in Average Hourly Earnings looks suspicious. It was only in supervisory and non-production workers, as AHE for Production Workers rose just 0.1% m/m. The latter's y/y was a benign 2.4% -- the same as in December 2017. A weather-related shift in composition toward higher-paid supervisors and non-production workers could be responsible for the January jump in AHE. An unwinding of this shift could hold down the February AHE to a 0.1% m/m increase (even taking account of an upward bias from the calendar) and 2.7% y/y. In any case, the January jump needs to be confirmed in February, by the y/y staying above 2.7%, in order to be viewed as significant.
Many commentators attributed Friday's stock market plunge and Treasury market sell-off to the ostensibly strong January Employment Report. The markets were said to conclude that the Report pointed to aggressive tightening by the Fed this year, based on the above-consensus +200k m/m Payrolls and the +0.3% m/m Average Hourly Earnings. However, the Report does not look especially strong behind these headline figures. It looks consistent with a continuation of gradual Fed tightening.
There were 5 parts of the January Employment Report that raise doubt about its overall strength:
The speedup in January Payrolls resulted from volatility in Retail Jobs, most likely stemming from seasonal adjustment. Seasonals look to offset post-holiday layoffs in the retail sector in January after looking to offset holiday hiring in November and December. The -25k m/m decline in December Retail Jobs (seasonally adjusted) shows there was less-than-normal holiday hiring that month. As a result, there was less-than-normal post-holiday layoffs in January, and Retail Jobs rebounded 15k that month. Excluding Retail Jobs, Payrolls rose 185k in both months. Remarkably, stability in underlying job growth occurred in pretty much every sector outside of Retail.
Nonfarm Payrolls (m/m change, 000s)
January December
Total 200 160
Retail 15 -25
Total Ex Retail 185 185
The 180k December-January average increase in Payrolls is in line with the trend seen by the Fed when it agreed on a gradual approach to tightening. The 2-month average essentially equals the 2017 m/m average. It is well below the peak pace seen in 2017.
Nonfarm Payrolls (average m/m change, 000s)
Dec-Jan 180
Oct-Nov 244
2017 181
Q417 216
Q3 142
Q2 190
Q1 177
There may have been a shift to part-time workers, raising a question about the quality of the recent job growth. Part-Time Workers rose for the 2nd month in a row in January, based on the Household Survey. They are up 138k since November, representing about 1/4 of the increase in Civilian Employment over this period. Part-timers said this was the only work they could find. This might reflect holiday-related hiring, but seasonal factors should have accounted for it. Since this figure is derived from the Household Survey, it is not comparable to the Payroll data. Also, the small sample of the Household Survey makes it not entirely reliable. Nevertheless, the upturn raises some question about the substance of the job growth over the past two months.
The Average Workweek fell sharply in January, down 0.2 Hour to 34.3 Hours. While a decline in the workweek is consistent with a shift to part-timers, this is probably not the reason -- the increase in part-timers from the Household Survey is not enough to make such a dent in the average workweek. The drop looks to be a fluke and may be weather related. Nevertheless, it depressed Total Hours Worked in January, taking some shine off the job growth.
The 0.3% m/m jump (with y/y up to 2.9% from 2.7% in December) in Average Hourly Earnings looks suspicious. It was only in supervisory and non-production workers, as AHE for Production Workers rose just 0.1% m/m. The latter's y/y was a benign 2.4% -- the same as in December 2017. A weather-related shift in composition toward higher-paid supervisors and non-production workers could be responsible for the January jump in AHE. An unwinding of this shift could hold down the February AHE to a 0.1% m/m increase (even taking account of an upward bias from the calendar) and 2.7% y/y. In any case, the January jump needs to be confirmed in February, by the y/y staying above 2.7%, in order to be viewed as significant.
Friday, February 2, 2018
A Longer-Term Downtrend in Stocks?
The stock market turned down before the end of the strong corporate earnings season. Moreover, the drop is in the face of solid US economic data and an FOMC Statement that suggested a continuing gradual approach to tightening by the Fed.
While there is mixed opinion regarding its catalyst and whether the decline is only a short-term correction, a case can be made that stocks are shifting to a longer-term downtrend. Ironically, stimulative fiscal policy is the stealth reason for this. The tax cut, easing of regulations, etc. serve to boost economic growth. This is problematic when the economy is operating near full capacity, as it would lead to bigger trade deficits (and a weaker dollar) and higher inflation. In response, lower stocks and higher Treasury yields will work to depress private demand to make room for the effects of fiscal stimulus. In other words, they will be the channel through which fiscal policy "crowds out" private spending. From a market perspective, strong US economic data may have become a negative for stocks, while weaker data a positive.
The market downtrend should end when economic growth has slowed sufficiently to free up resources to meet the demands of fiscal policy -- that is, when the outlook for Real GDP Growth has slowed to under 2.0%. Then, the outlook would be in line with the economy's long-run trend. The end result of fiscal policy would be just a shift in the composition of GDP.
Besides the boosts to business investment or consumer spending from the tax cut, the other significantly-sized fiscal policy that could weigh on the stock and Treasury markets in coming months is the proposed infrastructure spending -- regardless of whether it is funded through public or private monies. While market commentators will probably focus on the benefits to construction-related companies, the macro significance is that resources will need to be freed up in the economy to accomplish the additional building. Headlines regarding the progress of this proposal could become important negative market factors.
Fiscal stimulus would not be crowded out if the trend in productivity growth has ratcheted up to 1.5+% from sub-1.0% of the past few years. Thus, the one important piece of information in last week's US economic data was not the strength seen in the Mfg ISM or Employment Report. It was the 0.1% dip in Q417 Nonfarm Productivity. The dip argued against the possibility of a stronger productivity trend that had been raised by the good-sized productivity gains in the prior two quarters. The need for "crowding out" is still in the cards.
While there is mixed opinion regarding its catalyst and whether the decline is only a short-term correction, a case can be made that stocks are shifting to a longer-term downtrend. Ironically, stimulative fiscal policy is the stealth reason for this. The tax cut, easing of regulations, etc. serve to boost economic growth. This is problematic when the economy is operating near full capacity, as it would lead to bigger trade deficits (and a weaker dollar) and higher inflation. In response, lower stocks and higher Treasury yields will work to depress private demand to make room for the effects of fiscal stimulus. In other words, they will be the channel through which fiscal policy "crowds out" private spending. From a market perspective, strong US economic data may have become a negative for stocks, while weaker data a positive.
The market downtrend should end when economic growth has slowed sufficiently to free up resources to meet the demands of fiscal policy -- that is, when the outlook for Real GDP Growth has slowed to under 2.0%. Then, the outlook would be in line with the economy's long-run trend. The end result of fiscal policy would be just a shift in the composition of GDP.
Besides the boosts to business investment or consumer spending from the tax cut, the other significantly-sized fiscal policy that could weigh on the stock and Treasury markets in coming months is the proposed infrastructure spending -- regardless of whether it is funded through public or private monies. While market commentators will probably focus on the benefits to construction-related companies, the macro significance is that resources will need to be freed up in the economy to accomplish the additional building. Headlines regarding the progress of this proposal could become important negative market factors.
Fiscal stimulus would not be crowded out if the trend in productivity growth has ratcheted up to 1.5+% from sub-1.0% of the past few years. Thus, the one important piece of information in last week's US economic data was not the strength seen in the Mfg ISM or Employment Report. It was the 0.1% dip in Q417 Nonfarm Productivity. The dip argued against the possibility of a stronger productivity trend that had been raised by the good-sized productivity gains in the prior two quarters. The need for "crowding out" is still in the cards.
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