With the markets building in expectations of soft US economic growth
with little inflation, it could be worthwhile to examine the Fed's
outlook in the April FOMC Minutes. Although the Fed's forecasts are not
particularly reliable, they are useful in evaluating whether the data
flow are truly moving in a direction signaling a policy change. From
this perspective, it would seem that the recent bout of soft economic
data and low inflation are not enough to prompt a Fed easing.
Continuing below-trend growth and low inflation will probably be needed
to get the Fed to move.
Fed Staff Outlook
The
Fed staff acknowledges a near-term slowdown in GDP Growth, but expects a
speedup soon thereafter. Thus, current signs of weakness should not
change monetary policy. Further weakness is presumably needed to
convince the Fed that its economic forecast is too optimistic. The
staff expects somewhat higher inflation near term, as well, as temporary
factors that held it down wear off. But, the longer-term expectation
is for inflation to remain below 2.0%. So, higher inflation prints can
be ignored if they can be attributed to a reversal of one-off component
swings. But, continuing low inflation, which is possible given the
strong dollar and recent drop in oil prices, is conceivable and could
get the Fed to reevaluate its inflation forecast.
The Minutes say:
Real GDP Growth
The projection for U.S. economic activity prepared by the staff for the April–May FOMC meeting was revised up on net. Real GDP growth was forecast to slow in the near term from its solid first-quarter pace, as sizable contributions from inventory investment and net exports were not expected to persist. The projection for real
GDP growth over the medium term was revised up, primarily reflecting a lower assumed path for interest rates, a slightly higher trajectory for equity prices, and somewhat less appreciation of the broad real dollar.
Real GDP was forecast to expand at a rate above the staff’s estimate of potential output growth in 2019 and 2020 and then slow to a pace below potential output growth in 2021. The unemployment rate was projected to decline a little further below the staff’s estimate of its longer-run natural rate and to bottom out in late 2020.
Inflation
The staff’s forecast for inflation was revised down slightly, reflecting some recent softer-than-expected readings on consumer price inflation that were not expected to persist along with the staff’s assessment that the level to which inflation would tend to move in the absence of resource slack or supply shocks was a bit lower in the medium term than previously assumed.
As a result, core PCE price inflation was expected to move up in the near term but nevertheless to run just below 2 percent over the medium term. Total PCE price infla-tion was forecast to run a bit below core inflation in 2020 and 2021, reflecting projected declines in energy prices.
FOMC Members Views
The
FOMC members -- board members and Fed Bank Presidents -- have a similar
outlook to the staff. They saw the risk of a near-term slowdown, but
acknowledge that 2019 Real GDP Growth may come in above their forecasts.
The latter suggests the Fed's Central Tendency for Real GDP Growth
will be revised up at the June FOMC Meeting.
The minutes say:
Participants continued to view sustained expansion of economic activity, with strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes.
Participants noted the unexpected strength in first-quarter GDP growth, but some observed that the composition of growth, with large contributions from inventories and net exports and more modest contributions from consumption and investment, suggested that GDP growth in the near term would likely moderate from its strong pace of last year.
For this year as a whole, a number of participants mentioned that they had marked up their projections for real GDP growth, reflecting, in part, the strong first-quarter reading.
Sunday, May 26, 2019
Monday, May 20, 2019
An Historical Perspective on US/China Negotiations?
The markets continue to gyrate on hope and disappointment regarding US/China trade negotiations. The risk is that these negotiations will not end soon and the gyrations, if not further decline, will continue. Historical considerations suggest the issue is about which country -- the US or China -- will dominate the world.
A main US complaint is that China has been stealing US intellectual property. The Chinese acquisition of technical know-how, either through legal or illegal means, would seem to be equivalent to how rising empires in the past became powerful. The difference is that in the past these empires obtained their competitors' capital through military conquest. So, in a sense, the US-China negotiations are in the tradition of a battle over ownership of capital, although it is not now lethal. Conceivably, the ultimate outcome may be permanent US tariffs on Chinese goods and a slow separation of two "spheres of influence." Alternatively, China could concede dominance if it finds the loss of the US market too costly. China could accede to US demands and bide its time until it becomes less dependent on US demand for its goods.
A part of the US complaint is the Chinese requirement that foreign companies operating in China must have a Chinese partner. From an American perspective, this smacks of coercion, especially as a means to acquire technological property. But, from a Chinese perspective, it could be understood as a way to prevent a recurrence of European/US mercantile and subsequent military conquest of China in the 19th century. Private companies led the way of European/US imperialism then. If this is China's motivating factor, required partnership of US/Chinese companies may be difficult to end.
Meanwhile, US data have begun to hint that the slowdown seen in a number of US economic data in April may be behind us.
Initial Claims fell to 212k in the latest week, back toward their low range. Continuing Claims also fell. The Claims data still point to a smaller Payroll increase in May than in April (+263k m/m), but it is not clear by how much. Whether the Nonfarm Average Workweek rebounds will be as important as Payrolls in the May Employment Report. A higher Workweek would likely make Total Hours Worked more consistent with 2+% Q219 Real GDP Growth.
Initial Claims (level, 000s)
Jan 2019 220k
Feb 229
Mar 217
Apr 213
Apr 20 wk 230
27 wk 230
May 4 wk 228
11 wk 212
The large rebound in the May Philadelphia Fed Mfg Index points to a rebound in the Mfg ISM. The two moved in the same direction in the first 4 months of the year.
A main US complaint is that China has been stealing US intellectual property. The Chinese acquisition of technical know-how, either through legal or illegal means, would seem to be equivalent to how rising empires in the past became powerful. The difference is that in the past these empires obtained their competitors' capital through military conquest. So, in a sense, the US-China negotiations are in the tradition of a battle over ownership of capital, although it is not now lethal. Conceivably, the ultimate outcome may be permanent US tariffs on Chinese goods and a slow separation of two "spheres of influence." Alternatively, China could concede dominance if it finds the loss of the US market too costly. China could accede to US demands and bide its time until it becomes less dependent on US demand for its goods.
A part of the US complaint is the Chinese requirement that foreign companies operating in China must have a Chinese partner. From an American perspective, this smacks of coercion, especially as a means to acquire technological property. But, from a Chinese perspective, it could be understood as a way to prevent a recurrence of European/US mercantile and subsequent military conquest of China in the 19th century. Private companies led the way of European/US imperialism then. If this is China's motivating factor, required partnership of US/Chinese companies may be difficult to end.
Meanwhile, US data have begun to hint that the slowdown seen in a number of US economic data in April may be behind us.
Initial Claims fell to 212k in the latest week, back toward their low range. Continuing Claims also fell. The Claims data still point to a smaller Payroll increase in May than in April (+263k m/m), but it is not clear by how much. Whether the Nonfarm Average Workweek rebounds will be as important as Payrolls in the May Employment Report. A higher Workweek would likely make Total Hours Worked more consistent with 2+% Q219 Real GDP Growth.
Initial Claims (level, 000s)
Jan 2019 220k
Feb 229
Mar 217
Apr 213
Apr 20 wk 230
27 wk 230
May 4 wk 228
11 wk 212
The large rebound in the May Philadelphia Fed Mfg Index points to a rebound in the Mfg ISM. The two moved in the same direction in the first 4 months of the year.
Sunday, May 12, 2019
How Important Are The Tariffs?
The stock market will likely continue to struggle with the imposition of additional US tariffs on Chinese goods. Although the tariffs, themselves, should not have a significant effect on US GDP, increased uncertainty about the outcome of the trade negotiations and US/China relations -- as well as the potential hit to profits of companies with operations in China -- should be a market negative as it was in Q418. The absence so far of scheduled further talks is a negative.
The 25% Trump tariff on $200 Bn in Chinese imports should impart only a modest drag on US economic activity. Ironically, they also have the potential to move US spending toward public goods. They could be exactly what critics of the "consumer society" would like.
The tariff would likely have only a modest effect on the US economy for several reasons. /1/ If the entire cost is passed through to US consumers, the direct hit would be $50 Bn or only 0.2% of GDP. /2/ 40% of the hit already has been in effect since January. So, the additional tariffs would have closer to 0.1% pt hit to GDP. /3/ Any pullback of spending because of the tariffs will hurt Chinese manufacturers as well as US companies. So, the direct impact on the US economy is even smaller than the overall impact. /4/ The tariffs should boost the dollar, inasmuch as the expected trade deficit would be smaller because of the tariffs. The stronger dollar would lower import prices, offsetting some of the impact of the tariffs on the targeted goods and lowering prices on others. /5/ The stronger dollar also should lower commodity prices, particularly oil, which should work to offset the drag from the tariffs. /6/ The tariffs could be absorbed by Chinese manufacturers, lowering their prices to attempt to keep market share.
The tariffs offer an opportunity for the US to shift spending from consumer goods to public goods. From a revenue perspective, the added government receipts could encourage the bi-partisan desire for infrastructure spending. The tariffs can be viewed as a "sales tax" on selected items. The tax is paid by US consumers if the tariffs are fully passed through to prices. Or, it is paid by the Chinese if they absorb the tariffs by lowering their own prices. (In this case, US companies with operations in China could see their profits cut.) The tax revenue would be lost, however, if production shifts from China to other low-wage countries that are not subject to the tariffs. From an economic perspective, the resources freed from dealing with imported goods from China (eg, warehousing, transportation, etc) could be available for public policy projects. If this way of looking at the tariffs gains support, the desire to eliminate them could wane.
The impact of the tariffs on inflation should be minor. The prices of the targeted imports would ratchet up, but this would be a one-off adjustment. In contrast, other import prices could fall further because of the stronger dollar. This combination is what has occurred since January. Lower oil and other commodity prices would operate to hold down inflation, as well.
The 25% Trump tariff on $200 Bn in Chinese imports should impart only a modest drag on US economic activity. Ironically, they also have the potential to move US spending toward public goods. They could be exactly what critics of the "consumer society" would like.
The tariff would likely have only a modest effect on the US economy for several reasons. /1/ If the entire cost is passed through to US consumers, the direct hit would be $50 Bn or only 0.2% of GDP. /2/ 40% of the hit already has been in effect since January. So, the additional tariffs would have closer to 0.1% pt hit to GDP. /3/ Any pullback of spending because of the tariffs will hurt Chinese manufacturers as well as US companies. So, the direct impact on the US economy is even smaller than the overall impact. /4/ The tariffs should boost the dollar, inasmuch as the expected trade deficit would be smaller because of the tariffs. The stronger dollar would lower import prices, offsetting some of the impact of the tariffs on the targeted goods and lowering prices on others. /5/ The stronger dollar also should lower commodity prices, particularly oil, which should work to offset the drag from the tariffs. /6/ The tariffs could be absorbed by Chinese manufacturers, lowering their prices to attempt to keep market share.
The tariffs offer an opportunity for the US to shift spending from consumer goods to public goods. From a revenue perspective, the added government receipts could encourage the bi-partisan desire for infrastructure spending. The tariffs can be viewed as a "sales tax" on selected items. The tax is paid by US consumers if the tariffs are fully passed through to prices. Or, it is paid by the Chinese if they absorb the tariffs by lowering their own prices. (In this case, US companies with operations in China could see their profits cut.) The tax revenue would be lost, however, if production shifts from China to other low-wage countries that are not subject to the tariffs. From an economic perspective, the resources freed from dealing with imported goods from China (eg, warehousing, transportation, etc) could be available for public policy projects. If this way of looking at the tariffs gains support, the desire to eliminate them could wane.
The impact of the tariffs on inflation should be minor. The prices of the targeted imports would ratchet up, but this would be a one-off adjustment. In contrast, other import prices could fall further because of the stronger dollar. This combination is what has occurred since January. Lower oil and other commodity prices would operate to hold down inflation, as well.
Sunday, May 5, 2019
Focus on US/China, But Macroeconomic Backdrop OK, Should April CPI Be a Concern?
While market focus is back to US/China trade negotiations, the macroeconomic backdrop and upcoming data should not be problematic for either stocks or Treasuries.
The macroeconomic backdrop shows continuing economic growth with little inflation. There are some early, tentative signs of slower economic growth in Q219 than in Q119, but it is too soon to say for sure. The signs include an uptick in Initial Claims, a pullback in Mfg ISM and other manufacturing surveys, the decline in April Average Workweek and Total Hours Worked, and a dip in the ECRI Leading Index in the latest two weeks. But, all the pullbacks are modest and leave open the possibility that any slowdown from the 3.2% Q119 Real GDP pace will be slight. The Atlanta Fed model's projection already has moved up to 1.7% from the initial 1.3%. There is still not enough data to make the projection reliable.
The next important economic hurdle for the markets is next Friday's April CPI report. A consensus-like print of 0.2% m/m with an uptick in the y/y to 2.1% from 2.0% should be handled in stride by the markets.
But, whatever prints should not be taken necessarily at face value -- so beware knee-jerk reactions to a non-consensus print. There was a technical issue in the March CPI that could impact the April figure. Specifically, the 1.9% m/m drop in March Apparel Prices reflected the inclusion of a new source of survey data from a presumably major retailer. There was a major difference about prices from this new source than what had been estimated before. In effect, the drop could be considered a "series break." It is not clear how this new source will impact the Apparel Price Component in April. One possible problem is that seasonal factors are not aligned properly with it. If Apparel Prices move sharply, the best way to analyze the CPI is to calculate the Core excluding Apparel Prices. For example, the 0.1% m/m increase in the March Core CPI would be +0.2% excluding apparel.
This technical issue --which also raises question about the accuracy of past CPI prints, since the retailer's data were presumably estimated -- highlights a problem faced by the Fed in its approach to specifying its policy targets. The targets could be impacted by special factors that distort their meaning. Fed Chair Powell mentioned another example -- last year's phone company price war -- that deflected the inflation measure from the true underlying pace. A better approach to deciding whether inflation is on the desired track or not is to rely on a variety of measures. Powell mentioned the Trimmed-Mean Core Inflation as an example.
Various measures of labor costs also should be examined carefully. At this point, 2 of the 3 broad measures of labor costs -- Employment Cost Index and Average Hourly Earnings -- say labor costs have stabilized around 3.0%. The broadest measure -- Compensation/Hour -- says labor costs have decelerated to about 2.5%. All these measures say that labor costs are not now a catalyst for a speedup in inflation.
The macroeconomic backdrop shows continuing economic growth with little inflation. There are some early, tentative signs of slower economic growth in Q219 than in Q119, but it is too soon to say for sure. The signs include an uptick in Initial Claims, a pullback in Mfg ISM and other manufacturing surveys, the decline in April Average Workweek and Total Hours Worked, and a dip in the ECRI Leading Index in the latest two weeks. But, all the pullbacks are modest and leave open the possibility that any slowdown from the 3.2% Q119 Real GDP pace will be slight. The Atlanta Fed model's projection already has moved up to 1.7% from the initial 1.3%. There is still not enough data to make the projection reliable.
The next important economic hurdle for the markets is next Friday's April CPI report. A consensus-like print of 0.2% m/m with an uptick in the y/y to 2.1% from 2.0% should be handled in stride by the markets.
But, whatever prints should not be taken necessarily at face value -- so beware knee-jerk reactions to a non-consensus print. There was a technical issue in the March CPI that could impact the April figure. Specifically, the 1.9% m/m drop in March Apparel Prices reflected the inclusion of a new source of survey data from a presumably major retailer. There was a major difference about prices from this new source than what had been estimated before. In effect, the drop could be considered a "series break." It is not clear how this new source will impact the Apparel Price Component in April. One possible problem is that seasonal factors are not aligned properly with it. If Apparel Prices move sharply, the best way to analyze the CPI is to calculate the Core excluding Apparel Prices. For example, the 0.1% m/m increase in the March Core CPI would be +0.2% excluding apparel.
This technical issue --which also raises question about the accuracy of past CPI prints, since the retailer's data were presumably estimated -- highlights a problem faced by the Fed in its approach to specifying its policy targets. The targets could be impacted by special factors that distort their meaning. Fed Chair Powell mentioned another example -- last year's phone company price war -- that deflected the inflation measure from the true underlying pace. A better approach to deciding whether inflation is on the desired track or not is to rely on a variety of measures. Powell mentioned the Trimmed-Mean Core Inflation as an example.
Various measures of labor costs also should be examined carefully. At this point, 2 of the 3 broad measures of labor costs -- Employment Cost Index and Average Hourly Earnings -- say labor costs have stabilized around 3.0%. The broadest measure -- Compensation/Hour -- says labor costs have decelerated to about 2.5%. All these measures say that labor costs are not now a catalyst for a speedup in inflation.
Friday, May 3, 2019
April Employment Report Should Keep Fed Patient
The April Employment Report should not budge the Fed from its "patient" monetary policy stance. While job growth and labor market conditions strengthened, wage inflation remained contained.
Despite the strong Payroll gain, there are signs in the Report that economic activity had a slow start to Q219. Total Hours Worked dipped in April, as a result of a lower Average Workweek. Bad weather in the survey week, however, could have been responsible, as the weakness was primarily in the construction sector. A weather drag on the Workweek should reverse in May and June.
The +263k m/m increase in Nonfarm Payrolls, indeed, points to a strengthening in construction jobs. They climbed 33k m/m in April, after being flat over Q119. Residential construction remains subdued, however, as the job growth was in the nonresidential construction area. Manufacturing is still in the doldrums. Jobs in that sector rose 5k after -5k in March, but the increase is well below the double digit gains seen in 2017 and 2018.
The decline in the Unemployment Rate to 3.6% attests to the above-trend growth in overall Payrolls. While both Labor Force and Civilian Employment fell in April, this could have reflected the small sample bias of the Household Survey. This bias is eliminated in the calculation of the Unemployment Rate.
The tame 0.2% m/m in Average Hourly Earnings shows no inflationary pressure from the tighter labor market. The y/y slipped to 3.2% from 3.3% in March. Calendar considerations could have contributed to holding AHE down. They should work to do so again in May. A 0.2% m/m increase in May AHE would lower the y/y further to 3.1%.
Looking ahead to the May Employment Report, early evidence suggests a smaller gain in Payrolls, as well. The Claims data will be the key.
Despite the strong Payroll gain, there are signs in the Report that economic activity had a slow start to Q219. Total Hours Worked dipped in April, as a result of a lower Average Workweek. Bad weather in the survey week, however, could have been responsible, as the weakness was primarily in the construction sector. A weather drag on the Workweek should reverse in May and June.
The +263k m/m increase in Nonfarm Payrolls, indeed, points to a strengthening in construction jobs. They climbed 33k m/m in April, after being flat over Q119. Residential construction remains subdued, however, as the job growth was in the nonresidential construction area. Manufacturing is still in the doldrums. Jobs in that sector rose 5k after -5k in March, but the increase is well below the double digit gains seen in 2017 and 2018.
The decline in the Unemployment Rate to 3.6% attests to the above-trend growth in overall Payrolls. While both Labor Force and Civilian Employment fell in April, this could have reflected the small sample bias of the Household Survey. This bias is eliminated in the calculation of the Unemployment Rate.
The tame 0.2% m/m in Average Hourly Earnings shows no inflationary pressure from the tighter labor market. The y/y slipped to 3.2% from 3.3% in March. Calendar considerations could have contributed to holding AHE down. They should work to do so again in May. A 0.2% m/m increase in May AHE would lower the y/y further to 3.1%.
Looking ahead to the May Employment Report, early evidence suggests a smaller gain in Payrolls, as well. The Claims data will be the key.
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