Economic Reports Scorecard
The topic of the Fed’s annual Jackson Hole retreat this year was “Designing resilient monetary policy frameworks for the future”. That the gathered group of eminent economists had failed so spectacularly at designing a resilient monetary policy framework in the past did not deter the assembled learned group from pontificating about their presumed future accomplishments. Not that anyone at the annual confab seemed aware of their past failures; the economy described by various central banker types only vaguely resembling the one here in the real world producing the steady stream of disappointing data.
Janet Yellen spoke of an economy “nearing the Federal Reserve’s statutory goals of maximum employment and price stability” but one would be hard pressed to find the economy of her speech in the data released since my last economic update. In the last two weeks we learned that:
- 3 of the regional Fed manufacturing surveys were negative
- The Chicago PMI fell to 51.5 versus last month’s 55.8 and expectations of 55.2. New orders slowed and backlog fell sharply.
- The ISM manufacturing index posted a contractionary 49.4.
- Existing home sales fell year over year
- Durable goods orders fell 3.3% year over year while core capital goods orders fell 4.9%
- Last quarter’s GDP was revised lower as corporate profits contracted for the 5th consecutive quarter
- Productivity fell for the third consecutive quarter, the longest period of contraction since the halcyon days of 1979
- Unit labor costs soared 4.3% which, with the above productivity performance, bodes ill for the aforementioned and already contracting corporate profits.
- Imports and exports continue to contract
- 151,000 were added to the payrolls and that was the good news in the report
To be fair, there were some positives and we are not – yet – in recession. The broad Chicago Fed National Activity index came in at a better than expected 0.27 indicating that the economy, at least right now, is growing slightly above trend. And it should also be noted that the data has, even with the above noted negatives, improved ever so slightly recently. New home sales were solid and construction spending year over year remains positive. Those lousy year over year durable goods numbers were slightly better month to month. Personal income and spending numbers were okay if not spectacular. But again, the improvements are slight and certainly disappointing to the second half rebound crowd.
Janet Yellen is a labor economist so it is the employment report that takes on outsized importance for this Fed and the most recent one surely gave her no comfort. I won’t go through all the details – see Jeff Snider here, here and here – but suffice it to say that the trend for employment is not moving in the right direction and last month did nothing to change that dynamic despite the river of denial running through Jackson Hole. It may, though, explain the emphasis of the conference on what I like to call Star Trek monetary policy. The discussion at Jackson Hole was not about how to normalize monetary policy – as one might surely have hoped seven years after the financial crisis that ushered in this era of unconventional policy – but rather how it might be taken to places no central bank has been before.
The Fed has seemed intent the last few weeks on preparing the market for a near term rate hike that almost no one outside the Fed expects to actually happen. And the only minds that may have been changed by the employment report were inside the Fed itself where it is the hawks that cry not the doves. Which I think is why the Fed spent part of last week telling the market that the economy is fine and rates are going up, we swear and the rest of the week telling the market about all the new things they could try when the next downturn arrives as it inevitably will. I don’t know what message they thought they were sending but the one the markets got was that the economy will not improve enough in this recovery to return monetary policy to normal.
It was an admission of failure and the public flaunting of it – Jackson Hole is the rock concert of monetary policy, Janet Yellen playing Yoko Ono to Stanley Fischer’s John Lennon – makes it that much less likely that the Fed can meet the statutory goals it is now missing. Call it animal spirits or confidence or whatever you want but psychology plays a role in economic growth. Spending a week talking publicly about all the things that central banks could do in the next downturn probably isn’t the best confidence builder in the CEO community. It implies, first, that the downturn is not far away – else why the urgency to talk about these things – and second that, even seven years later the central banks still don’t have a clue what they are doing.
As I said above though, the data has improved ever so slightly recently and that is reflected in some of our market indicators. The yield curve continues to flatten as the Fed’s tough talk on rates holds up the short end.
Inflation expectations rose a little, as the market builds in some probability the Fed might try some of the stupid things it pondered in Jackson Hole and that they might actually prove more effective than the ones tried so far.
Growth expectations were up a bit too as real rates rose.
But credit spreads stopped narrowing since the last update as oil prices corrected.
10 year Treasury yields rose slightly to reflect the improvement in nominal growth expectations.
The dollar also found support:
Which suppressed commodities:
It does appear that we are getting a rebound in some areas of the economy after the last two quarters of very weak growth. But there is lot wrong still with the US economy even if it is reckoned to be the best in the developed world right now. That isn’t a high hurdle in any case but it is telling that the Fed just spent a week in Wyoming pondering whether it might be worthwhile to follow Japan and Europe into the dark matter of negative interest rates, a wormhole of monetary policy where the normal rules don’t apply. Or at least the Fed hopes….
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