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The Fed Thinks the US Economy Is Fine. Do You?

Summary:
Fed spokescritters are saying the US economy is in decent health. From Bloomberg: The U.S. economy doesn’t appear to be headed toward a recession, Federal Reserve Bank of San Francisco President Mary Daly said. “When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion,” Daly wrote Tuesday in a post on Quora.com, citing data on labor markets and consumer spending. Admittedly, Daly continued to say that weaker overseas conditions “trade uncertainties” were spooking markets and might give the confidence fairy enough of a fright to make a downturn a “self-fulfilling prophecy.” The Financial Times described how other Fed governors said they weren’t inclined to give Mr. Market a sop right now because the economy didn’t need it:

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Fed spokescritters are saying the US economy is in decent health. From Bloomberg:

The U.S. economy doesn’t appear to be headed toward a recession, Federal Reserve Bank of San Francisco President Mary Daly said.

“When I look at the data coming in, I see solid domestic momentum that points to a continued economic expansion,” Daly wrote Tuesday in a post on Quora.com, citing data on labor markets and consumer spending.

Admittedly, Daly continued to say that weaker overseas conditions “trade uncertainties” were spooking markets and might give the confidence fairy enough of a fright to make a downturn a “self-fulfilling prophecy.”

The Financial Times described how other Fed governors said they weren’t inclined to give Mr. Market a sop right now because the economy didn’t need it:

Less-than-dovish commentary from Esther George, the Kansas City Fed president, and Patrick Harker, the Philadelphia Fed president, fuelled concerns that the central bank was unlikely to meet market expectations and slash interest rates roughly 100bp by the end of 2020, as futures prices currently indicate.

In television interviews, both Ms George and Mr Harker said they saw little reason for additional interest rate cuts beyond the Fed’s quarter-point reduction in July.

Ms George, who had voted against the rate cut, told Bloomberg: “As I look at where the economy is, it’s not yet time, I’m not ready, to provide more accommodation to the economy without seeing an outlook that suggests the economy is getting weaker.” Mr Harker said on CNBC that more accommodation “wasn’t required”.

However, it’s not as if everything on the domestic front is rosy. CNBC reported on Thursday that Markit’s Purchasing Manager Index (PMI) was in a contraction for the first time since September 2009. Admittedly, it was just barely in a contraction, at 49.9 when 50 is neutral. More detail from the story:

New orders received by manufacturers dropped the most in 10 years, while the data also showed export sales tanked to the lowest level since August 2009, the data shows….

Investors track PMI readings to get early indicators as to where the economy is headed. After the Markit reading, stocks fell and the yield curve inverted.

“The most concerning aspect of the latest data is a slowdown in new business growth to its weakest in a decade, driven by a sharp loss of momentum across the service sector,” Moore said. “Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting.”

Contrary to Daly’s view, the contraction wasn’t due just to softening exports but to slacker domestic demand as well.

As we’ve pointed out for some time, this recovery has been weak by historical standards and has also been significantly a two-tier affair, with higher income households getting more of the benefit of growth, particularly because the profit share of GDP has nearly doubled since 2002, when Warren Buffett deemed it to be unsustainably high. And the touted low unemployment rate also doesn’t tell the full story.

Labor force participation is lower than at similar points in past business cycles. And even data doesn’t capture another factor that makes the supposedly robust jobs data less impressive: that involuntary part time employment is high. From Business Insider early this year:

The Fed Thinks the US Economy Is Fine. Do You?

“During early 2018, involuntary part-time work was running nearly a percentage point higher than its level the last time the unemployment rate was 4.1%, in August 2000,” according to Rob Valletta, a vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco. “This represents about 1.4 million additional individuals who are stuck in part-time jobs. These numbers imply that the level of IPT work is about 40% higher than would normally be expected at this point in the economic expansion.”

Mass unemployment — the historic kind, with dole queues, unemployment benefits, and idle workers on street corners — has been replaced by low-paid, part-time, “gig economy” or “zero-hours” contract work.

Finally, reader Scott has been lamenting for years that for the economic data he reviews (a lot!) the indicators that are based on measurements of activity have consistently been weaker than the ones that are significantly or entirely imputed.

So over to you, readers. What indicators do you use to measure the health of the parts of the economy you see? And what do they say to you?

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