Archive for the ‘Gross Domestic Product’ Category

Yellen’s Soliloquy: To Raise or Not to Raise

Monday, August 10th, 2015

To raise, or not to raise – that is the question:

Whether ’tis nobler in the mind to suffer

The barbs and insults of outraged pundits and journalists

Or to raise rates in spite of a sea of troubles

And by raising rates extend them. To stagnate, to grow —

No more (than 2%) – and by a flatlined economy to say we end

The headache, and the thousand natural shocks

The stock market is heir to.

We could go on imagining Fed Chair Janet Yellen in the role of Hamlet, another famous person who met with tragedy due to procrastination.  We could make note of “the law’s delay, the insolence of office, and the spurns that patient merit of th’ unworthy takes,” even if we don’t know what “spurns” Shakespeare was talking about when he wrote Hamlet.

We could go on, but “conscience does make cowards of us all,” so we’ll leave it at that and turn instead to last week’s comments by Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.  Lockhart said “the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.” Yellen as Hamlet

The experts will tell you that anticipation of increasing rates is built into current stock prices, but if that’s the case, why did stock prices drop to their lowest levels since February after Lockhart’s remarks?  Maybe it was the disappointing earnings reports for the quarter, or the still-not-there employment numbers, but the most direct correlation appears to be with the fear of rising interest rates.

Keep in mind, too, that the statement didn’t come from the chairwoman.  Granted, Mr. Lockhart is a member of the Federal Open Market Committee, but he’s not Janet Yellen.  Perhaps the idea was to see what impact his comments would have so the Fed as a whole would still have the option to not raise rates in September.  Mr. Lockhart apparently drew the short straw at the last FOMC meeting.  (more…)

How Low Can You Go?

Tuesday, May 5th, 2015

The weather has done it again.

The U.S. Bureau of Labor Statistics last week reported annualized growth of a piddling 0.2% for the first quarter of 2015.  The culprit, of course, is not bad policy, but bad weather, if you believe the Federal Reserve Board.

Last year the economy would have boomed during the first quarter, no doubt, if not for the “polar vortex,” but instead it shrunk by more than 2% (experts use the oxymoron “negative growth”).  The same people who believe that will likely believe that the U.S. economy would have boomed during the first quarter of 2015 if not for the dreadful winter.

At least no one’s using the term “polar vortex” to describe the non-stop snowfall that hit much of America this past winter.  And this year’s first quarter growth is multiples better than last year’s first quarter mini-recession.

Winter may be over, but the economy remains cooled.  The Fed is likely hoping for monsoons, tidal waves and earthquakes over the next few quarters to rationalize yet more non-growth in an economy that falls short of Fed projections.  Per the chart below, the Fed has been overly optimistic about economic growth for each of the past four years – and that streak is likely to continue this year, given first quarter performance. Fed Growth Predictions

Fed predictions for the future continue to be rose-colored, but not as rosy as they were previously, based on the Fed policy statement issued last week.

“Federal Reserve policy makers said some of the headwinds holding back the U.S. will probably fade and give way to ‘moderate’ growth,” Bloomberg reported.  Maybe the Fed considers 0.3% annualized growth to be “moderate,” since it would be a 50% improvement over the first quarter.


The Year of “May”

Monday, January 12th, 2015

We’re well into January, but 2014 demanded a bit of reflection before commenting.  Was it a good year or a bad year?

We still don’t know.  We’re calling it the Year of “May,” although that title could have gone to 2013, 2012, 2011 or even 2010.

Using “may” in a sentence illustrates why 2014 was the Year of “May.”  The economy may be improving, but it may not be improving by much.  Interest rates may go up, but they may stay put for a while.  The Federal Reserve Board may be done with quantitative easing, but it may be using other easy money measures to keep the stock market lovefest going.  Europe may also begin quantitative easing.2014

In 2015, we may find out what Fed Chair Janet Yellen means by “macroprudential supervision.”  During 2014, we may have joined the rest of the world in moving toward deflation, or, if the economy really is improving, we may soon be meeting – or even exceeding – the Fed’s inflation expectations.

See how useful that word “may” is?  It sums up a year in three letters.  It’s so noncommittal, so indefinite, so milquetoast … so 2014.  We may be at war with the Islamic State, Russia may be taking over eastern Europe and the Middle East may be in worse shape than it was before the Arab Spring.  Then, again, it may not be. (more…)

Land of the Setting Sun

Friday, November 21st, 2014

Let’s pretend that the United States economy is a football team.  The coach calls the play.  The running back runs right up the middle and is thrown for a loss.  What does the coach do on the next play?  Run the ball up the middle for a loss.  And the play after that?  Run the ball up the middle for a loss.  And the play after that?  Run the ball up the middle for a loss.

Other teams see what’s happening to the U.S. economy.  So what do they do?  Run the ball up the middle for a loss.  In Japan, in Europe and elsewhere the losses mount.  What’s the conclusion?

  1. Running the ball up the middle every play will result in a loss, or
  2. We need to run the ball up the middle more often.

JapanThe answer, if you’re paying attention to central banks and the actions of Japanese Prime Minister Shinzo Abe is, of course, B., as logic and politics rarely travel on the same highway.

Formerly the world’s number two economy behind the U.S., Japan’s future couldn’t have been brighter back in the ’80s, when “Japan Inc.” was all the rage.  Today, if there really was a Japan Inc., it would have long ago declared bankruptcy.  The “Land of the Rising Sun” has become the “Land of the Setting Sun.”



Friday, October 31st, 2014

So the Federal Reserve Board has made it official.  This is the end of quantitative easing.  It’s quits for QE.  Bond buying has gone bye bye.  Quantitative easing has been eased out of existence, tapered into extinction.  The QE case is closed.

If nothing else, QE has provided us with material for more of our blog posts than any other topic (55, not including this one!), so, given that we’ll now need a new source of inspiration, we’re almost sorry to see it end. Fed Portfolio

So is this an obituary for the greatest (in terms of dollars involved, if not in results) experiment ever in monetary policy?  Should we hoist up the “Mission Accomplished” banner, pop the champagne cork and make a toast to Ben Bernanke and his brethren?

Not so fast.  There’s still an epilogue worth drafting.  Closure is needed.  This may be our last chance to take a shot at QE, so we’re taking advantage of it.


Prozac Nation

Friday, June 27th, 2014

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.


Attention Deficit Capitalism

Friday, June 13th, 2014

“Democracy would not be democracy, rule of the people, without at least a modicum of political attention and activity from its citizens.”                                                                                                                                                                                              James Bovard, Attention Deficit Democracy

Is anyone paying attention?

It seems as though the faster the world moves, the shorter our attention span becomes.  And today, speed is measured in nanoseconds.

Many have become complacent as technology has taken over.  High frequency trading, in which computers make the decisions, accounts for the majority of trades today.  HFT is based on arbitrage.  Computers look for discrepancies in pricing and take advantage of them, and that’s how money is made.  A company’s performance is irrelevant.

Humans created computers, but can’t compete with them.  They can try to produce a better algorithm, but the computers will make the decisions.epi_college_unemployment.png.CROP.promovar-mediumlarge

Technology has affected much more than just trading, of course.  Consider communications.  The telephone made it possible to communicate almost instantly.  The Internet, though, has made communications even faster.  Anyone with a computer can send a message to a database of thousands with the click of a mouse.  We can not only hear, but see people anywhere in the world while we talk to them, and our smartphones guarantee that we remain virtually connected at all times.

These and other technological developments have been a big boost to productivity, but they remove the human element.  Life in real time is also life on auto pilot.  We’re connected electronically, but disconnected socially and emotionally.


Polar Vortex or Recession Redux?

Friday, May 30th, 2014

The recovery that wasn’t a recovery may have come to an end, as the Bureau of Economic Analysis reported that gross domestic product dropped by 1% during the first quarter of 2014.

Even with the drop in GDP, lower housing sales and continued high unemployment, no one is saying the economic is in a recession.  Perhaps when a recovery is as insignificant as the one we’ve experienced for nearly five years, the distinction between recession and recovery is insignificant.

The economy was in sad shape five years ago and it’s in sad shape today, in spite of record stimulus spending, bond buying, and warm and fuzzy messages from the President, Congress and the Fed.

Quarter-to-Quarter-Changes-in-Real-GDP-Percent-Change_chartbuilder-1But fear not.  The bar is so low now, even a baby step over it will look like a high jump.  At least that’s the opinion of PNC Chief Economist Stuart Hoffman who wrote, “I believe this real GDP decline, mostly due to the polar vortex, coiled the ‘economic spring’ even tighter for a sharp snap-back (boing!) this quarter, where I have an above-consensus forecast for a 4.0% annualized rise in real GDP.”

In other words, bad news for the first quarter is good news for the second quarter.  Stop me if you’ve heard that story before.


Wishful Thinking Does Not Create Economic Recovery

Wednesday, April 30th, 2014

This was going to be the year.  Remember the predictions of 3% economic growth?

More recently, the consensus was 1.2% growth for the most recent quarter.

It turns out, though, that the economy has flat-lined, growing at a puny 0.1%, quarter over quarter.  Even the 2% growth we’ve experienced throughout the 58 months of economic recovery we’ve had (see last week’s post) looks good in comparison to what we’re experiencing.GDP

Keynesians, undaunted by being wrong 100% of the time, have been predicting for years that prosperity is just around the corner.  The only thing around the corner, though, has been another corner, then another.  It’s time to realize that we’ve been going in circles.

Growth of 0.1% is, of course, just a whisker’s width away from recession.  Maybe that’s what’s around the corner.

Two areas of weakness were trade, which subtracted 80 basis points from GDP growth, and inventories, which subtracted 60 basis points.  You may recall that in Q4 of 2013, when economists were talking about strengthening growth, it was because inventories were increasing.


The Economic Recovery That No One Noticed

Friday, April 25th, 2014

The average recovery since the end of World War II has been 58 months.  The current “recovery” has just reached that milestone.

So maybe we should be celebrating.  But what’s to celebrate?econ_expansion25_405

If you were to define “recovery” as a period when gross domestic project (GDP) increases from one quarter to the next, yes, we’ve been in a recovery.  But a recovery is typically reflected by a period that also includes, among other things, low unemployment, strong consumer spending, increasing income, higher inflation and strong manufacturing.

Most of those signs of recovery have been either barely visible or missing, and GDP has been growing about as fast as a bonsai tree.

This has been, and will likely continue to be, the recovery that no one noticed.  It’s a recovery in name only, as for most Americans it doesn’t feel much different than a recession.  Consider what’s been happening: