Archive for October, 2006
One of the recent mysteries about the US economy is the question of how come reported corporate earnings (say for S&P500 firms) have been growing so rapidly when GDP has decelerated so fast from 5.6% in Q1 to 1.6% in Q3. Part of the answer could have been the sharp increase in the share of profits […]
One of the latest variants of the optimists’ soft-landing view is that the weakness in economic growth in Q3 was driven by the spike in oil prices during the summer. Now that oil prices are 25% down relative to the summer peak, the extra income in the pocket of consumers will be spent driving a […]
Was Q3 GDP growth manipulated upwards because of the coming elections or is the US government clueless about measuring output?
The first estimate of US Q3 GDP growth came out at a dismal 1.6% but, as reported by Bloomberg, the actual correct figure would have been 0.9% if the production of motor vehicles in Q3 had been measured correctly: U.S. Statistical Fluke Exaggerated Growth, Will Be Reversed By Carlos Torres Oct. 27 (Bloomberg) — An unexpected increase in auto production […]
The first estimate of Q3 GDP growth is a dismal 1.6%, sharply lower than the 5.6% of Q1 and the 2.6% of Q2. In July – when I first predicted a US recession in 2007 – I forecasted that Q3 GDP growth would be 1.5% at the time when the market consensus was 3.1%. Given […]
The 2000-01 Fed policy saga and statements say more about the 2007 US recession risks than yesterday’s FOMC statement
Since yesterday afternoon the entire industry of “Fed watchers” has been hard at work to interpret the latest FOMC statement where the only difference relative to the previous statement was an additional sentence on growth likely to be moderating ahead. The seeming consensus is that the Fed believes that the victory of a growth soft landing with moderating inflation has been achieved; thus, while a tightening bias is kept as inflation is still above the comfort zone, the Fed is not likely to tighten as the growth slowdown and lower energy prices make a Fed Funds rate of 5.25% just right for the time being. Also, the bond market expectation – stoked by last months Philly Fed report – that the Fed may ease rate as early as January have been – according to Fed watchers and Fed Funds futures – now mostly dashed: the bond market was ahead of the Fed and the expected “soft landing” implies no Fed easing any time soon; if anything the tightening bias keeps the option open that an unexpected rise in core inflation or failure of core to fall in the next few months (together with a growth rebound) may still lead the Fed to tighten some time in 2007, even if the most likely scenario looks like a Fed Funds stop at 5.25% through, at least, the first part of 2007.
Adding my epsilon or delta of interpretation or divination to the meaning of yesterday’s FOMC statement would be useless as there is a whole cottage industry of very good Fed watchers : I would actually call them “Fed-ologists” as they, like the cottage industry of Kremlinologists of the Cold War (who used to try to divine the meaning of the cryptic statements – or even looks and frowns – of Soviet leaders) appear to try to divine the meaning of every word uttered within the FOMC or by Fed governors in their speeches.
So, instead of trying to try to directly challenge the “no-way cuts ahead” message of the FOMC message or divine what Bernanke and his fellow governors really meant, I think it is more productive and value-adding to compare Fed policy and statements in 2006 to those of the Fed in 2000 as they may give a better divination of what may happen ahead. Fed policy and statements in 2000 were amazing as the Fed went from a tightening bias (because of inflation worries) in mid-November to an easing bias (because of faltering growth) in a matter of weeks in late December to an outright cut in the Fed Funds rate two weeks later (at an exceptional inter-FOMC time on January 3rd 2001). So all those Fed watchers who are now cheerfully stating that the Fed will not cut rates in Q1 (or even still believe that the next Fed move will be a hike in early 2007) may find their divinations wrong this time as they were wrong in 2000.
The Fed policy and FOMC statements saga of 2000 is more interesting than trying to interpret the meaning of an extra sentences in yesterday’s FOMC statement.
A little Fed policy history: in 1998 with the Fed Funds rate at 5.50% and an “new economy” speeding at 4% plus growth, the Fed eased the Fed Funds rate by 75bps (with the first cut at an inter-FOMC meeting date) because of the seizure of liquidity in US capital markets following the near collapse of LTCM (that in turn had been triggered in part by the default of Russia in August 1998). That liquidity boost stimulated further the US economy and the bubbly NASDAQ and stock market and, by June 1999, the Fed realized it needed to undo the post-LTCM easing and tighten further as growth was accelerating to 5% and inflation started to rear its ugly head. Thus, between June 1999 and May 2000 the Fed increased the Fed Funds rate by 175bps bringing the level to 6.5%. Note that in Q2 of 2000 the economy was still growing at an annualized rate of 5%; but the bust of the tech bubble – that started in March of 2000 – would lead (together with an oil shock and the Fed tightening) the economy from a 5% growth in Q2 to near zero growth by December and an outright recession that started in Q1 of 2001 that totally surprised the Fed and forced it – in a matter of two months to move from a strong tightening bias to a strong easing bias and then to an inter-FOMC meetings Fed Funds cut just two weeks later.
The story of sudden change in Fed outlook, statements, bias and actual decision in those two months between November 15th 2000 and January 3rd 2001 is more interesting than all the ink spent today trying to divine the next steps of the Fed based on yesterday’s FOMC statements.
So follow me now on this historical detour that has many lessons for today and the recession risks for 2007…
Last month when the September Philly Fed report signaled a sharp slowdown in the economy, the usual soft-landing bulls (but not the bond market) discounted it as a fluke and pointed to the much stronger results from the Richmond Fed report as suggesting that the hard landing was an illusion. Too bad that the Philly Report […]
With a Dismal Q3, Will US Q4 Growth Rebound Assuring A Soft Landing? Highly Unlikely As Data Suggest Recession Ahead
The first estimate of US Q3 growth is due on October 27th but, given the macro data that are already available, it is already possible to give a relatively precise forecast of that figure. Last August, when the consensus for Q3 was about 3%, I predicted a Q3 growth rate of 1.5%. In spite of […]
One of the arguments repeatedly heard these days among soft-landing optimists is that the recent fall in oil and energy and commodity prices is good news for the US consumer and the US economy as it reduces inflation and provides higher real incomes to consumers allowing them to continue to sustain their high consumption levels. […]
My forecast for payrolls in September was 70K at most against a delusional consensus of 120K. I must admit I was overoptimistic as the actual payroll increase was only a dismal 51K. As I said on October 3rd (but I had argued the same weeks before) : “I expect that September payroll figures could be as low as […]
Housing Slump in the U.S. versus UK, Australia and New Zealand: Four Differences or Why No Soft Landing for the U.S. Economy…
The ongoing U.S. policy debate on the recession risks can be summarized into two views. According to the first – still the market and investors’ consensus – the housing market will have a hard landing but the economy will have a soft landing, i.e. no recession. The second view – mine and still a minority […]