Is the US economy’s current pace set to trigger major imbalances, disrupt the current cycle and spark off a significant downturn in economic activity?
The stockmarkets’ severe recent downturn reflects investors’ concerns on forthcoming trends for the global economy, and in particular the performances we can expect from the US. Firstly, they reacted to the change in stance from the Federal Reserve on forthcoming inflation trends, expected to converge towards the central bank’s target of 2% and stay there in the long term. Secondly, rising wages confirmed this idea of nominal pressure, even if the 2.9% gain announced in January’s figures was probably a result of the reduction in number of hours worked due to unusually cold weather conditions. Lastly, the handover at the Fed added another level of uncertainty. Janet Yellen did a good job of steering the US economy, will Jay Powell do the job equally well?
I have already written at length on these matters, and an article published on Forbes.fr will provide details on the uncertainties surrounding Powell’s arrival to chair the Fed. However, looking beyond these factors, a number of other questions are being raised about the US economy.
The first question involves economic policy and the way fiscal and monetary policies can coordinate against a backdrop of full employment. This coordination has worked pretty well so far. The US economy nosedived in 2009 and both policy areas instantly loosened: it was vital that every effort be made to avoid a drastic chain of events that would end up creating higher unemployment and a long-term hit to the standard of living. This approach was successful and the country hit its cycle trough in the second quarter of 2009, moving into an upward phase that has lasted ever since. Monetary policy continued to accommodate, but fiscal policy became restrictive in 2011 and then converged to a sort of neutral situation to avoid hampering the economy. This policy combination drove the US into one of the longest periods of growth it has enjoyed since the Second World War: the pace of GDP growth was admittedly not as brisk as before, but it did not trigger any major imbalances, as reflected by an economy running on full employment and continued moderate inflation, remaining below the Fed’s target. Continue reading →
Point #1 – The global economic momentum remains weak World trade was up by only 2% when November 2015 is compared to November 2014. This growth rate is still below the average seen before 2008 (blue band on the graph). The explanation framework based on the absence of growth drivers seems always the good one. No impulse from the US or China and the incapacity for the world economy to converge to a higher growth trajectory.Continue reading →
First graph – A lower oil price will drive inflation rates down
With Iran back on the oil market, the price dropped below 30 dollars for a barrel. This could have an important impact on the inflation rate and therefore on monetary policy strategies in Europe and in the US.
The graph shows, for the Euro Area, the energy contribution to the inflation rate. It also shows the one year change of oil price (Brent) in euro. The two curves have consistent profiles.
With an oil price at 50 and the EURUSD exchange rate at 1.07 (red line), the oil price change is consistent with an energy contribution that could be close to 0 on average in 2016. It was a good hypothesis to put the price at 50. In that case, the headline inflation rate was able to converge to the core inflation rate. It was a comfortable situation for central bankers.
If on average, the oil price is 35 USD and 1.07 (green line), the contribution could be close to -0.6%. In that case, the inflation rate would be circa 0%. With 30 USD and 1.07 it would be probably negative.
These simple calculus show that the oil price trajectory will be important in 2016 (close to 30 or below?) and that there is no guarantee that inflation rates could converge to 2% in a finite time. Continue reading →
The main issue this week was the US employment figure as it may change the Fed’s mind on monetary policy. Nevertheless, employment is not the only aspect to mention to catch the US economy momentum. Another important issue, this week, is the rapid and deep drop of German industrial orders from outside the Euro Area. It’s a source of concern for the global investment dynamics. The last important point is the non-null probability of a rate lift-off at the Bank of England in 2016. Mark Carney has mentioned this possibility after the Monetary Policy Committee Meeting of the Bank. It’s not the first time that the BoE and Carney take this kind of commitment.
Eight points this week to follow the macroeconomic environment
1 – There was impatience to get the number of jobs creation in October in the US as it could be a trigger for a Fed’s rate move at its December meeting.
The number was strong at 271 000, way above expectations at 185 000. Nevertheless, the employment rate was almost unchanged for all classes of age and was unchanged for the 25-55 years of age. In other words, there were no supplementary pressures on the labor market even with employment surprising on the upside.
This figure comes after August and September during which the number of jobs creation was low. As a consequence, the average number of new jobs in the last 3 months is below the average of the 3 previous months: +187 000 in August, September and October versus 243 000 from May to July. Continue reading →
13 points this week to follow the macroeconomic momentum.
1 – The Fed is back in the game after its last week meeting (27/28 October). It hasn’t changed the stance of its monetary policy but it has deeply changed its press release. Headwinds coming from the external environment of the US economy were the main point to notice in September. The message from the Fed was that the probability of a Fed’s lift-off this year was low. This point has been erased in the October’s press release. Moreover, the Fed has mentioned explicitly a potential change at its next meeting (15/16 December). Can we expect a lift-off in December? I don’t think so. The main reason for a change would come from the US central bank commitment to hike its interest rates in 2015. But as always the decision will be data dependent. The current economic situation will not create tensions that could push the Fed to change its strategy very rapidly. Recent data on the ISM and on retail sales have shown weakness that cannot be a support for a change.
Janet Yellen will testify in the Congress at the beginning of December (2 and 3). It could be a source of information on the Fed’s strategy Continue reading →