Is the ISM index a bubble?

The ISM index for the manufacturing sector is, in August, at its highest since May 2004. It was then at 61.3 versus 61.4 in May 2004.
The reading of this index is puzzling for different reasons
1 – Since 2011, the average growth in the US is 2.2% but the trend was 2.7% between 2000 and 2007. But the ISM index was, on average, higher since 2011 than before the crisis. Its average was 54.1 from January 2011 to August 2018 but only 52.1 from January 2000 to December 2007. A higher ISM index doesn’t not reflect a stronger growth momentum. We can see that also when looking at the manufacturing production index. On the same periods, the annual growth rate was 1.8% from 2000 to 2007 but 1.15% from 2011 to July 2018.
In other words, the index is higher than in the past while growth is lower. 
2 – There is a robust index calculated by the Federal Reserve of Chicago. The CFNAI (Chicago Fed National Activity Index) is the synthesis of 85 indicators (industrial production, employment, personal income,….). It’s reading is easy with an average at zero and a standard deviation of one.
The CFNAI is an accurate measure of the business cycle based on observed variables. Usually the two profiles are consistent as the graph shows.
Recent data show a persistent divergence between the two. The CFNAI is close to 0 while the ISM is at a high historical level. It is probably too high giving a wrong signal of the US growth strength.ismcfnai-summer2018.png

Dollar set to remain the reference currency for a long time yet

In a recent opinion piece, the German foreign minister Heiko Maas discussed how Europe needs to reassess its partnership with the United States, stating that the two areas have been drifting apart, requiring them to reshape their relationship in light of recent changes, and calling for an assertion of Europe’s autonomy in diplomatic, military and financial terms.

German Chancellor Angela Merkel disputed this point of view, refuting this notion of drifting apart, which she believes would damage the very long-standing relationship between Germany and the US, which acted as the foundations for North Atlantic relations. It would also require greater political integration within Europe, which is not the direction Germany wants to take, opting instead for a sort of federal approach without a federal government, but with strict rules for each State. This sits in contrast with French president Emmanuel Macron’s aim and the idea of a substantial European budget to influence the pace of European construction.

Heiko Maas also raised the issue of dependence on the dollar Continue reading

Oil, dollar, wages and unemployment in the US – my Monday column*

Oil prices are soaring out of control to slightly above $75/bbl, while the greenback is gaining ground again, and now stands at under 1.2 to the euro with its effective exchange rate rising swiftly and triggering uncertainty on the markets, particularly emergings.

Meanwhile, wages are still not rising in the US, despite unemployment falling below the 4% mark for the first time since December 2000: at the time, the reference wage was up 3.8% vs. an increase of merely 2.6% in April 2018.

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The Fed increases its rate, but more to come

The Federal Reserve has increased its main interest rate by 25 basis points. The corridor for the fed fund’s rate is now [1.5 – 1.75%] versus [1.25 – 1.50%] since December 13, 2017. The dots graph which represents FOMC members’ expectations of the fed fund suggests that the US central bank will hike its rate 3 times in 2018 (already one is done), 3 times in 2019 but only twice in 2020. The rate’s profile contained in the dots graph is unchanged even if growth expectations are stronger according to these same FOMC members.
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The US economy’s worrying change of pace – My Monday column

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 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

A Worldwide Dilemma For 2018: Retreating Inward or Joining Forces?

Which side will win out in the current confrontation playing out across the world? The inward-looking attitude that has been so widespread these past months aims at taking power back locally. Meanwhile, the more cooperative approach involves joining forces to address global challenges and is based on continued dialogue. The choice between these two world views will be the key challenge for 2018.
The world is no longer quite so unanimous in its enthusiasm for globalization.

The cooperative dynamics we saw before the 2008 crisis are no longer the dominant force, and this shift was laid bare during the various elections and the referendums of recent times, as globalization and its cooperative approach did not lead to even distribution of wealth, particularly in developed countries. Branko Milanovic’s famous elephant curve was often held up as an example to demonstrate that the most badly off workers in the western countries had paid the price of globalization and swift growth in emerging countries, such as China and India. Continue reading