The Federal Reserve continue to think that the long term value of the fed funds follows a downward adjustment trend. This reflects an almost pessimistic perception of the US economic trend even if no recession is expected.
In the short run the Fed expects to being able to increase its rate in December 2016 without creating damage on the economy. The US central bank wants to catch some degree of freedom in the way it manages its monetary strategy. But a hike in December doesn’t mean a strong upward trend for 2017.
The Fed’s message is almost pessimistic on the long run as it expects the level of its rate (the fed funds rate) will follow a downward adjustment. Last June this long term level was anticipated as being at 3%. In September it is expected at 2.9%.
The Federal Reserve thinks less and less that the economic cycle will converge to its pre-crisis features. It’s important as it reflects a kind of secular stagnation with low growth and limited inflation in the long-term. If we follow the Fed’s forecasts then we see that the nominal GDP growth is never expected to be above 4% Before 2007 it was fluctuating between 4 and 6%. The Fed thinks that the US economy will not go back to this corridor and that’s the main reason for low interest rates. Continue reading
After the deep drop in the ISM surveys for August (see here and here) we have had two new important data.
Retail sales were down by -0.3% in August after +0.06% in July and core retail sales were down -0.1% in July AND in August. Therefore carry over growth for Q3 at the end of August was 1.8%% at annual rate (after 6% in Q2) for retail sales and 0.7% for core sales after in Q2. Q2 data were exceptional and not the beginning of a strong trend.
The risk is a low contribution of households’ consumption to GDP quarterly growth. Households’ expenditures were a strong support for GDP in the second quarter. This will probably not be the case for Q3. This means a probable downgrade of growth for 2016. We were at 1.4% for the whole year, it will probably be lower.
After a rebound in July (+0.6%), the industrial production index was down in August (-0.5%). For the manufacturing index data were -0.4% and +0.4% for August and July. Therefore carry over growth for Q3 at the end of August is a modest +2.3% (at annual rate) for the industrial index (after -0.6% in Q2) and for the manufacturing index data were +0.7% and -1% respectively. The momentum is still low. The YoY comparison shows that the industrial index is down by -0.7% and the manufacturing index is up by just 0.1%.
After the ISM, employment it is now retail sales that follow a weak trend while the industrial production index is neutral. Where is the risk of an overheating economy mentioned recently by Eric Rosengren from the Boston Fed. It was a cool summer in the US and the Fed has absolutely no reason to change its monetary policy at its next week meeting
Retail sales were marginally down (-0.17%) in August after a strong improvement in July (+1.86%). Therefore the carry over growth for the third quarter at the end of August is 6% at annual rate.
The first graph shows that the trend that started at the beginning of 2014 is still strong and not broken
The second graph shows that with the strong sales figures in July and August we can expect a large households’ consumption contribution to GDP growth for the third quarter.
Brexit is still not there and consumers take advantage of that (see here why the Brexit has no effect yet on the UK economic situation)
I married my daughter this week-end and I have had no time to write. Don’t be impatient.
The non-manufacturing index from the ISM survey was down more than 4 points at 51.35 in August. The sector is growing but at a slower pace. It’s its weakest level since February 2010.
With the retreat of the manufacturing sector at 49.4, the current outlook for the US economy is more fragile.
The synthetic index of the ISM survey in the manufacturing sector crashed in August. It is again below the 50 threshold. We can imagine that the recent improvement was temporary as the index was below 50 from October 2015 to February 2016. The August 2016 level is way below its historical average.
The drop in the ISM index reflects mainly the fragility of the domestic market as the new export orders index is stable above 50. This drop may be temporary but it shows that the American economic is not able to rebound strongly and permanently. That’s worrisome
I’m not sure that the US economy is close to the targets defined by the Federal Reserve and mentioned recently by Janet Yellen and Stan Fisher. We will still have to wait before the Fed hikes its main rate if it does it. Continue reading