A national accounts framework that can show the income distribution by decile is a priori fascinating. Piketty, Saez and Zucman have done that for the US. It allows to look at income shares through time. They show that the first 5 déciles share in national income intersects this share of the top 1% in the 90’s. The first five déciles share went from circa 20% in the 70’s to a little more than 12% in 2014. The top 1% has had a profile that mirrored this trajectory from 11% to 20%.
A comparison of the first five déciles share between the US and France shows that French people have had really a better situation.
The summary of a detailed document is available here
The Federal Reserve has increased its interest rate by 25bp. The fed fund rate will be in a corridor going from 0.75 to 1%. Previously and since last December Fed’s meeting the corridor was 0.5 to 0.75%.
The US central bank will continue to increase its rate and expects two other increases in 2017 to 1.375% (mid-corridor). Three hikes are expected for 2018 to 2.125% and for 2019 the rate will converge to 3% (which is also the Fed’s long term target). For 2017, there is no acceleration when the profile is compared to what was expected in December.
The Fed perceives the US economy as robust. Yellen said that clearly when she answered a question during the press conference. The US central bank said that its two objectives are almost attained. Growth is robust and the inflation rate is close to 2%. That’s a good reason for the central bank to increase its rate. It’s a new step for normalisation.
Growth and inflation forecasts are unchanged when compared to December. GDP growth is expected at 2.1 in 2017 and 2018 (it was 2% for 2018 in December). The inflation rate is at 1.9% and 2% as is the core inflation rate. These are the same numbers than in December. Continue reading
The Economic Outlook issue for September 2016 is now available
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
The inflation rate was 1.1% in August, close to the average seen since the beginning of the year (1.1%). The core inflation rate was at 2.3% the highest number since last February.
The surge in the core inflation rate can be decomposed between Housing and the rest of the index.
The following graph shows the Housing contribution to the inflation rate and the core rate contribution to the inflation rate. The Housing contribution explains more than 60% of the core contribution to the inflation rate. This the weight of the housing sector that makes a difference with the PCE index followed by the US central bank. It corresponds to a very different methodology. This means that all the other components of the core price index explain only 40%.
In the 40% it is interesting to see each sub index contribution. We see a strong contribution from the Health price index. All the other contributions are low and some are declining.
OK the core inflation rate is up to 2.3% but only through strong contributions from the Housing sector and from the Health sector. The first reflects the higher real estate price and a catch up effect. The real estate adjustment seen on the graph below is beyond the CPI issue. The Health index price is up but this is not a market price.
As all the other sub indices in the core price index are not accelerating we can say that the core inflation rate has a bias on the upside linked to Housing and Health but this doesn’t reflect tensions inside the US economy. That’s why the Fed must be careful in the way it takes this index (which is not its favourite) into account.
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.