Hiking Into a Slowdown
It becomes ever more tempting to conclude that the timing of the Fed’s rate hike was really quite odd, even from the perspective of the planners – even though the U3 unemployment rate has fallen to a mere 5% and they are probably correct about the transitory nature of the currently very low headline “inflation” rate (as we have recently pointed out, actual monetary inflation currently stands at almost 8% y/y).
Recent economic reports have by and large not shown any noteworthy improvements – on the contrary. District manufacturing surveys are going from bad to worse, existing home sales just had another truly terrible month (this time bad weather can obviously not be blamed, but apparently there is a problem with filling in simplified forms) and even the Markit services PMI has suddenly undercut the entire range of economists’ expectations. Meanwhile, the growth rate in ECRI’s coincident index has just hit a 21-month low:
ECRI’s coincident index growth rate keeps falling. The weekly leading indicator has recovered from its lows (while remaining in negative territory), but we dislike the fact that this indicator is evidently strongly influenced by the stock market. In our opinion the stock market has long ceased to tell us anything about the economy.
In her press conference, Ms. Yellen inter alia went on about the “strong consumer” – as if one could consume oneself to prosperity. Both stronger employment and stronger consumption are a consequence of economic growth, not a cause of it. To believe otherwise, one needs to put the cart before the horse, based on the primitive Keynesian flow model of the economy (however, this model does not depict how the economy actually works).
A difficulty consists of the fact that capital consumption – i.e., a net loss of wealth – tends to masquerade as growing prosperity during a credit expansion. This is why the planners erroneously believe that growing the supply of money from thin air and artificially suppressing interest rates improves the economy. It is a bit like watching the erection of a Potemkin village and believing that there is actually something behind the facade.
Ms. Yellen always reminds us are that empirical data are the main guide informing Fed policy, but even those seem to contradict her point about consumers – to wit, growth in real personal consumption expenditures has just hit a 15 month low: