The narrative that the U.S. economy is in trouble – some say teetering on the edge of recession - has become so powerful and persuasive that few investors give it a second thought. So of course, they believe, the Fed should cut interest rates.
The Fed got as dovish as it could get today without actually cutting short-term rates.
A few key economic reports have taken a turn for the better, boosting expected real GDP growth in the second quarter and pointing to an upward revision to first quarter growth.
At the Friday close the market consensus was that the Federal Reserve would cut short-term interest rates by 50 - 75 basis points in 2019, with another 25 basis point cut in 2020. We think this is nuts.
We haven't been worried about a trade conflict with China, which has a long track record of pirating intellectual property and is a potential military rival in the (not too distant) future. The US has enormous leverage with China, given our trade deficit with the country and the ability of firms to shift supply chains toward alternatives, like Vietnam, Mexico, and India.
One consistent theme we've heard lately among pessimistic analysts and investors is that slower growth abroad is a headwind for economic growth in the US. Softness in Europe or China, they say, bodes poorly for the continuation of US expansion. The standard theory, the conventional wisdom, is that slower growth abroad means slower growth in US exports.
At the close of activity on Friday the futures market in federal funds was projecting a 75% chance of at least one rate cut this year. From now through the end of 2020, the market is projecting two rate cuts.
Since hitting new all-time highs two weeks ago, the S&P 500 has fallen about 2.2% as trade negotiations with China hit a snag. Last week, the US announced new tariffs on Chinese imports. This morning, China announced new tariffs on some US goods. Many fear a widening trade war.
If you take a long hike up a mountain, there's plenty to appreciate along the way. But, sometimes, you just have to stop and enjoy the view. With that in mind, let's forget about the April employment report – which saw a combination of very fast payroll growth and moderate wage growth – and think about where the labor market stands in general.
Hold off on the Fed statement for a moment, Chair Powell's press conference was the real news today. He noted that both GDP and employment came in above expectations while inflation surprised to the downside.
Less than two months ago, conventional wisdom thought the US economy was in real trouble. The consensus expected real GDP would barely grow, if at all, in the first quarter of 2019.
It wasn't that long ago that some economists and investors were seriously concerned about US growth going negative for the first quarter. Now, based on our calculations, which we discuss below, it looks like real GDP grew at a respectable 2.6% annual rate in Q1, meaning that US real output was 3.1% larger than Q1-2018.
The Dow Jones Industrials Average and S&P 500 are breathing down the neck of record highs set last Fall. Some take that as a sign to sell, time to shift out of equities and realize gains. We think that would be a mistake.
Last month many economists had pushed down their estimates for first quarter economic growth to near zero. The Atlanta Fed's "GDP Now" model was projecting real GDP growth at a 0.2% annual rate in Q1, which would have been the slowest growth since the weather-related negative reading in the first quarter of 2014. But this time it was seen as a new trend leading us toward a recession.
It's true the yield curve is flat - inverted in some places - but that's because the market is pricing in a rate cut. We don't see it, nor do we see the reason for it.
From just about every significant group of thought leaders – the press, politicians, economists, analysts, and government officials – the narrative of the past twelve years has been all about government and nothing about the entrepreneur. They say the crisis ended because of government bailouts and easy money. It's an artificial sugar high, covering up fundamental problems that still exist and could come back without the Fed's support.
The Federal Reserve just made their most dovish shift in outlook since the aftermath of the financial crisis. The FOMC statement, economic projections, and "dot plot" (the expected path of rate hikes) all tilted dovish. In addition, the Fed has decided to maintain a significant portion of the bloated balance sheet it gathered during and after the crisis. In other words, their stated path of "renormalization" will leave the balance sheet well above normal levels.
The environment on Capitol Hill has made populism a bipartisan affair, with Republican Senator Marco Rubio now joining the fray with a call to tax corporate stock buybacks.
It's March 8, 2009. The market's down 56% from its all-time high, unemployment is over 8% and hurtling toward 10%, it's just been reported that real GDP dropped at a 6.2% annual rate in Q4 of 2008, and it feels like the world is coming to an end.
Real GDP grew at a 2.6% annual rate in the fourth quarter, and while some analysts are overly occupied with this "slowdown" from the second and third quarter, we think time will prove it statistical noise.
The clock is winding down, and the United Kingdom has some major decisions to make. Should it stay in the European Union or should it go? If it goes, under what terms? Some analysts and investors are concerned about a "Hard Brexit,"...
The most important quote from the Financial Panic of 2008 came from President Bush: "I've abandoned free market principles to save the free market system."
Whatever happened to the recession calls? Seems like just a few weeks ago that the correction in the stock market, as well as the partial government shutdown, had convinced many analysts and investors the US was about to enter a recession.
We've written about it over and over, and while many advisors seem to understand, the media, politicians, and many analysts don't...or won't. So, we thought we'd try again to explain why so many people don't understand the nearly ten-year long bull market in U.S. equity values.
The Doves won the day at the Federal Reserve, which noted continued solid economic performance but removed longstanding language that further gradual increases will be warranted, and instead highlighted global developments – both economic and financial - and a moderation in inflation as reasons the Fed will be "patient" in determining the pace of future rate hikes.
When it comes to monetary policy, one thing looks certain for 2019 - journalists, pundits, investors, and analysts will pay it way more attention than it deserves. The spotlight is currently on Wednesday, when the Federal Reserve will issue their first statement of the new year. The consensus expects no changes in rates, and we agree.
Normally, the end of January sees the government's first estimate of real GDP growth for the fourth quarter. But with no end in sight for the shutdown, which has already seen numerous other data releases postponed – including figures on retail sales, international trade, inventories, construction, and durable goods - it's very unlikely the GDP report will arrive on time.
For the more than three decades we have been involved in analysis of the economy, one nagging constant has been pessimistic prognostications over the U.S. debt. Now once again, debt is the news de jour. Consumer, business, and government debt are all at record highs, and, therefore, the theory goes, the economy is tempting fate.
Talk about destroying a narrative. On Friday, the Labor Department reported 312,000 new jobs in December, with an additional 58,000 from upward revisions to prior months. Recession talk got crushed.
Early in 2018 we said the US economy has gone from being a Plow Horse to Kevlar. Nothing that has been thrown at the economy since – neither trade conflicts nor tweets, not higher short-term interest rates nor the correction in stocks – is likely to pierce that armor.
The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was "no room for them in the inn."
Today's much anticipated Fed meeting brought answers and new questions. As expected, the Fed raised rates 25 basis points to a range of 2-1/4 to 2 1/2 percent, marking a fourth rate hike in 2018.
Last week in the New York Times, Yale economist Robert Shiller wrote we are "experiencing one of the greatest housing booms in United States history." Given what happened in the aftermath of the last boom – a financial panic and the Great Recession – this will add to investors' fears about another recession lurking around the corner.
Last Friday, the 10-year Treasury Note closed at a yield of 2.85%. That's up from 2.41% at the end of 2017, but down from the peak of 3.24% on November 8th, and well below where fundamentals suggest yields should be.
New Narrative Alert: Fed Chief Jerome Powell is to blame for the volatility in stocks. Back on October 3rd, with stock markets near their record highs, Powell said "we're a long way from neutral." That was not long after the Fed had moved the federal funds rate to a range of 2.00% to 2.25%...
It's that time of the year again. Holiday sales data show surging online sales while foot traffic at brick and mortar stores remains tepid. If you have a sense of déjà vu, it's because you heard the same stories last year.
Fed Chair Jerome Powell and others have started a new narrative about economic "headwinds." They think past rate hikes, slower foreign growth, and "fading fiscal stimulus" should slow the Fed's rate hikes. But is fiscal stimulus really fading?
Politics and economics are interwoven. Government grants licenses, enforces contracts and the rule of law, provides fire and police protection, a national defense, and can call on resources to recover from crisis. Without these institutions, activity would slow. No one is building billion-dollar hotels in Syria, Libya, or Iraq; stability and certainty support investment.
No fireworks in today's FOMC statement, as Chairman Powell and company held rates steady while reinforcing their outlook. Unemployment remains low, household spending remains strong, and inflation is running in-line with their 2% inflation target. In other words, today's near unanimously expected pause looks almost certain to be followed by a rate hike at the December meeting.
Growth is determined by a perpetual tug-of-war between entrepreneurship and government redistribution. When President Obama was in office, we believed incredible technological innovation would allow for economic growth in spite of Obamacare, greater redistribution, higher taxes and increased regulatory burdens. We thought it would be a Plow Horse Economy, and that things would get better if we did not grow government so much.
A solid 3.5% real GDP growth rate reported for Q3 wasn't enough to appease the doomsayers. They say inventories boosted growth and that can't last. Plus, they say, business investment was soft.
Economic growth continued at a robust rate in the third quarter, supporting the case for both a continued bull market in stocks and further rate hikes from the Fed.
Not long ago, many investors were kicking themselves for not investing more when the stock market was cheaper. But when stocks fall, like they did last week, many investors have a hard time buying for fear stocks may go lower still.
Federal Reserve Board Chairman, Jerome Powell, who has been remarkably quiet as he adjusts to his new role at the Fed, finally roiled markets last week. He made comments on Wednesday, during the Atlantic Festival at a session moderated by Judy Woodruff of the PBS News Hour.
As far as Harvard economist Martin Feldstein is concerned, we're all doomed. Feldstein says that the low interest rates of the last several years have created a stock market bubble rivaling the housing bubble that precipitated the last crisis. Why? Let's start by looking back.
As expected, the Federal Reserve raised rates by 25 basis points today. And at this point, the outlook for the remainder 2018 looks largely determined, with both 75% of Fed officials and the markets pricing in one more rate hike in December to make it four for the year.
The Federal Reserve meets on Wednesday and there's one thing we know for sure: it's going to raise rates by another 25 basis points, lifting the federal funds rate to a range from 2.00 to 2.25%.
The U.S. federal government reported last week that it ran a deficit of $214 billion in August, the fifth largest deficit for any single month in US history.
Friday's jobs report finally included what appears to be evidence of the long-awaited acceleration in wage growth.
In spite of woeful prognostications to the contrary, the US economy seems to be wearing Kevlar. Rate hikes, tariffs, Turkey, you name the fear, the economy remains unscathed. Case in point, through all the supposed turmoil, the U.S. grew at a 4.2% annual rate in the second quarter and looks set for a similar pace in Q3.
