This past week the Federal Reserve announced that it will not hike rates until December, claiming they’re on hold for now but that the data is strengthening for a data dependent FED. Since this is about economics, we’ll do it ceteris paribus and leave out politics and the outcome of the election in November. My crystal election ball is broken, the next decision of Ms. Yellen and her buddies at the FED will be different if Trump wins vs if Clinton wins. (For what it’s worth, if the Donald wins they’ll be more likely to hike, knowing that Yellen is out and it doesn’t matter what she does. If Hillary wins they’ll be steady as she goes, not wanting to rock the boat of their new employer.)
So let’s have a look at the data that will be stronger in December. Wait a second...We haven’t seen that data yet. Hell, it hasn’t even happened! August hasn’t been revised, which will likely be down for their data points. September isn’t over, and October through December hasn’t even happened yet. One must wonder out loud, do they have a crystal ball?
So let’s be fair about this. The vast majority of data points that we have access to are published by the FED, the Bureau of Labor Statistics, or another government agency, and all are in favor of national economic hardship, not economic growth. Here and there we can find positive data points, that much is true. But that is only isolated data points, and taken as a whole, the rosy picture that the FED wants to paint for us is nothing but smoke and mirrors.
The first data point is national debt. Yeah, a lot of economists, including New York Times favorite Paul Krugman, cry about how this doesn’t have an impact on us, the men and women of Main Street. But I beg to differ. The national debt currently sits north of $19.5 Trillion (no typo there, it’s trillion, and nearly 90% higher than 8 years ago). The current federal budget deficit is almost $600 Billion. In fact, it gets worse; the fiscal 2016 national debt rose by over $1.3 Trillion. Here’s what that means: eventually the lenders of that debt will come to realize that America can’t pay it back and there will be only two options left. America either defaults and negotiates cancellation and repayment of the debt (Trump), or America just prints the cash to pay it, in which case your cash will be worthless (Clinton).
Before that even happens, the interest rate on all that debt will begin to rise in the open market and irrespective of what the board of governors of the Federal Reserve would like to do, and that means that interest rates for houses, cars, credit, and all the other stuff you borrowed cash to buy will go up. All of a sudden no one will be able to afford all that stuff anymore. Can you say housing crisis to the Nth degree?
Here are a few more key data points which Ms Yellen and company may be looking at. The Baltic Dry Index is a measure of how much stuff is being shipped all over the world. It is generally understood that the more shipping, the more people are buying. That means that as shipping increases, economies are improving and growing. So the index is at a high for 2016; with a reading of 937 it is up just over 2%. But compare that to where it was at the last peak of 2330 in December 2013, and we’re off by almost 60%! The BDI measures world shipping and is more of an indirect indicator for the USA. In a general sense, if the world is way down, it will affect us negatively too.
The FED is looking at other measures too. Let’s have a look at the infamous unemployment rate. The number that is touted in the headlines and national news, called U-3, is currently 4.9%. It would seem to imply that 95.1% of people who want to work are working (excluding children, retirees, cognitively impaired, etc). Here’s the big but…It’s not so simple. This rate only measures people who are not working, would rather be working full time, and have looked for work in the last four weeks. It doesn’t measure anyone who stopped looking for work 29 days ago or more, even though those people are really still unemployed and would rather be working! U-3 is a little more complicated than this, but what you need to know is that this is a rosy data point and that’s why it’s used.
If we would look at the real unemployment (called U-6) and include everyone who would rather be working full time but is not, no matter the reason and no matter how long, that rate is north of 10.1%. Let’s be real honest here that both these numbers from the government are actually played with. That’s right. The government uses something called “hedonics and geometric weighting” to bring those numbers lower than they really are. A good example of that is coming just around the corner…the holiday season. Retailers and delivery services will be adding hundreds of thousands of temporary workers. The key being temporary. Yet they are considered part of the permanent full time workforce. Finally, new jobless claims are over 258,000 last week, and while 151,000 people found work in August it’s considered below the standard 180,000 per month just to keep up with population growth.
If you want the real numbers with a more appropriate calculation you can go to a website called shadowstats. It’s a subscription service and I don’t subscribe, but people who do tell me that the real numbers are about double what the government tells us. Meaning the real unemployment in the country is one in five people don’t work!
I’d like to spare you the details of more boring economic stories, so for now I’ll just give you some stats. Feel free to email me if you’re curious as to what it all means. The Philadelphia Fed index (also called the Manufacturing Business Outlook Survey) is down from its peak in December 2013, and it has weakened the last nine months in a row. Notice that mirrors the BDI. Manufacturing is down and hiring is weak. So weak in fact that only 12% of firms report an increase in hiring, whereas 17% report a decrease. About 70% remain unchanged. Input prices are rising while sales prices are falling.
The Empire State Manufacturing Index indicates similar conditions, but measures different things. New ordering fell 8 points from positive, down to -7.5, and shipments fell 18 points to -9.4! Employment hours and pay rates are lower. Input prices are rising here too, and more quickly than selling prices. By the way, the New York FED, who publishes the ESMI, just lowered the outlook for economic growth for the second half of this year, including 4th quarter growth expectation being lowered to just 1.22%.
Several FED governors have come out in the last 3–4 weeks claiming that the economy is heating up. Let’s get one thing straight about what is considered growth, sluggish, and overheating. A growing economy is considered stable at about 3% growth. 4.5–5.0% is generally considered to be bordering on overheating. And 1% is considered scary sluggish (meaning watch the hell out!). In the last three quarters the economy in America, according to the FED itself, has grown at 0.9%, 0.8%, and 1.1%. Accounting for inflation through the end of August, at 1.1%, that means 0% to negative growth.
When Boston FED President Eric Rosengren said a week ago that our economy is beginning to increase in temperature because of low interest rates, who was he trying to fool? Several other FED governors echoed his sentiments, including William Dudley, James Bullard, Charles Evans, and Stanley Fischer. But how can they say that when the S&P 500 earnings have fallen for the last 18 months in a row, productivity is dropping for nine months in a row, and tax revenue is lower now than it was at the same time last year. Mortgage purchase applications are falling, last month by over 7%, showing a steady decline since, December 2013. The purchasing managers index fell into contraction territory at 49.4 in August, and the service sector index fell 4.1 points to 51.4 and is now teetering on contraction territory as well. And where should those interest rates be if our economy is really starting to up the temp? Try 6–7% for 10 year debt, which is currently at 1.65%
With all this negative data and more, it’s no wonder we see record numbers of Americans on government programs like food stamps, section 8 housing, and Medicaid. It’s also no wonder the FED can’t bring itself to raise rates a measly 25 basis points (that’s 1.9% on the same 10 year debt). They didn’t raise rates this week, they won’t raise rates at the next meeting in November, and they won’t be raising rates in December either. I’ve said it before and I’ll say it again…December 2015’s 25 basis point hike was the first and likely the last. Watch for rates to fall, and by the middle of next year our new president might be facing the possibility of both negative interest (you get paid to borrow, rather than paying to borrow) and another round of QE.
If the FED had any credibility left, believe me there is none now. Ms. Yellen and her cohorts continue to threaten markets that they’ll pull the trigger and hike rates, but like a nervous 7th grader getting ready to kiss his first girlfriend, they don’t have the nerve to just do it. With all the talk and no action, the Federal Open Market Committee (FOMC) should be renamed the Federal Opened Mouth Committee. Actions speak louder than words, and like a playground bully this FED is all talk.