Written by Steven Hansen
The market-moving event this week was delivered by the Federal Reserve / FOMC meeting statement which most are interpreting as an end to further rate increases. The good news this week was the end of the government shutdown – and three missed data sets were issued.
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Many elements in the economy are declining, and others are improving – but overall the short term trend beginning in September 2018 has been downward.
I call the Chicago Fed National Activity Index (CFNAI) the super coincident indicator. This indicator aggregates 85 indicators – the problem with the last release of the CFNAI is the government shutdown caused almost half of the input data to be estimated. So in reality, we do not really know the current state of the economy.
On the other hand, the CFNAI has been and continues in positive territory which indicates the economy is expanding above the trend rate of growth. It has remained in positive territory for over a year – and it is the longest period of trend rate of growth expansion since the end of the Great Recession. A value of zero for the index would indicate that the national economy is expanding at its historical trend rate of growth; a level below -0.7 would be indicating a recession was likely underway. Using the CFNAI as gospel, the economy is doing fairly well.
However, it takes many months for the federal funds rate to affect monetary policy. The Fed cannot use the CFNAI as it is a rear view mirror – and the Fed must be looking far ahead. From the FOMC meeting statement:
The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
My reading of the FOMC meeting statement is that INFLATION (rather LACK of inflation) was the driving force in deciding not to raise rates further.
Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed.
If inflation is not an issue, and economic growth appears to be trending down, and the economy is not in danger of overheating – then there is little reason to raise the federal funds rate further.
There are signs certain things are not swell. The yield curve is racing towards inversion, a condition where long-term debt instruments have a lower yield than short-term debt instruments. An inverted yield curve is a symptom of tightening monetary conditions. Inversions historically are a precursor to a U.S. recession – but I have doubts that an inversion this time would be a recession flag.
But unless the economy noticeably improves, we are at the end of the current round of federal funds rate increases. Why risk further increases when the Fed could be blamed for killing the economy by tightening monetary policy further?
Economic Releases This Past Week
The Econintersect Economic Index for February 2019 insignificantly declined, and remains below territory associated with normal expansions. The question remains whether this downward trend will continue. Note, our index is built on data sets which were not affected by the government shutdown – and it is most likely that other recent economic forecasts you have seen fudged the missing data. A forecast with fudged data is simply a guesstimate.
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
| Release | Potential Economic Impact | Comment |
|---|---|---|
December Chicago Fed National Activity Index | n/a | This super coincident index showed little change in growth – but this should come as no surprise as the government shutdown affected many inputs to this index. |
| November S and P CoreLogic Case-Shiller home price index | n/a | Home price growth decelerated from 5.0 % year-over-year (initially published as 5.0 %) to 4.7 %. Likely home prices are not affordable. There is no correlation of home prices to economic activity. |
| January ADP Employment | n/a | ADP reported non-farm private jobs growth at 213,000 which was well above the range of expectations. The rate of ADPs private employment year-over-year growth is on the high side of the tight range seen over this year – and remains on an improving employment growth trend line. Employment cannot be used to predict future economic growth – but it is a good gauge of where we are. |
| 4Q2018 GDP | n/a | Not issued due to the government shutdown |
| January FOMC Meeting Minutes | could be economically positive | There was nothing unexpected in these meeting minutes. As many pundits suggested, the FOMC seems to have lost its appetite for raising the federal funds rate as they stated the will now be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”. And there is no note of any change to the ongoing reduction in the Federal Reserve’s balance sheet. HOWEVER, the FOMC issued a special Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization which stated in part:
|
| December Pending Home Sales | n/a | The pending home sales index declined further into contraction. The rolling averages remain in negative territory. The long term trends continue to be downward. Note that the downward trend of home sales began in mid 2015 – and unlike the NAR’s optimism, we see no upturn for home sales in 2019. |
| November New Residential Sales | n/a | This is the first makeup release from the shutdown. The headlines say new home sales surged but remained in contraction. The rolling averages declined. Median and average sales prices declined – and the backlog of unsold homes marginally declined. Home sales have been slowing for one year. |
| December Personal Income and Outlays | n/a | Not issued due to shutdown. |
| January BLS Employment | confirms economy is strong | The headline seasonally adjusted BLS job growth was well above expectations. BLS reported: 304K (non-farm) and 296K (non-farm private). Headline unemployment rate worsened from 3.9 % to 4.0 %. Last month’s data was significantly revised downward as predicted. |
| November Construction Spending | investment is declining | This is the second makeup release from the shutdown. The rolling averages declined – and previous month reported was significantly revised down. And the current month declined relative to the previous month. Also note that inflation is grabbing hold, and the inflation adjusted numbers are in contraction.. |
| November Wholesale Sales | says economy is slowing | The headlines say wholesale sales declined month-over-month with inventory levels remaining slightly elevated. Our analysis shows a deceleration of the rate of growth for the rolling averages. Still the rate of growth is higher than GDP. |
| Surveys | Surveys are mixed but generally trending lower |
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| Weekly Rail Counts | ??? | Rail has been flying high in 2019 – and this week (likely due to a holiday mismatch) contracted year-over-year. There is a correlation between rail growth and economic growth. |
This week the data is mixed but predominately showing a slowing economy.
Links To All Of Our Analysis This Past Week
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