The Federal Reserve had just barely met, given us its policy pronouncement, told us (according to everyone's interpretations) that the door is now open to a rate hike again, but then, less than 48-hours later, a cruel, weak, GDP report seemed to slam the rate-hike door shut again.
The lesson? Keep your fingers away from the door jamb when the Fed is making pronouncements or trying to keep doors open to rate hikes.
The Fed has been trying hard, planning scheming, forecasting, rate hikes - if not multiple rate hikes - for years now and has been able to deliver only one and that one was delivered under a cloud of suspicion and controversy and ran immediately into a dead end…
The curse of the…
Forget the curse of the Bambino in Boston (Red Sox) or the curse of the Billy Goat in Chicago (Cubs), The Curse of the Great Recession continues. And this one haunts the Fed inhibiting its ability to hike rates.
GDP growth remains banged up
What we see is that GDP has now remained with a weak result for three quarters running. True, in Q2 real final sales (GDP excluding the inventory effect) popped up at a 2.6% pace, but few economists have latched onto that as the critical silver lining as they might have in days gone by.
GDP is firing on one cylinder-
The reason that economists are staying back on their heels after this weak 2016-Q2 GDP report (1.2% growth compounded- that's like saying its short with lifts in its shoes…) is the extended weakness still being shown in business investment which has fallen for three quarter in a row. Apart from inventories, the Q2 GDP result was made up of rock-solid soaring consumer spending offset by declines in business investment, residential investment, government spending, and a flat international trade contribution. Of all of these it is the spike in the consumer spending component that looks unsustainable.
The business sector has become a black hole of weakness
The recent (released just last week) durable goods report was again weak and weaker than expected. Durable goods orders fell by 4% in June dropping for the second month in a row, and falling for two months in a row excluding transportation as well. Durable goods orders are lower by 1.9% over 12-months and lower by 3.6% excluding transportation.
The inventory factor shows its hand
There may be some tendency to want to proclaim the inventory cycle over. Business inventory investment has been reduced for five quarter in a row from an annual rate pace of $117bln in 2015-Q1 down to an annual rate pace of $1.6bln in 2016-Q2. And consumer spending has picked up, paving the way for inventory to sales ratios to fall in retailing. But sales have only started to outpace inventories in retailing over the last three-months Inventories have grown faster than sales over three-months, six-months and 12-months for manufacturers and wholesalers as well as over 6-month and 12- months for retailers. In short, the pick-up in spending is nascent and on far too-short a time-line for the recent drop in the ratio to be construed as a game-changer. Maybe it is the start of a real revival but it is too soon to be anything but a hunch.
On balance the weak trend for industrial orders probably trumps the pick-up in spending by the consumer, at least for now.
Job report: no longer King of reports?
But the curious thing that is developing is the way that economists look at job growth. Job growth is looking like it is both too weak and too strong and if that does not blow your mind nothing will.
Jobs growth is still 'too strong' to keep the unemployment rate level. Even if it slowed to its 3-month moving average of 147K for private jobs that would be more than the 100K or so need to stabilize the unemployment rate. Job growth is poised to slow and still to be too-fast from the standpoint of job market (unemployment rate) stability. Moreover, job growth now has come to a point where even 200K per month seems to be not quite enough to keep GDP growth at 2%. So if job growth slows further, GDP will get even weaker. But if job growth does not slow a lot more it's going to be too strong. Welcome to the jobs paradox.
Job focus: the Fed's folly
It has been folly for the Fed to focus on jobs. We need a healthy economy and the job market is only part of that process. We have now taken this policy to the absurd end of its practice. And it was last week's GDP report that shook us out of this trance. Job creation cannot be both too strong and too weak. Clearly, if the economy continues to stay this weak the Fed will be changing its mind on jobs. In recent quarters the Fed has been 'setting aside' this or that or the next weak GDP report as if it did not matter. It now has a string of them representing three quarters of a year - that much time is hard to dismiss as anomaly. Meanwhile, the low rate of unemployment is not creating much wage pressure- sure there is some but darn little. And if GDP remains this weak it's hard to believe that job growth will stand up. But we should remain open minded in these strange days about what can co-exist with what. The international pressures on the economy are and have been distorting the way the job market and other conditions play out and interact with one another. The Fed has been slow to understand this.
I do not mean to imply that the monthly job report is no longer very important. But it just got one heck of a lot more interesting and more complicated. Beware employment Fridays.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.