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Monday, December 02, 2013

December Fed - Grinch or Santa?

I bet that the December Fed should be the Grinch but will opt to be the jolly old elf.

The reason I think the Fed should taper is that if it doesn't do it in December, there is no possible justification for doing it next March. Thus I think the Street wisdom on this matter is less than wise.

There are two things the Fed has to fear - the auto expansion slowing and the housing expansion slowing. Interest rates have a lot to do with both, and Q3 data has been iffy for both. So the one thing the Fed cannot have is interest rates spiking in March, right? No sane Fed would want that. Compared to 2013, the FHA annual premium has already been instituted, so low-downpayment home purchases are quite constrained.

Therefore, the Fed should begin to taper in December, so it can see how interest rates develop and adjust into the spring. They were clearly arguing over that matter very seriously recently.

But will they do that? The holiday retail season is going to be constrained, because the FICA increase means people just don't have the money to spend:
The rolling six-month expansion in cash in non-jumbo checkings/savings is, inflation-adjusted, very low and it means that holiday sales won't be that good. Some increase, but not huge.It's a short sales season, taxes have been raised on the upper income brackets, and there just isn't that much spare cash lying around.

Nor will credit purchases bail them out, because the only people who like to pay those credit card rates are very, very stupid or like to hang out in clubs with whips and chains:
People have been spending money, but mostly on cars. And auto inventories are filling up, because purchases have fallen off a bit:

Ward's projection is for a good increase in November sales, so that may even things up a bit, but inventories indicate a slight downshift in production soon unless it blows out. I don't think it will blow out.

Mind you, there is nothing wrong with this economy. It's currently solid, but just solid at lower levels. I don't think the Fed will want to take the chance of further suppressing the housing market, which is not going to be great next year. And construction gains are there, but slipping already, because home sales are a bit constrained:


The Fed doesn't want a significant interest increase in that. Investor sales carried it this year, but all things have their natural end. Rising prices plus a constraint in sales plus higher mortgage rates would not produce a good sales trend next year:
 

It seems to me that everything I have posted here indicates that a rational Fed would taper a bit in December, because they have to try the waters. They cannot try the waters again next March - they would not have time to save it if they needed to do so. 

But if auto sales and retail data are not above expectations, I suspect they won't.

Comments:
C'mon, MoM, "There's nothing wrong with this economy"?!? That's like saying there's nothing wrong with the household finances of the nearly 50 million families on SNAP.

IMHO they'll never taper. If they surprise me and do, it'll be extremely short-lived.
 
Double whammy. Last year saw a lot of pull forward due to taxes making y-o-y more challenging. This year FICA and those same taxes constrain spending along with ACA uncertainty with no pull forward. Fed stands pat so that it won't get the blame.
 

I'm with TJ and Rob and M_O_M, with a twist.

As TJ says, the Fed can't taper. every bureaucrat in Washington is counting on cheap Treasuries.

As Rob says, the Fed can't taper. The political risks are enormous, because if they do and anything bad happens, the Fed will surely take the blame.

As M_O_M says, they need to taper just to test the water, but as TJ says, we already know the water is cold. The U.S. share markets are leveraged to QE infinity.

The only way they can maybe taper and get away with it is if they wait for a crisis in the Euro to shift Euro capital to the U.S. No guarantees that'll keep the Treasury rates down, though.

 
This comment has been removed by the author.
 
OK, TJ. There's nothing wrong with this economy other than that it has a low growth rate. A lot of this is demographics, and it would take a very large Fed staffed by Wilt Chamberlains to change that.

There are no indications of impending recession, and if they don't taper soon, they run the risk of running into the next cyclical down when they do, or QEing right into the next recession, which would leave them somewhat helpless at that point.

When I think of this, I think that the Fed has no alternative but to taper. But they really should have started this fall. You see, it's dangerous to start in the spring, when you can just crush housing.


 
Rob - ACA is a big question mark. I have to believe it will hurt the economy next year.

I think the Fed is a bunch of scared wimps. But if they don't taper in December, will anyone really believe they'll taper in March?
 
ACA.
If 5 million individuals got cancelation notices in the individual market, I would expect 15 to 50 million will get them in the employer provided market. My plan was to say "ef them, I'm not paying." (Healthy, insurance hasn't done jack for me for 30 years. The next 30 years would cost 4 times as much at current quote. But I intend to die rather than incur those kinds of bills that would need that type of treatment to cover those costs.)My wife disagrees. I say "What if your employer drops you next year because those costs are too much to shoulder? And you just rolled over and took it.
Jerry
 
MoM, why would the most educated, largest, most productive cohort in the history of the world entering to workspace be a demographic pull on productivity? There are more 23 year olds entering than 65 y ear olds leaving by a huge margin.
 
Rob,

What makes you think that 23-year-olds are productive? And what makes you think this particular cohort is more so? Education != productivity, especially these days.

I've always been led to believe that productivity increases with age' peaking during a cohort's 40's or 50's.
 
Looking at the government charts the 55+ crowd are doing a lot better then the young people entering the workforce.

I thought the taper could begin late summer and I was wrong. Sooner or later the FED will either taper or do QE forever.

I think the taper will only begin if the retail from Black Friday going forward look good. Currently it is lower then expected.

ACA will indeed have an large impact in my mind but not until its full implementation.

The economy is indeed chugging along very slowly.

MOM I love your blog as you actually try to make sense of economic data and your commenters do not go off on the deep end blaming each party.
 
Rob - I don't think the reason for slow growth is bad people, although all the generations vary in productivity.

The reason for slower growth is the trade deficit (which is improving) and the need of the older cohort to save for retirement, plus the "Japanese" solution of the Fed.

One may argue all one wants about the necessity for strong stimulus, but when the inevitable result of QE is low savings returns, and when we have declining real incomes, then of course the need of the older generation to save becomes relatively larger. They spend less and try to save more to recoup their lower savings returns.

The younger generation needs everything, but has much poorer earning opportunities on average, so they cannot pick up the consumption ball.

Under such circumstances, you will have slow growth. The huge borrowing drive that lit up the 80s is not in the cards.

The younger generation is underutilized, and no services-biased economy is going to pull them into full employment.

I would argue that the younger generation is practically skills-poor, and the bias toward H1B tech hiring is exaggerating that trend.

This is the first generation since the aftermath of the GD in which college-educated professionals are less likely to be able to buy a house than those in the skilled trades.
 
"What makes you think that 23-year-olds are productive? And what makes you think this particular cohort is more so? Education != productivity, especially these days."

A bit of a misread. The current crop of 23 year olds compared to past crops of 23 year olds.
 
"The reason for slower growth is the trade deficit (which is improving) and the need of the older cohort to save for retirement, plus the "Japanese" solution of the Fed. " ~ MoM

The reason for slower growth is deficit spending of past recovery stimuli. Deficit spending borrows growth from the future. We are in that future and paying plus interest for past recoveries.
 
But Rob, QE is basically designed to cut that out. It's a hidden deficit run to cut out the effect of the past deficits (which is why it has to be so huge).

But it doesn't offset, nor can offset, the structural changes in the economy.

The net longterm effect of the QE deficit will of course be the same as the long term effect of all the other deficits - future drag.
 
"The net longterm effect of the QE deficit will of course be the same as the long term effect of all the other deficits - future drag. " ~ MoM

Exactly. In the long term we arte all dead. In the long term all debt looks the same. In the long term.

What has changed is that the long term 30 years ago was thirty years, fifteen years ago fifteen, five five...
 
Rob,

I still don't see any basis on which to claim that today's 23-yr-olds are more productive. Unless you're counting the productivity of installed capital they're operating.

 
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