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Friday, October 02, 2015

They're Not Going to Be Raising Rates in December

They missed the boat - they should have inched it up in the summer. It would have been better for the economy and better for the stock market to get this out of the way, but that ship has sailed and they don't have the margin now.

If you look at CMI, the PMIs, and now the employment reports, the economy is sagging now with winter impending. The China situation is not favorable, the international instability is not favorable, and retail is not good. 

Rail never did get off the floor this year. It has remained just slightly lower than last year. ATA truck tonnage is saying exactly the same thing as rail - it peaked at the end of the beginning of the year and is just tailing down slightly.  

The strong GDP 2nd quarter numbers are just statistical bullshit. The economy is either in a mid-cycle growth recession or in the year before a real significant recession - take your choice. Nor is this a surprise - raising taxes as significantly as we did a few years ago was bound to suck money out of circulation.

There is a very, very strong consistency to current economic reports that indicate no collapse, but a weakening trend that is broadening across the economy and is close to gaining some authority, especially next year, since CPI has granted no increase at all. For lower income people, inflation is more like 10% on average, and next year will be difficult for retailers. 

On the bright side, construction is very strong, and auto sales have been holding up very well. So we are not about to collapse, although the economy is not on a strong footing. Credit is holding us up. This could only last for another six months, though.

When one looks at employment, although the Household survey and the Establishment survey differ on numbers, they tell the same tale - a notable weakening over the last two months. The Household numbers show no increase in employment over the last couple of months, and the Establishment survey shows a major drop in pace of job growth - the three-month average change in private employment has fallen from 222 in July to 138 in September, and although it should improve next month, the oomph is coming out of consumer spending. 

The only reason that the employment rate is not rising is that the civilian labor force has dropped by about 400,000 since July, with the "Not in Labor Force" number increasing by well over 800,000 since July. That is not a typo.

Say hello to President Trump. It is his if he really wants it. We cannot afford the path we have been on, and there isn't anything the Fed can do to change the basic circumstances. 

It's good to see you back. If the next couple of years turn out to be as interesting as they could, I look forward to reading your play-by-play.
The big issue, Clive, is what happens when construction tops out?

I think vehicles will be okay while construction keeps rising YoY, because nothing, but nothing, sells those very profitable light trucks like construction.

But there may be signs that the apartment construction is due to top out late next year (too soon to tell), and after that the Fed is in a more problematic situation.

Vacancy rates are the big issue for next year.

I certainly hope we do not find ourselves in another contracting economy with rates this low, but it is not a fantasy. It's a real possibility.

Well, at least we don't have to wonder anymore whether we're going to see inflation or deflation.

It's the three D's. All roads now lead to deflation, default, and depression.

The arrogance of the Fed: Why 94.6 Million Are Out Of The Labor Force

All quotes:

And this is where the wheels fall off the Atlanta Fed narative. Because the regional Fed’s very next sentence shows why the world is doomed when you task economists to centrally-plan it:
The decrease in labor force participation among prime-age individuals has been driven mostly by the share who say they currently don’t want a job. As of December 2014, prime-age labor force participation was 2.4 percentage points below its prerecession average. Of that, 0.5 percentage point is accounted for by a higher share who indicate they currently want a job; 2 percentage points can be attributed to a higher share who say they currently don’t want a job.
And there you have it: there are nearly 100 million working-age Americans who could be in the labor force, but are not “mostly” because they don’t want a job.
Nothing about the lack of job demand as mega corporations continue to lay workers off in droves instead of hiring, instead using every last dollar of free cash flow to buyback their own stock to boost executive compensation instead of growing their company and hire more workers.
Nothing about the collapse in small business formation – that driver of 80% of US employment – as firm exit rates are now greater than firm entry rates
Nothing about the inability to get a job in a world in which the rest of
the global is lapping the US in educational and labor skills.
Nothing about the US economy never having left the post-2008 depression where $4.5 trillion in Fed credit was created just to boost the S&P to all time highs and never making it to the actual economy (until the helicopters finally start paradropping of course)
Nothing about millions of aging, 55 and over, Americans refusing to retire or quit their job simply because they have no return on their savings to fall back on thank to the Fed’s ZIRP, thus keeping the labor pipeline clogged and preventing younger Americans from getting promoted and achieving better paying jobs.
Nothing about a Millennial generation encumbered with $1 trillion in debt, that is so terrified of its job prospects and having to pay down its debt, it choose instead to keep rolling and piling on to this debt by remaining in college indefinitely
Nothing about the perverted incentive structure of a welfare state that makes it more attractive to collect generous government handouts which end up punishing hard work.
None of that.
You see, it is because Americans “mostly don’t want a job.”

Any chance we could trade blog links?
The only bright side to a President Trump is that we'll have a president who already has plenty of experience with bankruptcies ...
No, the bright side to a President Trump is that he won't be hiring incompetents. It's a helluva thing when you find yourself agreeing more with Putin on foreign policy than Obama.
No kidding on the agreeing with Putin thing! Gebbus H. Christmas.

Can you elaborate on why you think it Trump is president if he wants it???
Trump would hire plenty of incompetents. He may be business savvy, but government doesn't work that way. And he is too gutless to cut spending.

Nothing about millions of aging, 55 and over, Americans refusing to retire or quit their job simply because they have no return on their savings to fall back on thank to the Fed’s ZIRP, thus keeping the labor pipeline clogged and preventing younger Americans from getting promoted and achieving better paying jobs.
Nothing about a Millennial generation encumbered with $1 trillion in debt, that is so terrified of its job prospects and having to pay down its debt, it choose instead to keep rolling and piling on to this debt by remaining in college indefinitely

These are the most important points. We've got older people too scared to retire - they'll hang on until they get laid off - part of that is the medical insecurity created by Obamacare. And the younger people are so desperate that their debt loads actually push wages down because people will apply for for they wouldn't want otherwise just to get cash flow to cut down their debt. Baby Boomer political programs were paid for on their unborn grandchildren, and now those grandchildren are alive and holding the bag. My biggest fear is that before they begin to outnumber the baby boomers, the baby boomers will re-instate the draft so they can cull a little bit of the Millennial herd.
Importing millions and millions of lower productivity and lower cost workers doesn't do much for wages either, nor the native born.
What a great plan, we educate our children, leverage them up with debt, then undercut them with someone from another country. Genius!
It's an interesting thing. The Repubs have wanted a candidate with crossover appeal, especially to minorities. They have one now and they don't want him, because they didn't buy him. I don't know what Trump would do as President and I am not sure anyone else does either. He is a very successful businessman. He's gone to the trouble to get conservatives to help with his position papers. I've never watched the tv shows, so I don't have any preconceived notions about him. But I can't look at any of the other candidates without thinking about who paid for them and what that means.

I continue to think it would be a good thing to have someone with business experience in the White House, especially if the economy goes south. I think a number of bureaucrats would put their resumes out, if he does get elected. I think he has a good chance of winning the nomination if he wants it. The base is really angry. They were told, if they voted for Repubs, that they would stop Obama's agenda. Instead, they've gone out of their way to pass it. It's pretty clear that we have a united elite, that think alike and despise the rest of the voters. The Democrats have a similar issue, with their eco-liberal base, so it's going to be a very interesting election. And I don't think Hillary will be the nominee.
Hey guys and gals, nice comments.

I'm a bit under the weather and as soon as I catch a good night's sleep, I'd like to take up some of them.

As to the wages/immigrant/BK thing - the reason I think that Trump will get the presidency if he wants it is because he is the only person now running brash enough to tell the truth - the economy is so bad the native young'uns can't afford to have children, so we are importing them. As a policy, that is a social disaster. If we had a large industrial expansion, we could afford to import them. That's not what we've got.

Not that all of this is the Fed's fault, or Obama's fault, or the Dallas Cowboys' fault, but when you back off and look at our "real" policy, it is a recipe for societal destruction.

To an old fart like me, this has a lot of 70s feel to it. But when one backs off a little further yet and looks at it, to be honest the 70s economy was a lot better than this one. We are into the seventh year of "recovery" now, and although housing has predictably rebounded, it does not seem like home values can continue to rise given the wages and debts of the next generation.

UAW Fiat-Chrysler may go on strike this week - the union rejected the negotiated contract by around 2/3rds vote. The powers that be are out of touch with just how hard it is to get by for far too many citizens. The frustration is building and building. I look at Redbook each week, and I think "trouble".

You're right that in a lot of ways the 70's economy was better than this one, but I think that was mostly residual as the major shocker was the slamming of the gold window once and for all. A student of economics would know that prices - including wages and interest rates - were inevitably going to balloon - but nobody really knew which parts of the balloon would get squeezed. The exodus of jobs to Japan and then China was inevitable, the saving grace was the domestic productivity gains from computers.

We really don't have a saving grace like that now. There is no technology coming along that, if leveraged by a business properly, can make the same radical increase in productivity. Future workers are going to have to have multiple skill sets, which really implies a level of intelligence beyond the human average. Ultimately I think this pulls wages for the average worker down, if not nominally then at least in relation to general consumer prices.

This essentially means renting versus owning, owning smaller houses versus larger, owning fewer automobiles per capita, traveling shorter distances for employment, shopping, etc. On the surface this doesn't appear so bad - sorta like the 1950's. Except that behind the surface things would be a lot less solid - the average worker of the 1950's had opportunities for pensions and retirement plans and little debt (along with fewer occupational licensure requirements, lower property, income, and sales taxes, etc.) The standard of living based on borrowing is simply unsustainable - as I said the boomers' grandchildren are the bag holders and they're going to pay with a reduced standard of living. I don't want to paint this as good nor bad, just inevitable. But unfortunately were are going to get government and central bank policy based on this being labelled bad and we'll get stuck with the age-old problem of the cure being worse than the disease.
And the interesting part of that, Charles, is how young people seem to plan for that. They like simplicity, minimalism and tiny houses. The house I used to own, built in 1949, was 600 sq feet downstairs with an attic area that was the kids' bedroom. That added another 200 sq ft. People are returning to the standards we used to have.

I heard the Portland news talking about how they were concerned abut the lack of low income housing. I told my husband that they need to get rid of the restrictions on boarding houses. That's how women used to be able to make a little money. Then it was regulated out of business. I have known people paying $600 a month for a room in a regular house, and paying for their own meals. And they should lift restrictions on building a "mother in law" structure and allow folks unrelated to the owner to rent it. Instead, since we are dealing with Portland, they will create a new housing bureaucracy and see if they can get Federal funding.

The other difference between now and the 70s is that young people are poorly educated. They seem to have no sense of history at all. The hippie era had a lot of young people going back to the land and learning how to work with their hands. Lots of interest in traditional crafts and techniques too. The app economy is not going to cut it and the hispanic immigrants are a lot more savvy about cobbling together a living. They still view the family as an economic unit.


Don't look at what the hipsters SAY, look at what they do. Food carts require minimal capital investment, are less regulated, and if the location doesn't work they move. The "maker movement" and 3D printing is basically cottage industry gone high-tech. Home-brew beer, grind your own sausage, chickens in the back yard--all home-made on a small scale.

Everybody is retreating from large-scale commerce, to some extent, becoming more self-sufficient and developing skills that can be traded on a small scale. That's the fashion of the day.

Which, of course, scares the h##l out of me.

This reminds me very much of the 70s. Except, instead of inflation we're in deflation. Carter's foreign policy was weak and intimidated. The USSR was on the march in Afghanistan and Central America. Our allies didn't trust us and our enemies didn't respect us. Our economy was over-regulated and over-taxed.

In a turn of events no fiction writer would dared to write, a B film star from Hollywood became President and turned the country around. There's a lot potential that is laboring under regulation, Obamacare, over-taxation, and a hostile Federal government. Entice manufacturing back with low taxes and low natural gas prices. Get rid of Obamacare, rebuild the military, open up federal lands for oil and gas exploration, authorize the Keystone XL pipeline, authorize the sale of oil and gas to other countries (Europe and the Americas), push for more liquid gasification export facilities, and many more things to get this country moving again. It can be springtime in America again. We just have to do what we know how to do. Heck, we mobilized and won a two theater war in 4 years. All it takes is the will and vision. Can Trump do it? Maybe. My money right now is on Fiorina, but there's lots of time till the primaries begin in earnest.
Washington post has this article by Lawrence Summers:

Here's the interesting stuff:
Western bond markets are sending a strong signal that there is too little, rather than too much, outstanding government debt.....

The case for more expansionary fiscal policy is especially strong when it is spent on investment or maintenance. Wherever countries print their own currency and interest rates are constrained by the zero bound, there is a compelling case for fiscal expansion until demand accelerates to the point where interest rates can be raised.

They haven't learned their lesson.
Neil - ditto. I often think what life will be like kids who are in fourth grade now hit their 20s. I would think the current trends would have accelerated.

Teri - RE the debt thing - to some extent it can be nullified by the Fed simply owning huge hunks of it, but it still won't work.

Until we get with a Jimmy J. program, and start producing more of our needs within the country, a weaker dollar means lower stands of living for most Americans. If we get a stronger dollar, exports fall.

We can't fix our current fundamental economic imbalance without structural reforms, and the Fed has nothing to do with it.
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