Category Archives: Economic Indicators

Weekly Jobless Claims and February Trade Deficit

KEY DATA:  Claims: 6.65 million/ Deficit: $39.5 Billion (down $5 bil.); Imports: -2.5%; Exports: -0.4%

IN A NUTSHELL:  “With some states, such as Florida, just discovering there is a pandemic, look for the unemployment claims to remain in the millions for a few more weeks.”

WHAT IT MEANS:  Last week, it was reported that new claims for unemployment insurance hit a record level that was five times the previous high.  We doubled that number in today’s report.  In just two weeks, ten million people have applied for unemployment insurance.  Have we topped out?  That is not clear, as it appears there are still a lot of new claims that could come in from the epicenter, New York, as well as other areas that are starting to see more and more shutdowns.  And, of course, those states that were living in denial are starting to wake up and face reality, so claims in those states should begin to skyrocket.  It is not unlikely that upwards of twenty million people will wind up applying for unemployment compensation and that total will not include those ineligible, for whatever reason, for the program. There is one really big and important difference this time: Under the CARES Act, some business owners who would not have been eligible under the old laws can now collect unemployment insurance. 

The trade deficit narrowed sharply in FebruaryThe sharp decline in imports point to what is likely to be continued significant cutbacks in U.S. purchases of foreign products.  As much of the February trade numbers reflect decisions made months before, the details really are not very relevant to the current or future economy.  But there was distressing news for farmers.  Sales of soybeans, which were expected to jump after the phase-1 China trade agreement, collapsed.  The idea that China will ramp up its purchases of U.S. goods this year is gone. Maybe next year.  We also sold a lot of energy products, but given the collapse in demand and price, that will not likely be repeated when the March data are repeated.  And vehicle sales, which also rose solidly, you can forget that for a while.  As for imports, fuel and computers were the chief products that saw less U.S. demand.   But to the extent that more computers are needed to support the remote economy, that could turnaround.

LABOR MARKET IMPLICATIONS:  We are headed toward double-digit unemployment rates that could breach 20%.  The CARES Act will soften that rise as it moves workers from the unemployment rolls to private sector payrolls.  One thing it does not do is necessarily create more output.  Businesses don’t have to have the workers do anything to get the money.  The intention is to create what I would call a “reserve army of the employed”.  These are people who are getting paid by the government but technically “employed” by businesses, no matter what they do or not do.  (Remind you of any other economic system?) 

For some firms, such as family run businesses, this is the greatest thing ever created.  They can hire their family members, to the extent that is legal (and according to some accountants I talked with, to some extent that is the case), and keep the income within the family.  That will allow them to subsidize the business and likely keep them from failing.  That may also be a rational strategy that firms that didn’t employfamily members might employ.  What that means for the unemployment rate is unclear.  If some of the family members hired were not part of the labor force previously, their hiring will not reduce the unemployment rolls.

Ultimately, the government payroll payments will have to end and private sector companies will have to start earning the money to pay those workers.  That is when demand will become key and for any economic recovery that results, the rubber will meet the road. When the upturn in the economy does appear, we could get a quarter or two of very strong growth, but only because we fell so far so fast.  It is the second and third and fourth quarters after the bottom is hit that matter.  Given that as well intentioned as the CARES Act is, and it is targeted more toward workers and small to mid-sized business than most previous so-called stimulus packages, it can only do so much.  

Thus, what we should really be calling the CARES Act is a stabilization plan, not a stimulus plan.  We need that desperately right now.  But it is just a start.  The lasting strength of the recovery will be determined by how well we wean businesses and households off the welfare state and return them to an economy based on capitalism. 

Weekly Jobless Claims, 4th Quarter GDP 2nd Revision and a Commentary on Planning

KEY DATA:  Claims: 3.28 million/ GDP 2.1% (Unchanged)

IN A NUTSHELL:  “The unemployment rate is like to go into the double-digits.”

WHAT IT MEANS: In large parts of this country the economy has essentially shut down and now we are starting to see the data that indicate the extent of that closing.  New claims for unemployment insurance, not surprisingly, skyrocketing to 3.28 million, the highest level on record.  The previous record was 695,000 in October 1982.  This is the not the only week we will see extraordinarily high claims numbers as not all shutdowns occurred at the same time.  So expect the unemployment numbers to rise by millions more.  It should also be remembered that many small businesspeople are not eligible for unemployment compensation if they are owners.  Thus, we are likely to be underestimating the true state of unemployment.  Regardless, we are likely to get to double-digits and how high that goes depends upon when the economy starts to reopen.

The final reading of fourth quarter 2019 GDP came in at 2.1%, which is unchanged from the previous estimates.  The economy ended last year growing at trend growth, which is what was expected, and started off this year on a fairly high note.  Part of that was weather driven, but at least economic conditions were not faltering going into the shutdown.       

Commentary: The Fed vs. the Government: Planning actually works!

The starkest difference in the reaction to the pandemic was between the Federal Reserve and the federal government.  The Fed has moved rapidly and strongly and there is a very simple reason: It learned the lessons of the financial market meltdown.  In 2008 – 2009, the Fed had no strategy to deal with what was happening.  The near-worldwide financial meltdown was not something that had been game planned.

But to its credit, the Fed has spent the last decade researching what worked, what didn’t and what needed to be done if there was another massive economic and/or financial crisis. It didn’t need anyone to tell it that a crisis was coming and it moved quickly and effectively to put in place the policies it had already identified as necessary.  The Fed had a game plan, it was not caught flatfooted and it moved to make sure the financial markets got the liquidity they needed.  There is still more to be done, but research and planning worked.  Kudos to past Fed Chairs Bernanke and Yellen, as well as current Chair Powell for getting the Fed as ready as possible for the current crisis.

And then there is the federal government.  It started first with denial that there was an issue, moved to disbelief that the problem could be large and finally to ragged, uncertain and uncoordinated reactions.  There doesn’t seem to have been a plan in place, despite warnings as recently as 2017 that a pandemic was possible and strategies had to be developed.

The implications of the failure of the federal government to have a plan to deal with a crisis similar to the current one are enormous.  Without a plan, policies to address the problems have lagged.  While other countries ramped up their testing, we are still well behind the curve.  Two nights ago, I was on a Zoom meeting and a senior manager at a major local hospital said that it was still taking four to six days to get test results back and that was for patients admitted because their symptoms mirrored those of Covid-19.  That required the hospital to treat the patients as if they had the virus and therefore critical, limited resources were wasted on patients that ultimately tested negative.  

In addition, the failure to ramp up testing and increase availability of critical medical supplies, as we saw in other countries, have created significant issues going forward.  Knowing who has the virus, who had the virus and who hasn’t had the virus is key if we are going to reopen the economy.  Otherwise, we don’t know the risk of potentially reopening early.  There is a debate going on that asks the question “when should we start reopening businesses?”  We all want the economy to reopen as soon as possible, but we also don’t want a relapse. 

If we are forced to shut down a second time, the attempts to stabilize the economy that have passed Congress will largely be wasted.  If we have to shut down again, it will come when the economy was greatly weakened and therefore less capable of handling the shutdown.  And if we have to shut down again, federal, state and local budgets will largely be busted.  And those are just the economic implications.  Clearly, the death toll will rise sharply if there is a relapse as it is not clear if the health care system could handle a second surge. 

My view is that it is better to err on the side of safety than on the side of speed.  We need to be as reasonably certain as possible that a relapse has a relatively low chance of occurring.  We will not be able to know with certainty, but that means this decision has to be made by experts.  The short-term economic costs of opening later may be greater but the longer-term economic and social costs are likely to be less.  That is my view.  Everyone needs to determine for themselves the risks of opening too soon and express those views, as this debate is raging right now.       And going forward, the federal government cannot be caught flat-footed again.

February Retail Sales and Industrial Production, March Builders’ Index, January Job Openings

KEY DATA:  Retail Sales: -0.5; Ex-Vehicles: -0.4%/ IP: +0.6%; Manufacturing: +0.1%/ NAHB: -2 points/ Openings: +411,000

IN A NUTSHELL:  “The economy was not doing particularly well before the virus hit, which is not good news.”

WHAT IT MEANS:  February data are still not reflective of where we are going, but it would be nice if they were strong enough to have formed some type of base.  That was hardly the case.  Take retail spending, which we know will be largely limited to online sales going forward.  Consumer demand faded in February, though that came on top of a strong January gain.  Together, though, the two months didn’t show much of an increase.  We can discount the sharp decline in gasoline because prices fell sharply, but people didn’t eat out, buy electronics, appliances, clothing or just about anything else.  All they did was shop online – which as I said, is what they will likely be still doing to some extent.  It will be interesting to see what the March retail numbers look like.  On the one hand, the last two weeks will be disastrous for anything but online sales.  But the panic buying may have made up for at least some of that.  So, the decline should be large, but maybe not as enormous as some fear.  April is when we could see the worst drop as it looks like social distancing will last at least the entire month. 

As far as manufacturing was concerned, output edged up in February.  Yes, overall industrial production soared, but it was all weather related.  Utility output was up over 7% after having declined by about 5% or more the previous two months.  What saved manufacturing was a surge in vehicle assemblies.  I suspect that not a lot of people are out kicking the tires these days, so that could reverse with a vengeance in the months to come.  Look for a truly ugly March manufacturing production number.

On the housing front, the National Association of Home Builders reported that its index edged down only relatively modestly in March.  All of the components, including traffic declined a small amount.  That was a pleasant surprise. 

The most meaningless, outdated number of the day was job openings, which were up sharply in January.  That is likely to change dramatically once we get the March numbers, in two months.  MARKETS AND FED POLICY IMPLICATIONS:Is a recession baked in the cake?  It is hard to see that it isn’t.  Whether the decline lasts four, six or eight months and is officially declared a recession is unclear, but we haven’t seen the really bad data yet.  The first time we get an employment report down massively, and we are going to get at least one or two, that will test the will of households.  How businesses continue to produce and stock the supply chain will be a challenge.  Europe is going into recession and China is just starting to recover, so at least one or two quarters of negative world economic growth is likely.  Second quarter growth could be sharply negative.  We will not shake the downturn until people can get back out to live their lives more normally.  And that requires largely ending the spread of the virus.  This country has been unprepared to even measure the extent of the problem as testing is way behind the rest of the world.  That is a failure of leadership and planning.  As testing ramps up, the numbers will surge.  But it is not clear when we will get things together as we are in a leadership vacuum that is being filled by governors and mayors making independent decisions but without the resources to meet the challenges they face.  The Senate is not even discussing an economic stimulus package, the President has just discovered there really is a problem and the administration’s economic brainless trust is either claiming we will not go into a recession or is proposing ideas that make little sense.  I was criticized for attacking the payroll tax proposal.  But if you are not working, you don’t pay the payroll tax anyway! Help is needed for those who are going to or have already lost their jobs, their businesses, their incomes, their health care and their ability to meet basic needs and pay bills and debt.  It seems our federal leaders in the administration and Congress just don’t get it. The result is that the downturn will likely be longer and deeper than necessary because of this federal-level leadership failure and it is why I and so many other economists now have a recession in our forecasts. 

Fed Emergency Rate Cut, March 3, 2020

In a Nutshell:  “The Fed’s emergency rate cut was supposed to boost confidence but it may wind up raising fears that the coronavirus is likely to cause a major economic downturn.”

Decision: Fed funds target range cut 50 basis points to 1.00% to 1.25%.

In an emergency action today, the Federal Reserve cut the fed funds rate by one-half percent.  The Fed noted in its statement that “…the coronavirus poses evolving risks to economic activity.”  In his press conference, Chair Powell indicated he knew that monetary policy would not change economic fundamentals, but he was acting to boost confidence. 

He was right in recognizing that monetary policy is limited in the current situation but may have been all wrong when he thought he was boosting confidence.

First of all, you cannot fight a virus with rate cuts.  The economy will slow because of the actions taken to fight the spread of the virus and those actions will not change because rates are lowered.  Indeed, it is hard to believe the Fed members actually think rate cuts will induce greater business or consumer spending.  I have no idea what the reaction function is that goes from rate cuts to better economic activity when the problem is an epidemic.

Instead, it looks like the Fed, as it did starting at the end of 2018 and all through 2019 when it reversed direction and started cutting rates, is targeting not the real economy but the financial economy.  For the past year, I have written that the Fed seems to have a triple mandate that includes not just growth and inflation but the equity markets.  This move seems to be targeted at the equity markets, as it is not likely to do anything to either growth or inflation. 

Since the late fall of 2018, I have argued that the Fed was wrong to consider cutting rates when the economy was solid and I continued that criticism all through the rate cutting process. 

My concern was that the actions were unnecessary to sustain the expansion and all it would do was make it difficult for the Fed to fight a real economic downturn.  In one respect, I was wrong: Investor confidence remained strong, even as growth moderated as most economists expected. 

But there were fewer arrows left to fire once the virus hit.  And after the current rate cut, which is once again occurring before the appearance of any weakening economic data, the Fed is largely out of ammunition.  Do the members actually believe that taking rates back down to zero will do anything more than it did in 2009? 

Even worse, the Fed may have botched the messaging.  If you cannot wait two weeks to cut rates, then why shouldn’t consumers, businesspeople and investors believe that the economy is on the verge of a recession?  An emergency cut means this is an emergency!

The message is that we are headed into real problems.  That is hardly the way to boost confidence.   

Where does the Fed go from here?  Once the softer economic numbers start coming in, and they we should start seeing them as we move through the spring, more cuts will be needed.  But there is only one percentage point left before we hit zero and that last percentage point is likely to do little. 

The Fed has botched it again.  When the markets tanked in 2018, the members should have looked at it as a resetting of overpriced markets because it was (my comment at the time was a correction is just that, a correction!).  Instead, they panicked and cut rates to support the equity markets.  They succeeded, but at a cost.  The markets surged and we were back into an overpriced situation, at least when you consider an economy that was growing by just 2.25%.  And the Fed wasted seventy-five basis points of ammunition. 

The only good thing to say is that it is a virus that is causing the economic problems and the only action that will turn things around is ending the epidemic.  This downturn was not caused by a bubble bursting or financial irresponsibility.  Instead, all it will likely require is people going back to living normal lives.  That may take a while, but once it does, we are likely to see a sharp recovery. 

January Income and Consumption

KEY DATA:  Income: +0.6%; Spending: +0.2%; Prices: +0.1%

IN A NUTSHELL:  “Households have money to spend, but with all that is happening, it is not clear they will spend it.”

WHAT IT MEANS:  The key to keeping the economy going is the reaction of households to all that is swirling around them.  It is not clear what people will do.  They have the money to spend, but for how long is the issue. Personal Income rose solidly in January.  But the details are a little questionable.  Wage and salary increases early in the year have been driven by increases in the minimum wage and while that is still happening, the gains are slowing down.  Thus, worker compensation did rise decently in January, but much less than it did in January 2019.  The biggest increase was in government transfer payments, especially for Social Security.  So, while the increase in income was large, it may have been only temporary.  In 2019, there was a surge in personal income but that faded as the first half of the year wore on.  I suspect the same will happen this year. 

As for consumer spending, it was moderate, at best.  Most of it came from a jump in durable goods demand – mostly vehicle sales.  The motor vehicle selling rate is trending down, though in a saw tooth pattern.  Thus, you get some ups even as demand fades.  When adjusted for inflation, which low, consumption rose modestly.  Indeed, we have started the quarter off growing at a 1% pace.  If the issues with the coronavirus and the markets affect consumer spending, we could see a very weak first quarter consumption number.   

MARKETS AND FED POLICY IMPLICATIONS:  In the midst of the stock market chaos/ panic, it is worthwhile to step back and ask the question whether the huge selloff makes sense.  If you look at it in the short term, the answer is yes.  The world economy is slowing and in many ways is shutting down.  Thus, some sectors are being clobbered because demand is just not going to be there anytime soon.  There is also the reality that it is likely to take some time, even when the all clear is given, for activity to ramp back up.  And since we have no idea how long before the epidemic is stabilized and dealt with and how long the process of returning to normal production and demand takes, the uncertainty has to factor greatly into pricing. 

But this situation is vastly different from the crash created by the financial crisis.  Then, there were real economic factors that drove the downturn.  The effects of a housing bubble bursting and financial system financial collapsing don’t disappear quickly.  In contrast, there is every reason to believe that travel and trade can be restored in a much shorter time once the restraints to activity are removed.  That is, the slowdown can be much more readily overcome.  Airlines will be flying again, manufacturers will be getting their supplies again, people will be interacting again, China will reopen and optimism will return.  It is just that we don’t know how long that will take.  And that means the markets will have problems pricing in the value of stocks, at least if you factor in earnings just for 2020.  For investors, the question is whether they are traders who are in it just for the short-term or are they investors.  We don’t know the bottom but we know that economic issues created by a virus are reversible. The Great Recession was long and deep and the recovery long and slow because there was so much damage to fundamental sectors of the economy.  This time is different and it is likely that the recovery will be swifter and stronger.  But getting to the bottom could be a very painful process. 

January New Home Sales

KEY DATA:  Sales: +7.9%; Over-Year: +18.6%; Prices (Over-Year): +14.0%

IN A NUTSHELL:  “The warm weather has really heated up the housing market.”

WHAT IT MEANS:  Some may call climate change a hoax, but to builders, it is the greatest thing since sliced bread.  In January, new home sales skyrocketed to their highest level since July 2007.  Demand surged in the Midwest and West, was up solidly in the Northeast but fell in the South.  But once again, you have to look at the numbers with some caution.  First of all, the gains over the year were clearly impacted by the extremely warm weather.  The increases from January 2019 to January 2020 in the Northeast, Midwest and West were all between 45% and 50%.  Really, does anyone believe that weather didn’t play a huge part in those surges?  When there is little snow and the cold weather isn’t so cold, people can visit the construction sites and builders can build so it is a lot easier to sell homes under construction.  Prices jumped as a greater proportion of sales were for homes above $400,000.

MARKETS AND FED POLICY IMPLICATIONS: What worries me about the apparent exuberance in the housing market is that the demand is likely being pulled forward because of the weather.  The outsized gains from the previous year for so many indicators are warnings that the strength may not be sustainable.  Thus, while first quarter growth might be hyped by strong housing construction, it could be matched by a major turnaround in the spring and summer.  And if builders do what they often do, which is assume the good times are here to stay, then we could run into some real problems in the sector as we go through the second half of the year.  With the level of supply, as measured by months, low, I would not be surprised if builders continue to ramp up starts.  February has been another warm month and the construction data should be really good.  I just worry that the sector could be getting ahead of itself.  As for investors, the story remains the coronavirus. It is not clear how long it will take for a vaccine to be developed and become universally available.  The estimates I have heard range up to a year or even longer.  The implication is that this is not going away anytime soon and each time a new outbreak occurs, expect the markets to react strongly.  Thus, the efficient but often irrational markets could be volatile for quite a while.  The Fed is likely to continue to put out the word that it needs to watch and wait, not react.  Since interest rate changes don’t impact the physical health of the world, that makes sense.  As for the mental health of investors, well the Fed found the placebo effect worked well last year so it just might try it again this year. 

January Leading Indicators, February Philadelphia and New York Fed Manufacturing Indices and Weekly Jobless Claims

KEY DATA:  LEI: +0.8%/ Phila. Fed (Manufacturing): +19.7 points/ Empire State Survey: +8.1 points/ Claims: +4,000

IN A NUTSHELL:  “More good economic data, but again, they seem to be powered by mild weather.”

WHAT IT MEANS:  My decision to buy snow insurance (a snow blower that is now collecting dust) is working out quite well.  It looks like we will not have any snow in Philadelphia this month and we have had less than one inch so far this season.  I love it!  My insurance plan is even helping drive what on the surface looks like a rebound in the economy.  Housing is having a great winter and that, at least in part, powered a sharp rise in the Conference Board’s January Leading Economic Indicators index.  The huge decline in jobless claims, which is slowly unwinding, also played a major role and most of the components were upThe LEI had declined in December and was up minimally in November, which is why I raise doubts about the sustainability of the increase.  What the seasonal factors giveth, they ultimately taketh away.

Still, I will take the strong numbers while we have them, especially given the problems that China, Europe and the developing nations are having given the coronavirus.  It hasn’t just been housing that has benefitted from the winter.  It looks like the manufacturing sector is improving as well.  Both the New York Fed’s Empire State Index and the Philadelphia Fed’s Business Outlook Survey jumped in February.  Orders soared and backlogs went from shrinking to increasing in both manufacturing surveys.  But while optimism rose in the Mid-Atlantic region, respondents were slightly less positive about the future in New York. 

The historic low jobless claims numbers are slowly moving back up to what was the “normal” level we saw during most of last year.  I say “normal” because they remain incredibly low.      

MARKETS AND FED POLICY IMPLICATIONS:It is hard to take the strong economic data as clear indicators of an economic rebound given the confounding factors of warm weather and the coronavirus.  Yes, builders are having a great time, but it is likely they are simply bringing forward some construction that they would normally due during the spring.  If that is the case, and I suspect it is, we could see some pretty ugly data during the March through June period. As for manufacturing, it is hard to know where all this new demand is coming from.  Firms are not likely seeing stronger foreign demand in this epidemic restrained environment.  Indeed, we are already seeing signs that the world economy has slowed and who knows what is the true condition of the world’s second largest economy, China. And there are no major indications that households are suddenly spending a lot more.  Thus, investors may want to operate in a vacuum and hope that the coronavirus goes away quickly, but that is a risky approach.  The Fed sees the virus risks as real, but has no idea at this point the extent of the potential damage.  For now, I will enjoy being outside when I am usually bundled up in my house and hope that the virus gets brought under control quickly and the “see no evil” investor is right in continuing to pile into the markets.

July Employment Report, Consumer Expectations and June Trade Deficit

KEY DATA: Payrolls: +164,000; Revisions: -41,000; Private: 148,000; Unemployment Rate: 3.7% (Unchanged); wages: +0.3%/ Confidence: +0.2 point/ Deficit: down $0.2 billion

IN A NUTSHELL:  “Job growth is right where it was expected to be and with confidence remaining high, the only concern remains trade wars, which look to be heating up again.”

WHAT IT MEANS: The normally highly anticipated jobs reported was released today and it came in almost at the exact number that forecasters anticipated.  In July, a moderate number or workers were added to the payrolls.  Clearly, that means it is a wrong number (drum roll). Actually, it is pretty much where job gains for this entire year were predicted. In other words, this was a ho hum number.  But there were reductions in the reported gains for May and June’s big rise turned out to be good not great. The three-month average is now below expectations.  As for the report, manufacturing job increases were surprisingly good.  The problem is that the retail sector just keeps contracting and given the structural changes in the sector, that should continue.  Unfortunately, warehousing and transportation are not picking up the slack. With firms not hiring few temporary help, we should not expect a sudden surge in hiring. As for the unemployment rate, it was stable.  The labor force rose solidly but as is usually the case, a lot of those entrants had trouble finding positions right away.   The participation rate edged up but it has remained in a pretty narrow range this year.  Finally, wages were up decently but not strongly.  However, hours worked declined and that does not bode well for overall income gains.  If incomes don’t keep rising solidly, consumption will have to moderate and that has been the sector shouldering the burden of growth.

As for the consumer, confidence remains in good shape.  The University of Michigan’s Consumer Expectations Index edged up in July.  The current conditions component eased but a rise in expectations overcame that decline.  Except for a steep drop early this year, the index has been in a fairly tight range for the past sixteen month.  That is good since the level is solid.

The trade deficit narrowed just a touch in June, which should be good news.  But both imports and exports were down fairly significantly and that is not a sign of either strong domestic or international demand.  Despite the President’s claims, farm exports, led by sales of soybeans, were up both monthly and for the year.  As one of my closest friends likes to say, “never let facts get in the way of bad policy”.  The biggest issues were sharp drops in vehicle, gem diamond and computer sales.  Energy didn’t play a large role in this report.  The petroleum deficit, though, was the lowest in memory.  That could easily turn next month, widening the deficit. 

MARKETS AND FED POLICY IMPLICATIONS:  Just a day after Fed Chair Powell talked about trade issues moving from boil to simmer, the heat got turned up again.  Nice call Jay.  Okay, it is unfair to knock the Fed Chair on a decision that was not expected at this exact time, though it was somewhat telegraphed.  The President complained that the Chinese were not buying our farm goods as promised, which for him is a political problem.  Of course it is an economic one as well, but the two have become one with this administration.  The result is that fundamental economic data that are not outliers are probably trees falling in a forest before measuring devices were invented.  When the tweet about more Chinese tariffs came out, the markets tanked and it looks like we are in for a long period of battles.  Ten percent is just the opening gambit.  Twenty-five percent is the next likely threat.  Ultimately, those tariffs/taxes on consumer of business goods will have to be passed on.  How would the Fed react?  Normally, I would argue that the Fed would see through the economic slowdown and any potential rise in prices caused by tariffs as being temporary.  But this is the Powell Fed and any one month of data matter, though which numbers and which month are unclear.  So, buckle up.  We have a volatile president and an unanchored Fed and what that means for the economy is anyone’s guess.  My new motto: “You tell me and we both know”. 

July Manufacturing Activity, June Construction, July Layoff Notices and Weekly Jobless Claims

KEY DATA: ISM (Manufacturing): -0.5 pt.; Orders: +0.8 pt.; Employment: -2.8 pts./ Construction: -1.3%; Private: -0.4%/ Notices: 38,845/ Claims: +8,000

IN A NUTSHELL:  “The manufacturing sector is not likely to do much until the trade issues are behind us.”

WHAT IT MEANS:  If you believe the Fed and Mr. Powell in particular, it is all about trade.  Trade wars are causing uncertainty, slowing world growth, U.S. business investment and exports and restraining manufacturing activity.  And there is little doubt that is the case.  In July, we saw that the industrial portion of the economy continued to moderate.  The Institute for Supply Management’s Manufacturing index eased to its lowest in three years.  Production and hiring increased significantly more slowly and order books thinned at a more rapid pace.  None of those are good signs and the modest increase in jobs points minimal help from manufacturing in tomorrow’s July employment report.  A similar measure, the IHS Markit Manufacturing Purchasing Managers’ Index, hit its lowest level in nearly a decade, so it does appear that manufacturing conditions have weakened significantly this year. 

Adding to the economy’s woes is the slowdown in construction, which declined sharply in June.  Most of that came from a large drop in government spending on education, highways and health care.  I guess we don’t need new schools, roads or hospitals.  But this report was not totally negative as private sector commercial and health care construction rose.  Still, commercial construction has not been great this year and there is little reason to expect that to change. 

As for the labor market data, the numbers did little to change the perception that conditions remain tight.  Challenger, Gray and Christmas reported that layoff notices continue to grow rapidly.  The weakest sector is industrial goods, consistent with the softening of the manufacturing sector.  The rise in unemployment claims last week only moves us back to more normal, but extraordinarily low levels.

MARKETS AND FED POLICY IMPLICATIONS: What will Mr. Powell and his band of monetary policy makers do next?  You tell me and we both know.  The economy is still expanding decently but the trade war issues are not going away.  With China showing it can be just as intransigent as Trump, don’t look for much to happen anytime soon.  The Chinese have decided to target agriculture and they are not buying our farm products.  How long farmers will be willing to stay on government welfare I don’t know, but it cannot be for too much longer. A lot of what is going on has to do with politics not economics, so the Chinese decision to hurt the politically important farm sector has to be recognized as an important factor in the negotiations to create true change in the bilateral relationship. Consequently, if a trade agreement with China occurs, it is likely to be mostly puff and little pastry.  But it would at least ease the uncertainty provide a short-term boost to growth.  Until then, the expansion should continue to moderate but not falter.  Chair Powell still claims the Fed is data dependent, which is hard to believe given the data didn’t support a rate cut.  I just don’t know what he is looking at and what he characterizes as weak enough to cut again.  If all he is worried about is world growth, he will probably get the data he needs to reduce rates again this year.  If growth and inflation are the keys, I am not sure the numbers will be as supportive.  And with the Fed clearly divided, forecasting what happens next has become a lot more uncertain, which is saying a lot given Mr. Powell’s penchant to change course on a dime.

July 30-31, 2019 FOMC Meeting

In a Nutshell:  “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate…”

Decision: Fed funds rate target range reduced to 2.00% to 2.25%.

As expected, but not universally agreed with, the Fed cut interest rates by 25 basis points – one-quarter point – for the first time in a decade.  That occurred despite an economic statement that was the same as in June and an economy where the data have been better than expected.

So, why did the Fed reduce rates now?  The key factors appear to be a fear of too low inflation that could lead to an extended, Japanese-style deflationary slump and worries about the world economy that were largely created by trade policy. 

On the inflation front, it looks like inflation expectations are the key. Fed Chair Powell recognized that 25 basis points will not cure the problem of below target inflation.  Indeed, it is fairly clear that a quarter-point cut will have limited economic impacts.  But he believes that image matters and the reduction in rates and the end of the quantitative tightening process (which was also announced), should provide the confidence that inflation will ultimately move back toward target levels.  I guess the Fed once again is putting its stock in jawboning, a strategy that hasn’t worked well in the past. He also noted that it might take longer to get back to target.  That was likely noted so he can buy the Fed more time.

As for the world economy, the idea of cutting rates was to take out some insurance against a domestic slowdown induced by the trade issues.  Of course, he did not indicate how a rate cut would accomplish that goal.  That’s because it cannot.

As for future rate cuts, he hinted that this was the start of a process, but he tried to make it clear it would not be a long process.  In other words, we should expect another rate cut, though it is not clear if that might happen at the next meeting or one a little later.  Of course, if we keep getting solid data, who knows what this Fed will do. 

So, what should we make of this move.  The Fed has now become the economic mouth that is trying to roar.  That is, he thinks that when the Fed talks, everyone listens.  They do, but do they believe in what the Fed is saying?  That’s unclear because rates are already low, global factors are beyond the Fed’s control and low inflation has been an issue for years now and small rate adjustments can accomplish very little.

But to me, the real problem is the markets.  The Fed became the drug dealer of choice when it implemented and more importantly, sustained quantitative easing.  But the junkies, i.e., the markets, are now controlling the drug dealer.  When the markets get starved for more opiates, they scream and yell and ultimately, the Fed provides the drugs.  It did that in two ways today, by lowering rates and ending QT early. 

It is likely the markets will soon start demanding more.  Indeed, the huge decline in the stock indices in the first hour after the announcement and during Mr. Powell’s press conference, as well as the rise in the dollar, seemed to say that one 25 basis point cut will not do it.  As addicts will tell you, they can never get enough and the Fed is opening itself up to that potential problem, especially if the trade negotiations with China drag on. 

If Mr. Powell wants to delude himself by continuing to make the argument that this is just a “mid-cycle adjustment”, then so be it.  But he is now at the mercy of a mercurial president, foreign economies over which he has no control and economic/inflation perceptions rather than economic fundamentals.  As Oliver Hardy liked to say: “Well, here’s another nice mess you’ve gotten (us) into.”(The next FOMC meeting is September 17-18, 2019.)