The first quarter of 2016 started with the roar of a lion and ended with
the whimper of a lamb. But the Fed must try, so the group of academics get together, estimate
how prices and economic activity might change in the future, and then
in their infinite wisdom they announce their monetary policy. And nothing
happens. We haven’t seen breakout growth over the last seven years,
even though money is essentially free for borrowers. Central banks in
other countries have gone so far as to charge banks for holding cash,
trying desperately to force banks to make loans. Still, nothing.
The irony is that the more central banks force interest rates lower, the worse the problem becomes. While they haven’t done anything toward creating growth and employment, their efforts have done incredible harm to the earnings of seniors, which typically rely on interest income. As rates paid on savings accounts and bonds move toward zero, older consumers have less money to spend, which holds back the economy.
Thanks to Dent Research, here is our weekly information roundup ending the week on April 1, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
The U.S. Economy Created 215,000 Jobs in February… Job growth remained steady, if not robust, last month. Wages increased
0.3% and the unemployment rate held at 5%.
What it means – The employment numbers were in line with expectations. We’re creating roughly 200,000 jobs per month, but they are skewed to the low end of the spectrum. Manufacturing lost jobs, while retail trades picked up almost 25% of those created. The modest wage increase was nice to see; however, as I cover below, Americans aren’t rushing out to spend everything they earn.
As with most other economic reports, this one yet again confirms that we’re muddling through, unable to break out to higher growth levels, but not yet falling into another recession.
As for our old friend, the Birth/Death Adjustment, the Bureau of Labor Statistics guessed that small businesses created 64,000 more jobs than they destroyed last month, which is 30% of all jobs created.
U.S. Consumer Spending Up 0.1% in February, January Revised Lower, from 0.5% to 0.1%… The modest gain in February was expected, but the revision of the January number was not.
What it means – Dialing back January’s spending report clouded the economic picture. Apparently, consumers aren’t taking their modest income gains to the store. Instead, they are saving more. In a world where central bankers are desperate for more spending, this is bad. By our forecasts, it’s just going to get worse as boomers age and push their savings rate higher.
Americans save just over 5% of their income today, while the long-term average is between 8% and 10%. Unless the millennials start having a lot more kids soon – which would boost expenditures – consumer spending should remain muted.
Atlanta Fed's GDPNow Model Forecasts First-Quarter GDP Growth of 0.6%….
It was about 2%, then 1.4%, and now this model projects almost no growth at all.
What it means – This model starts projecting quarterly GDP growth about a month after the quarter begins. Things started off modest this year, which was a disappointment given how last year ended. But as time went on, the hits kept coming. Economic reports showed less activity so this model, which has been very accurate, adjusted lower.
Keep in mind that GDP growth reports as an annualized basis, so 0.6% means that our economy actually grew by one-fourth of that, or 0.15%, in the first quarter. That’s not simply low growth. If the model is correct, this qualifies as no growth, which could keep the Fed sidelined for the rest of the year.
Fed Chair Yellen Said the Central Bank Would Proceed Cautiously When Deciding Rate Policy… Market watchers took her remarks to mean the Fed won’t raise rates at their meeting in April.
What it means – Well, that’s confusing. Her comments centered on global economic turmoil, and the possibility that overseas events could negatively affect the U.S. But recently, Atlanta Fed President Lockhart noted that economic momentum in the states was strong enough to warrant raising rates, and San Francisco Fed President Williams said he doesn’t see a looming global crisis.
So which is it? Is the world heading toward a disaster, so higher rates would be the worst thing to do, or are we on the path to recovery and higher rates will stave off inflation?
If you don’t know the answer, don’t worry. Apparently the Fed doesn’t either. Unfortunately, they set monetary policy for the most important economy on the planet.
The markets shot higher after Yellen’s comments, taking them to mean that rates will remain in place until at least June, if not longer.
S&P/Case-Shiller 20-City Home Price Index Up 5.7% for the Year in January… The seasonally adjusted index gained just 0.8% for the month.
What it means – Home price growth slowed in 2015, but stabilized at the end of the year. Annual gains dropped from double digits to just under 5%, and have rebounded a bit. But the growth isn’t evenly distributed. West Coast cities like Seattle and San Francisco are experiencing strong gains, while the energy belt and the Southeast are weak. This reflects the uneven nature of the economy, where the energy star fell back to earth but high tech companies keep printing money.
There’s also the issue of foreign real estate buyers. Chinese buyers, desperate to get cash out of their country as the yuan loses value, focus on California and Washington State. Brazilian buyers focused on Miami until their economy collapsed. It will be interesting to see what happens when foreign cash dries up.
U.S. Congress Proposes a Financial Lifeline for Puerto Rico… Draft legislation would allow the territory to cut some of its debt and also create a federal financial oversight board.
What it means – Bondholders are about to get taken to the cleaners. Puerto Rico pried loose from federal financial oversight 30 years ago. At the time, Congress passed a law explicitly denying the territory the ability to default on debt. It was meant to motivate island officials to be cautious when issuing debt. That failed. Puerto Rico went on a multi-decade borrowing binge, racking up more than $72 billion in debt. Now Congress will change the rules, hanging bond buyers out to dry.
The not-so-secret problem is that no one knows if this will work. Puerto Rico hasn’t released financial statements in two years, and the territory has almost zero dollars saved toward its $40 billion pension liability. Federal oversight sounds like a step toward a federal bailout, which would involve even more debt restructuring and cost bondholders even more.
Next Week – The first week of April brings very few economic reports, but on Wednesday the Fed will release the minutes of its last meeting.
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