From: Gregory S. MacKay, Economist
Remember that great scene in “Jaws” where Roy Schneider looks at the shark for the first time and with a perplexed and frightened look says “We’re going to need a bigger boat !” ? As the wee bit of summer we had leaves us, I’m left with a thought: “We’re going to need a bigger expansion”. There just hasn’t been any real kick to this expansion. Gimmicks like “cash for clunkers”, first time home buyer tax credits, various business tax credits, ultra-low mortgage rates, and a steady supply of new cash from the Federal Reserve have resulted in only 3 quarters of 4%+ GDP growth since the recovery began in June 2009. There have also been two negative quarters, and one quarter of .1% growth. “The Great Recession” was a biggie, and it appears that this expansion still doesn’t want to uncouple from the Fed’s help.
The minutes from the July 29-30 Federal Open Market Committee (Federal Open Market Committee) illuminated two facts. First, while there continues to be good debate among FOMC members about the possibility of inflation, the majority of members are siding with Dr. Yellen and her view that underemployment currently trumps any inflation worries. Thus, a good part of the discussion at that meeting was about “how” (rather than “when”) to implement tighter monetary policy. It was plainly stated that the Interest on Excess Reserves (IOER) rate (the rate the Fed pays banks on excess deposits they hold at Fed) will be the next tool used to slow monetary expansion. So when you hear that the Fed has stopped paying interest on bank deposits, you’ll know the Fed has deemed inflation to be a bigger problem than employment. However, at the recent economic conference in Jackson Hole, Wyoming, Dr. Yellen again stated that “the underutilization of labor resources still remains significant”… don’t look for any interest rate increases for some time.
Meanwhile, the headlines state that all the jobs lost in the Great Recession have been recovered. That’s good news, and one would wonder why this expansion continues to moderate. Looking at job growth since the end of the recession tells the story. While there has been reasonable growth in professional and other service type jobs, “old time” manufacturing and construction still suffer. Many of the service sector jobs are lower paying, such as retail, leisure, food service, health care, and social assistance. Hence, while jobs have returned, many do not allow for a rapid growth in net worth. So the mantra of good jobs creating good consumer spending creating good GDP growth is imperiled.
The “careful consumer” is illustrated by data from retail sales. I had been hoping for some improvement lately, but the numbers show no clear strength. July retail sales were less than robust, falling flat after June’s minor (.2%) increase. While the 12 month gain in retail sales was a reasonable 3.7%, the growth is slowing rapidly. Auto sales one year growth rate of 6% have slowed from almost double digits when measured earlier in the year, and were actually down .2% for July. Other poor performers in July included furniture (-.1%), electronics (-.1%), department stores (-.7%), and non-store retailers (-.1%). Only clothing and grocery stores had what could be considered a decent month. So consumers took the month of July off for everything but food and back-to-school clothes. For year-over-year comparisons, only building materials (+5.1%), health and personal care stores (+7.3%), non-store retailers (+5.9%), and restaurants (+6.2%) showed any kind of decent growth.
Home data was a bit more encouraging. Building permits issued in July (1.05 million annualized) rose 8.1% over June levels and are 7.7% above July 2013 levels. Housing starts (1.09 million annualized) are 15.7% above June levels and 21.7% above July 2013 levels. While single family activity is improving, both permits and starts continue to be driven by multi-family units, supporting my belief that younger families are having a hard time raising a down payment.
Existing home sales also suggest slightly growing strength. Sales in July of 5.15 million units (annualized) were the best thus far in 2014. Existing home sales have risen for four straight months, but still lag July 2013 levels by 4.3%. However, prices are holding firm, with a median of $222,900, which is 4.9% above year ago levels, and inventories have risen 5.8% over July 2013 levels. The huge overhang of homes from the Great Recession has about worked itself off, as foreclosures and short sales have fallen almost in half in one year and are at the lowest level since reporting began in October 2008. Still troubling is the fact that first time buyers account for only 29% of sales, and should be twice that.
And… finally… inflation… in my best Brooklynese “faaget aboutit”. Wholesale inflation as measured by the PPI rose a scant .1% in July, and “core” PPI (no food or energy) rose .2%. A jump in food prices offset a decline in energy costs, but the twelve month wholesale inflation number fell to 1.7%. Consumer prices were similar, with the CPI increasing .1%, “core” CPI up .1%, and twelve month consumer prices up 2%. This number will drop in coming months as wholesale price easing works its way into the system and food costs drop from summer levels.
So we’ll continue to trundle along, looking for enhancements in real wages and good jobs, and keep using the Fed’s help to keep the sharks away.
Notwithstanding geopolitical events and Fed guessing, stocks have recovered from their early August swoon. At 2:30 p.m., for the week and year:
Ten year Treasury yields continue to show the pressure from safety buyers, down almost 10 BPS in a month. Intermediate munis are reflecting a zero return when inflation adjusted.