Friday, 20 July 2012

Please Don’t “Get To Work, Mr. Chairman”

This week’s data builds a further case for a declining economy and likelihood of the Fed doing another round of QE. These data hit all of the Fed’s marks for action: joblessness and unemployment, declining industrial production, low price inflation and possible price deflation, and declining retail sales. These are the things that the Fed weighs heavily in judging the health of the economic and their perception that they can act to do something about it.
Do something they will. New jobless claims announced on Thursday added more fuel to the “new” recession theory. The number of new claims was 386,000, higher than estimates from economists. This is from Econoday.

The jump was attributed to seasonal factors including summer layoffs by auto manufacturers as they retool for 2013 models. Seasonal or not, this is a troubling trend. According to Econoday:
One indication that is clearly not positive is lack of improvement in continuing claims which total 3.314 million in data for the July 7 week for a 1,000 increase. The 4-week average is also up 1,000 to 3.312 million. This average hit its recovery low in mid-May at 3.268 million and has since been going the wrong way. The unemployment rate for insured workers has been stuck at 2.6 percent since mid-March.
Here is the trend:


This is troubling not only for those unemployed workers, but this also has negative implications for President Obama’s re-election.

Another bit of data are the Fed’s regional manufacturing data. This came in today from the Philly Fed showing still negative numbers:


We can compare this to the NY Fed’s Empire State report which shows a slight improvement but a negative trend:


The industrial production report from the Fed (G-17) showed a  0.4% in June after having declined 0.2%. in May. But “in the second quarter of 2012, manufacturing output rose at an annual rate of 1.4%, a marked deceleration from its strong gain of 9.8% in the first quarter.” As you can see from this chart the trend has been declining-to-flat for the past two years:


The Fed will get no solace from the CPI either. While it was flat MoM, on a YoY basis it was up 2.2%, right within the Fed’s “target.”



The recent CPI trend has been declining, which is not what the Fed wants to see because it indicates that we are heading into a recession. In fact declining prices may give the Fed concern over the likelihood that we will be seeing price deflation, which is a warning flag to the Fed. 

One more point to mention is that retail sales continue to fall:

Why is this important? Because almost all economists believe that consumer spending is the key to reviving the economy. Actually it is higher level production, but Keynesians believe we can spend our way to prosperity and most of those economists buy in to that view, including those at the Fed, Chairman Bernanke being the most notable.

What can we take away from this weeks data:
1. Industrial production and manufacturing continues to decline, a continuations of a two-year trend.
2. Jobless claims remain stubbornly high, and the overall employment rates have increased.
3. The CPI is declining giving rise the (incorrect) fear of price deflation.
4. Retail spending has been declining for the past year, another troubling statistic.

The Fed’s dual mandate is to keep prices steady and keep employment high. Neither of those things are happening. All of the important recent indicators are going against the Fed. I believe the threat of price deflation and growing unemployment will force the Fed’s hand soon. As Senator Schumer told Fed Chairman Bernankeearlier this week: “Get to work, Mr. Chairman.” 

To be clear on this point, the last thing the Fed should do is more QE and continued ZIRP. But this is what they will do. To paint a picture of a future scenario: immediate joy on Wall Street, possibly the dollar declining further (depending on the fate of the world’s economies), and further destruction of real savings/capital as businesses misdirect investments because of the false signal QE will send them which will lead to further stagnation of our economy.

QE3 is not going to work any better than QE 1 and QE2. Yet I’m afraid that is what the Fed sees as their only policy option.

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