High summer, now. A few schools re-opening, but many important people still on vacation, including all of Continental Europe by long tradition.
But stuff is still happening, and a few really big things that should be happening are not, with pressure building behind their dams.
Happening: new data. Optimism soared last week on good news for jobs in July. Ground that bird. Worker productivity has fallen in three straight quarters, and July retail sales stalled flat.
Small business statistically unchanged in the last year, off the recovery peak in 2014.
We can put lipstick on productivity because the measurement is unclear today. Productivity used to reflect capital investment, and we all know that non-inflationary GDP growth is the sum of population growth plus productivity.
But today, in a post-industrial information economy heavily linked to the outside world, who knows? Retail sales on the other hand — where the U.S. consumer has been the key economic prop — faltering?
And all-important small-business hiring intentions, also stalled.
The action overseas is muffled by Euro-vacation, but new data are as-before: Germany benefitting from a weak euro, the rest hurt by a too-strong euro. Spain and Portugal still have no governments, and Italy still has pretend banks. Only in Japan: emperor Akihito spoke to the nation to indicate his desire to retire, but if you’re the emperor, who gives permission?
10-year T-note in the last year. Stuck 1.5%-1.6%, holding mortgages close to 3.5%.
China is even quieter than Europe. Its official statistics still insist that GDP is growing 6 percent-plus, but reality is less than half of that, the winter jolt of stimulus fading.
2-year T-note in the last year, the best Fed-predictor, says no hike at all even on the horizon.
More important than consequences inside China is the damage it is doing outside. China’s July trade stats: in July, its year-over-year exports fell 4.4 percent, and its imports fell 12.5 percent. Shrinking global trade is the worst risk for all of us, whether by China’s grotesque management of trade, or counter-measures spiraling into trade war.
The Bank of England (BOE) began to bid for bonds, executing its newest round of QE (quantitative easing), but the market offered fewer bonds than the BOE wanted to buy.
Yields on 30-year U.K. “gilts” (from the embossed printing on old-empire physical-paper bonds) have fallen in half since Brexit, from 2 percent to 1 percent. The U.S. Treasury on Wednesday sold at auction $23 billion in new 10-year notes, and a record 72 percent were bought by foreign bidders.
Foreign bidder percents at U.S. Treasury 10-year auctions back to 2004.
So, what does it all mean?
Ben Bernanke this week told us as much as we can know. In his retirement he blogs intermittently for Brookings — never before has the Chair-emeritus provided an overview of current Fed policy.
Of course, he’s oh-so-cautious not to usurp Yellen’s wisdom or authority, but in this week’s posting he addressed those issues in plain sight that are difficult for the sitting Chair to discuss.
He provided a simple chart of historical Fed estimations of the future economy and interest rates, and this commentary: “The changing views of FOMC (Federal Open Market Committee) participants (and of most outside economists) follow pretty directly from persistent errors in forecasting….” Ouch.
Ben Bernanke’s chart.
Since 2012, the Fed has reduced projections of potential output capacity from 2.4 percent annually to 1.9 percent, the too-low hazard threshold of unemployment from 5.6 percent to 4.8 percent and the neutral fed funds rate from 4.25 percent to 3 percent.
He was kind enough not to point out that these misses have been huge, and the downshifting is not necessarily over.
But he did address the obvious: a return to 2 percent inflation and normalized monetary policy “playing out over a longer timeframe.”
He said that Fed communications have “therefore taken on a more agnostic tone recently,” and that “Fed-watchers will see less benefit from parsing statements and speeches and more from paying close attention to the incoming data.”
He even acknowledged merit in a suggestion by the Fed’s dullard (aka James Bullard, president and CEO, Fed Reserve Bank of St. Louis), that forecasters now can do no better than to assume that tomorrow’s economy will look like today’s.
The New York Fed’s quarterly survey of consumer credit. Except for student loans and auto loans, both about to hit ceilings, there is no meaningful growth in consumer borrowing.
Not addressed: why are the Fed’s beloved models failing in forecast? And what does it mean that the Fed is stuck in reaction in real time, with no ability to pre-empt?
Bernanke is far too disciplined, but I bet he’d like — just once — to answer this way: “You want answers to smart-assed questions like those? Go to the circus and look for the fortune-teller.”
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
