22/3/18: The Fed is boldly going where it was going before

My article on yesterday's Fed meeting is now up on Business Post page: https://www.businesspost.ie/opinion/fed-boldly-going-going-412191.

And a handy chart from Bloomberg on the relative size of the U.S. Fed's balancesheet, compared to other major Central Banks:

My key takeaway from the Fed meeting:

On the net, the Fed opted to continue underwriting the complete lack of fiscal discipline sweeping Washington these days. Since taking office, the current Presidential Administration has embarked on two major fiscal stimuli, involving the Tax Cuts and Jobs Act 2017 and the Government funding agreement that was delivered to the Congress late Wednesday night. The latter amounts to $1.3 trillion of new spending, $700 billion of which will flow to Pentagon. The new Bill will push projected 2018 U.S. fiscal deficit beyond $1 trillion mark, up on $665 billion last year. In January, President Trump has promised a third stimulus - the proposed $1.5 trillion infrastructure development plan - to be delivered later this year. By committing to continue slow deleveraging of the Fed’s  $4.4 trillion balance sheet, and by holding steady on small-step rates increases through 2018, Powell is de facto sustaining financing support for the swelling Federal deficits.

With calm and poise, the Fed’s new Chairman delivered no surprises, no dramas, a little dose of bitter medicine, and a lot of hopes. Unsurprisingly, dollar fell back 0.77 percent against the basket of major currencies, stocks slipped by less than 0.2 percent, and yields ended the day lower, following some volatile trading, while the yield curve flattened in the wake of the Fed’s decision. Like the FOMC projections for economic growth, the markets’ reaction to the Fed’s musings lacked conviction.

15/8/17: A Great Recovery or a Great Stagnation?

Value-added is one measure of economic activity that links the production side to consumption/ demand side (using inputs of say $X value to produce a good that sells for $Y generates $Y-$X in Gross Value Added). Adjusted for inflation, this returns Real Gross Value Added (RGVA) in the economy. Taken across two key sectors that comprise the private sector economy: households & institutions serving the households, and private businesses (including or excluding farming sector), these provide a measure of the economic activity in the private economy (i.e. excluding Government).

Since the end of WW2, negative q/q growth rates in the private sectors RGVA have pretty accurately tracked evolution of economic growth (as measured, usually, by growth rates in GDP). Only in the mid-1950s did the private sector RGVA growth turn negative without triggering associated official recession on two occasions, and even then the negative growth rates signalled upcoming late-1950s recession.

Which brings us to the current period of Great Recovery.

Consider the chart below, computed based on the data from the Fred database:

The first thing that jumps out in the above data is that since the end of the Great Recession, the period of the Great Recovery has been associated with two episodes of sub-zero growth in the private sector RGVA. This is unprecedented for any period of recovery post-recession, except for the period between two closely-spaced 1950s recessions: July 1953-April 1954 and August 1957-March 1958.

The second thing that stands out in the data is the average growth rate in RGVA during the current recovery. At 0.579% q/q, this rate is the lowest on the record for any recovery period since the end of WW2. Worse, it is not statistically within 95% confidence interval bands for average growth rate in post-recovery periods for the entire history of the U.S. economy between January 1948 and October 2007. In other words, the Great Recovery is, statistically, not a recovery at all.

The third matter worth noting is that current non-recovery Great Recovery period is the third consecutive period of post-recession growth with declining average growth rates.

The fourth point that becomes apparent when looking at the data is that the current Great Recovery produced only two quarters with RGVA growth statistically above the average rate of growth for a 'normal' or average recovery. This is another historical record low (on per-annum-of-recovery basis) when compared across all other periods of economic recoveries.

All of the above observations combine to define one really dire aftermath of the Great Recession: despite all the talk about the Great Recovery sloshing around, the U.S. economy has never recovered from the crisis of 2007-2009. Omitting the years of the official recession from the data, the chart below shows two trends in the RGVA for the private sector economy in the U.S.

Based on quadratic trends for January 1948-June 2007 (pre-crisis trend) and for July 2009 - present (post-crisis trend), current recovery period growth is not sufficient to return the U.S. to its pre-crisis long term trend path. This is yet another historical first produced by the data. And worse, looking at the slopes of the two trend lines, the current recovery is failing to catch up with pre-crisis trend not because of the sharp decline in real economic activity during the peak recession years, but because the rate of growth post-Great Recession has been so anaemic. In other words, the current trend is drawing real value added in the U.S. economy further away from the pre-crisis trend.

The Great Recovery, folks, is really a Great (near) Stagnation.

28/7/17: Long term U.S. growth trend is still weak: 2Q 2017 Update

U.S. GDP growth estimate for 2Q 2017 came in at 2.6%, matching the post-1948 trend for expansionary periods almost to the notch. The problem, however, is that the trend is ... declining over time.

Here's the kickers to today's cheerful media reports on U.S. growth:

1. Current expansion period average growth remains the shallowest amongst all post-recession recoveries since the end of WW2. That's right: the miracle of this Great Recovery is how weak it has been, despite all the Fed efforts.
2. Current 4 quarters average for growth is 2.4%, which is only 0.2 percentage points above the overall recovery period average. Or, put differently, even before the revisions to 2Q 2017 numbers, last four quarters of growth have been un-inspiring. 
3. The trend for historical growth during expansion periods has been sloping down since around the end of the 1980s. And we are, currently, still on that trend. In other words, recoveries are continuing to trend more anaemic over time.

So keep telling yourself that everything is coming out 'on expectations'. Just don't think about the pesky fact that expectations are trending lower.