With the Fed certainly not behind the curve in creating the next recession, being preoccupied with my day job, I appear to be the only one behind the curve in talking about diving bond yields. Others have already beaten me to it while the selling continues unabated, and the reverse repo carrying on as if it were December 17th. However, with my last post I included a graph that showed what happened to the effective funds rate while the reverse repo was quadrupling which one might describe as heading down the toilet. If the wrongheadedness weren’t such sad sight I might have a really great time with that factoid. But of course, I take no pleasure in the wipeout of $2T of wealth in less than a week. I only have to ask, as I’ve been completely perplexed about the conduct of monetary policy: Why? Was the verbalized intent to save us from inflationary bubbles really just front loading the losses so that we get all the pain with none of the pleasure? I think I’d rather take my chances with a bubble, thank you very much.
Lakshman Achuthan at the Economic Cycle Research Institute has always been one of my favorite sort of “retail” economists. He has an article posted on his website destroying Janet Yellen’s idea of the strength of the US consume as a reason for the rate hike.
During Q&A Fed Chairman Janet Yellen spoke about “upside risks to the economy,” mentioning the “much healthier” consumer. Clearly, the optimism about economic growth holding up, such as it is, or even accelerating, is predicated not on manufacturing or exports, but on consumer spending, which makes up more than two-thirds of U.S. GDP.
But in reality, consumer spending has been slowing steadily. As the updated chart shows, year-over-year (yoy) real personal consumption expenditures (PCE) growth is in a cyclical downturn and has now dropped further to an 18-month low (thick blue line). The sources of this growing weakness are telling.
Specifically, yoy real PCE growth for goods (teal line) — though bolstered by deflation in goods prices — remains well below its January high. Meanwhile, growth in services spending is in a decisive downturn. In particular, after a six-percentage-point two-year surge that ended in the first quarter of this year, yoy real PCE growth for health care services has turned down, declining to a 13-month low (thin dark blue line). And yoy growth in services excluding health care (light blue line) — which accounts for almost half of total consumer spending — has tumbled to a 25-month low. Thus, the premise of a consumer-driven pickup in U.S. economic growth is demonstrably false.
I’d like to take this criticism of “demonstrably false” FOMC claims one step further. We’ve been told by members of the FOMC themselves through the media and, more importantly, in the committee’s recent released statements that the drop in oil prices will boost the economy. But there is a huge problem with that because, all the while, the committee has been promising to offset any boost from the positive supply shock with tighter money, and has indeed done so with the rate hike. So where all the economic activity that is supposedly to raise inflation toward the target over the medium term is to come from I have absolutely no clue.
I’ve seen the word “moron” floating around the MM blogosphere lately, so I won’t be afraid to use it here to describe the people conducting monetary policy as if they’ve been granted furlough from the institution.
PS: If you like what Lakshman Achuthan had to say about the strength-of-the-consumer claims, you should see what he has to say about employment in the context of the rate hike.