The International Monetary Fund and the Federal Reserve have downgraded their estimates of growth in upcoming quarters. The IMF takes the worldwide view, with particular weakness in the emerging markets of Brazil, Nigeria, South Africa and Russia., and reduced demand in China for the commodities supplied by emerging market countries.
For the U.S., the IMF slightly raised its growth estimate by 0.1 percentage points to 2.6 percent this year amid a strong second-quarter rebound from an anemic first quarter marked by harsh winter weather and a West Coast ports slowdown. But IMF cut its U.S. projection to 2.8 percent from 3 percent for next year in light of deeper long-term headwinds for advanced economies generally, such as weak productivity growth, lower investment and aging populations.
The US Federal Reserve is also becoming less optimistic, due as well to the worldwide slowdown, but also to a hiring slowdown over the past couple of months. And retail sales seem to be slowing as well. Consumers seem to paying down debt, while eating out more, rather than buying things.
That’s probably why the U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, increased just 0.1 percent from the previous month, and 2.4 percent above September 2014. The July 2015 to August 2015 percent change was revised from +0.2 percent to virtually unchanged.
But wait a minute. Gas prices have plunged, so if always unpredictable gas prices are eliminated, the rest of sales including booming auto sales, plus Retail and Food service sales ex-gasoline increased by 4.8 percent on a YoY basis (2.4 percent for all retail sales including gasoline). That’s not such a bad figure with the holidays creeping in when sales always pick up.
Then why the doom and gloom about third quarter growth? Some economists are predicting below 1 percent GDP growth for Q3. For instance, the GDPNow model for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 0.9 percent on October 14, down from 1.0 percent on October 9, says the Atlanta Federal Reserve. This is even though the model’s nowcast for real consumer spending growth in the third quarter fell from 3.6 percent to 3.2 percent after this morning’s retail sales report from the U.S. Census Bureau.
With consumer spending still good, such slow growth doesn’t make a lot of sense. Firstly, because the Atlanta Fed’s Lockhart has been the most consistently hawkish on inflation if the Fed doesn’t raise interest rates soon, and the lone dissenter of the latest Fed’s easy credit policies. So why suddenly does Lockhart now see essentially no growth in Q3, which means little or no inflation?
Another reason for reduced domestic expectations may be the huge drop in producer, or wholesale prices. The latest Producer Price Index plunged 0.5 percent, and has fallen 1.1 percent in a year. Exports remain very weak at minus 0.8 percent in the month following August’s 0.4 percent decline. September energy prices fell 5.9 percent and are down 23.7 percent year-on-year. Gasoline fell a monthly 16.6 percent for an almost incredible 42.8 percent year-on-year decline.
But that still doesn’t explain the prediction for a decline in aggregate, or overall demand. Non-manufacturing service sector growth is still strong at 55 percent, according to the Purchasing Managers indexes.
And Marketwatch’s Rex Nutting believes service industry prices are actually rising above the 2 percent inflation target, since they measure domestic demand, which is largely shielded from outside influences such as the Dollar’s value.
“For instance, the CPI excluding energy has risen 1.9 percent in the past year, right in the narrow range it’s been in for three years. And the prices of services excluding energy (which account for three-fifths of the consumer price index’s market basket) have risen 2.7 percent in the past year, matching the largest gain since 2008.”
Lael Brainard, one of the youngest Fed Governors, believes foreign trouble will weigh down future growth, and so has joined the chorus to hold down any rate increases until inflation is more obvious in a recent speech.
“There is a risk that the intensification of international cross currents could weigh more heavily on U.S. demand directly,” she said, “or that the anticipation of a sharper divergence in U.S. policy could impose restraint through additional tightening of financial conditions. For these reasons, I view the risks to the economic outlook as tilted to the downside. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery–and argue against prematurely taking away the support that has been so critical to its vitality.”
Remarks such as Brainard’s with current low inflation is helping to keep interest rates at record lows. The 30-year fixed conforming rate has dropped to as low as 3.375 percent of late in California, which should help sustain economic growth. Much of the doom and gloom is due to predictions that Wall Street’s ‘salad’ days are over. I.e., stocks can’t go much higher, or interest rates much low—the 10-year T Bond yield today dropped to 1.90 percent—almost a historic low. So any reversal in these trends (higher rates, falling stock prices) could mean slower growth ahead.
But we don’t believe it with the holiday spending season coming up, and consumer confidence at post-recession highs, because consumers are in fact earning more money.
Harlan Green © 2015
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