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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Bloomberg Interview Summary


The hard data tell us that U.S. growth continues to slow.

People think U.S. growth outlook improved materially over past couple months, as economic surprise index turned up in Feb, but nobody seems to be talking about how it’s been falling lately.

Year over year (yoy) job growth is hovering just above a two-year low, after peaking in early 2015, and it’s not just about jobs.

Industrial production (yoy) growth is near a 6-year low, but it not just oil, it’s broadbased manufacturing that’s weak; GDP growth is at a two-year low; and real consumer spending growth is approaching a two-year low.

All of this hard data is summed up by our U.S. Coincident Index growth, which is at a two-year low.

The message from the hard data is clear: the U.S. economy remains mired in the pronounced, pervasive and persistent cyclical slowdown that ECRI warned of at the beginning of last year.

Therefore, the Fed is faced with stagflation "lite."

Yoy growth in core PCE deflator turned up last summer, and remains near a 3-year high. Yet, Fed Chair Janet Yellen won’t acknowledge the possibility of a sustained rise in inflation, saying instead that she expects the Fed’s target to be reached only “over the next two or three years.” But core PCE inflation is already approaching the Fed’s official 2% inflation target.

More importantly, it’s likely to stay in a rising trend, given that ECRI’s Future Inflation Gauge, which looks ahead a couple of quarters, is in a classic cyclical upturn.

Some may welcome higher inflation, but don’t forget what inflation does to real wage growth -- inflation eats away at wages, and as a result, real wage growth has been declining since last fall, and is now under 1.5% yoy.

How do these cyclical developments fit within the bigger picture?

Carl Sagan used to say, “that extraordinary claims require extraordinary evidence.” So do extraordinary economic policies.

Way back in the summer of 2008, before Lehman blew up and many years before the secular stagnation debate, we showed that the pace of expansions had been stair-stepping down since the 1970s.

Key ingredients of this structural decline in economic growth are declining trends in productivity growth and the potential labor force.

Going on seven years now, extraordinary monetary policy efforts result in perennial disappointment among policymakers, and it has everything to do with their flawed assumptions from the start.

They mistakenly assumed trend growth was higher than it actually was, and they also assumed that we were somehow owed a return to that long-term trend.

Taking rates to zero for seven years, and piling trillions in QE onto the Fed’s balance sheet (that’s not going away) -- that’s the definition of an extraordinary, grand experiment, and it was done on our entire economy.

So policy makers should have been darn sure that their basic assumptions were rock-solid.

But as we’ve been discussing with you for years, in fact we’ve been saying this since the summer of 2008, trend growth has been stair-stepping down for decades, so there should have been serious doubts in the first place, about any kind of monetary policy blasting the economy back to 3% growth.  
 
Despite all the happy talk on Wall Street, the reality on Main Street has been stagnant incomes, and since the turn of the century, the average household’s purchasing power has clearly declined, even with millions of jobs created.

And for the eight out of nine Americans with at least a high school diploma, the percentage employed, after plunging due to the Great Recession, hasn’t recovered any of those recessionary losses. Meaning the jobs recovery, such as it is, has been spearheaded by cheap labor, with job gains going disproportionately to the least educated — and lowest-paid — workers, many of whom have to work multiple jobs to make ends meet. 

This helps explain why it’s not just the Fed, but the entire establishment, whose credibility’s shot.

With central banks now “out of ammo,” as The Economist put it, the powers that be are building the case for massive, internationally coordinated fiscal stimulus, what Paul Krugman recently called “the fiscal equivalent of war,” given that, in his words, “we’re all Japan now” after all these years of ZIRP and QE.

But the real question is, can that reverse decades of declining trend growth? Ultimately, only policies that genuinely address the challenges of demographics and productivity have a chance to succeed.

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