Summary of Comments
Fed rate hike plans have been on a collision course with the economic cycle, and we’ve been saying this for over a year.
Both GDP and payroll jobs growth (yoy) have been falling since early 2015, and sit at 36 and 26 month lows respectively.
In the face of the slowdown, the Fed has been able to raise rates just once.
At the same time, our US Future Inflation Gauge turned up, and inflation has followed suit, with core CPI inflation staying over 2% for several months now.
Because of the USFIG, early this year we had warned of “stagflation lite,” a slowdown in growth along with a cyclical upturn in inflation.
Our view has come to the fore, with Double Line’s Gundlach now highlighting the USFIG’s upturn in his presentations.
While everyone is fixated on slowing growth and if inflation pressures are rising, ECRI is focusing on whether the ground may be starting to shift, with upticks in some of our data. We’re watching for any potential shift in the direction of cyclical growth, including our leading indexes for services and manufacturing.
Will the economy gain traction, or downshift further?
Politics & Policy
Lots of policy prescriptions are flying about, but hardly any of them are worth anything because they miss the point.
It’s simple math that shows why we aren’t growing the way we used to:
The labor force is hardly growing, and that’s not going to change.
And, we aren’t getting more productive, meaning despite all the cool technology, we aren’t producing much more per hour.
The litmus test for any policy is, does it improve demographics or productivity growth? Any policy proposal that doesn’t pass our litmus test misses the mark and won’t solve our problems.
Monetary Policy: All it can do is pull demand forward from the future, and central banks are bemoaning the fact that there’s nothing left to pull forward from the future.
Fiscal Policy: You can spend a lot of money on infrastructure, but look at Japan, they’ve been there and done that. What’s it done for them? After years of that they still needed Abenomics, and how’s that working?
What is the answer? The first thing is to stop digging. We’re in the hole because of too much stimulus: so we have massive overcapacity, especially in China, and massive inventories here at home. Only when that changes does it make business sense to invest in new capacity that might help productivity growth.