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Full Bloomberg TV Interview
1) Cyclical Slowdown
The economy is best described as one with a long-term decline in trend growth, exacerbated by ongoing cyclical slowdown.
ECRI uses the Three Ps, how pronounced, pervasive, persistent is a change in the data, to determine whether recent moves in data are noise or not.
-Yoy payroll jobs growth at a 17-month low
-Yoy GDP growth at 1½-year low
-Yoy industrial production growth near 6-yr low
We’ve just covered the current cyclical slowdown, which relates to slower growth this year, continuing into 2016.
Turning to Larry Summers, and the Fed, in their latest minutes they got pretty explicit about recognizing that the long-term decline in trend growth is not going away, something that ECRI first identified before Lehman blew up in the fall of 2008.
In essence, they said that equilibrium short-term real rates will stay lower than before the financial crisis if productivity growth doesn’t pick up and demographic projections are borne out.
This matches what ECRI has been saying for a long time.
Now that this reality is officially on the table, the cyclical slowdown recognized by Main Street, but not Wall Street, especially for 2016, makes a huge difference to the sustainability of the Fed’s rate hike cycle.
2) Oversupply Overwhelming Demand
We have a shrinking trade pie. Unable to generate adequate domestic growth, economies are trying to grab a larger share of that pie through competitive devaluation.
3) Reality of Inventory Build
Fed’s Fisher says "perhaps eventually" with regard to productivity growth rising. This notion was discussed in an ECRI piece titled Simple Math last June.
Since then, the Growth rate in ECRI’s U.S. Leading Index of Consumer Spending (USLICS) has been slowing, suggesting underwhelming retail sales this holiday season.
On top of that, there’s been a huge inventory build, with the inventory-to-sales ratio surging to its highest reading since the Great Recession. One might suppose that businesses are intentionally building inventory to meet a surge in expected demand, but a key point is that while inventories have risen steadily for years, the dollar value of sales has actually been falling since the summer of 2014.
This tells you that the inventory build is not by design, and is the main reason for the even more promotional holiday season we’re all seeing this year. Furthermore, the huge inventory overhang will necessarily act as a drag on growth, compounded by weaker business investment than hoped for by many, including the Fed.