Download View the entire report

Economic Research
Published by Raymond James & Associates
Scott J. Brown, Ph.D., (727) 567-2603, [email protected]
September 8, 2016
Economic Trends _______________________________________________________________________________________________
In a Fed Spin
 Economic data have been mixed, but generally consistent
with moderate economic growth in the near term.
 Federal Reserve officials, including Chair Yellen, have
signaled a possible September 21 rate hike. However, while
short-term hawkish, officials also appear long-term dovish.
 Financial market participants doubt the central bank’s
resolve. However, a 25-basis-point increase in the federal funds
target rate should not have a major impact.
In its July 27 policy statement, the Federal Open Market
Committee added a key phrase, “near-term risks to the
economic outlook have diminished,” paving the way for a
possible interest rate hike in September. Just before the FOMC
meeting, the Fed’s Board of Governors met to consider
requests from the district banks to increase the discount rate
(the rate the Fed charges banks for short-term borrowing),
currently 1.00%. Recall that changes to the discount rate (also
called the primary credit rate) have to be requested by one or
more of the district banks and be approved by the governors.
In late July, eight of the 12 district banks had requested a 25basis-point increase in the discount rate (but, obviously, the
governors did not approve). The presidents of four of those
district banks have a vote on the FOMC this year. Hence, there
has been growing sentiment for higher short-term interest
rates. Almost always, the Fed’s Board of Governors will
approve a change in the discount rate when the FOMC changes
the federal funds rate target (the federal funds rate, the market
rate that banks charge each other to borrow excess reserves
overnight, averaged 0.40% in August, a bit above the mid-point
of the 0.25-0.50% target range).
In her Jackson Hole speech (August 29), Fed Chair Janet
Yellen was expected to restrict her remarks to a general
discussion of monetary policy tools (the theme of the Kansas
City Fed’s annual monetary policy symposium this year) and
not say much about the current situation. Instead, she went
out of her way to preface her comments with “a few remarks
on the near-term outlook for the U.S. economy and the
potential implications for monetary policy.” Fed policymakers
expect “moderate growth, additional strengthening in the labor
market, and inflation rising to 2% over the next few years,” she
noted, adding that “in light of the continued solid performance
of the labor market and our outlook for economic activity and
inflation, I believe the case for an increase in the federal funds
rate has strengthened in recent months.” This was a clear
signal that a rate increase was likely to come sooner rather
than later, but she also left herself an out: “of course, our
decisions always depend on the degree to which incoming data
continue to confirm the Committee's outlook.”
While the federal funds futures market priced in a greater
chance of a September move following Yellen’s Jackson Hole
speech, the odds never went above 50%. The Fed may have
simply cried wolf too many times, or perhaps market
participants believe that the incoming economic data would be
weak enough to keep monetary policy on hold. The economic
data that arrived after Yellen’s speech have been mixed, but
generally on the soft side of expectations.
Fed Rate Hike "Odds" for September 21
0.45
0.45
Yellen Jackson Hole speech
0.40
0.40
0.35
0.35
August payroll data
0.30
0.30
0.25
ISM Non-Manf.
0.20
0.25
0.20
0.15
Fed rate hike odds are not directly
observable, this calculation
assumes that the average federal
funds rate will be near the midpoint
of the announced range
0.10
0.05
0.15
0.10
0.05
Source: Raymond James
0.00
0.00
Jul
Aug
Sep
The estimate of real GDP growth for 2Q16 GDP growth was
revised lower (to a 1.1% annual rate), but consumer spending
was stronger than initially reported and the trend in personal
income was revised sharply higher, suggesting a much better
backdrop for spending growth in the near term. Inventories
have become leaner in recent quarters, which usually bodes
well for future production (reflecting an inventory rebuild).
Yet, most indicators suggest a mixed, but generally lackluster,
manufacturing sector. Residential housing has sputtered a bit,
reflecting supply constraints and affordability issues. On
balance, recent economic figures have remained consistent
with modest to moderate growth in the near term.
ISM Indices
62
62
58
58
54
54
50
50
46
46
Manufacturing
Non-Manufacturing
42
38
42
38
34
34
Source: Institute for Supply Management
30
30
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. (RJA) as of the date stated above and are subject to change. Information has been obtained from third-party
sources we consider reliable, but we do not guarantee that the facts cited in the foregoing report are accurate or complete. Other departments of RJA may have information that is not available to the Research Department about
companies mentioned in this report. RJA or its affiliates may execute transactions in the securities mentioned in this report that may not be consistent with the report's conclusions.
JAclien
isR
Th
h
trasb
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
Raymond James
Economic Research
The focus for Federal Reserve policy has been on the labor
market. The monthly change in nonfarm payrolls (+151,000 in
August) is a fairly noisy statistic. The underlying trend in job
growth appears to have slowed over the last several months
(relative to the very strong pace of 2014-15), but that’s at least
partly due to a tighter job market. The unemployment rate has
flattened (at 4.9% in August, vs. 5.1% a year ago). Labor force
participation and the employment/population ratio have
improved only modestly over the last year. The Fed’s Beige
Book, the summary of anecdotal economic assessments from
around the country, noted that labor market conditions
“remain tight.” Wage pressures, while “moderate on balance,”
had “increased further.” Average hourly earnings rose 2.4%
over the 12 months ending in August, mixed across industries.
For the most part, the economic outlook appears to be
essentially “more of the same.” That is, household sector
fundamentals are sound, which should support solid growth in
consumer spending (which accounts for about 70% of GDP).
Business fixed investment is likely to remain soft, but the
contraction in energy exploration (which is capital-intensive)
appears to be behind us (hence, will no longer be a drag on
overall business investment). Housing is likely to improve, but
may not be especially strong in the near term. Global growth,
while spotty, is likely to improve in the quarters ahead.
Contributions To U.S. GDP Growth, %
6
5
4
Initial Jobless Claims, th.
700
700
600
600
500
500
400
400
300
300
200
200
100
100
6
Pers. Spd.
Resid. Inv.
Exports
Ch. Invent.
Bus. Inv.
Gov't
Imports
Real GDP
5
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
Source: BEA
-4
-4
14.1
Source: Labor Department
0
60
65
70
75
80
0
85
90
95
00
05
10
15
Quarterly figures on labor productivity are choppy, but the
trend through the second quarter remained weak. Unit labor
costs, the labor expense per unit of output, have risen at a
faster pace. This will show up either as higher inflation (if firms
can pass those higher costs along) or will eat into corporate
profit margins (if they can’t).
14.2
14.3
14.4
15.1
15.2
15.3
15.4
16.1
16.2
16.3
16.4
The recent backdrop (moderate growth, low inflation) has
been supportive for the stock market. The economy has been
improving, but not so fast that the Fed will rush to take the
punch bowl away. In a low interest rate environment,
price/earnings ratios should be higher. However, important
questions lie ahead. Population demographics imply slower
labor input in the U.S. and around the world. The trajectory for
potential economic growth would be further limited by slow
productivity growth, but that may prove to be temporary.
GDP ( contributions)
consumer durables
nondurables & services
bus. fixed investment
residential investment
Priv Dom Final Purchases
government
exports
imports
Final Sales
ch. in bus. inventories
3Q15
2.0
0.5
1.4
0.5
0.4
3.3
0.3
-0.4
-0.2
2.6
-0.6
4Q15
0.9
0.3
1.2
-0.4
0.4
1.8
0.2
-0.3
-0.1
1.2
-0.4
1Q16
0.8
-0.1
1.2
-0.4
0.3
1.1
0.3
-0.1
0.1
1.2
-0.4
2Q16
1.1
0.7
2.2
-0.1
-0.3
3.0
-0.3
0.1
0.0
2.4
-1.3
3Q16
2.8
0.2
1.4
0.2
0.2
2.3
0.3
0.4
-0.2
2.5
0.3
4Q16
2.7
0.2
1.3
0.2
0.2
2.3
0.2
0.2
-0.3
2.2
0.5
1Q17
2.2
0.2
1.3
0.2
0.2
2.3
0.2
0.2
-0.2
2.2
0.0
2Q17
2.2
0.2
1.3
0.2
0.2
2.2
0.2
0.2
-0.2
2.2
0.0
3Q17
2.2
0.2
1.2
0.3
0.2
2.2
0.2
0.3
-0.2
2.1
0.0
4Q17
2.1
0.2
1.2
0.3
0.2
2.1
0.2
0.3
-0.2
2.1
0.0
2015
2.6
0.5
1.6
0.3
0.4
3.3
0.3
0.0
-0.7
2.4
0.2
2016
1.5
0.3
1.6
-0.1
0.2
2.2
0.2
0.0
-0.1
2.0
-0.4
2017
2.3
0.3
1.3
0.2
0.2
2.3
0.2
0.3
-0.2
2.2
0.1
Unemployment, %
NF Payrolls, monthly, th.
5.1
192
5.0
282
4.9
196
4.9
146
4.9
188
4.8
150
4.8
135
4.8
140
4.7
135
4.7
130
5.3
229
4.9
170
4.8
135
Cons. Price Index (q/q)
excl. food & energy
PCE Price Index (q/q)
excl. food & energy
1.4
1.8
1.3
1.4
0.8
2.2
0.3
1.3
-0.3
2.7
0.2
2.0
2.5
2.1
2.0
1.7
1.4
1.7
1.9
1.7
2.0
1.9
1.9
1.7
2.1
1.9
2.0
1.7
2.1
1.9
1.9
1.7
2.0
1.9
1.9
1.7
1.9
1.9
1.8
1.7
0.1
1.8
0.3
1.4
1.2
2.2
1.0
1.6
2.0
1.9
1.8
1.7
0.14
0.0
0.7
2.2
0.16
0.1
0.8
2.2
0.36
0.2
0.8
1.9
0.37
0.3
0.8
1.8
0.40
0.3
0.8
1.6
0.63
0.5
1.1
1.9
0.67
0.7
1.3
2.2
0.88
0.9
1.4
2.3
0.90
0.9
1.5
2.6
1.13
1.1
1.6
2.7
0.13
0.1
0.7
2.1
0.44
0.3
0.9
1.8
0.89
0.9
1.4
2.5
Fed Funds Rate, %
3-month T-Bill, (bond-eq.)
2-year Treasury Note
10-year Treasury Note
© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
2