global webinar: hoping for a short and shallow rough patch · 2019-04-11 · inflation tame, wages...

Global Webinar:Hoping For A Short And Shallow Rough Patch

Jim O’Sullivan & Carl WeinbergHigh Frequency Economics www.hifreqecon.com/WebinarApr2019

U.S. Holding Pattern

Jim O’SullivanChief Economist www.hifreqecon.com/WebinarApr2019

High Frequency Economics® — Jim O’Sullivan, Chief Economist April 11, 2019

© 2019 High Frequency Economics, Ltd. 445 Hamilton Avenue, White Plains, NY 10601. All rights reserved. No secondary distribution without express permission. www.hifreqecon.com/WebinarApr2019

Fiscal Stimulus Fading; Exports Slowing—But Still Growing

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Wage And Salary Income, %chya, 3-Month Average Private Wage Income From Employment Report*, %chya, 3-Month Average Federal Withheld Employment-Based Tax Receipts, %chya, Smoothed 13-Wk Avg

*Including growth in hours worked as well as average hourly earnings.

1a. After-Tax Income Was Boosted By The Tax Cut In 2018

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New Caps For FY18-19 Federal Discretionary Spending Budget Authority Caps, Billions Of Dollars, Fiscal Years

1b. Increases In Spending Caps Will Need To Be Extended

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Manufacturing ISM Export Orders Index (Left) Real Good Exports, %chya (Right)

Shaded Bars Denote Recession Periods

2015 2012 1998

1c. ISM Export Orders Index Has Dropped, But It Is Still Above 50

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Private Payrolls, %chya (Left) Real Goods Exports, %chya (Right)


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1d. Employment Growth Depends On Much More Than Exports



Tightening In Financial Conditions Has Been Reversed

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Bloomberg U.S. Financial Conditions Index*

*Based on nine financial markets series, covering money markets, bond markets and equity markets; positive readings imply accomodative financial conditions.

Shaded Bars Denote Periods Of Recession

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2a. Recent Tightening Of Financial Conditions Has Been Reversed

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Yield Curve: 10-Year Minus 2-Year Treasury Yield, Percentage Points (Left) Yield Curve: 10-Year Minus Federal Funds Rate, Percentage Points (Left) Real GDP, %chya (Right)


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2c. Yield Curve Inversions Typically Followed By Recessions, But Not Always

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US 10-Year Treasury Yield, % (Left) S&P 500 Index (Right)

Election Day 2016

2b. S&P 500 Is Almost Back To Last Year’s All-Time High

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10-Year Term Premium*, % Nominal 10-Year Treasury Yield, % 10-Year Risk-Neutral Yield*, %

*NY Fed data; methodology developed by Tobias Adrian, Richard Crump & Emanuel Moench.

“Bond Market Conundrum”

Shaded Bars Mark Fed Tightening Periods

2d. Is This Time Different? Bond Market Term Premiums Are Historically Low



Inflation Tame, Wages Accelerating

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Fed Goal For PCE Prices

3a. Core Inflation Remains Tame

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ECI: Private Sector Wages & Salaries, %chya Employment Report: Average Hourly Earnings, %chya

3b. Wage Gains Have Been Accelerating

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TIPS 5-Year, 5-Year Forward Inflation Compensation, % Michigan 5-to-10-Years-Ahead Inflation Expectations, % New York Fed 3-Years-Ahead Inflation Expectations, % Michigan One-Year-Ahead Inflation Expectations, %

3c. Survey-Based Inflation Expectations Have Remained Low And Fairly Stable

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CBO Estimate Of Unemployment Gap* (Left) Acceleration/Deceleration In Private Wage Component Of ECI† (Right)

*Reported unemployment rate minus CBO estimate of NAIRU. †%chya minus %chya one year earlier, four-quarter average.

3d. NAIRU Framework Points To Ongoing Acceleration In Wage Gains



Productivity To The Rescue? Like In The Late 1990s?

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Unemployment Rate, % CBO NAIRU Estimate, % Core PCE Price Index, %chya Average Hourly Earnings*, %chya

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*Production & nonsupervisory workers, with data starting in 1964.

4a. Pick-Up In Wages Did Not Lead To Much Inflation In Late 1990s

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Nonfarm Business Productivity

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4b. ...With The Help Of A Surge In Productivity Growth



Unemployment Still Trending Down? Claims Continue To Signal Strength

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Unemployment Rate, % Fed Funds Rate Target, % Shaded Bars Denote Fed Tightening Periods

Fed Est For Long-Run Normal Unemp: 4.3%

5a. Fed Is Trying To Stop The Downtrend In The Unemployment Rate

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Weekly Four-Week Average Shaded Bars Denote Recession Periods

Initial Claims, Thousands Per Week

5b. No Sign Of Significant Labor Market Weakening In Jobless Claims

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25-54 Years: Female 25-54 Years: Male Labor Force Participation Rate, %

Shaded Bars Denote Periods Of Recession

5c. The “Prime-Age” Female Participation Rate Has Been Surging

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Labor Force Participation Rate, %


5d. ...The Overall Rate Is Up Recently, But It Is Still Close To Flat Since 2013



Weakness To Feed On Itself, Or Renewed Upward Momentum?

%ch from previous period, annual rate, except where noted; forecasts in bold

2018 2019 Calendar Average Q4/Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 2020 2018 2019 2020

Real GDP 2.2 4.2 3.4 2.2 1.5 3.2 2.0 2.0 2.9 2.4 2.0 3.0 2.2 1.9Final Sales 1.9 5.4 1.0 2.1 1.8 3.6 2.3 2.0 2.7 2.4 2.1 2.6 2.4 1.9

Domestic Final Sales 1.9 4.0 2.9 2.1 1.6 3.4 2.4 2.1 2.9 2.5 2.1 2.7 2.3 2.0Net Exports (pct pt contr) 0.0 1.2 -2.0 -0.1 0.2 0.1 -0.1 -0.1 -0.2 -0.1 -0.1 -0.2 0.0 -0.1

Inventories (pct pt contr) 0.3 -1.2 2.3 0.1 -0.3 -0.4 -0.3 0.0 0.1 0.0 -0.1 0.4 -0.3 0.0

Consumption 0.5 3.8 3.5 2.5 0.8 3.5 2.3 2.0 2.6 2.4 2.1 2.6 2.1 2.0Business Fixed Investment 11.5 8.7 2.5 5.4 4.1 3.3 3.4 2.7 6.9 4.1 2.8 7.0 3.4 2.7

Structures 13.9 14.5 -3.4 -3.9 0.0 -2.0 2.0 2.0 5.0 -0.3 1.7 4.9 0.5 2.0Equipment 8.5 4.6 3.4 6.6 4.0 4.0 3.0 2.0 7.4 4.2 2.2 5.8 3.2 2.0Intellectual Property 14.1 10.5 5.6 10.7 7.0 6.0 5.0 4.0 7.5 7.1 4.2 10.2 5.5 4.0

Residential Investment -3.4 -1.4 -3.5 -4.7 2.0 2.0 0.0 0.0 -0.3 -0.6 0.1 -3.3 1.0 0.0Exports 3.6 9.3 -4.9 1.8 3.5 3.5 3.5 3.0 4.0 2.4 3.1 2.3 3.4 3.0Imports 3.0 -0.6 9.3 2.0 1.5 2.0 3.5 3.0 4.5 2.8 3.0 3.4 2.5 3.0Government 1.5 2.5 2.6 -0.4 2.5 3.1 2.4 2.4 1.5 2.1 2.0 1.5 2.6 1.7

Inventories (ch $B annual rate) 30 -37 90 97 83 66 51 49 45 62 47 97 49 48

CPI 3.2 2.1 2.0 1.5 0.8 2.9 2.5 2.5 2.4 1.9 2.6 2.2 2.2 2.6Core CPI 2.7 1.9 2.0 2.2 2.3 2.4 2.5 2.5 2.1 2.3 2.5 2.2 2.4 2.6

Core PCE Prices 2.2 2.1 1.6 1.8 1.5 2.1 2.2 2.2 1.9 1.8 2.2 1.9 2.0 2.3

Unemployment (%, level) 4.1 3.9 3.8 3.8 3.9 3.7 3.6 3.5 3.9 3.7 3.5 3.8 3.5 3.5Federal Budget Balance ($B, FY) -779 -950 -1075

% Of GDP -3.8 -4.5 -4.8

End Of YearFed Funds Target (%, EOP) 1.63 1.88 2.13 2.38 2.38 2.38 2.38 2.38 1.8 2.4 2.4 2.38 2.38 2.3810-Year Treasury (%, EOP) 2.7 2.9 3.1 2.7 2.4 2.6 2.8 2.8 2.8 2.6 2.8 2.7 2.8 2.830-Year Treasury (%, EOP) 3.0 3.0 3.2 3.0 2.8 2.9 3.1 3.1 3.0 3.0 3.1 3.0 3.1 3.1S&P 500 (level, EOP) 2641 2718 2914 2507 2834 2750 2650 2632 2716 2701 2592 2507 2632 2550

6. HFE’s Economic & Financial Forecasts



Trade Tensions: Art Of The Deal?

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Nominal Goods Imports From China Nominal Goods Exports To China Percentage Point Change From One Year Earlier

7c. More Weakening In Exports To Than Imports From China In % Terms

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Nominal Goods Imports From China Nominal Goods Exports To China

Change From One Year Earlier, Billions Of Dollars Per Month

7d. ...But Not In Dollar Terms In The January Report

7a. Tariffs: United States Versus China

Tariff Rate, %

Simple Average*

Weighted Average**

United States' Exports To ChinaAgricultural Products 15.1 5.8Non-Agricultural Products 9.0 5.3

China's Exports To United StatesAgricultural Products 4.0 2.8Non-Agricultural Products 4.0 3.0

Source: WTO’s World Tariff Profiles 2017*Based on a standardized simple average across six harmonized system categories.**Based on a weighted average of recorded exports.

7b. MFN Tariff Rates

Simple Average MFN Tariff Rates, % Bound (Required By WTO) AppliedAustralia 9.9 2.5Brazil 31.4 13.5Canada 6.8 4.2China 10.0 9.9European Union 4.8 5.1India 48.5 13.4Japan 4.4 4.0Mexico 36.2 7.1Russia 7.6 7.8South Korea 16.8 13.9United States 3.5 3.5Source: WTO’s World Tariff Profiles 2017

Short And Shallow Rough Patch

Carl B. WeinbergChief International Economist www.hifreqecon.com/WebinarApr2019

High Frequency Economics® — Carl B. Weinberg, Chief International Economist April 11, 2019


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Global Exports In U.S. Dollars, Percent Change Year Ago,

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WTO Measure Of World Trade Volume

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World Export Volume, Percent Change Year Ago, Right Axis World GDP, Percent Change Year Ago, Left Axis

IMF Estimates Of Yearly World Trade And GDP Data Through 2018e

IMF Measure Of World Trade Volume Vs GDP Growth

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G-7 Only G-7 Plus China

G-7 Plus China Industrial Production Growth, Percent

Data Through Jan 2019 Using GDP Weights

The Pulse Of The Beast: TradeWorld trade was grinding to a halt in 2018. Nothing good can be said about that.



Today, April 11Parliament Votes To Accept EU Extension To October 31?

Waypoints To Brexit, Many Paths But No Paved Roads…Uncertainty prevails during a period when there is no clarity of Brexit outcome to encourage business investment or confidence.

May 22Last Date For Parliament To Ratify Withdrawal AgreementWithout Having To Run Elections For European Parliament

June 1Britain Is Expelled From EU If Withdrawal Agreement Is Not Passed

And UK Has Not Held Elections For EU Parliament

Whenever Britain Exits EU With Deal

And Orderly Transition Period

Yes

NoTomorrow, April 12

Brexit Day IIGovernment Must Withdraw Notice Or Hard Brexit

May 26Elections In Britain For European Parliament

Withdrawal Agreement Ratified?

June 19 - 20EU Summit To Review Progress Toward Brexit

October 31Brexit Day III

Britain Leaves With A Deal Or Withdraws Notice Or Leaves Hard(Or EU Grants Another Extension)

Unforecastable ContingenciesTory Leadership Change To Hardline Brexiteer / Tory Leadership Change To Remainer

Deal Between Tories And Labor On Customs Union / Second Referendum / Confirming Referendum On Withdrawal AgreementGovernment Is Toppled Forcing National Elections



SupplyAndDemandCurves

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Price

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Brexit In One ChartBrexit means the suspension of immigration and the departure of some migrant labor—a reduction in the workforce—a loss of a big chunk of the business of the City, and higher costs for imported goods on top of delays in supply chains. It is a supply shock—it shifts the aggregate supply curve upward to the left—that should result in a stagflation. Potentially, the drop in output and the acceleration of prices is huge—that is the hard Brexit risk. We have no statistical basis to estimate its magnitude or duration: No one has seen this before.



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Euro Zone: Industrial Production, Percent Change Year Ago Black Line Shows Annualized Percentage Change In Three-Month Moving Average Blue Line Shows Percent Change Since April 2008 Peak

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Canada: Manufacturing Output, Percent Change Year Ago

Volume Measure

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United Kingdom: Industrial Production Bars Are Industrial Production, %chya, Blue Line Is Percent Change Since Peak Yellow Line Is Annualized Three-Month Change In Production

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Japan: Industrial Production, Percent Change Year Ago

Line Shows Annualized Three-Month Percent Change

Industrial Output… Pretty Darn UglyProblems emerged in most advanced economies starting in early 2018, not just in the fourth quarter.



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Euro Zone: Retail Sales Volume, Percent Change Year Ago

Green Line Shows Annualized Change Of 3-Month Moving Average

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Nominal Retail Sales Retail Sales Volumes

Canada: Retail Sales, Percent Change Year Ago

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United Kingdom: Retail Sales, Percent Change Year Ago

Volume Index, Line Shows Yearly Change Of Three-Month Moving Average

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Seasonally Adjusted Monthly Index, 2005=100, Blue Line Is 3-Month Change Annualized

Japan: Retail Sales Volume, Percent Change Year Ago

Consumer Spending… Not So HotMaybe it was the surge in energy prices that slowed the consumer in 2018. But the damage is done, even though oil prices have now retraced their 2018 increases.



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Germany: IFO Inventory Index

Blue Line Is IFO Inventory Index To Mar 19 (Inverted Scale, Left Axis) Green Line Is Production To Feb 19f (Left Axis, %chya) 50

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Inventory-To-Sales Ratio Industrial Production Index (Left Axis, Inverted Scale)

Seasonally Adjusted Monthly Indexes, 2010 = 100

Japan: Inventory-To-Sales Ratio Vs Industrial Production

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Inventory/Sales Ratio Manufacturing Production %chya (Left Axis, Scale Inverted)

Canada: Manufacturing Inventories/Sales Ratio Vs Production

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United Kingdaom: GDP Vs Inventory Ratio

Lagged Year-Over-Year Real GDP Growth Rate (Bar) Vs Inventory Ratio (Line, Inverted Axiis)

The Inventory Cycle Un-MaskedIn many economies, excess inventories have been building up. HFE believes an inventory cycle correction is at the root of the slowdown in many economies. Demand is still grow-ing but output is down and employment growth has stalled. The pattern is clearest in Germany, Japan and Canada—less so for Britain, where Brexit is the key causal factor. Inventory cycles tend to be short and shallow, and rarely lead to financial sector distress or crisis.



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Economic Confidence, Right Axis

Consumer Confidence, Left Axis

Industrial Confidence, Left Axis

Data Through March 2019

Euro Zone: Economic Confidence Indexes

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Germany: IFO Index And Its Components

Blue Line Shows IFO Business Sentiment Overall Index Yellow Line Is Expectations Index, Red Line Is Current Conditions Index

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United Kingdom: CIPS Manufacturing Sector PMI

12-Month Moving Average Shown

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GDP To Q4 18,%chya Dev From Trend Large Manufacturers Large Non-Manufacturers Small Manufacturers Small Non-Manufacturers

Japan: Tankan Indexes And GDP Growth Trends

Informative Surveys… Also Not So HotEuro Zone to Japan, survey data point to decaying supply-side conditions.



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Euro Zone: Exports, Percent Change Year Ago

Yellow Line Shows Five-Month Moving Average

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Canada: Exports, Percent Change Year Ago

Blue Line Is Five-Month Trend

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United Kingdom: Exports, Percent Change Year Ago

Red Line Shows Five-Month Moving Average

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Record Trade Deficit In January 2014

Japan: Trade Balance, Billions Of Yen

Line Shows 12-Month Moving Average

Exports Are Not HelpingThe decline in global exports is evident.



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Total MFI Lending Lending To SMEs Ex-Mortgages Mortgages

Euro Zone: Bank Lending, Percent Change Year Ago

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Business Credit Mortgage Lending Total Lending

Canada: Measures Of Credit, Percent Change Year Ago

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United Kingdom: Growth Of Broad Money And Credit

Bars Are M4, Red Line Shows M4 Lending, Percent Change Year Ago

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M2+CDs, Bank Lending M2+CDs Ex-QE

Japan: Money And Credit, Percent Change Year Ago

Bank Lending: Too Slow And SlowingGrowth of money and credit is too low to accommodate desired nominal GDP growth—except in Canada. Credit is slowing in most economies, or flat at unacceptable rates of growth.



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0

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10 Q4

11 Q2

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17 Q2

17 Q4

18 Q2

18 Q4

GDP Potential Growth (Right Axis) Industrial Output (Left Axis)

China: GDP Vs Industrial Output, Percent Change Year Ago

0 5 10 15 20 25 30 35 40 45 50

Feb 04

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Line Shows 12-Month Moving Average Growth Rate

China: Fixed Asset Investment, Percent Change Year Ago

-4 -2 0 2 4 6 8 10 12 14

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

China Yearly GDP Growth China 10-Yr Trend Growth United States Yearly GDP Growth United States 10-Yr Trend Growth

China And United States: Economic Growth Rates

China Is Poised For Cyclical RecoveryAfter seven years of sub-par economic growth, China’s economy should be set to fly again. Excesses have been purged! However, fixed investment remains weak.

Produc'onPossibilityFron'er

ConsumerGoods

CapitalGoods

AdvancedEconomy

DevelopingEconomy

The Production Possibility Frontier



-20 -15 -10 -5 0 5 10 15 20 25

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

China: Yearly Changes In Urban And Rural Population

Millions Of Persons, Yellow Line Is Rural Population, Blue Line Is Urban Population Red Lines Are Ten-Year Moving Averages

0 1 2 3 4 5 6 7 8 9

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

China: Yearly Changes In Urban Population, Percent

Ten-Year Moving Averages Shown

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0

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14

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Demographic Dividend Productivity

China: Sources Of Yearly Changes GDP, Percentage Points

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75

100

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Mar 19f

M2 M1 Aggregate Financing

China: Money And Credit, Percent Change Year Ago

Pause In The Demographic Dividend?China modernizes by moving people into higher-productivity urban jobs from lower-productivity rural jobs. At the margin, shifting a worker from the farm to a city job increases his or her contribution to GDP 4.3 times. That pickup used to be 6.7 times. In addition, the percentage increase in the urban population caused by migration from farms declines over time. So the demographic dividend is down to about 8% per year now. That “potential” level of demand growth is still way higher than the 6.6% GDP growth reported for 2018.

global webinar: hoping for a short and shallow rough patch · 2019-04-11 · inflation tame, wages...

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