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US Economy Putters Along, Trying to Avoid Fiscal Cliff

Image: US Economy Putters Along, Trying to Avoid Fiscal Cliff

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Friday, 19 Feb 2016 09:21 AM Current | Bio | Archive


The global growth slowdown is taking its toll on the U.S. economy.

The OECD Quarterly National Accounts show U.S. real GDP growth in 2015, on a year-on-year basis, slowed from Q1 to Q4 from 2.9-to-2.7-to-2.1 and finally to 1.8 percent.

The Global Growth Outlook for 2016 of The Conference Board revises its GDP growth forecast for the U.S. to 2 percent, down from 2.4 percent in December, stating it will be overall strong demand that will allow the U.S. to grow at about 2 percent.

The Conference Board warns that raising profits will become increasingly difficult for companies as labor costs are expected to accelerate while labor productivity growth is expected to remain modest and interest rates are expected to rise.

It's by no means brilliant growth, but the U.S. is certainly not falling of that proverbial cliff.

All this becomes more interesting when we put it in context of what San Francisco Fed President John Williams, formerly an aide to Fed Chair Yellen but not a voting FOMC member, recently said:

“Despite recent financial volatility, my overall outlook for the U.S. and the global economy remains unchanged. There is plenty of concern about China’s slower pace, but as I said last year, this largely reflects a pivot from a manufacturing-based economy to one driven by domestic consumption and services-the exact engines that are currently powering U.S. growth," Williams said.

"When I look at my December forecast and compare it with my outlook for unemployment and core inflation today, there's virtually no change. The shifts in my forecast amount to just one-tenth of a percentage point. I therefore continue to see a gradual pace of policy normalization as being the best course. My preferred route is a gradual path of increases.”

It’s clear Williams is taking the bigger-picture view of economic life and is expressing less concern with micro managing. Therefore his outlook has not changed as a result of financial markets fluctuations.

I think the feedback loop from financial markets to the real world is, if not broken, at least damaged. I urge investors to remember that financial markets are not the economy.

Meanwhile, rising rents and medical costs lifted underlying U.S inflation in January by the most in nearly 4-1/2 years, signs of an uptick in price pressures that could allow the Federal Reserve to gradually raise interest rates this year.

The Labor Department said on Friday its Consumer Price Index, excluding the volatile food and energy components, increased 0.3 percent last month. That was the biggest gain since August 2011 and followed a 0.2 percent rise in December. In the 12 months through January, the core CPI advanced 2.2 percent, the largest rise since June 2012.

The CPI underlines some of the issues that the Fed is facing. Beneath the surface of oil price volatility, core CPI has been rising steadily for the past year and was over 2 percent in December

When you look at this from an economist’s standpoint, it is the steady rising core PCI that asks for attention. A trend increase suggests building underlying inflation pressures.

For investors it is important to keep in mind the ongoing, at least so far, core inflation pressures in the U.S. are a U.S. phenomenon and “correlations” of core inflation rates are extremely low “globally,” suggesting where inflation is occurring it will be primarily local in its driving factors and its overall nature.

This is important as many investors have gotten confused by the fact we are in a global dis-inflationary environment because of extremely low commodity prices of which oil stands out, but that doesn’t mean the rest of the economy, for example in the U.S., core CPI for the service sector, which represents about 75 percent of the economy, has a core CPI of close to 3 percent.

So when St. Louis Fed President Bullard, a dove of the FOMC, said “I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,” I must admit I found this really a strange argument to make, for the very simple reason market inflation expectations can only be important if the market is normally right in its inflation expectations or if market inflation expectations cause a change economic behavior. Neither of those things is true at present.

That said, the recent surge in credit in China the record levels seems finally to be causing some concerns on the mainland.

Newswires reports have the People’s Bank of China (PBoC) raising Reserve Requirement Ratios (RRR) for those banks that indulged to aggressively in the joys of lending. This is the normal micro management of the Chinese economy. A degree of interference and control that other Central Banks can only dream about.

It becomes now somewhat clearer authorities are trying to manage the economy so that it does not flounder on the rocks of weak growth, but at the same time guarantee it avoids the whirlpool of a credit bubble. Please keep in mind this will not necessarily be a terribly easy process.

China isn’t out of the woods yet and a rocky landing is still a possibility, which doesn’t mean it’s a probability.

(Newsmax wire services contributed to this report).

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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HansParisis
The U.S. economy is far from brilliant but America is certainly not falling of that proverbial cliff.
economy, investors, fed, stocks
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2016-21-19
Friday, 19 Feb 2016 09:21 AM
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