The Fed is ready to hike its rate in December

The Federal Reserve continue to think that the long term value of the fed funds follows a downward adjustment trend. This reflects an almost pessimistic perception of the US economic trend even if no recession is expected.
In the short run the Fed expects to being able to increase its rate in December 2016 without creating damage on the economy. The US central bank wants to catch some degree of freedom in the way it manages its monetary strategy. But a hike in December doesn’t mean a strong upward trend for 2017.

The Fed’s message is almost pessimistic on the long run as it expects the level of its rate (the fed funds rate) will follow a downward adjustment. Last June this long term level was anticipated as being at 3%. In September it is expected at 2.9%.
The Federal Reserve thinks less and less that the economic cycle will converge to its pre-crisis features. It’s important as it reflects a kind of secular stagnation with low growth and limited inflation in the long-term. If we follow the Fed’s forecasts then we see that the nominal GDP growth is never expected to be above 4%  Before 2007 it was fluctuating between 4 and 6%. The Fed thinks that the US economy will not go back to this corridor and that’s the main reason for low interest rates. Continue reading

4 graphs to understand the US inflation rate

The inflation rate was  1.1% in August, close to the average seen since the beginning of the year (1.1%). The core inflation rate was at 2.3% the highest number since last February.

The surge in the core inflation rate can be decomposed between Housing and the rest of the index.
The following graph shows the Housing contribution to the inflation rate and the core rate contribution to the inflation rate. The Housing contribution explains more than 60% of the core contribution to the inflation rate. This the weight of the housing sector that makes a difference with the PCE index followed by the US central bank. It corresponds to a very different methodology.  This means that all the other components of the core price index explain only 40%.usa-2016-august-housing.png
In the 40% it is interesting to see each sub index contribution. We see a strong contribution from the Health price index. All the other contributions are low and some are declining.
OK the core inflation rate is up to 2.3% but only through strong contributions from the Housing sector and from the Health sector. The first reflects the higher real estate price and a catch up effect. The real estate adjustment seen on the graph below is beyond the CPI issue. The Health index price is up but this is not a market price.
As all the other sub indices in the core price index are not accelerating we can say that the core inflation rate has a bias on the upside linked to Housing and Health but this doesn’t reflect tensions inside the US economy. That’s why the Fed must be careful in the way it takes this index (which is not its favourite) into account.

Gloomy Summer for Growth in the US

After the deep drop in the ISM surveys for August (see here and here) we have had two new important data.
Retail sales were down by -0.3% in August after +0.06% in July and core retail sales were down -0.1% in July AND in August. Therefore carry over growth for Q3 at the end of August was 1.8%% at annual rate (after 6% in Q2) for retail sales and 0.7% for core sales after in Q2. Q2 data were exceptional and not the beginning of a strong trend.
The risk is a low contribution of households’ consumption to GDP quarterly growth. Households’ expenditures were a strong support for GDP in the second quarter. This will probably not be the case for Q3. This means a probable downgrade of growth for 2016. We were at 1.4% for the whole year, it will probably be lower.


After a rebound in July (+0.6%), the industrial production index was down in August (-0.5%). For the manufacturing index data were -0.4% and +0.4% for August and July. Therefore carry over growth for Q3 at the end of August is a modest +2.3% (at annual rate) for the industrial index (after -0.6% in Q2) and for the manufacturing index data were +0.7% and -1% respectively. The momentum is still low. The YoY comparison shows that the industrial index is down by -0.7% and the manufacturing index is up by just 0.1%.

After the ISM, employment it is now retail sales that follow a weak trend while the industrial production index is neutral. Where is the risk of an overheating economy mentioned recently by Eric Rosengren from the Boston Fed. It was a cool summer in the US and the Fed has absolutely no reason to change its monetary policy at its next week meeting

United Kingdom – Households continue to spend

Retail sales were marginally down (-0.17%) in August after a strong improvement in July (+1.86%). Therefore the carry over growth for the third quarter at the end of August is 6% at annual rate.
The first graph shows that the trend that started at the beginning of 2014 is still strong and not broken
The second graph shows that with the strong sales figures in July and August we can expect a large households’ consumption contribution to GDP growth for the third quarter.
Brexit is still not there and consumers take advantage of that (see here why the Brexit has no effect yet on the UK economic situation)


The ISM global index at its lowest since January 2010:The Fed can rest at its next meeting

The non-manufacturing index from the ISM survey was down more than 4 points at 51.35 in August. The sector is growing but at a slower pace. It’s its weakest level since February 2010.
With the retreat of the manufacturing sector at 49.4, the current outlook for the US economy is more fragile.
Continue reading