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Weekly Economic Release Summary: Does The Fed Understand Inflation?


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Most inflation forecasts are simply educated guesses.

People talk more about things they do not understand. As an example in the Participant's Views section of the last Federal Reserve FOMC meeting minutes, the word inflation was used 76 times whilst the words "economic activity" was used only 12 times. "Economic Activity" are the words the FOMC uses to describe how the economy is doing.

Here is the bottom line on inflation from the FOMC meeting minutes:

Participants continued to view inflation near the Committee's symmetric 2 percent objective as the most likely outcome, but, in light of recent, softer inflation readings, some viewed the downside risks to inflation as having increased. Some participants also expressed concerns that long-term inflation expectations could be below levels consistent with the Committee's 2 percent target or at risk of falling below that level.

Does it seem like the FOMC is approaching inflation analytically - or is inflation forecasting by the Fed just an educated guess?

The Feds actions to "control" inflation can provide the wrong result.

According to ECRI Co-founder Lakshman Achuthan:

Both the Fed and the bond market have been way behind the curve in anticipating the inflation cycle downturn, and the plunge in the market's inflation expectations tells you that's the key reason yields have plummeted.

ECRI's U.S. Future Inflation Gauge, or FIG, was far more prescient. It leads inflation cycle turning points - and in fact, also leads inflation expectations, as shown in the chart. The FIG turned down in early 2018, and by last summer it was clear to us that a fresh inflation cycle downturn was at hand.

Certainly, that inflation cycle downturn wasn't obvious to the Fed, which hiked in September and December.

And the bond market was also caught flat-footed, with market inflation expectations - the spread between 10-year treasury yields and 10-year TIPS yields - remaining high through late fall. These exaggerated inflation expectations made bond market "royalty" pound the table about a bond bear market, pushing treasury yields near 3¼%, while prominent Wall Street houses went so far as to predict four rate hikes in 2019.

The subsequent plunge in treasury yields until the Powell pivot in January - as well as the last more recent freefall - was driven largely by plummeting inflation expectations.

That downturn was clearly anticipated by ECRI's FIG, which has stayed in a cyclical downturn for 15 months. In its latest reading, the FIG has dropped to its lowest reading in over three years.

The bottom line is that the U.S. inflation cycle - a concept that most economists, including those at the Fed, don't seem to understand - will stay in a downturn. And it's really this lack of understanding of the inflation cycle that was behind the Fed's abrupt about-face early this year.

This week the Consumer Price Index, Producer Price Index, and the Import/Export Price Index were released. And yes, all three moderated - and continued their downward trends which began almost one year ago.

A few pundits have even thought the U.S. could be entering a deflation cycle. I see no evidence yet of deflation.

Economic Forecast

The Econintersect Economic Index for June 2019 long term decline began in July 2018 - and continued this month. This forecast flies in the face of the continuing improvement trend of Real GDP. There currently is a disconnect between GDP and the EconintersectEconomic Index. Part of the reason is that GDP adjusts for trade, and we believe imports are an essential element of economic activity on Main Street. Further, GDP believes economic activity includes inventory, whilst Econintersect ignores inventory. If imports and inventory were ignored - GDP growth would have been less than half of the headline number.

Economic Releases This Past Wee

The following table summarizes the more significant economic releases this past week. For more detailed analysis - please visit our landing page which provides links to our complete analyses.

Economic Release Summary For This Week

ReleasePotential Economic ImpactComment
April JOLTssays employment growth will slow

The BLS Job Openings and Labor Turnover Survey (JOLTS) can be used as a predictor of future jobs growth, and the predictive elements show that the year-over-year growth rate of unadjusted private non-farm job openings was relatively the same as last month.

The unadjusted data this month remained well below average for the rate of growth seen in the last year. With this low average rate of growth, JOLTS is predicting lower employment growth than we have seen over the past year. Jolts predicted the slowing of employment growth.

May Conference Board Employment IndexInflation-adjusted growth in contraction

The Conference Board's Employment Trends Index - which forecasts employment for the next 6 months improved with the author's saying "The Employment Trends Index increased in May, more than reversing the declines in March and April".

Econintersect evaluates the year-over-year change of this index (which is different than the headline view) - as we do with our own employment index. The year-over-year index growth rate accelerated by 1.7 % month-over-month and grew 3.5 % year-over-year. The Econintersect employment index declined. Remember, both of these indices are predicting lower growth 6 months from now.

May Producer Price Indexn/a

The Producer Price Index (PPI) year-over-year inflation declined from 2.2 % to 1.8 %, Despite being in trade wars, the PPI has declined. Trade wars have both positive and negative impacts on prices.

May Consumer Price Indexn/a

According to the BLS, the Consumer Price Index (CPI-U) year-over-year inflation rate was 1.8 % year-over-year (higher than the reported 2.0 % last month). The year-over-year core inflation (excludes energy and food) rate improved from 2.1 % to 2.0 % and is at the target set by the Federal Reserve.

Energy was the main reason inflation declined. Medical cost inflation rose from 2.3 % to 2.8 %year-over-year - and was the highest increase in May.

May Import/Export Prices

n/a

Import and export pricing declined and is now the lowest in the last 12 months.

May Sea Container Countssuggests a slowing economy

The May year-to-date import/export container count growth rate remains in contraction.

Simply looking at this month versus last month - this was a marginally stronger month for exports and a weaker month for imports. The rate of growth slowed for imports and increased for exports. Still, year-to-date growth for both imports and exports are deep in contraction.

The three-month rolling averages for exports and imports improved but both are in contraction.

Imports container counts give an indication of the U.S. economy's state and the soft data continues to indicate a weak economy. Exports are saying the global economy is weak as well.

Container data is consistent with other transport data indicating a weak economy.

May Retail Salesgood improvement this month

Retail sales improved according to US Census headline data. The three-month rolling average improved, and the downward trend in the data seems to have been broken.

There was an upward adjustment of last month's data. Although the unadjusted data declined this month, the real test of strength is the rolling averages which improved.

May Industrial Productionrolling averages still declining

The headlines say seasonally adjusted Industrial Production (IP) improved month-over-month. Our analysis shows the three-month rolling average declined.

There was generally downward revision to the last 6 months of data. The best way to view this is the 3-month rolling averages which declined. Industrial production remains in a downtrend even with the improvement this month.

Note that manufacturing is barely in expansion year-over-year.

April Business Inventoriesmaybe decline in business sales has ended

Headlines show final business sales data (retail plus wholesale plus manufacturing) declined. However, the rolling averages significantly improved. Inventories remain very elevated.

Inventories remain at recessionary levels. Our primary monitoring tool - the 3-month rolling averages for sales - improved. As the monthly data has significant variation, the 3-month averages are the way to view this series. Overall business sales are better than the low point in 2015 - but is below average for the values seen in the last 2 years.

Surveysconsumer and business optimism relatively high

NY Fed Consumer Expectations - The May 2019 Survey of Consumer Expectations, which shows a decline in short- and medium-term inflation expectations. Households were generally less positive about their current and future financial situation, even though their average earnings growth and job finding expectations improved. Consumers see an increase in the average interest rate on savings accounts over the next year as less likely, with its average likelihood declining to the lowest level since October 2016.

NFIB Small Business Optimism - Small business optimism eclipsed pre-shutdown levels, increasing 1.5 points to 105.0 in May. Six components in the Small Business Optimism Index improved, three were unchanged, and one dipped. Capital spending plans increased along with actual outlays.

Michigan Consumer Sentiment - The preliminary University of Michigan Consumer Sentiment for June came in at 97.9 - down from the May final of 100.0, and up from the April final of 97.2.

Weekly Rail CountsDefinitely not positive news

Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Economy



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