Economics | Weekly Economic Report Macro Note
Last WEEKLY ECONOMIC SUMMARY Of The Decade: A Good Decade, Year, and Week.
December 29, 2019Sean Zhang, [email protected]
Dick [email protected]
Francesca [email protected] Nakajima
[email protected] [email protected]
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Last WEEKLY ECONOMIC SUMMARY Of The Decade: A Good Decade, Year, and Week.1. Beyond a reasonable doubt, global monetary stimulus
is significant and ongoing, and it’s being applied to a US economy that is doing well.
2. The US economy ended the year with ok Holiday Sales, consumer confidence in record-high territory, and record highs for both stock prices and house prices. EVRISI company surveys ticked down last week but remained elevated, and EVRISI Christmas tree sales survey for the four-week season was up a record +13% y/y.
3. The six years since 1949 with S&P increases of +29% or more were ALL followed by stronger real GDP growth the next year and higher S&Ps. The most important thing here is that faster real GDP growth is likely to lead to increases in S&P earnings.
4. Judging by EVRISI’s hedge fund survey last week, investors are still defensively positioned.
5. The fact that we’re almost 11 years into this upturn is hard to shake as a negative. But given where rates
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and inflation are, we believe that a recession is still years out.
The biggest risk for 2020 is a significant acceleration in inflation.
Very best regards,
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SUMMARY
Global Monetary StimulusKeep in mind that monetary stimulus works with lags of one to two years.
Global Short Rates have declined -50bp over the past year. Fed funds have declined -75bp over the past year. Fed funds are now below bond yields, ie, the yield curve is
positive. Money growth in the US last week accelerated to a rapid +7.6%
y/y (see below). Fed, ECB, and BoJ balance sheets are simultaneously
expanding. China’s RRR is likely to be cut -50bp on Jan 10 to 12.5%, down
-450bp over the past two years (see next page).
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Global Monetary Stimulus ContdThis -450bp decline in China’s RRR over the past two years is a positive for growth in 2020.
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U.S. Economy Entering 2020 At A Solid PaceEVRISI company surveys ticked down last week but at 52.9 are still elevated, consistent with well over +2.5% real GDP growth. And they appear to have bottomed.
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U.S. Economy Entering 2020 At A Solid Pace ContdBloomberg’s survey of consumer confidence increased last week to a reading in record territory. In some ways, this is remarkable given the negative nature of our national discourse, impeachment, the presidential election, and trade concerns. But in other ways, it’s not remarkable given the strength in employment, the low level of unemployment, record high stock prices, and increases in wages at the same time inflation is low.
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U.S. Economy Entering 2020 At A Solid Pace ContdTo be sure, there is significant disparity in confidence between low income and high income consumers. However, low income confidence has increased significantly, and Middle-America incomes in the $40k to $75k range have confidence at about the overall average level. This seems to be a healthier situation than is generally discussed.
The rising tide is lifting all boats.
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U.S. Economy Entering 2020 At A Solid Pace ContdA key to continued growth in 2020 is employment.Last week our contacts at temp & perm employment agencies told us that business was great! And last week unemployment claims declined and were in record-low territory. So employment is entering 2020 on solid footing.
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U.S. Economy Likely To Improve In 2020History suggests that accelerations in Consumer Net Worth lead accelerations in GDP by about a half year. Stock prices and house prices were both up last week, and CNW was probably up around +10% y/y.In addition, history suggests that declines in mtg rates lead by about a year to acceleration in GDP. Mtg rates over the past year have declined about -100bp. In any event, the past six times the S&P has increased +29% or more in a year, real GDP has accelerated in the next year. And no doubt related to the accelerations in GDP the “next year”, the S&P has had strong “next years”.
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U.S. Economy Likely To Improve In 2020 ContdAnother perspective: rallies in this global market cap index have been associated with accelerations in US real GDP.
The current rally is likely to reverse this Third mini-recession.
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U.S. Economy Likely To Improve In 2020 ContdYet another perspective: after fed funds were cut for a third time in Jan of 1996, the economy accelerated.
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U.S. Economy Likely To Improve In 2020 ContdThe upturn in industrial commodity prices is probably anticipating an improvement in global in 2020. And the decline in the BAA SPREAD suggests real GDP accelerates in the first part of 2020.
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U.S. Economy Likely To Improve In 2020 ContdOf course, an improvement in China’s economy in 2020 would be helpful for an improvement in the US. In that regard, it’s encouraging to see oil prices edging up because they increase the odds that China’s PPI edges up. Swings in China nominal GDP are correlated with swings in China’s PPI.Th
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U.S. Economy Likely To Improve In 2020 ContdThis chart is the average of EVRISI surveys of China company sales, Europe company sales, and US. It’s moving up going into 2020, appearing to mark the low for this Third mini-recession.
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U.S. Economy Likely To Improve In 2020 Contd
And at least three world leaders have a pressing need for solid growth in 2020:
Trump wants the US economy to be doing well in the run up to the election of Nov of 2020.
Abe wants Japan’s economy to be doing well in the run up to the 2020 Summer Olympics.
Xi wants China’s economy to be doing well in the run up to the 100th anniversary of the Communist Party in July of 2021.
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Perpetual Motion Machine?The great economist and MIT professor Rudi Dornbusch explained that:
Expansions do not die of old age, they’re murdered by the Fed.
It’s probably better to think about expansions in terms of economic characteristics, not time.Expansions are not like people, who inexorably age and die.Expansions become self-sustaining, like a perpetual motion machine that goes on and on until something stops it.In the past, that something has been an acceleration in inflation that the Fed tries to stop and, in so doing, ends the expansion. Perpetual motion involves, for example, an increase in employment which leads to an increase in consumer spending, which leads to an increase in company sales, which lifts corporate profits, which leads to an increase in employment, etc, etc. This machine eventually overheats! Demand exceeds supply of goods and services, or wages accelerate, or both! Interest rates go up. At the end of previous expansions, bond yields have been much higher than they are today.
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Perpetual Motion Machine? Contd
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Inflation Risks In 2020“Short supply of labor, minimum-wage rises, and increased poaching have helped lift wages for lower-income workers.”
“At Mooyah Burgers wages increased 9% in 2019.”
EVRISI pricing power surveys have increased, although they are still below 50. Stay tuned.
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Inflation Risks In 2020 Contd
So we’re on the lookout for inflation. But so far it’s not a problem. And it’s likely that when it’s becoming a problem, bond yield increases will surprise on the upside. That’s not happening now.
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Room To RunThe US participation rate of 16 and over is being held down as Baby Boomers retire. But the participation rate of ages 16-65 has increased significantly, which helps explain why the unemployment rate for ages 16-65 is 4.2%, ie, higher than the national 3.5%. This also helps explain why wage gains have been restrained. The 16-65 participation rate still has room to run and probably will.
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A Good DecadeThe S&P is on track to surge +191% in the past decade.
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A Scary PerspectiveThe Wilshire at $33t in 4Q is 52% greater than nominal GDP of $22t.
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Most Economic Releases LikelyTo Beat Consensus This Week
Vehicle sales probably accelerated to 17.2m in Dec, somewhat above the consensus. Home price gains, which have slowed over the past year, likely posted a solid increase of +0.7% m/m for the FHFA home price metric. But the most important release for the week is the ISM mfg PMI. The regional Fed surveys suggest some firming for the mfg PMI, and we estimate it climbed to 48.7% in Dec (Markit already released its “flash” mfg PMI for Dec at 52.5%). Unemployment claims probably fell to 215k for the week ended Dec 28, as the influence of the late Thanksgiving holiday unwound. Overseas, it’s a quiet week following the Christmas holiday. We estimate both German unemployment and their y/y CPI rose in Dec.
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