What's Up With The Economy?
Here are some recent trends we have been keeping an eye on in this economy
Cryptic Fed Chair Warsh
Slow Growth and Cool Labor Market
Yen, AI, and The Stock Market
The Fed Decision
The Fed met last week. While most talked about the split in the decision to hold interest rates steady — three dissents wanted higher rates — I walked away more frustrated with the lack of forward guidance from Fed Chair Warsh.
After the last meeting, I talked about how positively surprised I was by Warsh’s commitment to stable prices. I thought he would give in to the pressure to reduce interest rates but was happy to see his hawkish approach.
Since then, Warsh’s communication strategy has raised concerns. The lack of forward guidance troubles me. Warsh argues that it’s better to leave it out and let markets decide for themselves. Claudia Sahm, my go-to expert on the Fed, said in May that she “almost fell out of my chair” at the definiteness of Warsh’s statement: “I don’t believe in forward guidance.”
Since then, in a conversation with Marketplace last week, she suggested that she wasn’t as concerned with the lack of forward guidance but is concerned about transparency in how the decisions are being made.
Then this week, Fed Chair Kevin Warsh raised the possibility of changing the frequency of the central bank’s regular policy meetings. His proposal would cut the meetings from eight to six a year.
There are several concerns here. First, I’m a big believer that more data is better than less. I see forward guidance as more data to share with the market, which the market can then process as it wishes. Eliminating the guidance reduces information clarity and creates more opportunities for market mispricing.
Similarly, reducing the number of meetings reduces how often the Fed shares information with the market. It also makes it harder for the Fed to react to changes in the global economy. And the Fed’s ability to respond to market dynamics is critical to minimizing volatility.
The Fed is scheduled to meet Sept. 15-16. Warsh remains cryptic about which way he wants to move forward and what data he relies on to make his decisions.
As we navigate Q3 and Q4, I am expecting more market volatility. Not just because of the global political environment, but because of the market being forced to anticipate the Federal Reserve's actions and thoughts.
Slow Growth and Cool Labor Market
Based on second quarter data, Real GDP growth came in at an annualized rate of 1.5%. That is a slowdown from the 2.1% growth rate in Q1. Growth in consumer spending went from 0.5% to 3.2%, with durable goods up 6.8%. The headline number is telling you the opposite of what's actually happening at the register. Consumers continue to keep the U.S. economy going.
Federal government spending decreased by 4.1%, with most of that decline coming from nondefense spending. Finally, nominal GDP increased by 7.9%, meaning that inflation has taken a bite out of the economic growth.
It’s jobs report week. We have several data points to read through this week.
Job openings and Labor Turnover Survey on Tuesday
ADP employment report on Wednesday
Weekly Jobless Claims on Thursday
and, the Employment Situation Report on Friday
Yen, AI, and The Stock Market
Markets have created some news lately. News has ranged from Korea’s stock market collapse, the depreciation of the Yen, to SpaceX’s revenue beating expectations (the company is still losing money).
Here is a video explainer on what happened with the Yen and why the U.S bailed out Japan. I would love it if you followed me and Decode Econ us on Instagram.