SHI 07.11.18 Will the FED Quit Early?

SHI 07.04.18 Fireworks Galore
July 4, 2018
SHI 07.25.18 Where’s the Beef?
July 25, 2018

“Atlanta FED President Raphael Bostic is worried.”

 

It’s interesting and perhaps a bit confusing:   On one hand, the July 6 Atlanta FEDGDPNow‘ forecast remains a robust 3.8% for Q2.  On the other hand, a few weeks ago Mr. Bostic shared concern that a flattening yield curve, or even a perceived flattening of the yield curve, could trigger a recession.  Remember, in a recession, GDP growth is negative.  GDP shrinks.

Which is it?  Is the future rosy and the FED should raise short term rates 2 (or more) times this year?   Or might a flat — or even inverted — yield curve end our 9-year economic expansion?  Thus ending FED rate increases, and possibly ushering in FED rate cuts?

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/


Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   This has been the case for decades … and will continue to be true for years to come.

Is the US economy expanding or contracting?

According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is almost $80 trillion today.  US ‘current dollar’ GDP almost reached $20 trillion during Q1, 2018.   We remain about 25% of global GDP.    Other than China — a distant second at around $11 trillion — the GDP of no other country is close. The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.


Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.


The BLOG:

Atlanta Fed President Raphael Bostic is worried about the flattening yield curve.   The flattening curve “is not something we can afford to be too cavalier with and think this time is different,” he said.   He went on to  say that market perception that the curve is inverting “could trigger its own response that would increase volatility.”

In his book “Sapiens: A Brief History of Humankind,” Ynval Harari discusses “Level II chaotic systems.”   Mr. Bostic is talking about precisely that topic with his comment.   In the book, Harari suggests, “Level two chaos is chaos that reacts to predictions about it, and therefore can never be predicted accurately.”

Fascinating.  In other words, the prediction itself changes the outcome.   If the prediction were not made, the outcome would likely be different.

You’ve heard the phrase “self-fulfilling prophesy.”  This is the same concept.  The number of times the word “recession” appears in the press changes the way our economy is perceived, possibly ushering in the recession everyone worried about.  Apparently, Mr. Bostic feels widespread prediction of an inverted yield curve may have similar market-changing power.  Apparently, he feels this is a ‘Level II type’ prediction.   I agree.  Widespread discussion of the topic, and predictions for the end of the current expansion, could, in themselves, cause the outcome the forecasters fear.

If the curve actually inverts, the fear of recession alone could cause a recession.   So the FED has to wrestle with both economic fact and perception when considering future rate increases.  Remember, they don’t want to push the US economy into a contraction, but they want to prevent overheating as well.

Is the US economy in danger of overheating?   The most prevalent concern in the press, and at the FED, is the fear of explosive wage growth as the US unemployment rate falls to levels not seen in decades.  Make no doubt, this is a valid concern.   As I’ve made patently clear in prior blog posts, it’s not an opinion I share … but that doesn’t make it any less concerning.

In a newly published paper entitled “Understanding U.S. Wage Dynamics” by two gents at the International Monetary Fund (IMF), they summarized their thoughts as follows:

“In this paper, we undertake empirical analysis to understand U.S. wage behavior since the beginning of the new millennium. At the macroeconomic level, we find that a productivity-augmented Phillips curve model explains the data fairly well. The model reveals that the upward pressure on wage growth from recent tightening in the labor market has been dampened by a persistent decline in trend labor productivity growth and the share of income that accrues to labor. These themes are reinforced and complemented at the micro-economic level. Lower regional unemployment puts an upward pressure on wages of individuals, although this effect has become weaker since 2008. But there is downward pressure on wages for individuals with occupations that are exposed to automation and offshoring, and in industries with a higher concentration of large firms.  All these factors appear to play a role illustrating why it is difficult to single out any one culprit for the observed wage growth moderation.”

Permit me to interpret:   US wage growth isn’t accelerating as economic theory suggests it should be right now.   Automation and “off-shoring” are depressing US wages — or, at the minimum, holding down the growth rate.  Further, the authors suggest we’re seeing “declining contribution” from labor productivity.

See the green bar to the right?   Notice it rests below zero.  Meaning this component is detracting from wage growth.  This green bar is the share of labor required to produce a “unit” of output.  That share is falling.  And it’s been falling every year shown — since 2000.  Labor demand, as a unit of production, is falling.

If you’re interested in reading the IMF paper, here’s a link (remember to ‘right click’ and open the link in a new window):

http://www.imf.org/en/Publications/WP/Issues/2018/06/15/Understanding-U-S-45992

The FED is aware of these facts.  And they clearly know, and clearly have some concern, about the power of actual and perceived yield curve inversion.

So what will they do?  They will continue to talk tough, commenting on strong current growth and wage concerns, but meeting-after-meeting, they will sidestep further rate hikes.  Until only one 2018 hike remains.  We will see 1 additional FED rate hike this year.  Probably in December.   My opinion.

All right, let’s head to the steakhouses.   We have a couple of week’s data to review.  Here is the 10-city grid from last week:

 

As you can see, the SHI10 reading was a negative (155).  Reservation demand for this Saturday past in all the east coast cities — NY, Boston and Philly — was extremely low.   Only Boston had a few unavailable time slots.   Demand in Seattle remained strong, albeit not as strong as prior weeks.  Let’s see how reservation demand looks this week:

A bit stronger … but still weak by historic standards.   Here’s the long term trend report.  Note I’ve modified the format a bit:

 

Demand for reservations in Orange County opulent eateries has been fairly consistent in the past 6 to 8 weeks.  The same is true in Seattle, but as noted above we’ve seen demand degrade a bit.  For some reason, pricey T-Bones have been out of vogue in Philly, Boston and NYC for some time now.  After 28 weeks of SHI10 readings this year, we’ve seen only 5 positive readings.   Mother’s Day was clearly a huge reservation driver.  Otherwise, expensive steaks and bottles of wine are not exactly flying off the shelf.  Once again, the SHI10 is suggesting continued muted “consumer consumption” activity by the American public.

One final word on the SHI “hack” last week.   This site, https://www.steakhouseindex.com, is hosted on GoDaddy.  After the “hack” and a lot of work by GoDaddy, WordPress and yours truly — and a fair amount of money — I’m told all viruses have been detected and are now deleted.   How many?  132 in total.  I mention this as a cautionary tale:  As I’ve learned, my security settings and firewall were woefully deficient.  This has all been corrected.  And now, you’ll be pleased to hear you are protected by SSL technology!   🙂

And now a final, final word:  I will be on vacation next week.   So while we will gather SHI data, I will not be posting.   I’m “off” for a week — and so are you!  Thanks.

  • Terry Liebman

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