SHI 10.24.18 Give and Take

SHI 10.17.18 That’s Quite a JOLT!
October 17, 2018
SHI 10.31.18 So Good its SPOOKY!
October 31, 2018

“Hey there, you hard-working employees:  I’m sorry to tell you this, but the FED is not your friend.  They may get you fired.”

 

The FED has one job:  They are charged with steering the US economy toward consistent growth for a VERY long time.  Decade after decade.

They have a simple mandate:  Achieve the maximum possible employment level while, at the same time, restrain inflation to a reasonable level.  Today, ‘reasonable‘ is defined as 2%.   Economists, FED Bank Presidents, business titans, politicians, and policy makers all “get” this.  And they understand the implications of this paradigm:  When the FED raises rates to cool the economy (and thereby restrain inflation), people will lose jobs.  Lots of people.

Academically, I get it too.  Perhaps the outcome of this perpetual battle between inflation and employment is inevitable.  Perhaps this is the price we, collectively, must pay.  But while Wall Street may have an inherent understanding of this relationship, I suspect that many of the employees on Main Street do not.  I suspect most don’t have a clue.   Let’s look at the facts.

 

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 about $80 trillion today.  US ‘current dollar’ GDP now exceeds $20.4 trillion.  In Q2 of 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economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released.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:

Look, I get it.  I understand that the ‘greater good’ of the country must be the FEDs primary mandate.  I get it.

But must those folks that were hired in the past year or two of this growth cycle pay for the greater good by losing their hard-earned jobs?   Historically, this seems to be the reality.

I’ve taken data from the past four (4) FED rate cycles.   The most recent 4 cycles (each started when the FED began their programmatic rate increases) kicked off around January of 1980, January of 1988, January of 1999, and June of 2004.   The chart below shows both the FED funds rate (when the rate increase cycle began) AND the non-farm payroll (employment) number on three (3) different dates:  First, the time when the increase cycle began; second, when the rate increase peaked and went no higher; and finally, when the FED funds rate hit its next “bottom” or trough.

With the sole exception of the 1988-1992 cycle, in every case jobs were lost.  You may have noticed this:  Job growth tends to continue during the increase cycle … but falls off precipitously by the time the FED has once again lowered rates to the floor.

The date the FED started lifting rates — in all cases — does not necessarily correlate with the date a recession began.   Recessions, too, generally seem to lag the FED rate-increase cycles.  In 1980, the two were somewhat simultaneous.  But recessions did follow the FED rate cycles that began in January of 1988 and January of 1999, but not for about 1 to 2.5 years.   The ‘Great Recession’ of 2008 began about 2 years after the increase cycle start.

Could the FED achieve their mandate while, at the same time, protect the folks on Main Street from disaster?  I contend they could do a better job.  How?  Slow the rate of increase.  I believe it’s not the rate increase cycle — itself — that triggers a near-term recession.   It’s the speed of the increase.  In our current cycle, I feel they should stop, now, and take a more ‘data dependent’ viewpoint for possible future increases.

Are there dangers of lifting rates too slowly?  Absolutely.  Inflation could get away from them.  Which causes a whole different set of problems.   So while I’m sitting high up here in the cheap seats, castigating the FED for causing good people to lose their jobs, I understand their job is unbelievably difficult.  Perhaps even impossible.

The Talmud contains a famous quote:

“…. it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.

Perhaps the same can be said about the FEDs challenge here.  Perhaps its easier for a camel to go through the eye of a needle than for the FED to prevent job losses while constraining inflation.  But I would suggest they could try harder.

All right, I’m off my soap box.  Let’s head to the steak house!  This weeks SHI10 is almost identical to last weeks.  Take a look:

While pricey steakhouse reservations became quite popular in Chicago this week, NYC seems to have fallen off the map.   Philly saw some improvement, but most other markets were about the same.  Our steakhouse grills are definitely on ‘simmer.’   Here are the results of this week’s survey:

The underlying theme of the SHI is unchanged:  I believe the level of reservation demand at the priciest of steakhouses in large cities around the country is a barometer for the overall health of the consumer.  And as consumer spending makes up almost 70% of the US economy, it bears watching.

So does the FEDs ‘Beige Book’ that was released just hours ago.  In a nutshell, most of the FED districts are reporting “modest to moderate growth.”  Some districts, however, “indicated that firms faced rising materials and shipping costs, uncertainties over the trade environment, and/or difficulties finding qualified workers.”  These are factors we’ve talked about before; this is nice validation.

The bottom line:  For now, full steam ahead.  Things are hopping.  Steaks are selling.  Life is good!  For now.

  • Terry Liebman

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