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The Fed Reports A Sluggish Economy
From The Daily Capitalist
The Fed came out with its Beige Book, a summary of economic activity for June to mid-July in all of its twelve districts. The report overall noted "modest" growth if not slowing growth. According to their report:
Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady. Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.
Of note in their report:
Commercial and industrial real estate markets continued to struggle in all twelve Districts. Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents.
Nearly all Districts reported sluggish housing markets in the months since the homebuyer tax credit expired on April 30.
Reports on retail sales during the early summer months were generally positive, although in most Districts the increases were modest.
Manufacturing activity in most Districts continued to move up since the last report, although the pace of activity slowed or activity leveled off in the New York, Cleveland, Kansas City, Chicago, Atlanta, and Richmond Districts.
Reports on banking conditions were largely mixed across the Districts.
Most Districts reporting on credit standards continued to note that lending standards remain restrictive.
The Fed doesn't like to sound too negative in its reports, and it won't indicate a slowing until we are well into it. I have reported that a slowing economy is a trend. Chairman Bernanke said last week:
[That] there was "unusual uncertainty" over the economy's outlook. He told Congress the Fed, which has already slashed interest rates close to zero, was ready to take further measures to support the economy if necessary. ...
The U.S. economy shed jobs in June for the first time this year and the unemployment rate remained high, adding to concerns that the pace of the recovery could slow in the second half.
Also today, the report on durable goods orders came out:
The manufacturing sector sputtered in June, according to new durables orders. New factory orders for durable goods in June fell 1.0 percent, following a 0.8 percent drop the month before. The June numbers fell well short of market expectations for a 1.0 percent boost. The June decline was led by the transportation component. Excluding transportation, new durables orders slipped 0.6 percent, following a 1.2 percent gain in June.
Durable goods are an indicator of future business spending.
Courtesy of the Wall Street Journal
On Wednesday a consumer confidence report from the Conference Board was quite negative:
Consumer confidence dipped in July-again over worries about the jobs picture and over income prospects. The overall consumer confidence index slipped to 50.4 in July from an upwardly revised 54.3 in June (initially 52.9). Analysts projected July to print at 51.0. The latest decrease was led by a drop in expectations to 66.6 from 72.7 in June. But the present situation sub-index also declined-to 26.1 from 26.8.
Courtesy of the Wall Street Journal
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Snidley ..... what is the " nuclear option " ? ...i see the FED as being nearly out of bullets and no new tricks ( ie QE2.0 )
The first poster did not define the 'nuclear option'. I assumed that he meant unlimited printing of dollars and treasury issues...as in much more quantitive easing.
Please correct me if I misunderstood.
New term: Flee market.
New term: Flee market.
"growth is sluggish but the FED is willing, able, and policy-motivated to utilize the "nuclear option" before letting asset prices fall too much, so consider yourselves warned. don't fight the Fed. it sounds nice and cheeky to do so, but the game will not be won by those betting against the current policy decisions."
I am certain that the FED is willing and policy motivated to utilize the 'nuclear option' but I do not believe that the FED is able to do so.
Good credit risk borrowers are unwilling to borrow and banks are increasingly unwilling to lend to those with poor credit histories. These conditions are true for individuals and small businesses alike. Credit contraction is outstripping new credit creation by a huge margin and a QE2, 3, or 7 is not going to change anything in the real US Main St economy. QEs will help the financial sector, the second or 'unreal' US Economy.
Of course the FED/treasury has the option of sending money directly to citizens but the last time that was tried most of the money was used to pay down existing debt or put in savings. Consumer spending did not increase a significant amount, there was no kick start to the Main St economy after the stimulus checks were used, so the outcome was deflationary as debt was paid down and retired...money vanished from the system but the debt created to send checks to individuals remained. The money vanished but the interest payments didn't.
The FED can exercise the nuclear option if it wishes but unless the velocity of money increases in the real economy, real consumer spending, FED printing will accomplish little except a devaluation of the dollar against other currencies, an increase in the cost of commodities denominated in inflating dollars and an increase in the amount of interest demanded by purchasers of US Treasury issues when the bond market sees that 'temporary Keynesian policy' has become permanent Keynesian policy and QEs will continue until the economy is destroyed.
The stock market? Of course there would be some short term benefit to the stock markets as risk taking individuals took free money received from the FED/treasury and placed bets on equities. That free money would end up back with the big money center banks running HFT systems...Once again, no help to the Main St economy.
If QE2, QE3, etc, are begun who will benefit? What will be the objectives? Who believes that more QE will benefit the real US Economy? Who believes that more QE will benefit those entities that the US Gov and the FED have deemed too big to fail?
For generations a US budget has been passed and then ignored...new expenditures have been added during the year and the national debt level has been continually raised. Now we have a government that has decided that the US does not need a budget. At some point in time the world will decide that a country that does not have even a semblance of a budget is not a very good credit risk.
I do not 'fight the FED'. I ignore the FED...they have lost all credibility in my eyes. The FED has proven to me beyond any reasonable doubt that they care not one whit for the US Main St Economy. Ben can jawbone about the nuclear option but he is swimming against the tide of reality.
It is certainly true that we all need a some dollars on hand to continue living. Beyond necessity, dollars are an option, like all other asset classes.
The US Dollar is Dog Food....
very simply put: the credit cycle has allowed the USA to develop areas of the economy which lived on the very creation of credit. as we are weened off of this credit, the REST of the world is accessing the systems that we created and that will continue to drive marginal returns in this arena for the largest players in the business. what that means is that banks are going to have booming business outside of the USA and do probably pretty well despite the lack of domestic credit demand. in the last "great recession" of post-1929 fanfare, credit contracted for 12 years before bottoming in 1942. this time, the banking system worldwide is far more intertwined and again, the USA is the best in the business. what isn't printed and added to GDP in the United States by these same global banks will be printed in the form of government-led stimulus and asset purchases which perpetuate the "papering over" of the system over the next 5+ years. business spending picks up in the next 5 years and "nominal" GDP will be above 2007 levels by that time. the stock market may not do much, but GDP will keep trucking on higher. inflation works that way, Americans measure GDP growth in DOLLARS, and you all spend DOLLARS in the United States so consider it done. growth is sluggish but the FED is willing, able, and policy-motivated to utilize the "nuclear option" before letting asset prices fall too much, so consider yourselves warned. don't fight the Fed. it sounds nice and cheeky to do so, but the game will not be won by those betting against the current policy decisions. utilize the knowledge at hand to take advantage of what current polcy enables you to accomplish instead. shawn mesaros, pamria llc