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The Fed's Computer Model Of The US Economy "Sees Little Slack" (And A Big Clue From Gartman)
Continuing the recent trend of models are right, reality is wrong economic "analysis", launched when some unknown goalseekers over the past month suggested that a double seasonal adjustment is appropriate to any data that does not conform with the mandate of growth at all costs, and which has since been proposed as official Fed policy suggesting it is only a matter of time before the BEA rewrites history and drastically "adjusts" historical GDP numbers significantly higher, overnight Goldman was the latest to suggest that contrary to popular opinion of pervasive economic weakness, what the Fed sees in the economy is actually "little slack."
Specifically, Goldman updated the Fed's infamous FRB/US computer model which estimates key components of the economy's supply side, including potential output and the structural rate of unemployment, and has the following take-aways:
- potential growth has continued to recover (estimated at 1.8% year-over-year in 2015Q1);
- the structural unemployment rate has remained low at 5%;
- the cyclical gap in participation is very small; and
- the output gap has continued to close (reaching -0.6% in 2015Q1).
In other words, even without a double seasonal adjustment, the Fed may very well surprise with not only a September, but even a June hike. After all recall that to Yellen stocks are now clearly overvalued, and the cornered Fed Chairwoman is between a rock and a hard place - keep failing to rase rates and risk another bond tantrum as all the shorts are squeezed leading to even more illiquidity and volatility, or slowly take the air out of the stock bubble (good luck with that).
Some more details on Goldman's simulation of FRB/US:
In 2014, Fed staff economists published a model that estimates key components of the economy's supply side, including potential output and the structural rate of unemployment (the details are available here). The model employs statistical "filtering" techniques to separate trend from cycle and the resulting estimates form the supply side block in the Fed staff's FRB/US model. One of the key features of the model is that it uses not only GDP to estimate the cycle and trend in activity but also other information including gross domestic income and labor market data. Using a range of indicators to measure growth is a desirable approach in our view and one that we have used to construct our current activity indicator (CAI).
So in order to gauge what the Fed is really thinking based on its own computer feedback, overnight Goldman updated the Fed staff's supply side model through 2015Q1.
"Most of the required data for the model is already available for 2015Q1, including GDP, labor market and price information. For variables that are not yet available for 2015Q1--including, for example, gross domestic income and a couple of custom-made series--we use either the closest available proxy or the Fed staff's latest assumption (available in the March 30, 2015, update of the FRB/US model). We also project the model forward using the latest Fed staff's assumptions for the exogenous variables of the model (such as population growth, labor quality and the evolution of capital services)."
The model's findings:
- First, potential growth has continued to recover after slowing notably during the crisis. The estimates suggest that potential GDP growth slowed from almost 3% before the crisis to only 1% in 2011. Since then, estimated potential growth has recovered, reaching 1.8% year-over-year in 2015Q1. The intuition for why potential growth has continued to recover despite very weak GDP growth in 2015Q1 is that the model also puts weight on growth in employment (which has been solid) and gross domestic income (which is expected to be solid in Q1). Looking ahead the model suggests that potential growth will rise a bit further to 2% over the next couple of years, due primarily to an assumption that capital services continue to normalize.
- Second, the estimated structural unemployment rate rose in the aftermath of the crisis to a peak of 5.8% in 2010 but then declined to 5% in mid-2014. The model suggests that the structural unemployment rate has moved sideways since then and projects that it will remain at 5% going forward.
- Third, the model explains the vast majority of the decline in the labor force participation rate since the onset of the crisis by structural forces. Of the observed 2.8 percentage points (pp) decline in participation, the estimates attribute 2.6pp to structural factors and only 0.2pp to cyclical factors. Looking ahead the model projects that the trend participation rate will continue to decline, albeit at a slower pace, reaching 62% in 2020.
- Fourth, the estimates suggest that the output gap has closed rapidly since reaching a peak of almost -8% in mid-2009, reaching -0.6% in 2015Q1. The closing of the output gap slowed in 2015Q1 but continued due to solid growth in activity measures other than GDP (such as employment).
The bolded is key, as it is the closest to explaining why the Fed is in such a seeming rush to find justifications for hiking. Visually:
Does Goldman, which anticipates a September rate hike, agree with the Fed's computer simulation of the US economy? Not entirely:
The most important reason why we continue to see more slack in the participation rate is that wage growth--historically one of the best indicators for measuring labor market slack--remains sluggish. A likely reason why the Fed staff model points to less slack is that it does not use wage inflation in its estimation of labor market slack.
Said otherwise, it once again comes down to just one thing: wage growth, or the lack thereof. We have extensively shown before why there simply can not be wage growth for the bulk of the US population, ironically precisely because of the Fed's erroneous micromanagement of the economy, something which both the Fed and Goldman must realize by now. So if indeed the Fed is driven by this variable, expect no rate hikes for years, and an S&P of 3000, 4000 or whatever the breaking point is for 90% America's population to go "French Revolution."
If, however, the Fed's concerns about a stock bubble are dominant, the Fed will be willing to ignore the lack of wage growth, and proceed with at least one rate hike in the coming months just to test and see if it can even do it.
But perhaps the best hint of what the Fed will do comes not from the Fed, not from FRB/US or from Goldman, but from Gartman, whose overnight note has this:
- In summary then, here will be no rate increase this year. Count on it.
And now we know.
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Is this a bubble? Yes. Do bubbles burst? Yes.
DavidC
Who's this Gartman guy?
He's one of my financial planners, the other is Jim Cramer. They say buy, I sell, and they say sell, I buy. It works well for me.
Do you have a newsletter?
This is a stupid economic model in the first place because it's only the "supply side" of the equation and never mind the "demand side"
If there really is little slack left on the "supply side", then how does it explain the huge inventory buildup we have now?
It also says corporations will have to increase CAPEX tremendously to increase capacity which would mean NO MORE BUYBACKS!
Regardless, It's all an excuse for the Feral Reserve to raise rates soon.
Also.. This problem of little slack in the economy will be solved very soon as demand plummets into an epic deflationary implosion.
Character from south park
Don't worry, they have the Patriots on that job,
She will NEVER raise rates...
Free Beer Tomorrow ....very similar to Coming Rate Hike
Dow at record highs with the FED panicked about a 1/4 pt raise? How fragile must they
think this Alice in Wonderland economy is?
Dow made record 14k in 2207 with rates near 5%
compare and contrast
She will raise rates and nothing will happen for a while. Then things will start to go intot he shitter again and we'll get more money printing. Then they will appear to improve and they'll slow then more money printing when the shit starts hitting the fan. Each successive money print will be larger than the last because we all know that it isn't working because it isn't quite big enough.
definitely sounds like the game plan in this country.
I agree with your point but what about corporate and personal debt? .Gov can print via the Fed but that doesn't bail out the other two. I think they would have to use a fleet of helicopters if they are going to get serious about raising rates. I don't think they will do this as it would seem beneficial to main street even though it will blow up in the end anyway. I think their greed is much more focused and a rate rise will only be a precursor to QE for them, not us.
"Relative Rate Hikes"
Others lower their rates. Yellen stays the same.
Rates have risen relative to others.
It is all about the debt. If rates rise then interest on short term rollovers will go up and thus you would probably see the shale players and some of the buyback queens crap out. Then you would also see USG having to borrow more to make payments on the debt thereby making the debt larger thereby making interest payments larger thereby requiring more debt to pay the interest on the growing debt.........
They can raise rates but they are gonna have to QE the hell outta the system to make it sustainable for any length of time. As seen above that becomes a snake that eats itself.
She will NEVER raise rates...
Free Beer Tomorrow ....very similar to Coming Rate Hike
Dow at record highs with the FED panicked about a 1/4 pt raise off of ZERO? How fragile must they
think this Alice in Wonderland economy is?
Dow made record 14k in 2207 with rates near 5%
compare and contrast
There will never be any wage growth. Immigration, automation, and globalization have seen to that. U.S.S.A catching down to third world status one FRN at a time.
how come no one makes the connection between low wages and illegal immigrants?
That is the issue, that is the reason wages dont rise....right Ronald McDonad?
Dummies running the government.
Gartman shall change his mind a hundred times between now and the end of the year.
The steps required to alter the current course needed to be taken 15 to 20 years ago.
More than 15-20 years ago...but you are right. It's too late to change course now.
1971 to be precise.
Problems have solutions.
Predicaments have outcomes.
Waiting for the second one.
US financial markets are an outright disgrace as is the Federal Reserve. Not a scintilla of truth in either. The system has become a toy for those connected. No one I know believes any of the economic numbers, they are being manipulated for the play of the day, only known to the Wall Street Comrades.
Oh so true... garbage in garbage out. America, land of the great dumpster.
Prediction: rates will slowly rise then stabilise and things will get sustainably better.
(A few massive financial entities may blow up but that's what all the lovely new liquidity is for, right?)
It's go opposite Gartman's call again.
Wrong-way Gartman is a tool.
Slowly taking the air out of the stockmarket will be like pricking the hindenburg with a blow torch.
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When they use the term 'double seasonal adjustments' that's all the proof needed for anyone that as of yet doesn't understand the games that's being played on us all.
Also, the phrase reminds me of the Animal House scene when they put the frat bad boys on 'double secret probation'.
The Oracle has spoken! Rate increase in September, .10....
June hike???? ha ha ahaha lolollo lmao.
That household wealth metric is going to take a hit.