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Peter Schiff: What Kind Of "Improvement" Does The Fed Want?

Tyler Durden's picture




 

Submitted by Peter Schiff via Euro Pacific Capital,

Over the past few years observing changes in Federal Reserve interest rate policy has been a little like watching paint dry or grass grow...only not as exciting. That's because the Fed has not changed its benchmark Fed Funds rate since 2008 (Federal Reserve, FOMC). So with nothing else to talk about, Fed observers have focused on the minute changes in language that are included in Fed Policy statements. The minuscule revision in the July statement was the inclusion of the word "additional" to the "labor market improvements" that the Fed wants to see before finally pulling the trigger on its long-awaited rate increases. That should lead to a discussion of what kind of "additional" improvements those could be.

According to a good many of Main Street analysts, the labor market has already improved significantly over the past 5 years. During that time the unemployment rate has declined from 9.8% to just 5.3% (Federal Reserve Economic Data (FRED), St. Louis Fed). In the FOMC's June 2015 Summary of Economic Projections, Committee participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.0 to 5.2 percent. But that's not the kind of labor market success that has spurred Janet Yellen to action. She is looking for "additional improvements."  Since it is very unusual for the unemployment rate to fall below 5% (having done so in only ten years in the 45 years since 1970), it must be that she is looking for improvements in other employment metrics, like wage growth, labor force participation, and the ratio of full time to part time job creation. On those fronts there is very little to inspire confidence.
 
In late July the Dept. of Labor released the Employment Cost Index, which is considered the broadest measure of labor costs, that showed an increase of just .2% in the second quarter. Incredibly, this was the index's smallest quarterly increase since it was created back in 1982. The result came in far below the consensus expectation for an increase of .6%. If you believe as I do that the inflation measures that the government uses to calculate GDP growth are understated (its last GDP report assumed zero percent inflation) then such a minuscule change in wages would suggest that workers are losing ground, not gaining.
 
But last week the Wall Street Journal's Jonathan Hilsenrath, who is by many considered the most well-connected reporter to the Fed's inner decision makers, posted an article citing recent Fed studies that show how wage movements have an uncertain effect on consumer prices. And given the Fed's consistent concern about "too low inflation", this leads him to the conclusion that wage growth may not be considered an important driver of monetary policy.
 
So perhaps Yellen would be spurred to act by improvements in the labor participation rate, a metric that she has always talked about in reverential terms. But on that front she won't find much to cheer about either. Today's jobs report, though widely reported as a positive one, saw no change in the unemployment or participation rates. In fact, seasonally adjusted, July set a new record for those not in the labor force at almost 94 million people. And the headline number of 215k jobs was one of the weaker reports of recent years, all of which have not, as of yet, prompted a rate hike.
 
As the unemployment rate has crept steadily downward, the participation rate has moved down with it. In fact, more people have dropped out of the labor force in recent years than have actually found jobs. In June, a staggering 640,000 Americans gave up on job hunting (Bureau of Labor Statistics, 7/2/15), pushing the participation rate down to 62.6%, the lowest figure since 1977 (FRED, St. Louis Fed). And contrary to the spin put on by the White House Council of Economic Advisers, these are not retiring baby boomers. Older people are actually staying in the workforce longer. Rather, these are prime age workers who have simply given up looking for work.
In 2014 the Labor Department estimated that in June of this year 6.4 million workers who wanted full time work were just working part time jobs. This "involuntarily underemployed" category includes 56% more workers than it did in 2006. 
 
Such labor weakness would help to explain another recently released data set that shows that the economy remains much weaker than economists have expected. Last week we got the first look at Second Quarter GDP figures, which everyone hoped would confirm that the near-recession level figures of the first quarter were just a speed bump rather than a serious ditch. In fact, the numbers in the first quarter were so bad that they convinced government statisticians to go back to the drawing board to reformulate their GDP calculation methodology in order to eliminate the "residual seasonality" that many claimed was behind the disappointingly low Winter GDP results.
 
The good news is that the new formula did revive First Quarter (it's now positive .6% instead of negative), and also showed that the second quarter rebounded modestly to 2.3% annualized growth (Bureau of Economic Analysis (BEA)). The results were enough to generate happy headlines from the pushover media establishment that declared the economy was back on track. But most reports failed to mention that most observers had expected First Quarter to be revised much higher (the Fed itself had estimated that Q1 GDP could be as high as 1.8% annualized if better seasonal adjustments were used) and that the 2.3% for Second Quarter was well below the consensus forecast.
 
But the reduction in residual seasonality, which boosted First Quarter results, compelled the government to revise down other quarterly figures for the prior two years. The net result is that since 2012, the economy has not grown by an average of 2.3% per year as originally reported, but by just 2.0% (BEA). This makes what was already the weakest post-War expansion considerably weaker than economists believed. Maybe they will call for the revival of residual seasonality?
 
So barring any further revisions to First Half 2015 GDP, (which are much more likely to be revised down not up), our economy is running at an annualized pace of just 1.45%. To even get to the 2.3% annual growth rate, which represents the extreme low end of the Fed's "central tendency" for 2015, the economy would have to grow at 3.15% annualized in the Second Half. That is looking extremely unlikely. If we fail to hit those numbers, 2015 will be the ninth consecutive year in which the economy failed to reach or exceed the low end of its forecasts
 
The weak labor market and the weakening economy may explain a couple of trends that should not be occurring in a strengthening economy: Americans' growing love for old cars, and the high rate in which young people of working age remain living with their parents.
 
Recent statistics show that the average age of America's fleet of 257.9 million working light vehicles had an average age of 11.5 years, the oldest on record. The IHS Automotive survey (7/29/15) also showed that new car buyers were holding on to their vehicles for an average of 6.5 years, up from 4.5 years in 2006. When workers are doing well they tend to buy new cars more often. When things are lean they hold onto their rides longer. Interestingly, this trend has occurred while Americans are taking on more leverage in car loans.
 
Similarly a recent study by Goldman Sachs, from Dept. of Commerce data, shows that the percentage of 18-34 year olds who live at home, which had shot up during the recession of 2008, finally began to decline slightly in 2014, but that declinestopped at the beginning of 2015. USA Today (8/5/15) noted that the number of Millennials living at home increased from 24% in 2010 to 26% in the first third of 2015, according to a Pew Research Center report, based on Census Data. Why would this be happening if the economy was really growing? 
 
Since the unemployment rate seems unlikely to drop and both wage growth and increased labor participation show no signs of life, and the percentage of those who want to work full time, but can't, is still highly elevated, should we conclude that the Fed will move forward with its rate hike plans this year? If Janet Yellen is being honest that the Fed will not raise rates until we have further improvements in the labor market and those improvements seem to be nowhere in sight, then why doesn't she just admit that the Fed will not be raising rates any time soon?
 
If GDP growth only averages 2.0% in the Second Half (which I think is likely), then 2015 growth will only be about 1.7% annually. Given that the Fed didn't raise rates in 2012, 2013, and 2014, when growth was well north of 2%, why would they do so now? Yet Wall Street and the media stubbornly cling to the notion that 3% growth and rate hikes are just around the corner. Old notions die hard, and this one has taken on a life of its own.
 

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Sat, 08/08/2015 - 12:33 | 6404839 junction
junction's picture

Forget the economy for now and just realize we are already in World War III.  The proxy wars in the Middle East engineered by our Manchurian Candidate president are flames to the powder keg of World War. 

 

Sat, 08/08/2015 - 12:34 | 6404851 Latina Lover
Latina Lover's picture

Which is a continuation of WW2 and WW1.

All wars are bankster wars!

Sat, 08/08/2015 - 12:47 | 6404886 realmoney2015
realmoney2015's picture

Yup. End the Fed End the Wars!

Sat, 08/08/2015 - 13:02 | 6404930 Bokkenrijder
Bokkenrijder's picture

This article should HAVE BEEN TYPED IN CAPITAL LETTERS, as Peter Schiff always likes to shout your ears off. Lemme guess, he has many gold and silver coins to sell and YOU need to be the buyer? 

p.s. how is Jim-"my daughter is learning Mandarin"-Rogers doing these days? Still bullish on all those bubbles in China, agriculture ("farmers driving Maseratis") and commodities (oil $45) in general?

Sat, 08/08/2015 - 14:11 | 6405162 NotApplicable
NotApplicable's picture

Care to point out the flaws in Schiff's article, or are you just gonna stick to baseless ad hominem attacks?

Sat, 08/08/2015 - 14:21 | 6405187 rogerrabbithole
rogerrabbithole's picture

Baseless ad hominem attacks for $300.

Sat, 08/08/2015 - 14:26 | 6405198 TuPhat
TuPhat's picture

Care to point out anything worthwhile in Peter Schiff's article or do you just want to stick to attacking the baseless ad hominem attacks.  Attacks of ad hominem attacks for $400.

Sat, 08/08/2015 - 16:22 | 6405451 techpreist
techpreist's picture

Here come the downvote wars... but anyway I'll bite.

Schiff's basic message for the last decade has been:

"Economic data, read correctly, points to the US economy becoming weaker, less sound, and more and more based on ever-increasing debt load. Headline indexes that sort-of look good do not mean much once you dig deeper. Therefore, at some point in the future the bottom is going to fall out, and if you're positioned correctly you can still thrive."

For this article, ultimately it's the same message, with a few new data points, and usually he offers products in line with what he thinks will happen next. If you agree with his assessment, buy them. If not, don't.

Sat, 08/08/2015 - 22:15 | 6406057 GotNuttin'todo
GotNuttin'todo's picture

Agree. Schiff has been harping on the same string for a decade. As they say, "Better a decade early than a day late." (Well, they almost say that)

Sat, 08/08/2015 - 16:25 | 6405456 PoasterToaster
PoasterToaster's picture

attacking the baseless ad hominem attacks

lol!  This is a new low in argument even for a dopey shill.

Sat, 08/08/2015 - 15:42 | 6405376 baldski
baldski's picture

Bokken: you have that right! Peter Schiff has been absolutely wrong on all his predictions for the last 10 years. He is a fear seller. Why is he allowed to push his bullshit on this site? Tyler is he kicking back to you?

Sat, 08/08/2015 - 16:23 | 6405454 PoasterToaster
PoasterToaster's picture

Peter Schiff is always right.  Time and again.  Because he uses a little known superpower called common sense.

Sat, 08/08/2015 - 13:17 | 6404976 holdbuysell
holdbuysell's picture

Yes, they are LL.

Worthwhile read/listen:

All Wars are Bankers' Wars

https://www.youtube.com/watch?v=5hfEBupAeo4

 

Sat, 08/08/2015 - 18:58 | 6405765 jcdenton
jcdenton's picture

Well, Ja! Except that the banksters do have bosses ..

http://tuppersaussy.com/museum/html/writings/articles/15brienner.html

Sat, 08/08/2015 - 14:07 | 6405130 thunderchief
thunderchief's picture

The fed will keep jawboning  because it buys them time while the rest of the world goes to zero or negative. 

They may eventually raise rates to as much as 1% or so, but this is just keep the dollar strong and wait out the world's drop to zero or below, the new world order norm.

What Peter does not address, is that the fed is not going to fight WW1 (QE) when we are now in WWII.   The French tried this with the magi not line and the rest is history.

Strong dollar policy is everything now, and destroying everything with it to be the last man standing is the new game.  If the dollar fails now, we all know everything dollar based goes with it, and the Fed knows this more than anyone. 

Stocks, Bonds, Realestate,  the military industrial complex and USA hegemony all go if the dollar tanks this time.

So no overt QE, and until the world goes negative, the Fed will only then go to where it wants to be...

A cashless society with tolerable negative rates for a brain dead society.

Sat, 08/08/2015 - 19:23 | 6405623 NihilistZero
NihilistZero's picture

Agree with all but the cashless society. There are to many places TPTB benefit from cash and the underground economy. Banks launder for the drug trade. The economy as a whole benefits from tax dodgers putting that money back into goods and services. See how quickly they repealed the 1099 reporting requirements under Obamacare. There no where ready to ban cash without severe ancillary consequences that work against their interests.

Sat, 08/08/2015 - 22:13 | 6406054 August
August's picture

>>>See how quickly they repealed the 1099 reporting requirements under Obamacare.

IMHO the repeal of the 1099 requirement happened as quickly as it did because pretty much everyone recognized that it would damage the US "economy" badly, and immediately.

Sat, 08/08/2015 - 12:32 | 6404840 Latina Lover
Latina Lover's picture

Follow the money: who benefits from the endless 'economy is good' propaganda?

All economic lies are bankster lies!

Sat, 08/08/2015 - 12:50 | 6404894 KnuckleDragger-X
KnuckleDragger-X's picture

It's called the great arc of history and we're on the next downward slope. It's not the bankster per se, but a sector of the population who consider themselves to be the elite and who are the natural born leaders of the world. Every time they push their agenda civilization falls apart and we start over. This time though, the world population is huge and artificially supported by bread and circuses that has gone well beyond anything we've seen in history due to mass media brainwashing. Divide and conquer has always been the standard strategy, but this time the divided are extremely radicalized and heavily armed. It's all going to disintegrate and we can't stop it, we can only hope that it doesn't collapse too far and there's enough civilization left to build from.......

Sat, 08/08/2015 - 12:51 | 6404897 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

I reckon you can't blame them.  If they came out and told the whole truth of their parasitcal ways and means, then they would swing.

Sat, 08/08/2015 - 12:34 | 6404855 Cycle
Cycle's picture

The Fed deals with perception and not facts.

Sat, 08/08/2015 - 12:44 | 6404877 Meremortal
Meremortal's picture

Peter knows better, this is a big nothingburger. The FED has to do a raise because the bond market is leaving the FED behind and the FED has to follow or lose the false aura of control.

There will be one quarter-point raise, which will have no effect on anything. Then there will be a "pause" due to "anemic growth" in the economy.

Sat, 08/08/2015 - 19:23 | 6405630 NihilistZero
NihilistZero's picture

They're taking the funds rate to at least 1%. Perception is everything and a steady raise in rates during the election year says "Everything is okay" to those stupid enough to believe it.

Sat, 08/08/2015 - 12:46 | 6404880 Westcoastliberal
Westcoastliberal's picture

As I read the tea leaves, Yellen doesn't believe the BS BLS figures either.  That business birth/death model should be revised to reflect the reality that more small businesses are closing up shop than new startups are hatching.

Sat, 08/08/2015 - 13:01 | 6404927 CuttingEdge
CuttingEdge's picture

Take out the increased costs (to your average middle class earner - ripping the heart out of his/her disposable income) due to O'bummerCare and where would that GDP print be over the past couple of years?

Negative all the way; though looking on the positive side, its been great for big Pharma and Insurance.

 

Sat, 08/08/2015 - 16:22 | 6404948 Arnold
Arnold's picture

I believe the fed is waiting for the same thing we are: the unknown unknown.

 

Shemittah? Known unknown.

Unrepayable derivative debt? Known known

Asteroid? Unknown Known

Psychopathic weapon wielders? Unknown Known

Divine Intervention? Yes an Unknown Unknown , but not what they are waiting for.

Alien Invasion? Known known

Yellowstone Eruption? Known unknown.

Hell, I don't know.

Meanwhile financial products keep things churning....

 

 

Sat, 08/08/2015 - 13:19 | 6404981 silverer
silverer's picture

I'm scared to death of a new car.  The government has it covered with computers from seat sniffers to speed monitors to G force, to one or two hands on the wheel and the list goes on and on.  Why?  Because they can.  So I don't want one, thanks.

Sat, 08/08/2015 - 15:15 | 6405314 monad
monad's picture

Plus they are making them to Krugman quality standards. New cars are not built to last 6, maybe 7 years. Not even the black German ones.

Sat, 08/08/2015 - 22:18 | 6406060 August
August's picture

Seat sniffers?  Sounds um... unsavory.

Sat, 08/08/2015 - 22:40 | 6406065 GotNuttin'todo
GotNuttin'todo's picture

Buy an Audi - they don't have all the Spy gear. At least they didn't in 2014. I don't think Porsche does either, but damn near every other car line does. You can check you car here:

https://www.rimkus.com/uploads/pdfs/Event_Data_Recorder.pdf

Sat, 08/08/2015 - 13:23 | 6405000 adonisdemilo
adonisdemilo's picture

One thing they can't fiddle is the rate at which the clock ticks, and it's ticking, ever ticking.

Time is getting closer to retribution hour for all these bastards, that's the only thing that will stop the lies.

Can't come soon enough.

Sat, 08/08/2015 - 13:52 | 6405101 johnlocke445
johnlocke445's picture

I think there is so much emotional baggage attached to this long awaited 1/4% rate hike, there will be a catastrophe when the fed announces it will happen. The only markets that will benefit will be gold and silver.

Sat, 08/08/2015 - 14:12 | 6405166 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

Agree. If it only takes a 1/4% rate hike to destroy the economy, it wasn't much of an 'economy'. Stack it!

Sat, 08/08/2015 - 22:08 | 6406043 GotNuttin'todo
GotNuttin'todo's picture

My BIG guess is that the Dow is 1000 points off its high and has already priced in a 25 basis point hike. The Dow might drop some more ( 15,000 is a nice round number) but it won't be catastrophic.

Sun, 08/09/2015 - 00:58 | 6406292 sprintjump
sprintjump's picture

Don't know what you think of Armstrong, but he calls 25,000+ in '16/17.

Is that QE infinity? The world burns, the fed prints?

Sat, 08/08/2015 - 14:04 | 6405138 B2u
B2u's picture

ZIRP hasn't worked.  Normalize rates NOW.

Sat, 08/08/2015 - 15:06 | 6405299 slightlyskeptical
slightlyskeptical's picture

To get inflation they need to raise rates. Higher interest rates generally raise the cost of doing business for everyone thus higher prices. Just look back at history. I really don't know what is taking them so long. Truly could be that there is no way out this time.

Sat, 08/08/2015 - 16:59 | 6405516 monad
monad's picture

Based on performance the fed wants more political service dogs and more lebensraum.

Sat, 08/08/2015 - 17:26 | 6405573 lester1
lester1's picture

During the history of the Federal Reserve, they have only raised interest rates when the economy is overheating.

Clearly this economy isn't overheating !!

Sat, 08/08/2015 - 22:17 | 6406059 Aussiekiwi
Aussiekiwi's picture

The FED may feel bound to raise rates as the message sent to the Markets if it doesn't will cause more harm than if they do, they may feel the only solution is to carry out a miniscule rate rise, something that won't rock the economy but they can point too and say, there you go we are on the right path of raising interest rates.

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