Transitory: 1. tending to pass away; not persistent
2. of brief duration
Transitory is the term the FOMC used to describe the factors that held back the US economy in the 1st quarter. With the GDP report coming earlier in the day the FOMC had no choice but to acknowledge the slowdown but as many seem to be doing, they dismissed the weakness as being a function of factors that will fade as the year progresses. What exactly they see as transitory – other than winter – is hard to discern from the statement though and so it is hard to say why they are expecting a second half pick up. The commonly cited transitory factors – extra cold weather and the port slowdown – have already been resolved but we haven’t yet seen a pick up in the economic data. Yellen is making an assumption that we will but that seems to be based on nothing more than recent experience. The economy had a similar 1st quarter slowdown last year – and the year before that and the year before that – but recovered in the second half to get back to the recent trend of 2 to 2.5% growth.
I think the Fed suffers from the same problem as corporate America, an obsession with the short term. The FOMC’s transitory factors, assuming they are the ones everyone else is citing, are not ones that should have been enough to push the economy to the brink of recession. Cold weather is not exactly a unique phenomenon in winter and the Fed’s own research indicates that the effect on the economy is not very large. Indeed, there is a good, broken windows type argument that the cold weather actually has a short term positive effect on GDP. The cold weather pushes up utility output and there is also a hoarding effect as individuals prepare for reduced mobility during snowstorms. As for the port shutdown, international trade is not a large part of the US economy and therefore the effect should not be that great either. And yet, according to the FOMC, these “transitory” factors were sufficient to slow the US economy to a crawl in the 1st quarter.
What should be of more interest to the Fed is why the US economy’s growth trend has taken such a dramatic downshift over the last decade and what role monetary policy may have played in producing such an outcome. From the mid-80s and throughout the 90s and up to the Great Recession, the 10 year annualized growth rate of the US economy fluctuated between 3 and 3.5%. Looking back at the last 10 years though one finds the growth rate has fallen to roughly 1.5%. Of course, that period includes the Great Recession so it would be expected to be low but even measuring since the end of the recession the growth rate is only around 2%. Unfortunately, the Fed seems little interested in introspection at this point and so we are left with a Fed that sounds suspiciously like the average cheerleading Wall Street economics department. It seems Yellen & Co. would be happy if the economy just manages to get back to its new normal sub-par growth rate and they can get rates off the zero bound.
As for this economic slowdown, the data last week merely confirmed what I’ve been writing about for several months. The Dallas Fed manufacturing survey managed to fall even further than the most pessimistic estimate on the Street coming in at a bleak -16.0. The Richmond Fed survey was also negative at -3.0. The Chicago PMI did rebound back above 50 and the ISM manufacturing survey was unchanged at 51.5 but the industrial/manufacturing slowdown shows no sign yet of abating. This slowdown is mostly about the slowdown in shale oil drilling and it does not appear to have run its course. Recently rising oil prices are providing some optimism but I suspect that will be short lived. The Saudis, as I’ve said a number of times recently, seem intent on regaining control over oil prices and doing so leads right through the heart of shale country. So, whether the recent slowdown is transitory or not probably depends to a large degree on Saudi willingness to spend down their treasury for a while longer. My guess is that they will and if that is true the capex slowdown in oil country is just getting started.
The rest of the economy continues to muddle through. The PMI Services flash index was less than expected but a still respectable 57.8. Pending home sales showed some life rising 1.1% month to month and jobless claims hit a 15 year low. Personal income was flat while consumption rose 0.4%, neither of which is all that inspiring but aren’t in recession territory either. Consumer sentiment remains near the top of the recent range although as I’ve pointed out before that is at best a coincident indicator. Overall, the message of the economic data is that the slowdown of the 1st quarter isn’t over yet. That isn’t surprising as inventories are higher now than they have been in the early part of recent years. It seems obvious that the economy will have to work down those inventories and so the re-acceleration the Fed and everyone else expects in the 2nd quarter seems more likely to arrive – assuming it does – in the 3rd quarter.
That may be the source of the stock market angst this week as weak economic data for April doesn’t fit the narrative of a “transitory” slowdown that ends in the 1st quarter. The S&P 500 is still slopping around in the same range its been in since late November and much the same can be said of bonds. The recent pullback in the dollar is affecting not only stock market performance but also bond performance. As the dollar returns to earth, inflation expectations are rising keeping a lid on bond prices. The dollar is also affecting commodities and international stock markets as pressure on dollar debtors is relieved somewhat. Commodities have found at least a short term bottom with copper and iron ore – of all things – recently making strong upward moves and that has had a positive impact on emerging markets. I’m skeptical that will have any legs, especially if the US economic rebound is delayed, but for now it is powerful and worthy of watching closely.
The slowdown in the US economy this year may be transitory. Indeed, most everything in the post crisis global economy has been transitory. The US economy rebounded fairly strongly right after the end of the recession but that proved transitory and we’ve become accustomed now to the “new normal” of 2% growth. China instituted the largest stimulus program in the history of the world after the crisis and global growth looked robust for a while but that proved transitory as well. Emerging markets that were drafting on Chinese demand and capital inflows inflating credit bubbles found that their growth was very transitory, especially after the capital inflows turned into outflows. Europe had a burst of growth after Mario Draghi promised to save the Euro as we know it but, alas, that proved transitory too and he has now had to actually do something to try and keep that promise. And now, the rising dollar has choked off US investment in the one area that was fairly robust – shale oil production – and nothing has arrived yet to take its place.
The Fed and other observers see these periodic slowdowns in growth around the world as transitory but I think that has it backward. It is the periods of decent growth that are transitory. It is growth that clears the low bar of the new normal that has not been sustained. And as the marginal growth in the global economy gets shifted around the world with the ebb and flow of the global currency war – growth shifting to areas of recent devaluation – capital flows are determining winners and losers in the financial markets and economic regions. It is the movements of capital, the movements of the markets themselves that are affecting growth not the other way around. And until some change in economic policy produces growth that comfortably exceeds the new normal, that approaches the old normal, the ebbs and flows, the considerable transitory periods we’ve suffered since the end of the Great Recession will continue.
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