Tag Archives: u.s. recovery

Why the US is not as strong as you think

CNBC, Feb 26, 2015

The U.S. may not be as strong as investors think because it is growing overly dependent on the consumer for economic growth, said Jim O’Neill, former chairman of Goldman Sachs Asset Management.

“When the U.S. consumer is starting to be more than 70 percent of GDP, as it’s threatening to do again, the U.S. structural story is not as powerful as so many people seem to now believe it is,” O’Neill told CNBC on Thursday. “It was, but it’s weakening.”

A bull case emerged for the United States after the financial crisis in part because investors saw growth coming from structural improvement, rather than cyclical momentum, O’Neill said. The idea was the country would begin rebuilding its savings rate and shore up exports and investments as the consumer took a smaller role in fueling growth, he said.

That shift was beginning to take shape, but in the last year, signs are beginning to emerge that “the consumer is back to being king,” O’Neill said in a “Squawk Box” interview.

“In some ways, the reason we had the whole mess in the first place is because the U.S. consumer was too much of the king,” he said, referring to the financial and subprime mortgage crises.

He pointed to the role of oil production in improving the country’s balance of payments with the rest of the world. Last year, President Barack Obama’s Council of Economic Advisers highlighted strength in the American oil industry as one of three structural changes that would support sustained U.S. growth.

However, oil prices fell 60 percent between last summer and January. Many marketwatchers have said that is a net positive for growth because consumers will spend what they save at the pump in the broader economy, but O’Neill said collapsing crude prices are a negative for the rebalancing of the U.S. economy.

“It’s not really in the U.S.’s long-term interest for oil prices to drop so sharply on a sustained basis,” he said.

The marginal economic data on Europe is somewhat better than expected and the bear case for the continent is not as interesting as it once was, O’Neill said.

While he said he is not particularly friendly to the euro currency, he believes markets must receive perpetual bad news for it to continue its descent. The euro is currently trading at about 1.13 to the dollar.

The Swiss franc, rather than the euro or the yen, is the clearer currency play against the U.S. dollar, he added.

O’Neill is short the franc because he believes there is no reason to put money in Switzerland following the Swiss National Bank’s decision to drop its policy of capping the currency at 1.20 francs per euro and because of other recent developments in Europe.

“We had this enormous rise [in the franc] that came because of the crisis and the fears of Greece leaving and the whole fears of QE,” he said. “Those events have been dealt with at least for now. The Swiss franc was already far too strong for the Swiss economy.”


Fed officials worried about hiking rates too soon

Reuters, Feb 18, 2015

Federal Reserve policymakers expressed concern last month that raising interest rates too soon could pour cold water on the U.S. economic recovery, and fretted over the impact of dropping “patient” from the central bank’s rate guidance.

The minutes from the Fed’s Jan. 27-28 policy-setting meeting, released on Wednesday, show officials grappling to square solid U.S. economic growth with the weakness in international markets as well as worrying about falling inflation expectations in the United States.

Fed officials debated the impact that stubbornly low inflation measures were having on the central bank’s confidence in moving ahead with the rate hike plan, the minutes from the Federal Open Market Committee meeting showed.

The central bank is targeting June as the month to begin raising rates, Fed policymakers have indicated.

The minutes shed light on the depth of the Fed’s inflation debate and highlight the desire of policymakers to keep interest rates lower for longer.

“I think it’s probably much more dovish than anybody anticipated, that’s for sure,” said Greg Peters, senior investment officer at Prudential Fixed Income, referring to the minutes. “I think June is going to be hard for them to move, but that’s not to say they won’t.”

In its January policy statement, the Fed gave a nod to turmoil in markets across the globe, saying it would take “financial and international developments” into account. It was the first time since January 2013 that the Fed made an overt reference to overseas economic events in its policy statement.

The minutes offered a more detailed view of the overseas concerns, with policymakers noting how China’s economic slowdown and tensions in the Middle East and Ukraine posed downside risks to the U.S. economic growth outlook.

The “international” reference in January led bond investors to quickly bet that the Fed would wait longer to raise rates, but bond yields have shot higher since early February. The surge showed that investors were getting more comfortable with the expectation that the Fed’s initial rate hike would happen in June, on the back of strong economic growth and jobs data.

The release of the minutes, however, tempered that view, as bond yields fell after the 2 p.m. EST (1900 GMT) release.

“Clearly there are some more dovish members that feel the economy is still not strong enough to support steady pricing, so that is holding the Fed back from normalizing policy,” said Alan Gayle, senior investment strategist at Ridgeworth Investments.


Even though Fed officials agreed that U.S. economic growth was strengthening, the minutes showed the central bank continuing to struggle with whether it can move ahead with raising rates amid falling inflation expectations.

“Several participants saw the continuing weakness of core inflation measures as a concern,” the minutes said, detailing the Fed’s internal debate over the conflicting signals sent by different measures of inflation expectations.

Though policymakers expect the recent bout of low U.S. inflation to prove transitory, they also said the different measures of expectations “needed to be monitored closely” for signs the public or investors are losing faith in the Fed’s ability to reach its 2 percent inflation target.

Fed officials have said they could being raising rates even if inflation remains stuck at a low level, confident that economic growth and job gains will eventually produce rising prices. They also view the initial “lift-off” as the start of an extended, years-long process in which rates will remain far below normal and continue to boost investment and spending.

How to communicate when the Fed is ready to hike is another matter its policymakers continue to struggle with.

The Fed repeated in January that it would be “patient” in deciding when to raise benchmark borrowing costs from zero, where they have been since late 2008, and acknowledged a decline in certain inflation measures. Fed Chair Janet Yellen said in December that being “patient” implied the Fed would not raise rates at least for the next two meetings.

The minutes from the January policy meeting show that many of its participants feared that dropping “patient” – whenever the time comes – risks shifting market expectations of a rate hike to an “unduly narrow range of dates.”

The reference to the narrow range of dates suggests the central bank is worried that when “patient” is dropped, investors will put too much weight on its meaning, and financial markets will overreact.

Fed officials maintained in the minutes released on Wednesday that a decision on when to raise rates would remain dependent on economic data, though moving too early was cause for concern.

“Many participants observed that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the committee’s objectives,” the minutes said.

The minutes also said many participants were inclined toward “keeping the federal funds rate at its effective lower bound for a longer time.”


Cheaper crude oil subdues U.S. producer inflation

Reuters, Feb 18, 2015

U.S. producer prices recorded their biggest decline in more than five years in January on plunging energy costs, pointing to very benign inflation in the near term that could argue against raising interest rates.

Other reports on Wednesday suggested the economy was growing moderately early in the first quarter. Housing starts fell last month, while manufacturing output edged higher. “The reports paint a disappointing picture on the U.S. recovery, with the housing starts report in particular reinforcing the narrative that the housing recovery might be in a spot of bother, said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Labor Department said its producer price index for final demand fell 0.8 percent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 percent in December. It was the third straight month of decline in the PPI.

In the 12 months through January, producer prices were unchanged, the weakest year-on-year reading since records started in November 2010, after rising 1.1 percent in December.

Economists had forecast the PPI declining only 0.4 percent last month and gaining 0.3 percent from a year ago.

U.S. Treasury debt prices extended gains on the data. The dollar maintained gains versus a basket of currencies.

Lower energy prices, against the backdrop of softer global demand and increased shale production in the United States, and a strengthening dollar are dampening domestic inflation pressures.

“The weak PPI report adds further evidence of building disinflationary pressures in the U.S., not only in headline prices but also in core prices,” said Mulraine.

While the Federal Reserve, which has a 2 percent inflation target, views the tame price environment as transitory, signs that the energy-driven weakness is leaking to core inflation could cause discomfort among some policymakers.

A key measure of underlying producer price pressures, which excludes food, energy and trade services, fell a record 0.3 percent last month after edging up 0.1 percent in December.

Most economists expect the U.S. central bank to start raising interest rates in June, citing rapidly tightening labor market conditions. The Fed has kept its short-term interest rate near zero since December 2008.

The U.S. economy still faces headwinds created by a stronger dollar and weaker overseas markets, which weigh on exporters. U.S. manufacturing output rose a modest 0.2 percent in January and was flat in December, the Fed said in a separate report.

Wholesale energy prices tumbled a record 10.3 percent in January after sliding 6.2 percent in December. It was the seventh straight month of declines.

Food prices fell 1.1 percent, the largest decline since April 2013, after falling 0.1 percent the prior month. The volatile trade services component, which mostly reflects profit margins, rose 0.5 percent following a similar gain in December.

The Commerce Department said housing starts fell 2.0 percent to a seasonally adjusted annual pace of 1.07 million units in January.

Despite the decline, which was driven by a fall in groundbreaking for single-family projects, starts remained above the one million-unit mark for a fifth straight month. Compared to January last year, groundbreaking was up 18.7 percent.

Sluggish wage growth and a shortage of homes on the market stymied housing last year, even as the broader economy was accelerating.

But a turnaround in housing is expected this year as a rapidly tightening labor market pushes up wages and encourages more young adults to move out of their parents’ basements and set up their own homes.

Already in the fourth quarter, household formation was accelerating, breaking above the one-million mark that usually is associated with a fairly healthy housing market. Although much of the gain in households went into rentals, that would still be a boost to housing starts this year.

Homebuilders such as DR Horton (DHI.N), Lennar Corp (LEN.N) and Pulte Group (PHM.N) are likely to benefit from the anticipated pick-up in starts this year.

In January, permits for future home construction dipped 0.7 percent to a 1.05 million-unit pace. Permits have been above a 1 million-unit pace since July.

Single-family permits fell 3.1 percent last month, while multi-family permits rebounded 3.6 percent.