Here we are, one month into the second half. Expectations, or, perhaps more accurately, blind hope, is that the back half of 2011 is better than the first half. We can only hope this is true. The revised GDP data reveal the US economy flirted with recession in the first six months of the year, raising the real concern that we are at stall speed. We need those confidence fairies sooner than later – because it looks like fiscal and monetary policymakers are still on the sidelines. Worse, in the case of the former, near, medium, and long-term policy are all looking contractionary at the moment.
Will the economy tumble into recession, or simply continue to limp along? Bets are all over the place at this point. Optimists are looking for a stronger second half as the temporary factors (Japan, oil price shock, etc) fade, giving a boost to at least one sector, autos. Karl Smith sees room for optimism in the manufacturing survey data – we will see the ISM number this morning for further insight. Rebecca Wilder, however, sees weakness in the high frequency data, although the most recent initial claims numbers fell below 400k. That said, Brad DeLong noted unusual seasonal effects in past Julys, and 2011 could be the same. Bloomberg sees trouble signs in container shipping rates:
Plunging rates for chartering container vessels that carry sneakers, furniture and flat-screen TVs may signal a U.S. consumer slowdown and losses for shipping lines in what is traditionally their busiest time of the year.
Fees for hiring vessels have fallen 9.3 percent since the end of April, according to the Howe Robinson Container Index, which tracks charter rates for a range of vessels. Last year, the index surged 56 percent in the period, as lines added ships on demand from U.S. and European retailers restocking for the back-to-school and holiday shopping periods.
“The troubling part is that charter rates are falling in the peak season,” said Johnson Leung head of regional transport at Jefferies Group Inc. in Hong Kong. “Sentiment among consumers and retailers isn’t very strong.”
I think you can tell a story of growth in the 2.0 to 2.5 percent range in the second half of this year, consistent with the low-end of consensus. Weak, weak, weak relative to the depth the recession – too weak to push down unemployment rates, perhaps too weak to prevent joblessness from increasing. As far as faster growth is concerned, I am still held up by the issue that the last two expansions were tied up in massive asset bubbles. What will provide that wealth-effect source of demand this time around? What will take its place? It certainly isn’t fiscal stimulus. If not, then what?
Moreover, while all eyes where on the debt-ceiling debate, the European debt crisis continues essentially unabated. So while the US economy is dragging itself into the second half at stall speed, it faces the certain shock of fiscal contraction and the increasingly likely shock emanating from Europe.
Where is the Federal Reserve in the midst of this turmoil? Out of sight. Well, not entirely, San Francisco Fed John Williams offered conditional support:
Looking ahead, we at the Fed will keep a very close eye on incoming data and adjust our policy as needed to work towards our two policy goals. If the recovery stalls and inflation remains low or deflationary pressures reemerge, then we may need to keep our very stimulatory policies in place for quite some time or even increase stimulus. On the other hand, assuming growth picks up and inflation doesn’t fall too low, then at some point we’ll need to start gradually removing stimulus.
We need to see both low growth – in the second half of the year, the first is irrelevant – and a reversal of recent inflation trends. Note the GDP revisions where not kind on that front:
Chicago Federal Reserve President Charles Evans would be willing to push for additional stimulus, again, dependent on the third quarter growth numbers – see the Wall Street Journal. Still, he would be more likely to ease even in the face of recent inflation trends, as he sees those as largely transitory. Note the same article highlights the opposite view of Philadelphia Fed President Charles Plosser. He expects stronger growth, and is looking to tighten policy ASAP.
Richmond Federal Reserve President Jeffrey Lacker sees more easing as simply inflationary:
This circumstantial evidence suggests that the additional monetary stimulus initiated last November raised inflation and did little to improve real growth. Last year, raising inflation was a desirable policy objective, but that clearly is not the case today. Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth.
I suspect Federal Reserve Chairman Ben Bernanke is not far from this outlook as well. And, finally, we also have the wisdom of St. Louis Federal Reserve President James Bullard:
Now, “you’ve got rising inflation, and headline inflation is pretty high compared to a year ago. It could even go even higher,” Bullard said, noting “in that case you have be very circumspect” about doing more to help the economy, even in the face of anemic growth.
Sounds like a no vote to me.
Bottom Line: Pins and needles time for the US economy. The general expectation is for a stronger second half – but how much stronger? Seems like a lot of swords are still hanging over our heads to expect much more than anemic growth. That said, monetary policymakers expect something better and won’t budge either way until the tea leaves become clearer. And even if growth surprises on the downside, the inflation issue remains. Just can’t see monetary policy shifting in such an environment. The growth/inflation nexus needs to make a clean break one way or the other to prompt Fed action. For market participants, the mix of growth, inflation and policy is in something of a perverse sweet spot. Consider that corporate profits have held strong – revised upward even – helping sustain equity markets. Not sure that this should change in the absence of outright recession. Indeed, Wall Street is ready to ignore weak data, instead expected to rally hard this morning on the news that a debt-ceiling solution is at hand. Meanwhile, the Fed is effectively sidelined by weak growth, keeping interest rates low and freeing investors from imminent tightening fears. Impending fiscal contraction only locks in that outlook. And inflation is sufficiently high such that the Fed won’t loosen policy. No need to fret about that for the time being, and instead just enjoy the ride.