Rate-Rise Fears Trip Up Markets

The Federal Reserve is still deciding whether or not to raise interest rates. With the slow economic growth and stagnant inflation rate, the Fed is not very concerned with raising the short-term rates higher. Janet Yellen had previously stated she thought the Fed had a strong case for raising rates partly due to the price of the 10-year Treasury note price dropping. Many doubt that central banks can and would stimulate the economic growth. This doubt led the prices of bonds, along with many stocks, to significantly decrease. Recently, the European Central Bank decided to leave their interest rates unchanged despite hopes for an increase. The Fed is looking to Europe and Japan for any clues about which path to take regarding the rates. These two areas are in similar situations, but with negative interest rates and bonds being purchased to keep them down. The European Central Bank recently decided not to expand their bond-buying program and Japan is also meeting soon to determine if they should change their efforts. By the end of the month the Fed will have made their decision, a much anticipated one by the public.



http://www.wsj.com/articles/rate-rise-fears-trip-up-markets-1473462332

US finally has stable economic growth, but for how long?

As seen in previous posts, and this article, the Fed seems to be be making the right moves, and US economy seems to be growing. Unemployment and inflation rates are stable and very near the Fed's mandated target, signaling stability for those participating in the economic market. This means vacant housing rates have decreased, investment has gone up, jobs are stable, and the financial market is booming.
But how long can last?
The Fed, in order to keep rates constant, and the economy in its "happy place", is aiming to tighten their monetary policy, slowly and gradually in efforts to ensure consistent, if yet slow, growth. The Fed's focus seems to be very under control, however with the ying, comes the yang. Such stability at home breeds excessive risk-takers from investors, households, and even banks. Where international investment has increased with real estate prices, there seems to be record lows on the net income of properties in comparison to prices paid. This loss of money accounted for could be the lit fuse to a large economic shock to threaten the stability of the secure economy we are seeing now.

http://www.cnbc.com/2016/08/31/with-fed-nearing-goals-rate-hikes-could-shield-economy-says-feds-rosengren.html

FED: The Waiting Game

Coming into 2016, the FOMC (Federal Open Market Committee) projected four separate rate hikes, as they seek to normalize monetary policy following the expansionary policy used to stimulate the economy post-2009. These projections came after a 25 basis point hike to the Fed's target rate in December 2015, which was the first rate hike since the pre-crisis days of 2006. Last December's hike was long awaited by bond market traders and was originally expected to occur during the Summer of 2015, but was delayed due to low wage growth in U.S. labor markets and economic troubles in both Greece and China.

Again, the FOMC have been unable to follow through on their projections, as wages are still significant lacking growth and inflation is lagging. In addition, the global uncertainty caused by Brexit earlier this summer, pushed any possibility of a rate hike back even further.

The chart below, from Bloomberg, shows the probability of an interest rate hike in September.

This chart is current as of August, 26th 2016 and demonstrates the stabilization of the global economy in a post-Brexit world. The possibility of Brexit was largely underestimated during the week leading up to its occurrence, as market sentiment projected about a 30% chance of it taking place following Jo Cox's (British Labor Party M.P.) murder. The uncertainty brought about by this phenomenon as well as the negative yields in Japan and Germany, tied the hands of the FOMC and prompted them to continue pushing off further rate hikes. 

Now, following some market stabilization and decent summer labor data (excluding August's low jobs number), Fed Fund Futures trading implies a 32% chance of a September rate hike (as of 8/26). Markets will be watching short term treasury yields as a leading indicator of a hike coming into the September meeting.   

If there's one thing I've learned about the Fed through watching markets over the past 18 months, it's that nothing is solid, and although the Fed's mandates focus on inflation and unemployment, external factors consistently shift the sentiment of the FOMC. It will be interesting to see if more global events shift the rate-hike timeline, or if the domestic presidential election will cause the Fed to be more dovish through the end of 2016 (due to the political uncertainty and their tradition of relative inaction during election years).

 Read more about the Fed's election year tradition here on MarketWatch

Watch more about Fed Chairwoman Janet Yellen's recent comments on the state of the economy here on "Bloomberg Markets"

Bill George

Economists See Tougher Road for Labor Market Improvement

According to a survey of business, academic, and financial economists conducted by the Wall Street Journal, there is a general consensus that the US economy is in for steady economic and labor market times, but with little improvement over the next two and a half years. The unemployment rate has come down significantly from the height of the 2008 recession (10%) to today's 4.9%; most economists surveyed believe, however, that more significant reduction is unlikely and that come the end of 2018, the unemployment rate will most likely be around 4.5%.  Another key indicator of labor market health, the underemployment rate, is again significantly lower today at 9.7% than it was a few years ago at 17%, but progress has already slowed and the statistic is likely to end up at around 9% by end 2018. Pushing this number down any more would require structural economic shift away from using part time workers, something that is unlikely to happen. August job growth was 192,000, but similarly to the aforementioned statistics, economists see this slowing to in the neighborhood of 157,000 within a two and a half year period, putting it just slightly above the rate necessary to keep pace with population growth. The general consensus from the survey was that the Fed is expected to raise interest rates in December, but any other policy, especially with the upcoming election, is unlikely to come out of congress this year. The estimated chance of an upcoming recession, has continued to lower and is currently at 20%, and unquestionably good sign.  The general takeaway from the economic survey seems to be that the growth and renewed strength of the labor force we saw after the recession is quickly diminishing, although with slim chances of a recession relapse, the American economy is likely to simply coast for an upcoming period of time.

http://www.wsj.com/articles/wsj-survey-of-economists-sees-slowing-labor-market-progress-1473343201

Healthy service sector takes economic spotlight this week

The US’s service sector, consumer spending, and labor market steal the economic spotlight after booming significantly in the month of July. Following disappointing reports for both job growth and manufacturing, The Institute for Supply Management’s (ISM) non-manufacturing index continues to expand despite slight dips during July. This can be primarily attributed to the fact that solid job and income growth, low gasoline prices and healthy balances are boosting consumer confidence.
This boost in consumer confidence is resulting in a significant increase in household credit growth, and total spending of consumers. Household credit growth, which was primarily driven by student and auto debt for several years after following the Great Recession in 2007-09, is now growing due to an increase in credit card expenditures. Consumers are less inclined to leave their credit cards in their pockets, providing more support to consumption, which contributes to 70% of economic activity and GDP. Thursday, September 8th, it is expected that the Fed will report a jump in outstanding credit to $15 billion for July, despite credit gains slowing by $5.6 billion the previous month.

This Wednesday September 7th, the Labor Department will evaluate payroll growth in the month of July. Hovering near record levels behind generating 275,000 jobs in July, hiring has been lagging. This can be attributed to mismatches between job requirements and candidates’ skills, as well as a decrease in supply of labor due to increase in hiring the past months. Another contributor could be a decrease in layoffs rather than stronger hiring.Healthy service sector takes economic spotlight this week

As consumer confidence rises, and faith in credit begins to restore post mortgage crises. The potential for growth in consumption looks promising; With interest rates extremely low, consumers are feeling comfortable with taking on more credit.

http://www.usatoday.com/story/money/2016/09/05/healthy-service-sector-takes-economic-spotlight-week/89773000/

Article by:
Paul Davidson, USA TODAY 3:38 p.m. EDT September 5, 2016

Laid-Off American Workers Are Having Better Luck Finding New Jobs

This article talks about how the U.S. labor market is showing some improvements since the recession in 2008. One sign of improvement mentioned was the unemployment rate for July. The rate was measured at 4.9% which is less than half of the 10% rate for 2009. Another sign mentioned was that more workers who lose a job are able to find a new one. According to the article 7.4 million people lost their jobs between January 2013 and December 2015. 3.2 million of those people were laid off from jobs that they had held for at least three years. However, among those long-tenured workers that were laid off over the past three years, it was reported that about 66% ended up re-employed as of January 2016. This is a fairly significant increase when compared to the 49% in 2010 of long-tenured workers that were re-employed after being laid off during the recession years of 2007-2009. Although the re-employment rate has not quite reached the 70% that was displayed in 2003-2005, the labor market is slowing showing improvements and starting to return to normal, seven years after the recession. However, it would be interesting to see how many people of the 66% had to settle for a lower income compared to what they were getting paid before they were laid off.

Here's the link: http://blogs.wsj.com/economics/2016/08/25/laid-off-american-workers-are-having-better-luck-finding-new-jobs/

Our Labor Force

In economics we call individuals who are seeking a job, unemployed.  Whereas those who are working we call them employed.  This article dives into the what the unemployment rate actually means and how our economy is impacted from the job market.  In most cases we only use metrics such as unemployed and employed to get a general idea of how many people are working in the job market.  However, there is a third metric which is not always used which is called, "missing workers."  A missing worker is a person that has the potential to work at a job but, because of the weak job market it's increasingly difficult to earn a position in a corporation such as Dell which manufactures computers and other software in the technology industry.

In August, the total number of missing workers was 2,220,000.  Whereas the official unemployment rate is 4.9%.  These numbers are recalculated monthly to ensure an aggregate and accurate measurement of the economies health.   Is there an economic relationship between the numbers?

Lets dive into the numbers:

May 2016 Missing Workers: 3,020,000
August 2016 Missing Workers: 2,220,000

Result: From May to August the overall economy experienced a 36% decrease in missing workers.  More workers are getting jobs and corporations are hiring.

What about the Unemployment Rate?  From June to August the unemployment rate stayed constant at 4.9%

Result: The data is telling us that the overall labor force is staying constant even though the number of missing workers is decreasing.  To go deeper in this issue we can assume that the employment rate and unemployment rate has seen very little movement in the past 3 months.

I can conclude that since the missing workers are starting to be employed, we can expect the unemployment rate to decrease in the coming months.

http://www.epi.org/publication/missing-workers/

Governor Christie Vetoes $15 Minimum Wage Bill

In recent news, Governor Chris Christie of New Jersey vetoed the state’s bill for a raise to $15 minimum wage. Governor Christie called the bill a, “really radical increase” that “would trigger an escalation of wages that will make doing business in New Jersey unaffordable.” Counters to Christie’s argument say the current minimum wage is unlivable, and that raising minimum wage will give low-wage workers more money to spend. The logic is undeniable, however just because more money literally means more money, that does not mean that standard of living will suddenly rise and businesses will thrive. Economist Tim Worstall said, “Human labor really is an economic good like pretty much all of the others. Raise the price and the demand for it will drop.” In the recent case of $15 minimum wage raise, Seattle has not been the golden example as hoped for by liberal politicians. Many businesses, especially restaurants, have closed down due to inability to keep up with the enforced high hourly wage rate. Forbes says, “shut-downs have idled dozens of low-wage workers, the very people advocates say the wage law is supposed to help. Instead of delivering the promised “living wage” of $15 an hour, economic realities created by the new law have dropped the hourly wage for these workers to zero.” Another problem is that these low-wage workers used to have multiple jobs, but now, with $15 minimum, they make a little too much to receive government aid but still not enough to truly live comfortably. I would have to agree with Governor Christie’s decision to hold off of such a drastic raise.

http://www.nytimes.com/2016/08/31/nyregion/christie-vetoes-minimum-wage-increase-for-new-jersey.html?_r=0

http://www.forbes.com/sites/timworstall/2015/03/16/we-are-seeing-the-effects-of-seattles-15-an-hour-minimum-wage/#6234f31715aa

The Pentagon Cannot Account for $6.5 Trillion Dollars of our Money!

This is an interesting article about how thousands of documents that should be on file, disappeared without a trace, and any reasonable explanation. The army failed to provide documents that are:accurate, complete, timely, and well-supported.

In one quarter of 2015, $2.8 trillion was adjusted by the US military. In 2015, $6.5 trillion was adjusted for the year. The inspector general found that 16,513 of 1.3 million records were removed from the Pentagon's budget system during the third quarter of the 2015 fiscal year. The D.F.A.S. Indianapolis quotes they were, "system-generated adjustments rather than manual." The Pentagon, the single largest US government bureaucracy, has been accused of delaying its financial accounting multiple times.

The argument here is that the Pentagon should have checks on it spending. The total market is affected negatively by explicit government spending. If the Pentagon can't account for the expenditure, why should the markets have to suffer because of outrageous budget?

As seen in the Reagan deficits of the early 1980s, there was an increase in defense spending, and big tax cuts. The government spends more bringing about many consequences: decreasing the overall savings of the economy, and increasing the interest rate.

https://www.rt.com/usa/356562-pentagon-account-trillion-audit/