The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
The International Monetary Fund announced last week that it will add the Yuan to its elite basket of reserve currencies, effective October 2016. As the world’ second largest economy and the biggest trading nation, China will then play an even larger role globally. The Yuan accounts for less than 3% of world trade, it will be a boost for China but unlikely to create a surge in Yuan buying, nor will Yuan displace the dollar in the near future. China now accounts for over 15% of the global output and the change will give that country additional leverage, provided that it will choose to have its finances more integrated into the international financial system. Money managers are currently losing faith in China’s ability to revive its economy, which got hit from rising nonperforming debts and dropping exports. China’s coal industry particularly is suffering from a global commodities slump. .Hidili Industry failed to repay dollar-denominated bonds in November, and Yunnan Coal had $205.6 million of overdue loans in October. Winsway coking-coal importer asked for approval of investors holding $309.5 million debenture due 2016, to be restructured.
Brazil’s recession got worse as its GDP shrank 4.5% in the third quarter creating the worst crisis since the Great Depression. There appear to be no real positive prospects for the next several quarters, debilitated by stall and political scandals. Consumer and business confidence plummeted causing layoffs and cutbacks bringing unemployment to 7.9%, a six-year high. Simultaneously inflation accelerated forcing the central bank to raise its benchmark interest rate to 14,25% a nine-year high claiming that the budget gap for the 12 months through October reached 9.5% of GDP.
The slowdown in emerging markets is put- ting the EU’s recovery to a test. ECB is debating a 1,1 trillion-euro asset purchase pro- gram and cutting the deposit rate deeper below zero. EU consumer prices rose an annual 0.1%in October while core inflation jumped 1,1%, the highest level since August 2013,
According to Thomas Piketty, author of the bestselling “Capital in the 21st Century”, Russia’s struggle to rebuild holdings depleted during last year’s currency crisis missed out on building a bigger stockpile in the past 15 years, by failing to create a transparent financial system. The flight of capital and
targeting half a trillion dollars, after going through 20% of its holdings, propping up the ruble last year made things worse, The Russian government is now backing efforts to repatriate $1 trillion in capital held abroad by companies and officials.
Standard and Poor suggested that the de- pressed oil and gas prices pushed the percentage of junk bond trading at distressed levels to the highest since the financial crisis. The ratings firm’s so-called distress ratio increased to 20.1% in November, up from 19.1% in October and the most since September 2009, when it hit 23,5%. The ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade debt outstanding, according to S&P distressed debt has a yield of at least 10% points more than similar-maturity Treasuries, At the same time, the Federal Reserve recently adopted a rule that curtails its flexibility to rescue struggling firms during crisis. It is designed to make Congress feel less concern about the Fed’s broad powers to pump money into the financial system.
In the U.S. factory activity fell in November to the lowest level since the end of the re- cession. The ISM index of manufacturing unexpectedly fell to 48.6 (level below 50 is a contraction) from 50.1 in October. Much of this is due to a weak global demand and a strong dollar. Our exports shrank for the sixth straight month. New orders dropped to 48.9 in November from 52,9 and production fell to 49.2 from 52.9. Inventories fell for the fifth straight month to 43. Prices fell for the 13th month in a row to 35.5 which the Fed views as deflationary. Yet, U.S. new-car sales continued to run at a fast pace toward 17.35 million peak in 2000. The tally brings the industry this year to 15.82 million cars through November.
Manufacturing is a smaller share of the U.S. economy than it used to be and the Business Roundtable survey showed that 27% of the CEOs expect to shrink their capital out- lays even more over the next six months. It offered a weak outlook for business for the third straight quarter. U.S. farm incomes will drop 38% this year to $55.9 billion, the low- est level in 10 years, after earning $123 bil- lion in 2013 and $90.4 billion in 2014. At the same time Congress agreed on a $305 billion measure to fund highways and mass- transit over the next five years, the longest span in 20 years.
E.S. Finley
Consumers spent an estimated $4,45 billion online on Thanksgiving and Black Friday, with Friday sales rising 14% from a year ago. They spent an estimated $12.1 billion at traditional stores over the two days, a drop from a year ago.
UoM consumer sentiment index for November fell to 91.3 from mid-month’s of 93.1.The personal savings rate was 5.6% in October- the highest since December 2012. U.S. companies’ profits dropped 1.1% in the third quarter to $2.1 trillion. Compared with a year ago, profits fell 4.7%, the biggest annual decline since 2Q, 2009. The revised GDP in the 2Q climbed to a 2.1% rate up from an initial estimated growth of 1.5%.
U. S. employers added 211,000 jobs in November, showing the official unemployment rate steady at 5%. Hiring was stronger in September and October than originally estimated. The November hiring brought the average monthly job growth to 210,000 this year, down from last year’s faster pace of 260,000 per month. The job scenario was viewed by investors as a sign that the market was ready for the initial liftoff in rates this month, followed by gradual increases. The Dow Jones Industrial average jumped 396.96 points, or 2.12%, to 17847.63, easing over the past few days about 17600, while the two-year Treasury note dropped to 0.943%. Wages rose a tepid 2.3% since last year, and are up 2.6% from January through November, with an outlook for higher raise rates to follow.
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MID-SHIP Report December 10, 2015
Brazil’s recession got worse as its GDP shrank 4.5% in the third quarter creating the worst crisis since the Great Depression. There appear to be no real positive prospects for the next several quarters, debilitated by stall and political scandals. Consumer and business confidence plummeted causing layoffs and cutbacks bringing unemployment to 7.9%, a six-year high. Simultaneously inflation accelerated forcing the central bank to raise its benchmark interest rate to 14,25% a nine-year high claiming that the budget gap for the 12 months through October reached 9.5% of GDP.
The slowdown in emerging markets is put- ting the EU’s recovery to a test. ECB is debating a 1,1 trillion-euro asset purchase pro- gram and cutting the deposit rate deeper below zero. EU consumer prices rose an annual 0.1%in October while core inflation jumped 1,1%, the highest level since August 2013,
According to Thomas Piketty, author of the bestselling “Capital in the 21st Century”, Russia’s struggle to rebuild holdings depleted during last year’s currency crisis missed out on building a bigger stockpile in the past 15 years, by failing to create a transparent financial system. The flight of capital and
targeting half a trillion dollars, after going through 20% of its holdings, propping up the ruble last year made things worse, The Russian government is now backing efforts to repatriate $1 trillion in capital held abroad by companies and officials.
Standard and Poor suggested that the de- pressed oil and gas prices pushed the percentage of junk bond trading at distressed levels to the highest since the financial crisis. The ratings firm’s so-called distress ratio increased to 20.1% in November, up from 19.1% in October and the most since September 2009, when it hit 23,5%. The ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade debt outstanding, according to S&P distressed debt has a yield of at least 10% points more than similar-maturity Treasuries, At the same time, the Federal Reserve recently adopted a rule that curtails its flexibility to rescue struggling firms during crisis. It is designed to make Congress feel less concern about the Fed’s broad powers to pump money into the financial system.
In the U.S. factory activity fell in November to the lowest level since the end of the re- cession. The ISM index of manufacturing unexpectedly fell to 48.6 (level below 50 is a contraction) from 50.1 in October. Much of this is due to a weak global demand and a strong dollar. Our exports shrank for the sixth straight month. New orders dropped to 48.9 in November from 52,9 and production fell to 49.2 from 52.9. Inventories fell for the fifth straight month to 43. Prices fell for the 13th month in a row to 35.5 which the Fed views as deflationary. Yet, U.S. new-car sales continued to run at a fast pace toward 17.35 million peak in 2000. The tally brings the industry this year to 15.82 million cars through November.
Manufacturing is a smaller share of the U.S. economy than it used to be and the Business Roundtable survey showed that 27% of the CEOs expect to shrink their capital out- lays even more over the next six months. It offered a weak outlook for business for the third straight quarter. U.S. farm incomes will drop 38% this year to $55.9 billion, the low- est level in 10 years, after earning $123 bil- lion in 2013 and $90.4 billion in 2014. At the same time Congress agreed on a $305 billion measure to fund highways and mass- transit over the next five years, the longest span in 20 years.
E.S. Finley
Consumers spent an estimated $4,45 billion online on Thanksgiving and Black Friday, with Friday sales rising 14% from a year ago. They spent an estimated $12.1 billion at traditional stores over the two days, a drop from a year ago.
UoM consumer sentiment index for November fell to 91.3 from mid-month’s of 93.1.The personal savings rate was 5.6% in October- the highest since December 2012. U.S. companies’ profits dropped 1.1% in the third quarter to $2.1 trillion. Compared with a year ago, profits fell 4.7%, the biggest annual decline since 2Q, 2009. The revised GDP in the 2Q climbed to a 2.1% rate up from an initial estimated growth of 1.5%.
U. S. employers added 211,000 jobs in November, showing the official unemployment rate steady at 5%. Hiring was stronger in September and October than originally estimated. The November hiring brought the average monthly job growth to 210,000 this year, down from last year’s faster pace of 260,000 per month. The job scenario was viewed by investors as a sign that the market was ready for the initial liftoff in rates this month, followed by gradual increases. The Dow Jones Industrial average jumped 396.96 points, or 2.12%, to 17847.63, easing over the past few days about 17600, while the two-year Treasury note dropped to 0.943%. Wages rose a tepid 2.3% since last year, and are up 2.6% from January through November, with an outlook for higher raise rates to follow.
Page 5
MID-SHIP Report December 10, 2015
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Within the last couple of weeks the world market has shown oil stockpiles having reached a record of almost 3 billion barrels, due to a strong production by OPEC and other sources. According to the International Energy Agency (IEA )It deepened the rout of oil prices down to the $40 level despite the world fuel demand having grown at the fastest pace in 5 years, Their report expects that production outside OPEC will fall 600,000 barrels per day next year, lowest since 1992, with an equal-sized decline in U.S. shale oil, creating a stronger outlook for next year. The oil weakness in combination with a plunge in commodities prices has hit producers of natural resources, under- mining many currencies. Since last summer Russian ruble fell 45%, Brazilian real 40%, Norwegian Krone 26%. The IMF showed that only 35% of member countries let their currencies float this year in face of many uncertainties and a high degree of volatility, causing the market to be erratic. In Europe ECB President Draghi assured the market that he will do what’s necessary in monetary easing to reach its inflation goal. While economists expected Japan’s economy to undergo another fall after contracting 0.7% in the second quarter, it came as a surprise when the announcement put it at a deeper level of decline of 8% annualized pace in the third quarter. Some economists maintain frequently that two consecutive quarterly contractions constitute a recession. Japan’s low unemployment of 3.4% combined with labor shortages due to an aging workforce makes it difficult to concur with that theory.
By the end of this month the IMF is expected to decide whether to include the Yuan in the basket of currencies of which SDR (Special Draw- ing Rights) is composed. Created 25 years ago, the SDR value is over $300 billion consisting of the dollar, euro, pound and yen, or about 2.5% of global currencies reserve. In case IMF decides to bring the Yuan into SDR, it would be for a small amount. China meets one criteri- on being a big exporter, but its Yuan is not as widely used as the other currencies. If admitted, Yuan would be allocated over several years and in no way could it rival the dollar in the near future.
China’s holdings of U.S. debt dropped to a seven month low of $1.258 trillion. More on China: the Population Reference Bureau, America’s think-tank, found that even if the new two-child policy were successful it would only increase the population by 23 million, or al- most 2%, but the number of people over 65 would double making the final result weak.
The Trans-Atlantic Trade and Investment Partnerships (TTIP) have globally raised many concerns. One would join the U.S. and the EU in a huge common market with 800m consumers, and the other one in the Pacific would be between the U.S., Japan and 10 other Asian countries. Some demands are far beyond tariffs and include drug patents and other protections while others voice opposition. The resolutions may be difficult and prolonged.
The WSJ reported that our monthly imports through the three busiest seaports (Los Ange- les, Long Beach Ca. and New York/Newark) declined during a peak season to below 1 mil- lion per month rate of TEUs (shipping contain- ers). Even so, the reduced total volume of im- ports in the first ten months of this year was up 4% above the level of a year ago. This slow- down in the past few months could be a blip or a possible signal of weakening GDP.
After dropping 0.1% in September, manufacturing output grew 0.4% in October but capacity utilization fell to 77.5% from 77.7%. Despite the cheap average gasoline price at $2.19, consumers are not inclined to spend. After stalling for two months retail sales barely moved in October. Spending at retailers rose only 1.7% since October 2014, compared with 4.7% annual climb the year earlier. S&P 500 consumer-discretionary sector, including major retailers, was the biggest decliner on November 13th, down 4.6% for that week. Sales at nonstore retailers on the other hand were up 7.1% from a year ago, the strongest of any retail category, and 1.4% higher in October. Online seller Amazon reported unexpected profit in October, and their sales rose 23% from a year ago. Excluding auto sales which slumped 0.5% and gasoline sales declining 0.9%, retail sales rose just 0.1% in October.
Sales of previously owned homes dropped 3.4% in October from the second-highest level since 2007,to 5.36 million annual rate, mainly to a limited supply. The median price of an existing home rose 65.8% from October 2014 to $219,600. In the first half of the year, owners borrowed $43.5 billion against their homes, or 45% more than in the first half of 2014. According to the Federal Reserve, since house prices bottomed in 2011 home equity has roughly doubled to $12.1 trillion and is nearing the point seen a decade ago, before the down-
turn. Although the NAHB (National Assn. of Home Builders) index fell 3 points to 62 in November, it remained near a 10-year high,
suggesting growth momentum.
Despite many uncertainties. the UoM’s preliminary consumer sentiment index for November rose to 93.1, a four-month high, from 90 in October. The gain in confidence ap- pears to have come from the lower two-thirds of pay as a seemingly improving job market and cheap fuel point to the most favorable income expectations since 2006, despite weak retails sales in October. Their survey index of expectations six months from now rose to 85.6, a five-month high, from 82.1 in October. The gauge of current conditions increased to 104.8, the highest since August, from 102.3. The survey expected an inflation rate of 2.5% in the next year, and prices would also rise 2.5% over the next 5 to 10 years, the lowest in monthly data going back to 1979. In light of the recent geopolitical and socio-economic developments, we have serious reservations about this overly optimistic forecast. The CPI rose 0.2% in October while core prices have increased 1.9% in a year. Despite weak third quarter,\the Conference Board’s outlook for the next 3 to 6 months rose 0.6%, with 9 out of 10 indicators climbing.
Profits from S&P 500 companies have fallen about $24 billion in the first three quarters of this year to $804 billion, compared with $828 billion for the first three quarters last year. In seeking protection, investors facing the initial rate increase in a decade, sold $1.12 billion U.S. fixed income funds in November, for the first time since June.. The Federal officials stressed that henceforth tightening of the easy money policy will be gradual. Thomas Hoenig Vice Chairman of FDIC suggested that instead of extending their borrowings, banks should add more equity capital to better withstand crisis. In seeking protection, for the first time since June, investors facing the initial rate increase in a decade sold $1.12 billion U.S. fixed income funds in November, Federal officials stressed however that henceforth the tightening of easy money policy will be gradual.
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MID-SHIP Report November 25, 2015
By the end of this month the IMF is expected to decide whether to include the Yuan in the basket of currencies of which SDR (Special Draw- ing Rights) is composed. Created 25 years ago, the SDR value is over $300 billion consisting of the dollar, euro, pound and yen, or about 2.5% of global currencies reserve. In case IMF decides to bring the Yuan into SDR, it would be for a small amount. China meets one criteri- on being a big exporter, but its Yuan is not as widely used as the other currencies. If admitted, Yuan would be allocated over several years and in no way could it rival the dollar in the near future.
China’s holdings of U.S. debt dropped to a seven month low of $1.258 trillion. More on China: the Population Reference Bureau, America’s think-tank, found that even if the new two-child policy were successful it would only increase the population by 23 million, or al- most 2%, but the number of people over 65 would double making the final result weak.
The Trans-Atlantic Trade and Investment Partnerships (TTIP) have globally raised many concerns. One would join the U.S. and the EU in a huge common market with 800m consumers, and the other one in the Pacific would be between the U.S., Japan and 10 other Asian countries. Some demands are far beyond tariffs and include drug patents and other protections while others voice opposition. The resolutions may be difficult and prolonged.
The WSJ reported that our monthly imports through the three busiest seaports (Los Ange- les, Long Beach Ca. and New York/Newark) declined during a peak season to below 1 mil- lion per month rate of TEUs (shipping contain- ers). Even so, the reduced total volume of im- ports in the first ten months of this year was up 4% above the level of a year ago. This slow- down in the past few months could be a blip or a possible signal of weakening GDP.
After dropping 0.1% in September, manufacturing output grew 0.4% in October but capacity utilization fell to 77.5% from 77.7%. Despite the cheap average gasoline price at $2.19, consumers are not inclined to spend. After stalling for two months retail sales barely moved in October. Spending at retailers rose only 1.7% since October 2014, compared with 4.7% annual climb the year earlier. S&P 500 consumer-discretionary sector, including major retailers, was the biggest decliner on November 13th, down 4.6% for that week. Sales at nonstore retailers on the other hand were up 7.1% from a year ago, the strongest of any retail category, and 1.4% higher in October. Online seller Amazon reported unexpected profit in October, and their sales rose 23% from a year ago. Excluding auto sales which slumped 0.5% and gasoline sales declining 0.9%, retail sales rose just 0.1% in October.
Sales of previously owned homes dropped 3.4% in October from the second-highest level since 2007,to 5.36 million annual rate, mainly to a limited supply. The median price of an existing home rose 65.8% from October 2014 to $219,600. In the first half of the year, owners borrowed $43.5 billion against their homes, or 45% more than in the first half of 2014. According to the Federal Reserve, since house prices bottomed in 2011 home equity has roughly doubled to $12.1 trillion and is nearing the point seen a decade ago, before the down-
turn. Although the NAHB (National Assn. of Home Builders) index fell 3 points to 62 in November, it remained near a 10-year high,
suggesting growth momentum.
Despite many uncertainties. the UoM’s preliminary consumer sentiment index for November rose to 93.1, a four-month high, from 90 in October. The gain in confidence ap- pears to have come from the lower two-thirds of pay as a seemingly improving job market and cheap fuel point to the most favorable income expectations since 2006, despite weak retails sales in October. Their survey index of expectations six months from now rose to 85.6, a five-month high, from 82.1 in October. The gauge of current conditions increased to 104.8, the highest since August, from 102.3. The survey expected an inflation rate of 2.5% in the next year, and prices would also rise 2.5% over the next 5 to 10 years, the lowest in monthly data going back to 1979. In light of the recent geopolitical and socio-economic developments, we have serious reservations about this overly optimistic forecast. The CPI rose 0.2% in October while core prices have increased 1.9% in a year. Despite weak third quarter,\the Conference Board’s outlook for the next 3 to 6 months rose 0.6%, with 9 out of 10 indicators climbing.
Profits from S&P 500 companies have fallen about $24 billion in the first three quarters of this year to $804 billion, compared with $828 billion for the first three quarters last year. In seeking protection, investors facing the initial rate increase in a decade, sold $1.12 billion U.S. fixed income funds in November, for the first time since June.. The Federal officials stressed that henceforth tightening of the easy money policy will be gradual. Thomas Hoenig Vice Chairman of FDIC suggested that instead of extending their borrowings, banks should add more equity capital to better withstand crisis. In seeking protection, for the first time since June, investors facing the initial rate increase in a decade sold $1.12 billion U.S. fixed income funds in November, Federal officials stressed however that henceforth the tightening of easy money policy will be gradual.
Page 1
MID-SHIP Report November 25, 2015
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
The world economy does not appear to be showing any signs of improvement. The EU continues to limp economically and politically causing the ECB to likely extend QE action beyond September 2016. The persistent slowdown in China diminishes exports from the euro area, particularly from Germany. The EU industrial output fell 0.5% in August. The emerging markets, which until a few years ago, were favorites among investors, are not doing so well either. Brazil is in the second year of recession, and Russia is close to it. IMF revealed that emerging markets’ GDP has slowed down for the fifth year in a row, and at the same time, their companies’ debt, excluding financials, have reached 90% of the GDP. As their currencies keep declining, repayment of the debt is get- ting more difficult. According to Capital Economics, over $260 billion was taken out of the emerging markets, more than at the time of the financial crisis seven years ago.
After taking several steps to stop its slowdown, as listed in our last issue, China suddenly put the brakes on them. China also decided to end its one -child policy, which dramatically shrank its working age population,16 to 59, down 66% to 916 million, compared to 74% in 2010. Social engineering through a selection process caused the sex ratio to climb to almost 120 boys for every 100 girls, which leveled by year 2000. The eventual consequences of this new two-child policy, therefore, are questionable, particularly since China, as other Asian countries, are facing a “graying society”. Meanwhile, according to the Economist, Chi- na’s overall debt-to-GDP ratio was about 160% in 2007, and now stands at more than 240% or $25 trillion (161 trillion Yuan), nearly 50% climb over the past 4 years. Bank of America commented that “some investors are buying bonds with borrowed cash.”
At home, the White House and Congress agreed to suspend the debt limit through March 2017, established by a 2011 law that has been in effect since 2013, known as sequester. It boosts spend- ing by $80 billion through September 2017; $50 billion in fiscal 2016 and $30 billion in 2017, equally spread between military and domestic spend- ing. In the wake of OPEC’s policy to maintain it’s share of the market, U.S. production of oil dropped from 9.6 million barrels a year to 9 mil- lion. Concurrently the U.S. imports of oil increased 1.7% from April through July. The price of oil still hovers around the mid-forties. After rising at a 3.9% rate in the second quarter, the GDP rose only 1.5% in the third quarter, despite the fact
that in the same quarter, spending by consumers reached a 3.2% level.
With weak overseas demand and raised inventories in the U.S. the ISM index showed small change at 50.1 in October, the weakest since May 2013. Half of the 18 industries surveyed shrank including metals, petroleum and plastics. Only 7 industries showed growth. ISM’s gauge of employment fell to 47.6 in October, the weakest reading since August 2009, from 50.5 in September. Only 5 of the 18 industries reported expanding employ- ment, the lowest since 2009. The index of export orders rose to 47.5 from 46.5, the fifth straight month of contraction. Inventories index dropped to 51 in October from 54.5, while the index of prices paid rose to 39 from 38. The new orders gauge rose to 52.9 from 50.1, and production index also rose to 52.9 from 51.8. Gauge for orders waiting to be filled contracted for the fifth month in a row. Motor vehicles production climbed at a 14.9% rate in the 3Q, after a 14.5% increase in 2Q. Sales of cars and light trucks were at a 18.1 million rate in September, the strongest since 2005.
For the year, S&P 500 earnings are predicted to fall 0.5%. For 2016 its earnings growth are expected at 7.9%, down from 10.9% expected in late July. The U.S. trade deficit in manufacturing hit a record $74.7 billion in September. Overall employment is up 3% since the recession, but manufacturing is down 10%. Owing to the lowest oil im- ports in a decade. U.S. trade deficit shrank in September to $40.8 billion from $48 billion in Au- gust. But one-month dip masks a rising trend; U.S. imports from China hit a record of $45.7 billion in September.
On the 100th anniversary of the U.S. Bureau of Labor Statistics, the backbone of monthly job re- ports, the occasion was somewhat tarnished by Alan Greenspan, former Federal Reserve Chair- man; based on 50 years of its own figures, Green- span found an inverse relationship between entitlement outlays and gross domestic savings. This showed that the money the government spends on retiring boomers, leaves less available for in- vestment. If true, growth of our GDP will be limited for years. Greenspan said -”if savings are not created, investments are not occurring, therefore productivity is not growing, thus the rate of growth in the economy is held back.” However, there are skeptics about that conclusion. Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former chief economist for Vice President Joe Biden, believes that while weak productivity and declining labor force worry him, entitlement spending isn’t crowding investment,-- in part because there is plenty of capital available. We tend to agree with Alan Greenspan’s conclu- sion. Meanwhile the persistent Fed hesitation to raise the interest rates has done more harm than
E.S. Finley
good, favoring financial assets rather than real investment.
Last week the Labor Department announced that U.S. employers added 271,000 to non-farm payrolls in October, bringing the official unemployment rate to 5%. Average hourly earnings rose at a 2.5% pace. However encouraging these figures may look, they are illusory. The fact remains that 9.8% of people were still either stuck in part-time jobs or too discouraged to look for work in October. In the same month 7.9 million workers who wanted a job could not find one, a highly elevated level, six years after the expansion started. In addition, participation of employment ratio to the labor force continues to be stuck at about 62.4%, the lowest since October 1977. Applications for unemployment benefits rose 16,000 to 276,000 in the week of October 31, the highest level in five weeks. Even so, the Federal Reserve is faced with no more arrows in its monetary policy quiver, short of turning to negative interest levels. Therefore it is likely to be compelled to abandon its 4QE regime and begin to raise the interest rate in December, paving the way from a distortion of the interest rate to letting it rise naturally, enabling investments to follow, and in that manner help our economy, both with growth and employment. The immediate reaction of the stock market was negative. Still, the dollar rose to a six months high, and some analysts expect the U.S Dollar Index to extend to 102, a level last reached in 2003.
Congress and the White House agreed to in- crease spending by $80 billion through September 2017, and increase the federal
government's borrowing limit until March 2017. The bill raises spending evenly for both military and domestic programs: $50 billion in 2016 and $30 billion in 2017. It is the second 2-year agreement to relax the sequester across-the-board cuts that took effect in 2013.
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
Page 1 MID-SHIP Report November 12, 2015
After taking several steps to stop its slowdown, as listed in our last issue, China suddenly put the brakes on them. China also decided to end its one -child policy, which dramatically shrank its working age population,16 to 59, down 66% to 916 million, compared to 74% in 2010. Social engineering through a selection process caused the sex ratio to climb to almost 120 boys for every 100 girls, which leveled by year 2000. The eventual consequences of this new two-child policy, therefore, are questionable, particularly since China, as other Asian countries, are facing a “graying society”. Meanwhile, according to the Economist, Chi- na’s overall debt-to-GDP ratio was about 160% in 2007, and now stands at more than 240% or $25 trillion (161 trillion Yuan), nearly 50% climb over the past 4 years. Bank of America commented that “some investors are buying bonds with borrowed cash.”
At home, the White House and Congress agreed to suspend the debt limit through March 2017, established by a 2011 law that has been in effect since 2013, known as sequester. It boosts spend- ing by $80 billion through September 2017; $50 billion in fiscal 2016 and $30 billion in 2017, equally spread between military and domestic spend- ing. In the wake of OPEC’s policy to maintain it’s share of the market, U.S. production of oil dropped from 9.6 million barrels a year to 9 mil- lion. Concurrently the U.S. imports of oil increased 1.7% from April through July. The price of oil still hovers around the mid-forties. After rising at a 3.9% rate in the second quarter, the GDP rose only 1.5% in the third quarter, despite the fact
that in the same quarter, spending by consumers reached a 3.2% level.
With weak overseas demand and raised inventories in the U.S. the ISM index showed small change at 50.1 in October, the weakest since May 2013. Half of the 18 industries surveyed shrank including metals, petroleum and plastics. Only 7 industries showed growth. ISM’s gauge of employment fell to 47.6 in October, the weakest reading since August 2009, from 50.5 in September. Only 5 of the 18 industries reported expanding employ- ment, the lowest since 2009. The index of export orders rose to 47.5 from 46.5, the fifth straight month of contraction. Inventories index dropped to 51 in October from 54.5, while the index of prices paid rose to 39 from 38. The new orders gauge rose to 52.9 from 50.1, and production index also rose to 52.9 from 51.8. Gauge for orders waiting to be filled contracted for the fifth month in a row. Motor vehicles production climbed at a 14.9% rate in the 3Q, after a 14.5% increase in 2Q. Sales of cars and light trucks were at a 18.1 million rate in September, the strongest since 2005.
For the year, S&P 500 earnings are predicted to fall 0.5%. For 2016 its earnings growth are expected at 7.9%, down from 10.9% expected in late July. The U.S. trade deficit in manufacturing hit a record $74.7 billion in September. Overall employment is up 3% since the recession, but manufacturing is down 10%. Owing to the lowest oil im- ports in a decade. U.S. trade deficit shrank in September to $40.8 billion from $48 billion in Au- gust. But one-month dip masks a rising trend; U.S. imports from China hit a record of $45.7 billion in September.
On the 100th anniversary of the U.S. Bureau of Labor Statistics, the backbone of monthly job re- ports, the occasion was somewhat tarnished by Alan Greenspan, former Federal Reserve Chair- man; based on 50 years of its own figures, Green- span found an inverse relationship between entitlement outlays and gross domestic savings. This showed that the money the government spends on retiring boomers, leaves less available for in- vestment. If true, growth of our GDP will be limited for years. Greenspan said -”if savings are not created, investments are not occurring, therefore productivity is not growing, thus the rate of growth in the economy is held back.” However, there are skeptics about that conclusion. Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former chief economist for Vice President Joe Biden, believes that while weak productivity and declining labor force worry him, entitlement spending isn’t crowding investment,-- in part because there is plenty of capital available. We tend to agree with Alan Greenspan’s conclu- sion. Meanwhile the persistent Fed hesitation to raise the interest rates has done more harm than
E.S. Finley
good, favoring financial assets rather than real investment.
Last week the Labor Department announced that U.S. employers added 271,000 to non-farm payrolls in October, bringing the official unemployment rate to 5%. Average hourly earnings rose at a 2.5% pace. However encouraging these figures may look, they are illusory. The fact remains that 9.8% of people were still either stuck in part-time jobs or too discouraged to look for work in October. In the same month 7.9 million workers who wanted a job could not find one, a highly elevated level, six years after the expansion started. In addition, participation of employment ratio to the labor force continues to be stuck at about 62.4%, the lowest since October 1977. Applications for unemployment benefits rose 16,000 to 276,000 in the week of October 31, the highest level in five weeks. Even so, the Federal Reserve is faced with no more arrows in its monetary policy quiver, short of turning to negative interest levels. Therefore it is likely to be compelled to abandon its 4QE regime and begin to raise the interest rate in December, paving the way from a distortion of the interest rate to letting it rise naturally, enabling investments to follow, and in that manner help our economy, both with growth and employment. The immediate reaction of the stock market was negative. Still, the dollar rose to a six months high, and some analysts expect the U.S Dollar Index to extend to 102, a level last reached in 2003.
Congress and the White House agreed to in- crease spending by $80 billion through September 2017, and increase the federal
government's borrowing limit until March 2017. The bill raises spending evenly for both military and domestic programs: $50 billion in 2016 and $30 billion in 2017. It is the second 2-year agreement to relax the sequester across-the-board cuts that took effect in 2013.
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
Page 1 MID-SHIP Report November 12, 2015
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
The world economy continues in the shadow of swelling clouds, caused by China’s slow- down and that of the rest of BRIC members, plus other emerging nations. China exports fell 3.7% in September from a year ago, and imports declined 21%. China experienced record flight of capital over the past 8 months. Brazil will contract 3% this year and 1.4%in 2016. This will make it a first recession since 1931. Even developed nations were not left unscathed, including the U.S. which cut back again on its factories production in September. The demand for Ameri- can products narrowed in face of weakening economies, aggravated by the strong dollar and devalued foreign currencies, which make American goods more expensive. Industrial production in the U.S. comprising factories, mines and utilities fell 0.2% in September after retreating 0.1% in Au- gust. Manufacturing, the biggest component of index measuring the production of every- thing, also declined 0.1% in September after falling 0.4% in August, without a sign of forthcoming improvement. We would be remiss not to mention here the geopolitical flash points involving the Ukraine, Syria, Libya, Yemen and, as of late, Israel. All of these contribute to great uncertainty and high volatility of the financial markets.
To cushion its economic slowdown China’s Central Bank cut its benchmark lending rate and reserve requirements for banks. Similar- ly, ECB is planning fresh stimulus measures to boost the EU economy, including a de- posit rate cut. Government debt in France and Italy is reaching the Euro-Era high, while Britain is considering another QE. In the wake of these central banks’ maneuvers, U.S. stocks recovered with the DJIA closing at 17,646 last week, but stalled this week.
The Conference Board Leading Economic Indicators Index (LEI) for the U.S. decreased 0.2% in September from a revised 123.5 in August to 123.3. Despite this slight decline, the LEI increased 1.5% in the six-months period (3% annual rate) but slower than its 3.9 annual rate in the previous six-months. LEI’s Director, A. Ozyildirim said that economic expansion “will continue at a moderate rate of about 2.5% percent in the coming quarters, despite the mixed global economic landscape.”
The latest CPI has added to the Fed’s indecision regarding the interest rate rise. Ac- cording to the Labor Department, the con- sumer-price index fell 0.2% in September, the second straight month of price decline, owing mostly to low gas prices. Excluding food and energy, prices rose 0.2% in the month and 1.9% during the past 12 months. The price of services rose a healthy 2.7% in the past year. mostly by a 3.2% rise in the cost of shelter. On the other hand, weekly wages dropped 0.2% in September. From year ago weekly earnings went up 2.2%, while the number of hours worked were unchanged from a year ago, but fell 0.3% in September.
Angus Deaton, the recent recipient of the 2015 Nobel Prize in economics, has newly defined how to measure economic status, since income, poverty data and/or unemployment offer only a limited insight. Deaton’s thesis points to the importance of including food, housing and other needs. Along this line, the U.S. researchers developed the Human Needs Index, (HNI), which focuses not on income but on consumption, and whether people’s basic needs are being met. After reaching a high point of 2.8 in 2012, the HNI slipped to 1.4 in 2014, its low- est level since its started in 2004.
The budget deficit for the fiscal 2015 was brought down to $439 billion, the smallest since 2007, as revenues rose sharply from rising incomes and corporate profits and some budget reductions. It is now about 2.5% of the GDP and below the average over the past 40 years. Still, the government is about to run out of cash, if the debt ceiling, now set at $18.1 trillion is not raised by Congress. Despite seven years of unprece- dented monetary intervention, the U.S, economy is still about 16% below the level it could have reached had it grown at its previ- ous historical pace of 5%.
The National Association of Builders housing market Index climbed to 64 in October, a 10- year high in home-builder sentiment, after standing at 61, both in August and Septem- ber. It suggests to some economists an expectation of further improvement in housing activity during 2015. For the 12th straight week, the 30-year fixed mortgage averaged
E.S. Finley
3.82%. However, there are still pockets of softness in some markets across the nation. The homebuilders’ gauge of current single- family sales rose to 70 in October from 67 in September. At the same time sales of exist- ing homes climbed 4.7% in September to an annual rate of 5.55 million, a significant in- crease, pointing to a strength unseen since 2007, of 5.79 million. The national median home price was $221,900 in September, up 6.1% from a year ago, with first-time home buyers’ share at 29%, down from 32% in August. However, sales of new homes fell 11.5% in September to a 468,000 annual rate, after the prior 2 months were revised lower. Progress in housing is held back by limited affordable homes and workable lots on which to build. The supply of new homes, at current sales rate, rose to 5.8 months from 4.9 months in August.
In deciding to keep the current interest rate at its September meeting, the Federal Open Market Committee continued to see “the risks to the outlook for the economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.” The Committee continues to monitor inflation developments closely, and in determining whether it will be appropriate to raise the target rate at its next meeting, the Committee will assess progress –both realized and expected – toward its objectives of maximum employment and 2% inflation. The only opposing vote was cast by Jeffrey Lacker, President of the Richmond Fed, who preferred to raise the target range for the federal funds rate by 0.25% at this meet- ing.
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MID-SHIP Report October 29, 2015
To cushion its economic slowdown China’s Central Bank cut its benchmark lending rate and reserve requirements for banks. Similar- ly, ECB is planning fresh stimulus measures to boost the EU economy, including a de- posit rate cut. Government debt in France and Italy is reaching the Euro-Era high, while Britain is considering another QE. In the wake of these central banks’ maneuvers, U.S. stocks recovered with the DJIA closing at 17,646 last week, but stalled this week.
The Conference Board Leading Economic Indicators Index (LEI) for the U.S. decreased 0.2% in September from a revised 123.5 in August to 123.3. Despite this slight decline, the LEI increased 1.5% in the six-months period (3% annual rate) but slower than its 3.9 annual rate in the previous six-months. LEI’s Director, A. Ozyildirim said that economic expansion “will continue at a moderate rate of about 2.5% percent in the coming quarters, despite the mixed global economic landscape.”
The latest CPI has added to the Fed’s indecision regarding the interest rate rise. Ac- cording to the Labor Department, the con- sumer-price index fell 0.2% in September, the second straight month of price decline, owing mostly to low gas prices. Excluding food and energy, prices rose 0.2% in the month and 1.9% during the past 12 months. The price of services rose a healthy 2.7% in the past year. mostly by a 3.2% rise in the cost of shelter. On the other hand, weekly wages dropped 0.2% in September. From year ago weekly earnings went up 2.2%, while the number of hours worked were unchanged from a year ago, but fell 0.3% in September.
Angus Deaton, the recent recipient of the 2015 Nobel Prize in economics, has newly defined how to measure economic status, since income, poverty data and/or unemployment offer only a limited insight. Deaton’s thesis points to the importance of including food, housing and other needs. Along this line, the U.S. researchers developed the Human Needs Index, (HNI), which focuses not on income but on consumption, and whether people’s basic needs are being met. After reaching a high point of 2.8 in 2012, the HNI slipped to 1.4 in 2014, its low- est level since its started in 2004.
The budget deficit for the fiscal 2015 was brought down to $439 billion, the smallest since 2007, as revenues rose sharply from rising incomes and corporate profits and some budget reductions. It is now about 2.5% of the GDP and below the average over the past 40 years. Still, the government is about to run out of cash, if the debt ceiling, now set at $18.1 trillion is not raised by Congress. Despite seven years of unprece- dented monetary intervention, the U.S, economy is still about 16% below the level it could have reached had it grown at its previ- ous historical pace of 5%.
The National Association of Builders housing market Index climbed to 64 in October, a 10- year high in home-builder sentiment, after standing at 61, both in August and Septem- ber. It suggests to some economists an expectation of further improvement in housing activity during 2015. For the 12th straight week, the 30-year fixed mortgage averaged
E.S. Finley
3.82%. However, there are still pockets of softness in some markets across the nation. The homebuilders’ gauge of current single- family sales rose to 70 in October from 67 in September. At the same time sales of exist- ing homes climbed 4.7% in September to an annual rate of 5.55 million, a significant in- crease, pointing to a strength unseen since 2007, of 5.79 million. The national median home price was $221,900 in September, up 6.1% from a year ago, with first-time home buyers’ share at 29%, down from 32% in August. However, sales of new homes fell 11.5% in September to a 468,000 annual rate, after the prior 2 months were revised lower. Progress in housing is held back by limited affordable homes and workable lots on which to build. The supply of new homes, at current sales rate, rose to 5.8 months from 4.9 months in August.
In deciding to keep the current interest rate at its September meeting, the Federal Open Market Committee continued to see “the risks to the outlook for the economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.” The Committee continues to monitor inflation developments closely, and in determining whether it will be appropriate to raise the target rate at its next meeting, the Committee will assess progress –both realized and expected – toward its objectives of maximum employment and 2% inflation. The only opposing vote was cast by Jeffrey Lacker, President of the Richmond Fed, who preferred to raise the target range for the federal funds rate by 0.25% at this meet- ing.
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MID-SHIP Report October 29, 2015
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
E.S. Finley
E.S. Finley
The third quarter showed the largest percentage declines for U.S. stocks in four years, caused by a slowdown of the global economy. There was also concern over the growth rate of China, with its factory gauge at a 6-1/2 year low, imports down 20.4% in September from year ago, and weak- ness in many other markets. Contrary to earlier predictions voiced by the Fed that global slow- down would have little impact on the U.S. growth rate, quarterly corporate earnings are expected to go down for the second quarter in a row. and for the first time since the financial crisis. The only U.S. sectors which showed marked growth in estimated earnings in the third quarter were Con- sumer Discretionary, Telecom, and Financials, ranging respectively between 12% and 10% from a year ago. Slower demand from Europe and Japan and the firm dollar caused a decline in U.S. exports. Ignoring the energy sector, the S&P 500 estimated earnings stand at 3.4%; volatility of the market will continue unabated. The WSJ believes that spreads in the investment-grade corporate bonds over Treasuries at a 1.62% yield widened in two consecutive years, and since the financial crisis it is “flashing a warning sign”. Previously, that has occurred in 1997 and 1998 during a fi- nancial crisis in Asia, and during the dot-com bubble in the U.S. The IMF cut its forecast for emerging markets to 4% this year, down 0.2% from last July. The Insti- tute of International Finance estimated that this is the first year since 1988, that more than $1 trillion was pulled out of Turkey, Brazil and South Africa. World’s central banks sold U.S. government bonds at the fastest record pace, hitting
$123 billion in the year ended in July. A year earlier, they purchased $27 billion, and a year before that $230 billion. The IMF cut its estimate for global growth to 3.1% this year from its earlier forecast of 3.3%, and down to 3.6% for 2016, with a 50% chance that it may fall below 3%. In her final year as the IMF’s head, Ms. Lagarde asked EU to address the very big and bad loans, and for the Fed to hold off its first rate increase in 9 years. Its new economic Chief, Maurice Obstfeld warned that “downside risks to the world economy appear more pronounced than they were just a few months ago.” IMF and IIF warned that developing countries face a wave of corporate defaults. A new free-trade agreement with a dozen Pacific Rim nations (TPP) was closed with a promise of great economic, political and strategic benefits for many years to come, adding close to $300 billion to the world’s GDP within the next decade. How- ever, it is too early to predict whether and when the Congress will approve it in its present form.
In a timely front-page article in the October 3rd issue The Economist featured an analysis of the U.S. dollar in the world economy. It shows that the U.S. accounts for 23% of global GDP and 12% of trade, yet about 60% of the world’s output with similar share of people, lie within a de facto dollar
zone. It further points out that American firms’ share of the stock of international corporate in- vestment has fallen from 39% in 1999 to 24% today. American fund managers run 55% of the world’s assets, up from 44% a decade ago. The widening gap between America’s economic and financial power creates problems for other coun- tries in the dollar zone.
In the past decade America’s share of imports has dropped from 16% to 13%. America is the biggest export market for only 32 countries, down from 44 in 1994, while the figure for China has risen from 2 to 43. “A system in which the Fed dispenses and the world convulses is unstable.” Until China opens its financial markets, the Yuan will be only a bit player. In recent papers the UoC scholars argued that the ”size, stability and liquidity” of finan- cial markets are the most important determinants of reserve status. The Economist suggests that the global monetary and financial system will not smoothly or quickly wean itself off the greenback. The article concludes that “The dollar has no peers, but the system that it anchors is cracking.”
Despite the ugly U.S. stock market performance in August, personal spending rose 0.4%, after climb- ing 0.4% in July and 0.3% in June. Personal in- come rose 0.3% in August. The personal savings rate fell to 4.6% from 4.7% in July, and 5.4% in the 1Q. After a 3.9% robust growth of the GDP in the second quarter, the estimates set its growth at just above 2% for the balance of the year. Somewhat surprisingly, consumers’ outlook on the U.S. economy improved in September, The Conference Board index of consumer confidence rose to 103.0 from a revised 101.3 in August. However, the trade gap widened sharply in August reflecting a drop in exports. It grew 15.6% to $48.33 billion, with rising imports of consumer goods. Imports rose 1.2% while exports dropped 2%, to their low- est level since October 2012.The U.S, trade deficit grew 5.2% from January to August compared with the year-earlier period.
According to S&P /Case-Shiller Home Price Index of 10 major cities, existing single-family homes rose 4.7% in the year ended July, after gaining 4.5% in June. The 20-city index climbed 5%, just above the June level. NAR pending home-sales index fell 1.4% showing some disparity in the home market. In strong cities a sellers’ market prevailed with rises between 10 and 15%.
After a few best readings in ten years, the rate of growth in U.S. service industries slowed. The ISM index fell to 56.9 in September from 59 in August, due mainly to a lower demand in face of global weakness. Its payroll growth has slowed for four straight months, the longest streak since 2001. New orders dropped to 56.7 in September, the lowest in 7 months, from 63.43, the largest drop since November 2008. The ISM services index
E.S. Finley
make up almost 80% of the economy, from retail- ing to healthcare, including sectors in construction and agriculture. The ISM’s manufacturing index fell broadly to its weakest level in over two years, dropping to 50.2 in September from 51.1. Mean- while, DJIA added several hundred points but at the same time the U.S Treasury sold a new government security with a three-month maturity and a zero yield for the first time on record. Not a fa- vorable signal.
Employers added only 142,000 workers to payrolls in September. Although the Labor Department claims that the official unemployment level stands at 5.1%, we question it in face of the fact that the workforce participation rate persists at 62.4%, the lowest since October 1977, revealing over and over again that the unprecedented monetary policies of the past 7 years did not help alleviate the serious persistent unemployment problem. The hourly wages rose 2.2% over the last 12 months, they posted on average a 2% gain since 2009, falling a penny in September to $25.09. The financial market is far from a balance. A significant economic growth can be brought about by a long- term settlement of our national debt, a fair tax reform, close review of entitlements and unproductive government projects, accompanied
by sound and steady federal budgeting. It is pernicious to continue the failed easy money policy instead of bringing back a balance to our financial market by raising, even moderately, the interest rate. Fed Vice-Chairman Stanley Fischer said the U.S economy may be strong enough to merit an interest–rate increase by the end of 2015, while noting slower job growth and international developments. Atlanta Fed President Dennis Lockhart, Chicago’s Fed President Charles Evans with other six Fed Presidents, comprising 8 out of 12, similar- ly favored such interest-rate increase, but Fed Governors Daniel Tarullo and Lael Brainard opposed that timing.
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MID-SHIP Report October 15, 2015
$123 billion in the year ended in July. A year earlier, they purchased $27 billion, and a year before that $230 billion. The IMF cut its estimate for global growth to 3.1% this year from its earlier forecast of 3.3%, and down to 3.6% for 2016, with a 50% chance that it may fall below 3%. In her final year as the IMF’s head, Ms. Lagarde asked EU to address the very big and bad loans, and for the Fed to hold off its first rate increase in 9 years. Its new economic Chief, Maurice Obstfeld warned that “downside risks to the world economy appear more pronounced than they were just a few months ago.” IMF and IIF warned that developing countries face a wave of corporate defaults. A new free-trade agreement with a dozen Pacific Rim nations (TPP) was closed with a promise of great economic, political and strategic benefits for many years to come, adding close to $300 billion to the world’s GDP within the next decade. How- ever, it is too early to predict whether and when the Congress will approve it in its present form.
In a timely front-page article in the October 3rd issue The Economist featured an analysis of the U.S. dollar in the world economy. It shows that the U.S. accounts for 23% of global GDP and 12% of trade, yet about 60% of the world’s output with similar share of people, lie within a de facto dollar
zone. It further points out that American firms’ share of the stock of international corporate in- vestment has fallen from 39% in 1999 to 24% today. American fund managers run 55% of the world’s assets, up from 44% a decade ago. The widening gap between America’s economic and financial power creates problems for other coun- tries in the dollar zone.
In the past decade America’s share of imports has dropped from 16% to 13%. America is the biggest export market for only 32 countries, down from 44 in 1994, while the figure for China has risen from 2 to 43. “A system in which the Fed dispenses and the world convulses is unstable.” Until China opens its financial markets, the Yuan will be only a bit player. In recent papers the UoC scholars argued that the ”size, stability and liquidity” of finan- cial markets are the most important determinants of reserve status. The Economist suggests that the global monetary and financial system will not smoothly or quickly wean itself off the greenback. The article concludes that “The dollar has no peers, but the system that it anchors is cracking.”
Despite the ugly U.S. stock market performance in August, personal spending rose 0.4%, after climb- ing 0.4% in July and 0.3% in June. Personal in- come rose 0.3% in August. The personal savings rate fell to 4.6% from 4.7% in July, and 5.4% in the 1Q. After a 3.9% robust growth of the GDP in the second quarter, the estimates set its growth at just above 2% for the balance of the year. Somewhat surprisingly, consumers’ outlook on the U.S. economy improved in September, The Conference Board index of consumer confidence rose to 103.0 from a revised 101.3 in August. However, the trade gap widened sharply in August reflecting a drop in exports. It grew 15.6% to $48.33 billion, with rising imports of consumer goods. Imports rose 1.2% while exports dropped 2%, to their low- est level since October 2012.The U.S, trade deficit grew 5.2% from January to August compared with the year-earlier period.
According to S&P /Case-Shiller Home Price Index of 10 major cities, existing single-family homes rose 4.7% in the year ended July, after gaining 4.5% in June. The 20-city index climbed 5%, just above the June level. NAR pending home-sales index fell 1.4% showing some disparity in the home market. In strong cities a sellers’ market prevailed with rises between 10 and 15%.
After a few best readings in ten years, the rate of growth in U.S. service industries slowed. The ISM index fell to 56.9 in September from 59 in August, due mainly to a lower demand in face of global weakness. Its payroll growth has slowed for four straight months, the longest streak since 2001. New orders dropped to 56.7 in September, the lowest in 7 months, from 63.43, the largest drop since November 2008. The ISM services index
E.S. Finley
make up almost 80% of the economy, from retail- ing to healthcare, including sectors in construction and agriculture. The ISM’s manufacturing index fell broadly to its weakest level in over two years, dropping to 50.2 in September from 51.1. Mean- while, DJIA added several hundred points but at the same time the U.S Treasury sold a new government security with a three-month maturity and a zero yield for the first time on record. Not a fa- vorable signal.
Employers added only 142,000 workers to payrolls in September. Although the Labor Department claims that the official unemployment level stands at 5.1%, we question it in face of the fact that the workforce participation rate persists at 62.4%, the lowest since October 1977, revealing over and over again that the unprecedented monetary policies of the past 7 years did not help alleviate the serious persistent unemployment problem. The hourly wages rose 2.2% over the last 12 months, they posted on average a 2% gain since 2009, falling a penny in September to $25.09. The financial market is far from a balance. A significant economic growth can be brought about by a long- term settlement of our national debt, a fair tax reform, close review of entitlements and unproductive government projects, accompanied
by sound and steady federal budgeting. It is pernicious to continue the failed easy money policy instead of bringing back a balance to our financial market by raising, even moderately, the interest rate. Fed Vice-Chairman Stanley Fischer said the U.S economy may be strong enough to merit an interest–rate increase by the end of 2015, while noting slower job growth and international developments. Atlanta Fed President Dennis Lockhart, Chicago’s Fed President Charles Evans with other six Fed Presidents, comprising 8 out of 12, similar- ly favored such interest-rate increase, but Fed Governors Daniel Tarullo and Lael Brainard opposed that timing.
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MID-SHIP Report October 15, 2015
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC E.S. Finley
After many, many months of debate and undue hesitation, the Federal Reserve left the short-term interest rates unchanged after the last two-day FOMC policy meetings. Chairwoman Yellen justified the decision stating that “In light of the developments that we have seen and the impacts on the financial markets, we want to take a little bit more time to evaluate the likely im- pacts on the United States.” The Fed also stat- ed that it does not want to start raising rates until policy makers are more confident inflation will rise toward the 2% target. Some officials were also concerned about China’s slowdown and the strengthening dollar. Many economists believe that the Fed waited too long and by doing that may eventually have to raise rates more aggressively. Just before the meeting six officials called for two interest-raises this year. The median projection for 2015 came down to 0.375% from 0.625% in June, and 1,375% at the end of 2016 from 1,625%. It drops to 2.625% at the end of 2017 from 2,875%. In the longer-run the Fed estimated rate will reach 3,5%, down from an earlier projection of 3.75%.Clearly officials are less optimistic about our economy’s growth which they cut back to 1.8% -- 2.2% from their June estimate of 2% -- 2.3% growth in the long-run. The Fed cut its benchmark interest rate to near zero in Decem- ber 2008, three months after the collapse of Lehman and the subsequent financial crisis, and by not raising it, will perpetuate the uncer- tainty and imbalance in the financial market.
By now the entire world has learned by that after central banks injected about $8 trillion into the global economy since the financial crisis, this did not help it to grow, instead it is still experiencing an overall slowdown with little pro- spect of a decent revival. The latest lack of action by the Federal Reserve was not well received by investors. The DJIA dropped the next day over 290 points to 16,384,while the yield on ten-year Treasury note, posted its largest single-day decline since December 2010. After being down 7.3% in the past year, gold contract, on the other hand, gained 1.9 to settle at $1,137.80, The Fed will have two more opportunities to reconsider raising the bench- mark rate, one in October and the other one in December when the FOMC will meet again.
In this connection it may be interesting to men- tion the opinion article in the WSJ of September 21, in which Richard Hurowitz, Publisher of the Octavian Report, comments on what Keynes would think of “Neo-Keynesians”. Quoting Nixon’s words in 1971, when he took the U.S. off the gold standard, :- “I am now a
Keynesian”, Hurowitz says that John Maynard Keynes probably would have been horrified by this attribution. Keynes and his contemporaries recognized that gold has been valued as a monetary metal for millenniums. The writer concludes that “If (Keynes) took in today’s eco- nomic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist - regardless of what his disciples might think.”
While the Fed hesitates about timing of raising the rates, the ECB is prepared to expand QE, despite the fact that the Eurozone is running against the limitations of what monetary policy can hope to succeed. Loans to EU firms totaled 4.31 trillion euros in July, and a started fund is projected to release 315 billion euros more in investments in coming years. Low .inflation seems to propel additional QE despite concern of possible creation of bubble. Meanwhile initial Chinese factory activity index fell to its lowest level in 6-1/2 years in September, indicating that the outlook for the second-half slowdown of the world’s second largest economy looks worse, and China is unlikely to come near the 7% growth target for this year. Caixin Manufacturing Purchasing Managers’ index fell to 47, the lowest nationwide manufacturing activity, since March 2009. China President Xi Jimping reiterated that that China’s slowing growth and market fluctuations won’t deter needed re- forms.
In the U.S. a harsh winter and a port slowdown caused the GDP to grow only 0.6% in the first quarter. The GDP for the second quarter was revised up to 3.9%, thus bringing the economy to grow at a 2.3% rate for the first half of this year. Most economists expect a growth pace slightly above 2% in the third quarter. August was not a happy month. The stock market suf- fered from a correction. After a gain of 0.7% in July, retail sales increased 0.2% in August. Existing home sales tumbled 4.8% in August to 5.31 million, the steepest monthly drop since January. The median home price rose 4.7% over last year to $228,700. Sales of single- family homes fell 5.3% in August with condo- minium and co-ops sliding 1.6%. Encouragingly the year-over-year sales were up healthy 6.2%. Sales of newly built homes rose 5.7% in Au- gust, the highest level since the beginning of 2008, and a new post recession high since February. New home sales account for 10% of the home market. From a year earlier , sales were up 21.6% in August: month-to-month statistics can be volatile. The median sales price of new homes was 0.3% higher from a year ago at $292,700.
After increases in June and July, orders for durable goods fell 2% in August, as business investment came down in new equipment, elec- tronics and other related products. These or- ders have fallen in five out of past eight months; on a year-over-year basis they fell for straight seven months. Industrial production – gauge of output in manufacturing, utilities and mining fell 0.4% in August. ISM also found U.S. manufacturing expanded at the weakest level since May 2013, mainly owing to a sharp drop of 5.8% in orders for transportation equipment. Overall new orders for durable goods are down 4.6% compared with the same period last year.
Following the inclination of 13 of the 17 FOMC officials to raise the rates this year, Chairwoman Yellen finally decided to put an end to her hesitance and stay ahead of the curve. She stated that “Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2% over next few years as the temporary factors weighing on inflation wane”. Ms. Yellen conceded, however late in the game, that she is aware of the risks waiting too
long to raise rates by stating that “If you wait too long, the Fed might end up having to raise rates abruptly to stop the economy from over- heating, and push the economy into recession. The more prudent strategy is to bring tightening in a timely fashion and at a gradual pace, ad- justing policy as needed in light of the incoming data”. From this we would deduct that the Fed is likely to finally begin raising the rates this year.
Page 1
MID-SHIP Report October 1, 2015
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC E.S. Finley
After many, many months of debate and undue hesitation, the Federal Reserve left the short-term interest rates unchanged after the last two-day FOMC policy meetings. Chairwoman Yellen justified the decision stating that “In light of the developments that we have seen and the impacts on the financial markets, we want to take a little bit more time to evaluate the likely im- pacts on the United States.” The Fed also stat- ed that it does not want to start raising rates until policy makers are more confident inflation will rise toward the 2% target. Some officials were also concerned about China’s slowdown and the strengthening dollar. Many economists believe that the Fed waited too long and by doing that may eventually have to raise rates more aggressively. Just before the meeting six officials called for two interest-raises this year. The median projection for 2015 came down to 0.375% from 0.625% in June, and 1,375% at the end of 2016 from 1,625%. It drops to 2.625% at the end of 2017 from 2,875%. In the longer-run the Fed estimated rate will reach 3,5%, down from an earlier projection of 3.75%.Clearly officials are less optimistic about our economy’s growth which they cut back to 1.8% -- 2.2% from their June estimate of 2% -- 2.3% growth in the long-run. The Fed cut its benchmark interest rate to near zero in Decem- ber 2008, three months after the collapse of Lehman and the subsequent financial crisis, and by not raising it, will perpetuate the uncer- tainty and imbalance in the financial market.
By now the entire world has learned by that after central banks injected about $8 trillion into the global economy since the financial crisis, this did not help it to grow, instead it is still experiencing an overall slowdown with little pro- spect of a decent revival. The latest lack of action by the Federal Reserve was not well received by investors. The DJIA dropped the next day over 290 points to 16,384,while the yield on ten-year Treasury note, posted its largest single-day decline since December 2010. After being down 7.3% in the past year, gold contract, on the other hand, gained 1.9 to settle at $1,137.80, The Fed will have two more opportunities to reconsider raising the bench- mark rate, one in October and the other one in December when the FOMC will meet again.
In this connection it may be interesting to men- tion the opinion article in the WSJ of September 21, in which Richard Hurowitz, Publisher of the Octavian Report, comments on what Keynes would think of “Neo-Keynesians”. Quoting Nixon’s words in 1971, when he took the U.S. off the gold standard, :- “I am now a
Keynesian”, Hurowitz says that John Maynard Keynes probably would have been horrified by this attribution. Keynes and his contemporaries recognized that gold has been valued as a monetary metal for millenniums. The writer concludes that “If (Keynes) took in today’s eco- nomic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist - regardless of what his disciples might think.”
While the Fed hesitates about timing of raising the rates, the ECB is prepared to expand QE, despite the fact that the Eurozone is running against the limitations of what monetary policy can hope to succeed. Loans to EU firms totaled 4.31 trillion euros in July, and a started fund is projected to release 315 billion euros more in investments in coming years. Low .inflation seems to propel additional QE despite concern of possible creation of bubble. Meanwhile initial Chinese factory activity index fell to its lowest level in 6-1/2 years in September, indicating that the outlook for the second-half slowdown of the world’s second largest economy looks worse, and China is unlikely to come near the 7% growth target for this year. Caixin Manufacturing Purchasing Managers’ index fell to 47, the lowest nationwide manufacturing activity, since March 2009. China President Xi Jimping reiterated that that China’s slowing growth and market fluctuations won’t deter needed re- forms.
In the U.S. a harsh winter and a port slowdown caused the GDP to grow only 0.6% in the first quarter. The GDP for the second quarter was revised up to 3.9%, thus bringing the economy to grow at a 2.3% rate for the first half of this year. Most economists expect a growth pace slightly above 2% in the third quarter. August was not a happy month. The stock market suf- fered from a correction. After a gain of 0.7% in July, retail sales increased 0.2% in August. Existing home sales tumbled 4.8% in August to 5.31 million, the steepest monthly drop since January. The median home price rose 4.7% over last year to $228,700. Sales of single- family homes fell 5.3% in August with condo- minium and co-ops sliding 1.6%. Encouragingly the year-over-year sales were up healthy 6.2%. Sales of newly built homes rose 5.7% in Au- gust, the highest level since the beginning of 2008, and a new post recession high since February. New home sales account for 10% of the home market. From a year earlier , sales were up 21.6% in August: month-to-month statistics can be volatile. The median sales price of new homes was 0.3% higher from a year ago at $292,700.
After increases in June and July, orders for durable goods fell 2% in August, as business investment came down in new equipment, elec- tronics and other related products. These or- ders have fallen in five out of past eight months; on a year-over-year basis they fell for straight seven months. Industrial production – gauge of output in manufacturing, utilities and mining fell 0.4% in August. ISM also found U.S. manufacturing expanded at the weakest level since May 2013, mainly owing to a sharp drop of 5.8% in orders for transportation equipment. Overall new orders for durable goods are down 4.6% compared with the same period last year.
Following the inclination of 13 of the 17 FOMC officials to raise the rates this year, Chairwoman Yellen finally decided to put an end to her hesitance and stay ahead of the curve. She stated that “Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2% over next few years as the temporary factors weighing on inflation wane”. Ms. Yellen conceded, however late in the game, that she is aware of the risks waiting too
long to raise rates by stating that “If you wait too long, the Fed might end up having to raise rates abruptly to stop the economy from over- heating, and push the economy into recession. The more prudent strategy is to bring tightening in a timely fashion and at a gradual pace, ad- justing policy as needed in light of the incoming data”. From this we would deduct that the Fed is likely to finally begin raising the rates this year.
Page 1
MID-SHIP Report October 1, 2015
The MID-SHIP Report
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
The world economy continued to suffer from a slowdown in the first half of this year, caused largely by geopolitical instability and financial uncertainties leading to much volatility in the equities. The Vix index moved well into the twenties from the benchmark of 19. In the weeks following our last issue the situation did not improve. In fact, financial volatility increased, triggered by a number of occurrences which are highlighted below.To start with, the oil crash recently below $40 caused the energy companies to lose about $1.3 trillion in value.This meltdown pushed most commodities down into costly bear markets. The Canadian, Australian, and New Zealand dollars went to the worst level since the financial crisis, fighting a 30% drop in raw-material prices amid growing supplies. After U.S. stocks had the biggest gain since May they slid about 10% when China devalued its currency.The world’s second largest economy’s GDP 7% goal has diminished and brought it closer toward a 3.5% level reality. This could affect U.S. growth moderately, however, it will affect the rest of the world economy much more adversely. China’s total debt is 350% of its GDP, while its stocks lost close to 40% of their value. China’s growth in industrial production, fixed as- sets investment and retail sales slowed in July and exports also showed a steep decline, prompting Xi Jimping to state that he will stimulate internal consumption to ameliorate the situation. Meanwhile the Chinese government spent be- tween $100 and $150 billion l last month to stabi- lize their stock markets.
In other parts of the world, the Russian economy shrank 2.2% in the first quarter, another 4.65% in the second quarter and is expected to contract 3.5% this year. Meanwhile Brazil is experiencing a 2-year recession. Hard to believe that a 10-year paper in Germany brings only 0.6% per annum versus U.S. 10 year Treasury around 2.15%. The latest bailout of Greece called for $94 billion dollars.
Surprisingly, Greece showed a 0.6% rise in its GDP in the second quarter, but it is estimated that the bailout may set the Greek economy back by 2.3% in the months to come. The Eurozone GDP growth slowed to 0.3% in the 2Q from 0.4% in the 1Q, with unemployment above 11%, more than double that of the U.S. At the same time, global mergers and acquisitions are about to reach $4.58 trillion, the highest level on record and well above the $4.29 trillion in 2007.
Compared to the rest of the world the U.S is doing moderately well. The U.S. economy grew at a 0.6% rate in the 1Q and at a 2.3% pace, recently revised to 3.7% in the 2Q. Despite the woes of the world’s economy, most of the economists anticipate the growth of our GDP to reach 2.2% for the entire year 2015. However, the official U.S . statistics show that for a decade, the economic out- put per hour worked, which is its formula for productivity, has hardly budged, and over the past two quarters it has actually fallen, alarming Chairwoman Yellen. The chief economist of Google appears to be the singular contrarian claiming that false measurements are used causing an outdated GDP; in fact the economy does not have a productivity problem being armed with inventive- ness of the Silicon Valley. Other economists put much blame for our slow recovery at the door of the Dodd-Frank financial law, beyond its ill-effect on the banking business.
Meanwhile new orders for durable goods in the U.S. rose for the second straight month by an adjusted 4.1% in June and 2% in July. Excluding orders for defense and aircraft, orders rose to a revised 1.4% in June and 2% in July, the biggest increase since June 2014. Overall new orders were down 2% in the first half of the year com- pared with the same period in 2014. Orders for core capital goods were down 3.4% in the first half. Industrial production, a measure of output in the manufacturing, utilities and mining, rose 0.3% in June and 0.6% in July, indicating higher investment in machinery, electronics and other goods.
Net U.S. farm income is expected to drop 36% to $58.3 billion from $91.1 billion, the lowest level in nine years, and the largest percentage decline since 1983. It’s a second consecutive drop, follow- ing the highest level two years ago. The decline is mainly due to diminished outlook for dairy farmers, price decline for hogs and record crops in corn and soybeans which triggered depressed prices.
U.S consumer confidence rose in August to its highest level since the beginning of the year, when the Conference Board index reached 101.5. Consumer spending rose 0.3% in June and the same in July. New-home sales increased 21% in July from the year ago, raising builder sentiment to the level not seen in ten years. Current sales are only about 33% of the 1.4 million units sold in 2005. However, the UoM’s preliminary consumer sentiment for September has fallen to 85.7, the lowest level in a year this month, from 91.9 final reading in August. To put the report into larger historical context since its beginning in 1978, the sentiment is now 0.5% above the average reading. Consumer spending is likely to persist at a modest level with anticipation of a weaker domestic economy owing to the global slowdown, and a somewhat pessimistic outlook about the future growth in jobs and wages than before.
After payrolls advanced 231,000 in June, employers added another 215,000 jobs in July. The report also showed a pickup in hours worked, but aver- age hourly earnings rose less than forecast at 2.1% from a year ago. Employers added 173,000 workers in August and officially the jobless rate dropped to 5.1%, the lowest since April 2008, a level the Fed views as full employment. This is understated, as the CBO claims that the labor- force participation rate stands at 63.4%, the miserable level of some 45 years ago. While the CBO also believes that the government will run its narrowest deficit since 2005, it conceded that it is on pace to add $7 trillion more to the federal debt over the next decade. Raising the government federal borrowing limit stands out prominently on the legislative agenda, as does the student –loan debt, with more than half of the students in 347 colleges and vocational schools having defaulted on their loans. In other words, the long-term debt and long-term unemployment present daunting fiscal and social problems in the face of a failed monetary policy of easy money over the past sev- en years. The Fed policy makers are watching the global economy and its stock-markets turmoil, while they consider raising the benchmark interest rate for the first time in nine years.
Former Chairman Bernanke and Chairwoman Yellen admitted that monetary policy alone cannot revive the economy. Despite urgings by Vice-Chairman Stanley Fisher, and Jeffrey Lacquer, President of Richmond Fed, and also other officials, Chairwoman Yellen showed too much hesitancy in commencing a raise of the bench rate which contributed to the uncertainty and volatility of the markets and to the lack of balance in the financial situation. As we go to print, there is no consensus whether the Fed will end its seven-year old policy of zero interest rate, as the views on the fallout from such a move are widely divided. The Fed’s decision will be announced on September 17th. The short and medium-term results of that critical policy decision will be felt for many months ahead, and perhaps some years as well.
MID-SHIP Report September 16, 2015
Economic Comment from Mr. E.S. Finley - Retired Chairman ICEC
The world economy continued to suffer from a slowdown in the first half of this year, caused largely by geopolitical instability and financial uncertainties leading to much volatility in the equities. The Vix index moved well into the twenties from the benchmark of 19. In the weeks following our last issue the situation did not improve. In fact, financial volatility increased, triggered by a number of occurrences which are highlighted below.To start with, the oil crash recently below $40 caused the energy companies to lose about $1.3 trillion in value.This meltdown pushed most commodities down into costly bear markets. The Canadian, Australian, and New Zealand dollars went to the worst level since the financial crisis, fighting a 30% drop in raw-material prices amid growing supplies. After U.S. stocks had the biggest gain since May they slid about 10% when China devalued its currency.The world’s second largest economy’s GDP 7% goal has diminished and brought it closer toward a 3.5% level reality. This could affect U.S. growth moderately, however, it will affect the rest of the world economy much more adversely. China’s total debt is 350% of its GDP, while its stocks lost close to 40% of their value. China’s growth in industrial production, fixed as- sets investment and retail sales slowed in July and exports also showed a steep decline, prompting Xi Jimping to state that he will stimulate internal consumption to ameliorate the situation. Meanwhile the Chinese government spent be- tween $100 and $150 billion l last month to stabi- lize their stock markets.
In other parts of the world, the Russian economy shrank 2.2% in the first quarter, another 4.65% in the second quarter and is expected to contract 3.5% this year. Meanwhile Brazil is experiencing a 2-year recession. Hard to believe that a 10-year paper in Germany brings only 0.6% per annum versus U.S. 10 year Treasury around 2.15%. The latest bailout of Greece called for $94 billion dollars.
Surprisingly, Greece showed a 0.6% rise in its GDP in the second quarter, but it is estimated that the bailout may set the Greek economy back by 2.3% in the months to come. The Eurozone GDP growth slowed to 0.3% in the 2Q from 0.4% in the 1Q, with unemployment above 11%, more than double that of the U.S. At the same time, global mergers and acquisitions are about to reach $4.58 trillion, the highest level on record and well above the $4.29 trillion in 2007.
Compared to the rest of the world the U.S is doing moderately well. The U.S. economy grew at a 0.6% rate in the 1Q and at a 2.3% pace, recently revised to 3.7% in the 2Q. Despite the woes of the world’s economy, most of the economists anticipate the growth of our GDP to reach 2.2% for the entire year 2015. However, the official U.S . statistics show that for a decade, the economic out- put per hour worked, which is its formula for productivity, has hardly budged, and over the past two quarters it has actually fallen, alarming Chairwoman Yellen. The chief economist of Google appears to be the singular contrarian claiming that false measurements are used causing an outdated GDP; in fact the economy does not have a productivity problem being armed with inventive- ness of the Silicon Valley. Other economists put much blame for our slow recovery at the door of the Dodd-Frank financial law, beyond its ill-effect on the banking business.
Meanwhile new orders for durable goods in the U.S. rose for the second straight month by an adjusted 4.1% in June and 2% in July. Excluding orders for defense and aircraft, orders rose to a revised 1.4% in June and 2% in July, the biggest increase since June 2014. Overall new orders were down 2% in the first half of the year com- pared with the same period in 2014. Orders for core capital goods were down 3.4% in the first half. Industrial production, a measure of output in the manufacturing, utilities and mining, rose 0.3% in June and 0.6% in July, indicating higher investment in machinery, electronics and other goods.
Net U.S. farm income is expected to drop 36% to $58.3 billion from $91.1 billion, the lowest level in nine years, and the largest percentage decline since 1983. It’s a second consecutive drop, follow- ing the highest level two years ago. The decline is mainly due to diminished outlook for dairy farmers, price decline for hogs and record crops in corn and soybeans which triggered depressed prices.
U.S consumer confidence rose in August to its highest level since the beginning of the year, when the Conference Board index reached 101.5. Consumer spending rose 0.3% in June and the same in July. New-home sales increased 21% in July from the year ago, raising builder sentiment to the level not seen in ten years. Current sales are only about 33% of the 1.4 million units sold in 2005. However, the UoM’s preliminary consumer sentiment for September has fallen to 85.7, the lowest level in a year this month, from 91.9 final reading in August. To put the report into larger historical context since its beginning in 1978, the sentiment is now 0.5% above the average reading. Consumer spending is likely to persist at a modest level with anticipation of a weaker domestic economy owing to the global slowdown, and a somewhat pessimistic outlook about the future growth in jobs and wages than before.
After payrolls advanced 231,000 in June, employers added another 215,000 jobs in July. The report also showed a pickup in hours worked, but aver- age hourly earnings rose less than forecast at 2.1% from a year ago. Employers added 173,000 workers in August and officially the jobless rate dropped to 5.1%, the lowest since April 2008, a level the Fed views as full employment. This is understated, as the CBO claims that the labor- force participation rate stands at 63.4%, the miserable level of some 45 years ago. While the CBO also believes that the government will run its narrowest deficit since 2005, it conceded that it is on pace to add $7 trillion more to the federal debt over the next decade. Raising the government federal borrowing limit stands out prominently on the legislative agenda, as does the student –loan debt, with more than half of the students in 347 colleges and vocational schools having defaulted on their loans. In other words, the long-term debt and long-term unemployment present daunting fiscal and social problems in the face of a failed monetary policy of easy money over the past sev- en years. The Fed policy makers are watching the global economy and its stock-markets turmoil, while they consider raising the benchmark interest rate for the first time in nine years.
Former Chairman Bernanke and Chairwoman Yellen admitted that monetary policy alone cannot revive the economy. Despite urgings by Vice-Chairman Stanley Fisher, and Jeffrey Lacquer, President of Richmond Fed, and also other officials, Chairwoman Yellen showed too much hesitancy in commencing a raise of the bench rate which contributed to the uncertainty and volatility of the markets and to the lack of balance in the financial situation. As we go to print, there is no consensus whether the Fed will end its seven-year old policy of zero interest rate, as the views on the fallout from such a move are widely divided. The Fed’s decision will be announced on September 17th. The short and medium-term results of that critical policy decision will be felt for many months ahead, and perhaps some years as well.
MID-SHIP Report September 16, 2015