20+ Reasons The Fed Won't Raise Even After The Strong October Jobs Number
When taken with the other recent US and world economic data, the total doesn't translate into a situation in which the US Fed should even consider tightening. Yes, I do know that auto sales have been strong; but the US economy is a lot more than just auto sales.
Some of the recent negative US economic data are below:
- Factory Orders for August 2015 were down -1.7%.
- The Chicago PMI for September 2015 was only 48.7.
- The ISM Index for September 2015 was an anemic 50.2.
- Consumer Credit for August 2015 was down from $18.9B (in July) to $16.0B.
- Export Prices ex. Agriculture for September 2015 were down -0.6%.
- Import Prices ex. Oil for September 2015 were down -0.3%.
- The PPI for September 2015 was down -0.5%.
- The Core PPI for September was down -0.3%.
- Retail Sales ex. Autos for September 2015 were down -0.3%.
- The CPI for September was down -0.2%.
- Empire Manufacturing for October 2015 was -11.4.
- The Philly Fed Index for October 2015 was -4.5.
- Industrial Production for September 2015 was -0.2%.
- Leading Economic Indicators for September 2015 were -0.2%.
- Durable Goods Orders for September 2015 were -1.2%.
- Durable Goods Orders ex. Transportation for September 2015 were -0.4%.
- The Q3 GDP was +1.5%, which was far down from the Q2 2015 GDP Growth Rate of +3.9%. It greatly missed the expectation of +2.9%.
- Both Consumer Confidence and Michigan Sentiment were down in October 2015 from the prior month.
- The Core PCE Prices for September 2015 were only +0.1%.
- Factory Orders for September 2015 were down -1.0%.
- The ISM Index for October 2015 was an anemic 50.1.
- Year to date Exports decreased -$66.3B (-3.8%) and Imports decreased -$51.3B (-2.4%) for a net increase in the US Trade Deficit of +$14.9B (+3.9%).
The chart below from the US Census Bureau of the Total Business Inventories To Sales Ratio shows a strong trend upward. This is extremely worrisome.
(click to enlarge)
Readers should remember the result the last time this ratio journeyed upward (the Great Recession).
The above ratio doesn't appear to be at a critical level yet; but it keeps inching closer; and that is a bad sign.
The charts below from the Bureau of Labor Statistics summarize the October 2015 Non-Farm Payrolls data.
(click to enlarge)
First many areas above are still showing negative jobs growth. Second all of the big gainers among the various industries are service industries. Since Retail Sales growth has been anemic of late, one is inclined to think that the growth in that area is just seasonal. Notable of late has been the poor performance of apparel retailers. Failure to spend on clothes is usually a signal that people are wary of the economy going forward.
The growth in Health Services is probably significantly due to the still growing ObamaCare enrollment. However, I have been reading about the increasing dissatisfaction with how much this cost for the benefit it gives. Plus the ObamaCare Silver Plan premium is set to rise 7.5% in 2016 for the 37 states using the Federal Exchange. An increasing number of participants may become disenchanted. The growth in this area is expected to fall dramatically, if not reverse, in 2016. This should cut services growth in this area.
The other big gainer is the Professional and Business Services category. I didn't delve into this deeply enough to attempt a truly valid explanation. However, readers should remember that this category is very dependent on the economy. The Fed has said they expect US economic growth to be anemic in 2016. If that is the case, there doesn't seem likely to be continued great growth in this area going forward. Remember that a lot of pundits are now predicting a good chance of a US recession in the next 1-2 years. Some famous ones include Mohamed El-Erian and Jim Paulsen. These guys are not known to claim "the sky is falling". Their worries are real worries; and their concerns probably mean anemic growth at best for the US in 2016.
Much is also being made of the move down to 5.0% unemployment. However, this disguises the fact that the Labor Participation Rate was only 62.4%. The chart below shows the Labor Participation Rate in recent years.
(click to enlarge)
In 2008 before the crash, it was typically over 66.0%. If you factor this into your calculations, the unemployment rate becomes roughly 5.8% higher (or 10.8%). This doesn't sound like the US has returned to full employment. If the US Fed wants to try to fool people into believing that 5.0% is the real unemployment rate, they are being deceitful; and I don't think that benefits the US people. The U6 unemployment number for October 2015 was 9.8%. That more closely agrees with the 10.8% figure above; but it too probably underestimates unemployment in the US. The US has not come close to returning to pre-recession employment levels.
Readers will also want to note the net increase in the US Trade Deficit of $14.9B (+3.9%) year to date. Exports have decreased far more than Imports. That means Americans have been losing the jobs that had been producing those Export Goods. A good part of the reason for the decrease in Exports year to date of $66.3B has been the strength of the US dollar. As an example the euro has fallen from 1.2544 USDs late in 2014 to 1.0741 USDs as of this writing November 6, 2015 (-14.37%). US goods are more expensive now; and Europeans are consequently less eager to buy them. A good part of the reason for euro plunge versus the USD has been the ECB's QE program, which amounts to negative interest rates of -3%+ for the euro. If the US raises its interest rate that will further exacerbate the situation (cause the USD to appreciate further against the euro). It will cause more US job losses.
One can perhaps make an argument that the US should allow the EU economy to recover by allowing them for a short time to practice Mercantilism against the US (after all we did it to them not long ago). However, one cannot make a good argument that the US should increase the negative effects of that Mercantilism by raising its own interest rates. One is reminded of the old adage about being so eager to get your gun out of your holster that you shoot yourself in the foot. According to any reasonable kind of economic theory, the US should be waiting until after its big trade partners have stopped their easing activities before considering raising its interest rates.
The counter argument to that is that you have to worry about inflation. However, the statistics cited above show that there is no inflation yet. In fact there may be deflation. There may be credit contraction. There may be economic slowing. This is not the environment in which a good economist would want to raise rates. I hope the Fed does not. Yet when I see comments that indicate that the Fed may be trying to use raising rates to achieve its inflation targets, I get very worried about STAGFLATION. Yes, inflation will occur if you raise rates, but normally raising rates will also slow the economy. It is not currently growing fast enough that the Fed should want to slow it. If the Obama Administration is pressuring the Fed to raise rates, they are doing all Americans a disservice. So far there is no indication of inflation in the US. Plus major trade partners such as Japan, China, and the EU have all been easing tremendously. That is more likely to lead to deflation, as their products will consequently be cheaper in the US.
Of course, there is the theory that the Fed is keeping the "raise option" alive in order to prevent a US stock market (and other) bubble by continually scaring market participants. I hope this is it. I hope they are not egotistical enough to raise rates in this environment. The Fed has to pay attention to the rest of the world's economies. Former Fed presidents have not done that to the detriment of the US economy and US jobs. Paul Volcker's extremely high rate policy and strong USD policy led to a huge exodus of US jobs. This might have happened at a slower rate in any case; but his policies definitely sped things up. The US does not need any more of that short sighted egotism. The US does not need to unfairly lose more jobs to its trade partners as they practice mercantilism against the US.
If the above were not reason enough, a lot of smaller countries use the USD as a secondary currency. If the US makes the USD rise against other currencies by increasing the interest rates, that will automatically decrease those countries' GDPs, which are calculated in USDs. It will cause all of their imports to be more expensive. It will cause their exports to be less expensive.
This will hurt the economies of virtually all of those countries. It will mean they will buy fewer US products; and they will try to sell more of their products to the US more cheaply. Both of these actions will cause the US economy to slow a bit more. In other words, by hurting these other countries' economies, the US will end up hurting its own economy. That sounds moronic.
Doesn't it? It is; and the Fed should consider that diligently before they take any rate raising actions.
NOTE: Some of the above fundamental fiscal data (especially the list of economic data at the top of the page) is from Yahoo Finance.
Good Luck Trading/Investing.