On November 12th the New England Commercial Finance Association held an Economic Update featuring an evening with Jeff Fuhrer, EVP and Senior Policy Advisor, Federal Reserve Bank of Boston.
It was a very enjoyable hour and I will try to summarize the important facts delivered. Upon arriving we received a one page handout comprised of GDP components, unemployment and payroll employment growth.
First the component of GDP from 2009 Q3 to present.
|Line||Component||Average during recover||2013 Q3|
I found two facts stunning
- Inventory growth comprises 28.5% of 2013 Q3 growth vs 21.7% on average for the period. So about 20% of the GDP growth since the US came out of the recession is still on the shelves.
- The US Government has and will continue to be a drag on GDP growth. With the amount of deficit the US is running I find this very surprising. In fact, according to President Rosengren “One of the unusual features of this recovery has been significant fiscal retrenchment. The Congressional Budget Office (CBO) estimates that fiscal austerity measures like higher income taxes and substantial reductions in real government spending have reduced 2013 GDP growth by 1.5 percentage points – a very significant headwind.” From his Nov 4th presentation – “Had the economy grown by 3.5 percent rather than 2 percent over the past year, job growth would almost surely have been stronger, unemployment lower, and inflation closer to the two percent goal,” said Rosengren.
Most of you have read that the Fed plans on keeping the current monetary policy in place until unemployment declines to 6.5% or whatever number the new Fed Chairperson and team believe is appropriate to start a reduction in monetary stimulus and low rates. More on this subject in a bit.
Unemployment has declined from over 9.0% to 7.2% with .8% coming in 2013. A big drag on the unemployment rate has been the reduction in government workers. The government employed approximately 22.5 million people in 2009 and it declined to just under 22 million in Q1 of 2013. This is the absolute opposite to what has transpired in previous recoveries. What we do not know is what percentage of the loss in employment of government employees relates to retirees who will continue to receive substantial compensation via a pension. To me that is almost a wash in terms of cash available for spending.
An important point made was that the employment population ratio has remained flat throughout the recovery. This implies to me that while unemployment has declined those employed as a % of those looking for work remains constant. This is somewhat concerning as you would expect an increase in the employment ratio during a normal recovery.
It was also made crystal clear that the data comes from a survey conducted by contacting 60,000 households. Our statisticians would proclaim this okay. Looks like a very small sample to me.
Impact of the government shutdown –
Our speaker was concerned that the real negative from the government shutdown is consumer confidence. With 70% of GDP coming from consumer spending a decline in confidence does not bode well for economic improvement.
When will the tapering end? Is that not the real question we all have and no – we received no – indication of what that date is. However, everyone has a calculator and can guess when unemployment might reach 6.5% or whatever number they arrive at. This is a moving target and we received no information that it would end soon. The fed will not put the brakes on and the Fed is going to keep rates low. Look what happened in housing when rates popped 1%. It slowed dramatically. Until the US economy can grow on its own and employment growth is sustainable the Fed will keep on buying and providing monetary stimulus. Governor Rosengren believes full employment is at 5.25%. According to Governor Rosengren an average grow rate of 3.3% would bring defined full employment by the end of 2016 but a growth rate of 2.8 stretches this out till the end of 2018. A growth rate of 2.3 or worse 2.0 stretches out the period to reach defined full employment well into the next decade.
The growth rates is expected to be around 2.5% in 2014 subject to changes in fiscal policy.
Global Growth Rates –
A brief discussion of global growth rates took place. Japan, after decades of slow growth, is growing at 3 – 4% and China has slowed down from the torrid rate and the EU remains flat.
Just not an issue now or in the near future.
Profit Margins as a % of labor Costs-
Profit margins as a % of labor remain very high so a reduction in gross profit should not impair the economy. It appears to me prices remain high so what happens if demand increases? Inventories are increasing as a percentage of GDP so companies can afford to cut prices at least modestly to move inventory and still have strong margins.
Monetary policy is based upon the numbers. When the Fed sees uncertainty in the numbers it leads to a lack of guidance. We are in a slow growth mode with high unemployment and a counter acting fiscal policy coming out of Washington and all that entails. Consumers lack confidence to go out and spend to drive GDP and our government continues to be a drain on GDP, tough as it is to believe.
All this said a young company without revenue turned down $3 Billion.