Broken China - Fears of slower growth in China and other emerging economies - August 25, 2015
Raymond James Financial Services
Description
Raymond James
Economic Research
Consumer price inflation has remained low in recent
months. The Consumer Price Index rose 0.2% in the 12 months
ending in July. Lower energy prices have played a key role.
Gasoline prices were down 22.3% year-over-year, and are
poised to decline further. Ex-food and energy, inflation in
services has been moderate, with more than half of that in
shelter (up 3.1% y/y).
Prices of consumer goods have generally been falling and lower commodity prices should push them even lower in the coming months. Real GDP (trillion $2009) 18.0 18.0 17.5 17.5 Real GDP (BEA) 17.0 -3.5% 16.5 16.0 15.5 15.5 -7.3% 15.0 4.0 16.5 16.0 Core Consumer Price Inflation, y/y % ch. 4.0 17.0 Potential GDP (CBO) 15.0 non-energy services, 58.3% 3.5 3.5 goods, ex-f&e, 19.3% 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 14.5 0.0 Source: Bureau of Economic Analysis, Congressional Budget Office, Raymond James 3.0 14.0 -0.5 05 -0.5 source: BLS -1.0 -1.0 07 08 09 10 11 12 13 14 15 The Fed policy focus is not on past inflation. Officials have indicated that the central bank could raise rates even if inflation is currently low. It’s future inflation that matters, and this is where we see differences of opinion.
While inflation is always and everywhere a monetary phenomenon, it’s driven through pressures in resource markets. Commodity prices are down. There are no significant production bottlenecks that would drive prices higher.
The labor market is the widest channel for inflation pressures and wage growth is lackluster. 06 07 08 09 10 11 12 13 14 15 16 17 14.5 14.0 18 So, why is the Fed even talking about raising short-term interest rates? The Great Recession created a large amount of slack in the labor market. Job growth has been strong and that slack is being reduced, but there is still plenty of room for improvement. Monetary policy affects the economy with a long and variable lag.
Officials need to set policy based on where the economy is expected to be 12 to 18 months from now – and, at the current pace, the labor market should be a lot closer to normal in late 2016 or early 2017. Moreover, monetary policy is exceptionally accommodative currently and will still be very accommodative even after the first couple of Fed rate hikes. The U.S.
economy should be able to withstand slightly higher interest rates. In their public comments, Fed officials have expressed a range of opinions regarding the timing of the initial move. Recent financial market turmoil and downward pressure on commodity prices ought to keep the Fed on hold beyond the September 17 policy decision, but the Fed is still on track to begin raising rates at some point. GDP ( contributions) consumer durables nondurables & services bus.
fixed investment residential investment government Domestic Final Sales exports imports Final Sales ch. in bus. inventories 3Q14 4.3 0.5 1.8 1.1 0.1 0.3 3.8 0.2 0.2 4.3 0.0 4Q14 2.1 0.4 2.4 0.1 0.3 -0.3 3.0 0.7 -1.6 2.13 0.0 1Q15 0.6 0.1 1.0 0.2 0.3 0.0 1.7 -0.8 -1.1 -0.2 0.9 2Q15 2.3 0.5 1.5 -0.1 0.2 0.1 2.2 0.7 -0.5 2.4 -0.1 3Q15 2.4 0.4 1.5 0.5 0.4 0.2 3.1 0.4 -0.6 2.9 -0.5 4Q15 2.6 0.4 1.6 0.5 0.3 0.2 3.0 0.4 -0.6 2.8 -0.1 1Q16 2.7 0.4 1.6 0.5 0.2 0.2 2.8 0.4 -0.6 2.7 0.0 2Q16 2.7 0.4 1.4 0.5 0.2 0.2 2.8 0.5 -0.6 2.7 0.0 3Q16 2.7 0.4 1.5 0.5 0.2 0.2 2.7 0.5 -0.6 2.7 0.0 4Q16 2.6 0.4 1.4 0.5 0.2 0.2 2.6 0.5 -0.6 2.6 0.0 2014 2.4 0.4 1.4 0.8 0.1 -0.1 2.5 0.4 -0.6 2.4 0.1 2015 2.3 0.4 1.6 0.3 0.3 0.1 2.7 0.2 -0.9 2.6 0.2 2016 2.6 0.4 1.5 0.5 0.2 0.2 2.9 0.5 -0.6 2.7 -0.1 Unemployment, % NF Payrolls, monthly, th. 6.1 237 5.8 324 5.6 195 5.4 226 5.2 200 5.1 190 5.0 190 4.8 190 4.8 185 4.7 180 6.2 260 5.3 203 4.8 186 Cons.
Price Index (q/q) excl. food & energy PCE Price Index (q/q) excl. food & energy 1.2 1.4 1.2 1.4 -0.9 1.5 -0.4 1.0 -3.1 1.7 -1.9 1.0 3.0 2.5 2.2 1.8 2.5 1.8 2.0 1.6 1.5 1.8 1.5 1.6 1.8 1.8 1.7 1.7 1.9 1.9 1.7 1.7 1.9 1.9 1.8 1.7 1.9 1.9 1.8 1.7 1.6 1.7 1.4 1.5 0.3 1.8 0.5 1.4 2.0 1.9 1.7 1.7 0.09 0.0 0.5 2.5 0.10 0.0 0.5 2.3 0.11 0.0 0.6 2.0 0.13 0.0 0.6 2.2 0.13 0.1 0.7 2.2 0.18 0.2 1.2 2.4 0.42 0.4 1.8 2.8 0.65 0.6 2.1 3.0 0.92 0.9 2.3 3.1 1.17 1.1 2.6 3.2 0.09 0.0 0.5 2.5 0.14 0.1 0.8 2.2 0.79 0.8 2.2 3.0 Fed Funds Rate, % 3-month T-Bill, (bond-eq.) 2-year Treasury Note 10-year Treasury Note © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 .
Prices of consumer goods have generally been falling and lower commodity prices should push them even lower in the coming months. Real GDP (trillion $2009) 18.0 18.0 17.5 17.5 Real GDP (BEA) 17.0 -3.5% 16.5 16.0 15.5 15.5 -7.3% 15.0 4.0 16.5 16.0 Core Consumer Price Inflation, y/y % ch. 4.0 17.0 Potential GDP (CBO) 15.0 non-energy services, 58.3% 3.5 3.5 goods, ex-f&e, 19.3% 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 14.5 0.0 Source: Bureau of Economic Analysis, Congressional Budget Office, Raymond James 3.0 14.0 -0.5 05 -0.5 source: BLS -1.0 -1.0 07 08 09 10 11 12 13 14 15 The Fed policy focus is not on past inflation. Officials have indicated that the central bank could raise rates even if inflation is currently low. It’s future inflation that matters, and this is where we see differences of opinion.
While inflation is always and everywhere a monetary phenomenon, it’s driven through pressures in resource markets. Commodity prices are down. There are no significant production bottlenecks that would drive prices higher.
The labor market is the widest channel for inflation pressures and wage growth is lackluster. 06 07 08 09 10 11 12 13 14 15 16 17 14.5 14.0 18 So, why is the Fed even talking about raising short-term interest rates? The Great Recession created a large amount of slack in the labor market. Job growth has been strong and that slack is being reduced, but there is still plenty of room for improvement. Monetary policy affects the economy with a long and variable lag.
Officials need to set policy based on where the economy is expected to be 12 to 18 months from now – and, at the current pace, the labor market should be a lot closer to normal in late 2016 or early 2017. Moreover, monetary policy is exceptionally accommodative currently and will still be very accommodative even after the first couple of Fed rate hikes. The U.S.
economy should be able to withstand slightly higher interest rates. In their public comments, Fed officials have expressed a range of opinions regarding the timing of the initial move. Recent financial market turmoil and downward pressure on commodity prices ought to keep the Fed on hold beyond the September 17 policy decision, but the Fed is still on track to begin raising rates at some point. GDP ( contributions) consumer durables nondurables & services bus.
fixed investment residential investment government Domestic Final Sales exports imports Final Sales ch. in bus. inventories 3Q14 4.3 0.5 1.8 1.1 0.1 0.3 3.8 0.2 0.2 4.3 0.0 4Q14 2.1 0.4 2.4 0.1 0.3 -0.3 3.0 0.7 -1.6 2.13 0.0 1Q15 0.6 0.1 1.0 0.2 0.3 0.0 1.7 -0.8 -1.1 -0.2 0.9 2Q15 2.3 0.5 1.5 -0.1 0.2 0.1 2.2 0.7 -0.5 2.4 -0.1 3Q15 2.4 0.4 1.5 0.5 0.4 0.2 3.1 0.4 -0.6 2.9 -0.5 4Q15 2.6 0.4 1.6 0.5 0.3 0.2 3.0 0.4 -0.6 2.8 -0.1 1Q16 2.7 0.4 1.6 0.5 0.2 0.2 2.8 0.4 -0.6 2.7 0.0 2Q16 2.7 0.4 1.4 0.5 0.2 0.2 2.8 0.5 -0.6 2.7 0.0 3Q16 2.7 0.4 1.5 0.5 0.2 0.2 2.7 0.5 -0.6 2.7 0.0 4Q16 2.6 0.4 1.4 0.5 0.2 0.2 2.6 0.5 -0.6 2.6 0.0 2014 2.4 0.4 1.4 0.8 0.1 -0.1 2.5 0.4 -0.6 2.4 0.1 2015 2.3 0.4 1.6 0.3 0.3 0.1 2.7 0.2 -0.9 2.6 0.2 2016 2.6 0.4 1.5 0.5 0.2 0.2 2.9 0.5 -0.6 2.7 -0.1 Unemployment, % NF Payrolls, monthly, th. 6.1 237 5.8 324 5.6 195 5.4 226 5.2 200 5.1 190 5.0 190 4.8 190 4.8 185 4.7 180 6.2 260 5.3 203 4.8 186 Cons.
Price Index (q/q) excl. food & energy PCE Price Index (q/q) excl. food & energy 1.2 1.4 1.2 1.4 -0.9 1.5 -0.4 1.0 -3.1 1.7 -1.9 1.0 3.0 2.5 2.2 1.8 2.5 1.8 2.0 1.6 1.5 1.8 1.5 1.6 1.8 1.8 1.7 1.7 1.9 1.9 1.7 1.7 1.9 1.9 1.8 1.7 1.9 1.9 1.8 1.7 1.6 1.7 1.4 1.5 0.3 1.8 0.5 1.4 2.0 1.9 1.7 1.7 0.09 0.0 0.5 2.5 0.10 0.0 0.5 2.3 0.11 0.0 0.6 2.0 0.13 0.0 0.6 2.2 0.13 0.1 0.7 2.2 0.18 0.2 1.2 2.4 0.42 0.4 1.8 2.8 0.65 0.6 2.1 3.0 0.92 0.9 2.3 3.1 1.17 1.1 2.6 3.2 0.09 0.0 0.5 2.5 0.14 0.1 0.8 2.2 0.79 0.8 2.2 3.0 Fed Funds Rate, % 3-month T-Bill, (bond-eq.) 2-year Treasury Note 10-year Treasury Note © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2 .
