tsl outlook eConomiC insigh T
ow is the U.S. economy doing?
Pretty important question for
the world as so many countries
sell goods to the American
consumer. And if the U.S.
economy was completely
satisfactory in Federal Reserve
Chair Yellen’s view, then of
course short-term interest
rates might rise at a faster
pace and then investment
outflows from emerging
market nations might occur
even more quickly.
The basic summary statistic for the
economy is GDP. Everyone in the
economic forecasting business seems
to be on the same page right now in
terms of the outlook for GDP: Wall
Street economists, the White House,
IMF and Federal Reserve, a pretty
rare occurrence. So GDP growth was
2.0% in 2011 and 2.0% again in 2012.
Growth was faster at 2.6% last year
for 2013, despite the Washington uncertainty factor and when stories say
economists look for stronger growth
in 2014, keep in mind the call is only
2. 8 or 2.9% this year. Growth was held
down by cold winter weather in the
first quarter, maybe only 1%-some-
thing, but should bounce back higher
in the spring.
There was some thought GDP
growth should be faster after the
recession and that led to some above
3.5% real GDP forecast numbers for a
while, but people have given up that
hope. Baby boomers retiring since
2011, and spending less, is part of it.
High student loan debt payments are
part of it for younger people: they cannot afford to go out and buy homes
and the furniture and appliances that
go in those homes.
There is a lot of concentration on
GDP, spending on goods and services
in the $17-trillion economy. But our
focus is on Fed policy. Short-term
interest rates have been zero since
December 2008. When are they going
to rise? Never, according to Yellen
speech headlines on the last day of
March which read: “Fed Efforts to Spur
Economy, Jobs Necessary ‘for Some
Time.’” However, the Fed has provided
a timeline for its Exit Strategy, so we
can look past some of Yellen’s cautious words that it will be “some time”
before interest rates go up.
The forecasts of all the Federal
Reserve bank presidents and the Fed
governors show a Fed funds rate of 1%
at the end of 2015 and 2.25% at the end
of 2016. If the Fed funds rate is 1% at
the end of 2015 and the Fed normalizes rates 100-bps per-year, which is
half the 200-bps per-year pace of rate
hikes under Greenspan, then the first
rate hike will be June 2015.
There are still some on the Fed and
elsewhere who think GDP growth is
not strong enough. The key, however,
for the economy is whether growth
is fast enough to bring down unemployment. It is. And unemployment
is close to where it was the last two
times coming out of recessions and
the Fed did not wait before hiking
rates. Savers are getting no returns.
We think it is a mistake for Fed
officials to put more labor market
indicators on their dashboard, which
tells them when to raise rates. Too
many other indicators of current
economic conditions are at or near all-
time record highs: Retail sales, payroll
jobs, capex, exports. This is why we
do not trust the unemployment rate’s
elevated level as a measure of slack
economic conditions that requires the
Fed to still try and stimulate growth
and jobs. In fact, we are creating as
many jobs now as we did during the
housing bubble economy years of eco-
nomic expansion from 2004-06.
We don’t see the slack economic
conditions the Fed sees. As a result,
we think interest rates are going up
sooner rather than later. TSL
Chris Rupkey is managing director, chief
financial economist, Bank of Tokyo-Mitsubishi UFJ.
He is frequently quoted in the Wall
Street Journal, Bloomberg News, Reuters,
Yahoo and other investor publications.
Rupkey was president of the Money
Marketeers of New York University from
2001-2002, a club in New York made up
of Wall Street dealers and New York Fed
staff, and was President of the New York
Association for Business Economics in
2009-2010. In September 2013, Rupkey
was awarded the 2012-2013 National
Association for Business Economics
(NABE) Outlook Award. The annual award
is presented to the NABE Outlook panelist
with the most accurate economic forecast
for the previous four quarters.