Don't Believe the Economic Performance Hype

December 2013 Federal Reserve Policy Outlook

Mark Twain said, “The reports of my death have been greatly exaggerated.”

Similarly, the Federal Reserve Board’s reaction to recent news by the Fourth Estate might be, “The reports of US economic growth have been greatly exaggerated.”

For example, a New York Times Economy Chronology on November 27, 2013 follows:

“Commerce Department reports home building permits jumped 6.2 percent in October, to their highest point in more than five years; Standard & Poor's Case-Sheller composite index of single-family home prices rose 13.3 percent in September from a year earlier.”

Reuters published an even rosier picture on this myopic piece of data, suggesting that, “Some economists, however, said the strong housing data, combined with better-than-expected October employment and retail sales reports, increased the possibility that the Fed could begin tapering its bond purchases as early as December.”

Not to be outdone, Marketwatch’s headline of New U.S. home sales leap 25.4% in October implies that the economy is already on a stronger footing. 

Nevertheless, the Fed voted 9-to-1 on Oct. 30 to continue the $85 billion-per-month asset-purchase program, also known as QE3. It further made few changes to the language in its statement. If tapering were so imminent, wouldn’t you expect the vote to be much closer?

What could our monetary policymakers be thinking?

The following insight at http://viableopposition.blogspot.ca/2013/12/a-different-perspective-on-sales-of-new.html shows a different perspective on these data.

“You can see how the current residential real estate market in the United States can hardly be termed "healthy".  Ignoring the rather anomalous rise in sales between the years 2000 and 2006 (aka the housing bubble), it is clear that the number of new single family home sales is still extremely depressed.  In fact, July's sales level of 390,000 homes was the 74th worst month on record out of all 608 monthly data points since January 1963.  To show you just how bad the housing market was during 2009 - 2011, of the 608 monthly data points, the top 22 worst months for new single family home sales were found during that timeframe.  As well, at the beginning of 1963 when the population of the United States was only 188 million compared to today's 317 million, 591,000 new homes were sold on an annual basis, 170,000 more homes than were sold in August 2013.”

Recent reports of the Federal Reserve’s Beige Book findings appear to characterize national economic activity as "modest to moderate," as it did in October.  Fortunately, our policymakers in the Fed appear to have a more balanced view of the economy, even as they consider alternative plans of action to the possibilities of different scenarios unfolding.

Marketwatch observed in a November 20, 2013 article, titled, “Federal Reserve weighs slowing bond buys soon,”  ‘Minutes from the Oct. 29-30 meeting showed that officials considered reducing the size of the asset-purchase program even “before an unambiguous further improvement in the [labor-market] outlook was apparent.” And “many members” — by members, the Fed is referring to voters — “stressed the data-dependent nature of the current asset purchase program, and some pointed out that, if economic conditions warranted, the committee could decide to slow the pace of purchases at one of its next few meetings.”’ http://www.marketwatch.com/column/the-fed

If that observation were true, why would the markets appear to be so skittish this week in anticipation of a strong jobs report this Friday?

The December Beige Book says, "Hiring showed a modest increase or was unchanged across Districts… Difficulty with finding qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on wages and overall price inflation were contained. Contacts in many Districts voiced concern about future cost increases attributable to the Affordable Care Act and other types of federal regulation." http://www.businessinsider.com/federal-reserve-beige-book-december-2013-12#ixzz2mXFgoWLe

If structural unemployment is such a major challenge facing our country today, than I don’t see how tapering is going to help reduce unemployment. Indeed, it seems likely to have the opposite effect.  One of the duties outlined in the Federal Reserve’s Mission Statement is “conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.” Clearly, the Fed does not have the tools, nor should it, to retrain our workforce so the Fed can realize maximum employment.  The nonprofit and private sectors appear to be addressing structural unemployment in part with new online training programs to enable motivated workers to qualify for highly skilled positions.

At the same time, I have a hard time believing that the Fed plans any kind of tapering so long as some members of Congress could act so capricious and whimsical to cause a default on federal government debt.  Another government shutdown is possible in the first quarter of 2014 too.  If you were a policymaker at the Fed, would you vote for tapering at this time?

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.