Dear President Trump,
We hope you realize that you're inheriting an economy that rests on increasingly shaky ground. Consider the facts:
- GDP: Year-over-year GDP growth has fallen from 3.3% in March 2015 to 1.5% today.
- Jobs Market: Year-over-year jobs growth is 1.7%, down from the peak of 2.3% in February 2015
- Aggregate Weekly Hours: Private sector year-over-year has declined from its 2015 peak around 3.5% to 1.05% today
- Durable Goods (Ex-Defense & Aircraft): Negative at -0.2% YoY. This marks the 6th month of negative growth in the last 7 months and the 15th month of negative growth in the last 17 respectively.
- Industrial Production: Growth was negative for the 13th consecutive month at -1.03% year-over-year. That makes it the longest non-recessionary losing streak ever.
- Productivity: At a 40-year low.
It's going to get worse.
Remember, Fed head Janet Yellen is threatening to raise interest rates at their December meeting into this economic slowdown. Hedgeye CEO Keith McCullough wrote the following in today's Early Look:
"A guy named Trump or a gal named Hillary winning this election wasn’t going to change that our predictive tracking algorithm for US GDP is tracking towards 0%... Whether you love or loathe Trump… that’s the economy his economic team is going to have to deal with. Sounds like a perfect time for a rate hike, right?"
The last time the Fed raised rates into a slow-down (in December 2015), the US stock market fell -10% in a month. Will this time be different? Probably not.
Look at the Chart of the Day below, showing prior economic cycles and by how much the Fed typically cuts the Fed fund rates – the Fed's policy lever to raise or lower interest rates – to deal with an economic downturn. The average is peak-to-trough decline in the Fed funds rate historically is -7.5 percentage points. The current Fed funds rate is 0.41, meaning the Fed can cut rates just 0.4 points before hitting the zero bound.
In short, the Fed doesn't have the ammo to deal with the coming downturn.
You know this. At the first Presidential debate you made the observation:
"Now look. We have the worst revivial of an economy since the Great Depression; and believe me we’re in a bubble right now. The only thing that looks good right now is the stock market and if you raise interest rates even a little bit that’s going to come crashing down. We are in a big, fat ugly bubble and we better be awfully careful."
Believe your own words. It's going to be a wild ride.
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Click here to watch Hedgeye CEO Keith McCullough discuss all of this an more on a complimentary The Macro Show today.
