THE ZEITGEIST: March 7, 2017
stagflation?
Back in mid-January, when the initial Q4 GDP number came in at a mere 1.9%, the most repeated word used in the financial media was “disappointing.” With the Trump Trade euphoria rising, we were suddenly reminded that 2016 GDP growth tracked in (at 1.6%) as tied with 2011 for the worst year since the Great Recession. Arghh. No matter. Things would accelerate in 2017, a hope buttressed in early February by rising consensus estimates for Q1 2017, anchored by the Atlanta Fed’s buoyant GDP Nowcast of +3.4%.
But these hopes—while definitely still alive—are being sorely tested by a triple whammy punch last week. First, we saw underwhelming durable goods orders, way below consensus, calling into question all those glowing manufacturing diffusion indexes. Second, we saw the BEA’s second Q4 GDP estimate, which (though unchanged overall) saw a bigger drop from Q3 and which revised personal consumption expenditure (PCE) upward and investment downward. So much for animal spirits. Third, and most troubling, came the BEA’s personal income and outlay data for January. In that month, it turns out, real disposable personal income actually dropped by -0.2% and real PCE by -0.3%.
The forecaster response was sudden and dramatic. The big boys on Wall Street all cut their Q1 forecasts overnight—Goldman from 2.1% to 1.8%, JP Morgan from 2.0% to 1.5%, and BoA from 1.8% to 1.4%. The Atlanta Fed GDP Nowcast for Q1 dropped in one day from 2.5% to 1.8%. (To be sure, the undaunted New York Fed’s GDP kept its Nowcast virtually unchanged at 3.1%.)
What may prompt concern here? Let’s summarize:
- The magnitude of the January real PCE decline is large: In the 88 months since the Great Recession, there has only been one month (January 2014) that has experienced a (slightly) larger PCE drop. Keep in mind that recently most initial PCE estimates have later been revised downward.
- If this first estimate sticks, it will be much harder for Q1 GDP to inflect upward from Q4. To get to 1.9% for the quarter, we will probably need the last two months to average +3.0%. Sure, that’s very possible, but the odds have gotten steeper. Keep in mind that PCE is roughly 70% of GDP and has—over the last year—been the leading powerhouse behind GDP growth. The recent wide divergence between so-called “soft” and “hard” economic data surprises will soon be resolved one way or the other. PCE and GDP are obviously among the hardest of indicators.
- More troubling is that the real PCE decline coincided with an uptick in nominal PCE growth—which necessarily points to accelerating inflation. Both sequentially and YoY, the PCE deflator rose faster in January than in any month since 2012. Moreover, it’s not a one-month anomaly: Nearly every measure of inflation has been on the upswing for over a year.
- The first question raised by quickening inflation is whether it indicates the economy is reaching its employment ceiling (with a downward floor on the unemployment rate and upward resistance on the labor force participation rate). If so, further stimulus is likely to translate more into higher prices than higher real output. I agree that we are not seeing any “overheating” in earnings gains or in average hours—but perhaps that is due to post-recession changes in the labor market. We certainly are seeing, over the last 12 months, a flattening trend in the employment-to-population ratio and a tapering trend in aggregate hours. Note: January saw the second-slowest month in YoY aggregate hour growth since August 2010.
- The second question raised is how quickly the acceleration in the PCE deflator will trigger a Fed response. By now I think we know the answer: in a heartbeat. It’s no coincidence that the March 1 PCE release coincided with the leap in the Fed odds of a March rate hike from 33% to 70%. At 1.9%, the YoY PCE deflator growth is now only one notch below the Fed’s long-term target rate. And its annualized sequential growth is 5.3%—giving it plenty of steam. Whether or not the economy has reached its employment potential, there is one phrase in the NAIRU acronym that is etched on the brain of every FOMC member—and that’s the “non-accelerating inflation” part. Whatever else, the Fed cannot allow that acceleration to take off.
By this point, I think it’s obvious that the "Trump Rally" is something of a misnomer. The market rally is real enough, but what’s driving it is rising internal momentum in the economy that appeared in the late spring and summer of 2016 and that everyone is hoping—after a fall pause—can get ripping even faster this winter.
Following the election, the markets jumped in anticipation of the pro-growth policy changes Trump would author. But since the inauguration, I think these hopes have cooled—both because of the decreasing likelihood Trump will be able to push them through and because of the increasing dilation of the timetable even if he succeeds.
What’s more, the quickening of inflation renders the most eagerly anticipated part of his program—sizable fiscal stimulus—almost irrelevant. Even if the GOP in Congress were to agree to it (which by now I think they won’t), the Fed would work to counteract it through monetary tightening. The Trump stimulus raised hopes in the midst of ZIRP and deflation expectations. It makes less sense with the advent of Fed hikes and inflation expectations. Everything else—deregulation, tax efficiency, border adjustments, and the like—may all be great long term, but they do not impact the economy short term.
So again the real issue for next few quarters is not Trump. It is the endogenous strength of the economy. Will its real-dollar growth accelerate? Or, as we saw briefly in January, will its nominal acceleration fail to translate into real growth? For the real growth to speed up, Trump cannot count on any appreciable growth (roughly 0.2% annually this year and next) in the working-age population. Which means he’s banking on a new jump in either the employment-population ratio or in labor productivity. Either could happen. But exactly why either would happen, and happen now, is unclear to me.
NewsWire
- Teens today are using video chat apps like “Houseparty” to virtually hang out with friends after school. For peer-oriented Millennials, “live chilling” gives them what they want (time with friends) in a world where packed schedules and unwalkable neighborhoods make physical hangouts infrequent. (The Wall Street Journal)
- Facing sliding demand for its hepatitis C blockbuster drug, Big Pharma company Gilead is pushing for all Boomers to undergo testing for the disease. The firm sees a big profit opportunity in the notoriously unhealthy generation that has brought higher rates of chronic disease into old age brackets. (FiercePharma)
- Apollo Peak and Pet Winery are two start-ups competing in an unlikely market: faux wine for cats. Although most felines don’t seem that impressed with cat wine, the founder of Apollo Peak makes a case for the humanization of pets: “A pet is more like a friend, a roommate or a family member…why are we just feeding them water?” (The New York Times)
- Brightwheel, an app that allows educators and child care providers to send parents mobile updates about their kids, raised $10 million in VC funding. The app also handles payments—but its primary function undoubtedly will be to keep Xers and Millennials apprised of how their Homelander children are doing throughout the day. (TechCrunch)
- President Trump ordered the U.S Department of Labor to reconsider a pending fiduciary rule that will force financial advisers to put their clients’ interests first. But as columnist Ben Steverman points out, the damage to the financial industry is already done: Investors will never again be blind to the perils of active money management. (Bloomberg Businessweek)
- The NHL recently poached former Pandora marketing executive Heidi Browning with the goal of attracting younger fans. Like most major pro sports leagues, the NHL hopes that investing in cutting-edge technology (including VR) and new social media initiatives will win over a new generation of viewers. (The Wall Street Journal)
- Gen-X contributor Lisa Goodman-Helfand lists 10 tidbits about her non-digital college experience. From writing letters to her friends to keeping phone conversations short to limit long-distance charges, this Xer is proud of her “Googleless college memories” and acknowledges that her generation may be the last to remember a non-digital past. (The Huffington Post)
- Contributor Stan Phelps argues that sending Millennials to remote-working locations that “inspire” them is a good way to boost engagement. While this strategy may turn some heads, true Millennial appeal starts with frequent feedback, career mentoring, and purpose-filled work. (Forbes)
- A recent column details the story of one affluent Boomer who lost all of her assets during the housing crash and was forced to leave California for Iowa. Her tale is not a one-off: Many Boomers with expensive tastes have been forced to take drastic measures (like working far into retirement) just to get by. (The Wall Street Journal)
- Talks of a $140 billion megamerger between Kraft and Unilever fell through last month. The ill-fated deal would have provided these CPG firms a valuable buffer against shoppers who are abandoning “middle-aisle” supermarket products for natural options. (CNN Money)
- Online lender SoFi does more than just hand out loans—it pairs out-of-work customers with career counselors who will help them find a job. The initiative is about more than ensuring that its customers can pay back loans; it’s about establishing a bond with Millennials who feel neglected by big banks. (Quartz)
- Nearly all 19- to 24-year-olds (88.4%) admit to engaging in at least one risky driving behavior (such as texting while driving) during the past month, the highest share of any age group. Though Millennials are a fairly cautious bunch, their attachment to smartphones is contributing to their risky decision-making on the road. (AAA Foundation for Traffic Safety)
- Instead of downsizing as they age, some Boomers are “upsizing” into the retirement homes of their dreams. In addition to serving as a “home base” for family and adult children, larger homes provide a place to socialize, according to Boomer Cindi King: “We decided we wanted bigger, more open space and we like to entertain.” (WSYX ABC 6)
- Aetna decided not to appeal a federal ruling blocking its planned merger with Humana, effectively ending the deal. Until the GOP comes up with an ACA replacement, insurers are pinned between a rock (the prohibitively costly public exchanges) and a hard place (regulators who keep them from teaming up). (Bloomberg Business)
- Millennial Rajaa Elidrissi explains why she still lives at home even though she’s fully employed. It’s all part of the plan for this financially responsible Millennial, who says her goal is “achieving actual financial independence, and being debt-free, by the age of 25.” (CNBC)
- A recent study finds that 75% of Xers watch YouTube videos that relate to past events or people. Though nostalgia is hardly unique to Generation X, media professional Justine Bloome correctly observes that Xers have the unique ability to tangibly access decades of memories through YouTube. (Google)
- U.K. Xer David Barnett says that his generation possesses the best characteristics of Boomers and Millennials without the downsides. He stakes his claim using some sound (if exaggerated) examples, including: “Boomers don’t understand the Internet and Millennials were raised on it. Generation X created it.” (Independent.co.uk)
- After eliminating unlimited data plans back in 2011, Verizon has announced that it is bringing them back. Verizon CFO Mark Ellis recently said he didn’t think the company needed unlimited data plans to beat its competitors—but the prospect of a combined AT&T-Time Warner clearly changes things. (MediaPost)
- In 2016, just 20% of 25- to 35-year-olds said they had changed addresses in the past year—down from 26% of Xers in 2000 and 27% of Boomers in 1990. Risk-averse Millennials are turned off by the prospect of uprooting themselves from their communities and social groups and moving to a new city where a job is not guaranteed. (The Wall Street Journal)
- Facebook will soon introduce apps for a number of smart TVs, including the Apple TV. While this change enables Facebook to branch out from online-only ads, it doesn’t change the fact that the entire ad universe is a fixed revenue pie, making the ad business a zero-sum game. (CNN Money)
Did You Know?
Millennials Veto Traditional Politics. In the wake of Donald Trump’s election, Millennials were widely panned for either abstaining from voting or casting their ballots for third-party candidates. According to The Economist, this political apathy extends across the globe. In Britain and Poland, less than half of eligible adults younger than 25 voted in their country’s most recent general election. These habits, combined with population aging throughout much of the developed world, have manifested in low relative voter turnout for young citizens. In Israel and Britain, the ratio of old to young voters in the latest national election for legislature was above 2:1; in the United States, the ratio was above 1.4:1. Does this mean that Millennials are destined to become political non-participants? Not necessarily. Millennials practice formal and informal civic engagement in their daily lives (through conversation, activism, and news consumption). And they may yet become active voters. Millennials’ archetypal counterpart, the G.I. Generation, was known for its civic enthusiasm. Only time will tell whether Millennials will follow suit.
Student Debt Goes Gray. The age group with the fastest growing amount of student loan debt is older than you think. According the Consumer Financial Protection Bureau, the number of borrowers over age 60 with student loan debt skyrocketed from 700,000 in 2005 to 2.8 million in 2015. And nearly 40 percent of these borrowers are in default. This trend is particularly worrisome since older borrowers are often on a fixed income: According to a Government Accountability Office report, the number of borrowers over age 65 using a portion of their Social Security check to pay off a federal student loan grew by 540 percent between 2002 and 2015. Over the past several years, it’s become increasingly common for lenders to require parents to take at least partial responsibility for college students’ loans. For Boomers with high-achieving Millennials, taking on debt is a no brainer—but it’s something they could be paying for in more ways than one.
