23rd August 2012
It was only yesterday that I remarked on the lack of a summer lull this year although I have to confess that I did not necessarily expect for the pace of events to pick up further! However they have and we are back to what have become the Scylla and Charybdis of 2012 which are signs of economic weakness and possible further monetary easing by central banks. Let us first consider the position in the United States.
Federal Open Market Committee Minutes
The minutes from the July meeting were released last night and the crucial sentence is shown below:
"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."
This will not have come as a complete surprise to readers of this blog as I have argued many times that more stimulus from the FOMC – no doubt to be called QE3- is a near certainty. Whilst the US economy has shown some signs of recovery it is my view that this has been a disappointment if you consider the amount of monetary and fiscal stimulus that has been deployed. Therefore if you ask the question what happens when the stimulus fades away? It is hard to avoid the thought that at least some of the recovery probably will too.
The actual language above provokes thoughts on what "substantial and sustainable strengthening" actually means and I suspect gave those who have made the case for a strong US economic recovery mull the word "sustainable". If I had to pick a subject to which this applies I would choose what I consider the priority for the FOMC which is the unemployment/employment situation. By what is an accident of timing we did learn something about the prospects for this too.
Congressional Budget Office
This body updated its forecasts yesterday and told us that this would happen if the various "temporary" tax cuts and unemployment measures were not renewed in January:
"the unemployment rate rising to about 9 percent in the second half of calendar year 2013"
So we can see that any substantial attempt to deal with the fiscal deficit is expected to raise unemployment in 2013. But even if that does not happen and current policies are renewed by whoever is President come January then the CBO expects this:
"the unemployment rate would be about 8 percent by the end of 2013"
So the optimistic scenario is for unemployment to remain the same and the pessimistic one is for it to rise. No wonder the FOMC has signalled it is on amber alert!
Indeed if you look further into the document you will find something very troubling for an institution which prioritises unemployment as a sign of policy success. The CBO has kindly illustrated my theme that official bodies have rose-tinted views on future economic growth by suggesting that the US economy will grow by 3.1% in 2014 and an even more extraordinary 4.8% in 2015! Perhaps they will spare some time and tell us exactly how or more likely they expect everyone to have forgotten this by the time we get there. But the real rub as Shakespeare would put it is that even with economic growth of which Elton John's "Rocket Man" would be proud the baseline projection for the unemployment rate in 2015 is for it to average 7.7%. That of course is very little better than where we stand now.
The Chinese Problem
If we leave the US in its "fiscal cliff" versus economic stimulus debate and move across the Pacific Ocean we see another nation which has received further troubling economic news.
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