Fed might be overlooking generational shift in spending

When Federal Reserve chairman Janet Yellen speaks Friday at the Federal Reserve Bank of Kansas City’s Monetary Policy Symposium in Jackson Hole. Wyo., economy watchers will listen for clues about whether a rate hike could be coming in September.
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When Federal Reserve chairman Janet Yellen speaks Friday at the Federal Reserve Bank of Kansas City’s Monetary Policy Symposium in Jackson Hole. Wyo., economy watchers will listen for clues about whether a rate hike could be coming in September.

Ahead of that event, others, including Fed officials, continue to talk, and their remarks reflect differing views of where the U.S. economy is headed. The Fed raised rates last December for the first time in seven years, but it has made no moves since as the domestic and global economies have dealt with a series of problems.

On Sunday, Federal Reserve Vice Chairman Stanley Fischer told the Aspen Institute in Colorado that the central bank is still considering a rate increase this year because the economy is getting close to meeting the goals the Fed set for it.

One of those is a 2 percent inflation rate. Fischer said the central bank’s preferred price benchmark — the U.S. Personal Consumption Expenditure Core Price Index — minus food and energy costs, at 1.6 percent was “within hailing distance of 2 percent.”

“Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes,” Fischer said in a Bloomberg report.

Stephanie Pomboy, an economist and the founder of MicroMavens, has a different view. Her theory is that the financial crisis that led to the Great Recession is changing modern consumers’ behavior the way the Great Depression in the 1930s altered a generation’s way of thinking about saving and spending.

Pomboy told Barron’s in an interview that “for 20 years the consumer has reliably borrowed from China to buy their tube socks. Post-crisis, the consumer has clearly pulled back. How many months did we have disappointing retail sales numbers that no one could explain? They’d say it’s too hot, too cold, there’s Brexit. But what’s really causing this slowdown in spending is that the post-crisis consumer is determined to save, and do it the old-fashioned way. Historically, when rates go down, people save less. In this cycle, things have completely reversed.”

She predicts that the next phase of global economic policy will be “fiscal stimulus funded by helicopter money.”

“[Countries across the world are] dealing with an aging population,” she said. “This is another great flaw in the logic of monetary-policy makers. They’ve pushed rates to and below zero in an effort to boost growth. But they did so against a population that is aging and needs more than ever to get returns on what they’ve set aside. By lowering rates, they’ve actually intensified the saving urge.

“The statistics bear this out. Over the last four years, U.S. nominal GDP growth has gone from 4.3 percent to 4.1 percent to 3 percent to 2.4 percent. The deflator, the inflation we are supposed to be targeting, went from 1.9 percent to 1.6 percent to 1.5 percent to 1.1 percent. What greater proof do you need that lower rates aren’t helping and, to the contrary, are making things worse? Growth and inflation are slowing, and it has to do with this aging demographic.”

Week to week, month, to month, economists follow the regular rhythm of government and private reports for signs about whether consumers are becoming more able and willing to spend in ways that stimulate general commerce.

Last week the spotlight was on the housing industry. Housing starts in July rose at the fastest pace in five months, increasing 2.1 percent to an annualized rate of 1.2 million, the Commerce Department reported.

“What we’re seeing is quite encouraging,” Millan Mulraine, deputy head of U.S. research and strategy at TD Securities in New York, told Bloomberg. “It suggests that the housing sector recovery is building on the strong momentum we’ve had in the past few months.”

However, the Commerce Department also said building permits fell 0.1 percent in July from the previous month, to a seasonally adjusted annual level of 1.15 million. Permits had risen during the three previous months.

“The big picture for housing remains very positive,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note to clients, the Wall Street Journal reported. “Sales are up, despite a shortage of homes on the market in many cities and rapid price appreciation. Thus, builders have every incentive to get as many new homes built as they can.”

The housing sector has had a good year. The National Association of Realtors said home resales rose in June at their best pace in more than nine years. New-home sales were up 10 percent for the first half of this year from the same period a year earlier.

New-home sales figures for July will be released today and existing-home sales for the month will be out on Wednesday. The consensus of economists is for new-home sales at a rate of 581,000, down from 592,000 in June.

The consensus on home resales is for a pace of 5.5 million, down from 5.57 million in June.

On Friday, ahead of Yellen’s speech, the University of Michigan will release its final Consumer Sentiment Index for August. The consensus is for a reading of 90.9, which would be a small improvement in the consumer’s mood from a 90.4 reading earlier this month.

Low mortgage rates have helped to fuel the continuing improvement in the housing industry. It remains to be seen whether the Fed will want to tamper with rates very soon as long as the housing market continues to show strength, particularly because home buying stimulates spending in other areas of the economy.

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