“[The Committee] will act as appropriate to sustain the expansion”
Federal Reserve Chairman Jerome Powell – June 19, 2019
As was widely expected, the Federal Open Market Committee (FOMC) did not cut the fed funds target rate at yesterday’s meeting, but they kicked the door open for a rate cut as early as July if the economy does not improve. Chairman Powell used the phrase, “use our tools to sustain the economic expansion”, or something similar, no less than six times during the press conference yesterday.
It’s no wonder. With all measures of inflation stubbornly and consistently below the Fed target of 2%, and the fed funds rate sitting at 2.25%, the FOMC probably overshot its mark with the last rate increase. To be fair, in every other economic expansion cycle, unemployment fell causing wages to increase as firms competed for workers. That hasn’t happened this time as the U.S. continues to shift to a more service-based economy from a manufacturing economy. Although unemployment now sits at a 50-year low of 3.6%, and average wages have grown about 3% over the last year, the shift to lower paying service jobs has not resulted in the usual wage-push inflation pressure. The FOMC has downgraded its expectations for inflation to 1.5% for 2019 and doesn’t expect to hit the 2% target rate until 2021.
The market is virtually certain the FOMC will act at the July meeting to cut rates by at least 1/4 point to 2% from 2.25%. About 40% of those who believe rates will be cut think the Fed may go as low as a 1/2% cut to 1.75% in July.
As the population in the United States gets older, (by 2022 the average Baby Boomer will be retired), Americans are consuming less “stuff” and more services (like healthcare). Also, as the fertility rate (children per woman) in the U.S. has fallen from 3.65 children in 1960, to 1.8 today (a 50% reduction), consumption also falls for everything from baby clothes, car seats, soccer uniforms, laptop computers and college tuition.
Luckily, we are on the verge of another transformative technological revolution that will have a similar effect on society like when we went to the moon in the late 1960s. The introduction of 5G cell service that is 100 times faster than current 4G LTE service will fundamentally change the everyday utility of the device in your hand. Secondly, quantum computers are close to achieving “quantum supremacy” (doing something traditional computers can’t do) and “quantum advantage” (doing everyday tasks much faster than traditional computers).
We think the growth resulting from transformational technology could allow U.S. GDP to continue to expand at a rate higher than otherwise possible given the demographic changes in the population.
“The end of labor is to gain leisure”
Something for HR managers to consider:
You can bet Aristotle’s wife never said that. According to the just released American Time Use Survey from the Bureau of Labor Statistics, women work an average of 41 minutes per day less than men. BUT, women spend nearly an hour per day more on “household activities” like cooking and cleaning, “caring for household members” and shopping, than their average male counterparts. As a result, women spend about an hour less per day on leisure activities and eating compared to men. Surprisingly, women report sleeping about 18 minutes longer than men on average. Caitlyn Collins, a sociologist at Washington University in St. Louis was quoted in the Wall Street Journal today saying that women are dealing with increasingly demanding employers and an expectation that they will still care for their children. “Of course these two things are impossible to accomplish at the same time: full allegiance to one’s job and full allegiance to one’s family.” This could explain much of the success of meal delivery/prep services like Hello Fresh, Blue Apron and Dream Dinners, because women are trying to get those leisure minutes back by paying for convenience.
The bottom line is: Men do sleep less and work more, while having more time for leisure activities and eating/drinking. Women work slightly fewer hours at their job, but then spend more time managing the household and caring for family members resulting in less “mommy time.” A more equitable division of tasks outside of work would equalize the amount of time available for leisure activities.
Weak demand and high prices mute the housing market
- The number of new homes being constructed fell slightly in May compared to April.
- The number of new single-family homes declined to an annual rate of 820,000 in May from a revised 876,000 in April.
- Multi-family starts increased to 449,000 in May from 405,000 in April. While the absolute number of single-family homes is larger, all of the housing market growth this year has been coming from multi-family units like apartments and condominiums.
- The first step in the housing construction process is obtaining a permit to build and this is why permits are considered to be a leading economic indicator. Total housing permits rose to an annual rate of 1.294 million from 1.29 million during the month. Permits for single-family homes rose to 815,000 from 786,000 while permits for multi-family homes dropped to 479,000 from 504,000. The number of permits is a function of demand and the number of units already under construction.
Retail sales stronger than expected
- Retail sales increased a larger than anticipated 0.5% during May and April sales were revised significantly higher to 0.3% from a negative 0.2%.
- Sales were stronger at electronics and appliance stores, sporting goods stores and food retailers. Non-store retailers continue to gain ground over traditional brick and mortar stores as well. Internet sales were up 1.4% during the month.
- The winning combination of low unemployment, low inflation and modest wage growth should keep consumers happy and spending though 2019.
New York Fed survey highlights weakness in the manufacturing sector
- The general business conditions index in the June Empire State Manufacturing Survey nosedived from 17.8 to -8.6. The decline of 26.4 points is the sharpest in the survey's history, which dates to early 2001. The negative result is the first since October 2016.
- New orders declined sharply, and employment dipped as well. Average workweek hours fell and plans to expand dropped by half.
- While the results warrant some caution, we need to see confirmation of a trend before ringing the alarm. This index has suddenly dropped into negative territory before, (2016) and subsequently rebounded without the economy falling into a recession. Much of the decline is likely due to increased trade tensions and may yet be resolved.
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