Economic Policy and Financial Insights
China’s Stimulus Boosts Markets, but Expected Economic Impact Modest
In reports in recent years, I have described the transition of China’s economic structure and its government-generated excesses in real estate, and warned that its adjustments would dampen its economy for years to come. Everything is unfolding as predicted.
A Comparison of the Biden and Trump Economic Platforms
This paper provides a comparison of the economic platforms of Biden and Trump. I purposely do not analyze the economic effects of the platforms or their specific provisions and try to be even-handed in my descriptions (and stay clear of personality and leadership issues). The implications for economic performance, in the U.S. and globally, are important. If there are changes between now and November, I will provide updated analysis.
Japan’s Economy, the Yen, and the Bank of Japan
The Bank of Japan's policy of zero interest rates and ongoing asset purchases while inflation is above 2% and inflationary expectations rising is contributing to a weak yen and harming Japan's economy. Raising the BoJ's policy rate and normalizing monetary policy would boost the yen and enhance Japan's economic performance.
The Dilemmas Facing the Fed, BoE, ECB, and BoJ
Inflation has receded in the U.S., UK, EuroArea, and Japan but remains above their central banks' 2% targets. This piece assesses the different situations faced by the Fed, BoE, ECB, and BoJ, and considers the appropriate policies that would achieve their objectives and their likely course of action.
A Week of Insights into the Economy and Fed Interest Rate Policy
In an article published in the Wall Street Journal last Monday, I argued that there has been a pickup in productivity and sustainable potential real growth, which has raised the natural real rate of interest. These trends imply that the Fed’s real policy rate of 2.6% (the Fed’s current target of 5.25%-5.5% minus the 2.8% core PCE inflation) is not as restrictive as the Fed perceives, limiting the magnitude of interest rate cuts appropriate to achieve the Fed’s 2% inflation target. The Fed’s view, as reflected in Fed Chair Powell’s testimony on the Fed’s semiannual Monetary Policy Report (MPR) to Congress, is that monetary policy is restrictive and will generate a significant slowdown in economic growth below potential that will lower inflation to 2%. Following this, important data releases throughout the week confirmed the continued health in labor markets and strength in household balance sheets that will support ongoing consumer spending. Later in the week, I also had the honor of discussing these issues with Larry Summers at an investment conference in Phoenix, Arizona. His views on the economy, real interest rates, and the Fed were similar with mine — and capped off a week full of insights.
U.S. GDP, Profits, and the Stock Market
The U.S. stock market continues to outperform leading overseas markets, reflecting stronger economic growth and the rise in profits, and the expectations that these innovation and technology-drive trends will continue. In anticipation of this Thursday’s GDP Report, which is expected to record another healthy gain in U.S. GDP in 2023Q4, this brief assesses the longer-run trend in the U.S. economy and profits and highlights some important evolving trends.
The Stock Market and Economic Performance during Presidential Election Years
How will stocks fare and what will happen to interest rates during this Presidential election year? These questions are viewed through three lenses: 1) a historical assessment of economic and financial performance during Presidential election years going back to 1960, including the performance of the S&P500 during Presidential election years, along with changes in the Federal funds rate, inflation, real GDP, employment and the unemployment rate as highlighted in the table below, 2) recent research on Federal Reserve behavior during election years, and 3) prior research on the cyclical linkages between the S&P500, corporate profits and economic expansions.
Critical Issues for U.S. Economic and Financial Performance in 2024
The lead stories in 2023 were the resilience of the U.S. consumer and the economy that dispelled concerns about recession and lifted expectations about sustained growth; a decline in headline and core inflation that reduced inflationary expectations, despite the damages of stemming from the high level of prices; and the Federal Reserve’s associated shift from higher-for-longer forward guidance to signaling that it will lower interest rates in 2024, which powered a late-year significant decline in yields. Here are the big economic issues in 2024.
Consumption and Household Net Worth
The sustainability of the expansion and the health of the economy depends critically on consumption, which is 69% of GDP. The biggest factor driving consumption is real disposable income, which is determined by employment and wages, but it is also influenced by real interest rates and changes in household net worth. This note briefly discusses the trends in disposable income, interest rates and consumption and then focuses on household net worth and its implications.
Factors Supporting a Soft Landing
The healthy job gains in the November Employment Report underline the resilient economy and are consistent with sustained expansion. While employment is a coincident indicator, it’s important to understand the key factors that support a soft landing, or at minimum would likely make any economic downturn sufficiently mild that it will not take on the characteristics of a typical recession.
