In case you missed it, the U.S. economy grew at a disappointing 1.2% in the second quarter, well below the 2.5% estimate., but above the .8% print for Q1. As highlighted in Friday’s WSJ:
Economic growth is now tracking at a 1% rate in 2016—the weakest start to a year since 2011—when combined with a downwardly revised reading for the first quarter. That makes for an annual average rate of 2.1% growth since the end of the recession, the weakest pace of any expansion since at least 1949.
Obviously, average growth rates during expansions have decreased fairly consistently in the post WWII period . The economy is much bigger and more mature in each expansion than the one before and overall volatility in the numbers is lower. But what’s nuts is that with the unemployment rate at 4.9% (at a post recession low) and average hourly wage increases (expected to be 2.6% in July) nearing post recession highs, it would appear that the U.S Federal Reserve should be lifting up banners on aircraft carriers if we were to purely judged them on their dual mandate (maximizing employment & stabilizing prices):
But with the S&P 500 (SPX) at all time highs and equity volatility very near post financial lows, one of the most important mechanisms of risk asset prices; interest rates, shows few signs of getting up off the mat. The yield on the 10 year treasury is 1.5%, not far from recent all time lows. And the Fed Funds rate is just 25 bps:
Yeah Yeah the Fed just told us they want to normalize interest rates, and that all meetings are “live meetings” (whatevs, there is no way they raise at their Sept 21 or Nov 2nd meetings before one of the most divisive presidential elections in modern times). After Friday’s GDP print, the probability of a rate rise in the Fall (only the second since June 2006) has fallen to 20% & 22% respectively.
Something is terribly wrong with this whole set up. Why is the U.S. economy only growing at 1% in the first 6 months of 2016 with Fed Funds at 25 bps, with housing hitting post crisis highs and personal spending and retail sales continuing to confound on the upside? Corporate America is not spending on the right stuff, plain and simple. Maybe it’s the deflationary pressures managements see all around them, or the relative strength of the U.S. dollar in a world where central bank policies are diverging. Or the increasingly bad geo-politics backdrop. The list goes on.
It seems that all the C-Level Suites in the U.S. (not including Amazon’s Jeff Bezos & Facebook’s Mark Zuckerberg) want to do is maintain high payout ratios and head scratching m&a (see Microsoft’s $27 billion bid for Linkedn last month).
There is some pretty weird stuff going on. It’s like nothing I have ever seen in my 20 year career. What’s different this time is the extreme distortion of asset prices by central bank crisis policy simply turned into regular monetary policy. That’s been great for asset prices, but so far not as great for sustainable growth. And the inability for the the U.S. Fed to normalize interest rates after such a prolonged expansion, because the global economy remains in such a fragile state should scare the crap out of you. It does me.