Over the past several months, economics reporters at the Associated Press have told us time and time and time again that the U.S. economy is "largely insulated" from adverse economic developments overseas.
So why is the AP's Martin Crutsinger going along with the now-shifting conventional "wisdom" that Janet Yellen's Federal Reserve may have to defer implementing additional interest-rate increases for quite some time because of what the wire service headlined as a "darker global economy"? The obvious answer is that the U.S. economy is also weak, and the business press simply won't admit it.
Here are excerpts from Crutsinger's Monday morning report (bolds are mine):
A MONTH AFTER RAISING RATES, FED FACES DARKER GLOBAL ECONOMY
Since the Federal Reserve raised interest rates from record lows last month, the global picture has darkened. Stock markets have plunged. Oil prices have skidded. China's leaders have struggled to steer the world's second-biggest economy.
All of which raised a delicate question: Did the Fed err in raising rates for the first time in nearly a decade?
... in their (Wednesday policy) meeting, the Fed's policymakers will surely grapple with whether - and, if so, how - to respond to an altered economic landscape.
... some analysts say the Fed might signal that the pace of three or four additional rate increases that many had expected this year could become more gradual - with perhaps only two rate hikes this year and not starting until midyear.
"People are just scared right now," said David Wyss, a former Fed staff economist and now an economics professor at Brown University. "It isn't just China weighing on things. Europe hasn't solved its problems, we have geopolitical risks in the Middle East and in the United States there is a lack of confidence in the political parties and the candidates."
You see, it's not the U.S. economy itself. It's those darned "political parties and candidates" — none of whom will have any power to do anything tangible to the economy for some time. (And y'know, Hillary's the only candidate who says she's happy with the job Barack Obama has done and is expected to continue with more of the same, so if you want to keep the uncertainty manageable, you really need to vote for her.)
(Chief economist at IHS Global Insight Nariman) Behravesh ... said his firm's forecast is for the economy to rebound from a slow final three months of last year to growth of around 2.5 percent this year.
... And what should the Fed be doing?
Analysts expect no course shift this week. The Fed may make some slight changes to its policy statement to express concern in particular about intensified global pressures. That could assure investors that the Fed will weigh such developments in deciding when to next raise rates.
"The Fed will probably acknowledge that global economic conditions have deteriorated since the December meeting, but they will balance that by saying U.S. economic conditions have not changed," suggested Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.
"I still see four Fed rate hikes this year," said Mark Zandi, chief economist at Moody's Analytics. "I believe the market turbulence will abate. The labor market has not been damaged by the turmoil, and job growth will be sufficient to achieve full employment by the middle of this year."
The problem with Mr. Zandi's confidence is that the employment market is showing signs of softening — not definitively by any means, but still troubling. Seasonally adjusted initial applications for unemployment claims have recently been edging up. On Thursday, the government reported that raw (i.e., actual) claims for the week ended January 16 were less than 2 percent below raw claims during the same week in 2015.
The obvious problem with Mr. Sohn's statement is that U.S. economic conditions have changed — and not for the better.
Here's a quick rundown of just a few other problematic areas:
- The Institute for Supply Management's Manufacturing Index went into slight contraction in November, and went further into contraction in December. The ISM's national survey seems rose-colored, as most other regional manufacturing surveys have been far more negative for a far longer time.
- The Federal Reserve reported that industrial production fell 0.4 percent in December, 1.5 percent during the last three months of 2015, and 1.8 percent from December 2014 to December 2015. Results that negative have generally been associated with recessions.
- Retail sales fell a seasonally adjusted 0.1 percent in December, the most important retail month of the year, and have only increased by 0.2 percent in the past five months.
- Finally, four different respected prognositicators are predicting that overall economic growth during the fourth quarter, which Crutsinger would only acknowledge via a quoted source was "slow," is looking quite weak. Moody's are predicting annualized growth of just 1.0 percent; the Atlanta Fed is at 0.7 percent; JP Morgan Chase is predicting a microscopic +0.1 percent; Barclay's is at +0.7 percent.
Yellen and the Fed aren't thinking about holding off on rate increases because of the "darker global economy." If the U.S. economy is as "largely insulated" from worldwide problems as the AP has claimed for several months, they must be far more worried about the darker domestic economy. So was the AP fibbing then, or is its Marty Crutsinger fibbing now? It has to be one or the other.
Cross-posted at BizzyBlog.com.