Wednesday, July 16, 2014

The U.S. economy just keeps growing

Despite enduring concerns about the health of the U.S. economy and the supposed threat of deflation, the economy continues to grow and inflation is alive and well. A few quick graphs to make those points using data released today:

Producer price inflation is running at a solid 2-3% pace. In the past six months, the PPI has actually increased at a 4.1% annualized pace.

Real Treasury yields are at levels that were associated with rising inflation in the late 1970s. When bond yields fail to compensate for inflation this weakens the demand for money (e.g., by making borrowing cheap, and by increasing the attractiveness of speculation).

It's difficult to understand the Fed's preoccupation with "stimulating" the economy when the U.S. is doing demonstrably better than Europe and doing quite well on a standalone basis. U.S. industrial production is up at a 4.7% annualized rate in the past six months, and U.S. manufacturing production is up at a 4.1% rate over the same period. This is unambiguously strong. What's amazing is the gap between U.S. and Eurozone industrial production, which has become gigantic.

A survey of home builders' sentiment in July was stronger than expected (53 vs. 50), so as the graph above suggests, housing starts are likely to continue to move higher, albeit relatively slowly. The housing market has been taking something of a breather in the past 6-9 months, but that isn't necessarily the precursor to another slump.


Benjamin Cole said...

Scott: The Fed went to QE and so has the BoJ.
The ECB has not.
The industrial production chart on Europe tells a tale, no?

Scott Grannis said...

There's little or no evidence to support the theory that a lack of QE in the Eurozone is the cause of huge economic underperformance relative to the U.S. There's only correlation.

In fact, for the past several years the euro has been relatively stable vis a vis the dollar, and the difference in measured inflation between the two economies has been very low.

More likely, what's holding back the Eurozone is fiscal policy (tax and regulatory burdens). Plus, of course, the fallout from the Eurozone sovereign debt crisis, itself a function of non-monetary policy problems.

db said...


Off topic of this post, my apologies.

Any thoughts on this subject, headline in the Minneapolis Star Tribune regarding Medtronic's tax inversion to Ireland being potentially held up/nullified by the White House. Being from MN this a big topic of debate. I can't for the life of me understand why this doesn't trigger the discussion of lowering our Corporate tax rate, instead of "restricting" company activity...Thanks in advance for any thoughts.

Scott Grannis said...

db: You are spot on, and so is the WSJ. See their two op-eds on the subject in today's edition:

I encourage everyone to read these opinions. When corporations start voting with their feet you know something is wrong. The only sensible solution is to drastically lower corporate income tax rates. We want the U.S. to be the best friend to capital in the world. With more capital comes rising living standards for all. Treat capital poorly and it will leave. Jack Lew has taken leave of his senses.

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Benjamin Cole said...

The best corporate and dividend tax rate would be zero---we could do that with cuts in federal agency spending.
Re Europe: they are on cusp of deflation, evidence of monetary aspyxiation. Japan has revived with QE...seems like QE is a winner...