February 19, 2015
“Yes, There Will Be Growth in the
Spring”
Chance, the Gardener (Google it)
Looking past the large upward revision to November 2014
nonfarm payrolls, you might have noticed that the U.S. economy has entered, in
the words of the Federal Reserve’s version of Chance, the Gardener, Alan
Greenspan, a “soft patch”. In recent months, labor conditions have weakened,
manufacturing activity has hit a wall, consumer spending has waned and
residential real estate demand has sunk. This “soft patch” is illustrated in
Charts 1,2,3 and 4, which contain representative data that will not be revised radically, if at all.
Chart 1
Chart 2
Chart 3
Chart 4
I believe this current
weakening in the pace of U.S. economic activity is primarily the result of the past sharp deceleration in the growth of
thin-air credit, thin-air credit being defined here as the sum of commercial
bank credit and reserves of depository institutions held at the Federal
Reserve. As I have argued ad nauseam, there is a positive
correlation between lagged values of thin-air credit growth and the growth of
economic activity. Chart 5 shows the behavior of thin-air credit in the 12
months ended January 2015 in terms of its three-month annualized growth and its
month over year-ago month percent change. There was a noticeable deceleration
in the growth of thin-air credit in October, November and December 2014,
followed by a sharp re-acceleration in January 2015.
Chart 5
Chart 6 shows the behavior of the two components of
thin-air credit in terms of their three-month annualized percent changes.
Chart 6
With the cessation of Fed QE securities purchases in
October 2014, the Federal Reserve component of thin-air credit, depository
institution reserves held at the Fed, has entered an outright contractionary
phase. But at the same time that the Fed’s contribution to thin-air credit has
been diminishing, commercial banks’ contribution has been increasing. The
acceleration in commercial bank credit
in the three months ended January 2015 has largely been responsible for the
re-acceleration in year-over-year and three-month annualized growth in total thin-air credit in January 2015.
Barring a sharp deceleration in commercial bank credit in
the next several months, a re-acceleration in total thin-air credit growth
should be sufficient to extricate the U.S. economy from its current “soft
patch”. So, to paraphrase Chance, the Gardener: “Yes, there will be stronger
growth in the U.S. economy in the spring.” The current economic-activity “soft
patch” likely has the FOMC leaning toward making no monetary policy changes at
its June 16-17 meeting. If the pace of economic activity picks up in the second
quarter, as I expect, the lag in the reporting of economic data might still
stay the FOMC’s hand in June. If I am right about a spring pick-up in the pace
of economic activity, however, look for some overt FOMC tightening action at
the July 28-29 meeting.
Paul L. Kasriel
Senior Economic & Investment Advisor
Legacy Private Trust Co. of Neenah, WI
Founder, Econtrarian, LLC
econtrarian@gmail .com
1-920-818-0236
