REACHING FOR THE GOLD - Amazon S3 · Sources: Haver Analytics; U.S. Dep. of Com.; Federal Reserve...

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REACHING FOR THE GOLD

January 10, 2019

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: CSMFO, Palm Springs, CaliforniaJanuary 10, 2019

Initial applications for unemployment benefits (thousands, weekly) Sources:HaverAnalytics;U.S.DepartmentofLabor.UpdatedthroughDecember29,2018.

150

200

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300

350

400

450

500

550

600

650

700

150

200

250

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350

400

450

500

550

600

650

700

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

This One Knows the Economy Best …

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Claimants (number) Initial applications for unemployment benefits (thousands, weekly) Sources:HaverAnalytics;U.S.DepartmentofLabor.UpdatedthroughDecember22,2018(claimants)andDecember29,2018(claims).

… It and Its Cousin (Claimants)

180

200

220

240

260

280

300

320

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2016 2017 2018 2019

Jobless claims ("flow into the bathtub") (right scale)

Recipients of unemployment insurance benefits ("bathtub level") (left scale)

Bathtub Analogy

The water flowing from the

faucet into the tub

The level of the

water in the bathtub

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Jobless claims in California (ratio to 2007 Q4 level) Sources:HaverAnalytics;U.S.DepartmentofLabor.UpdatedthroughDecember29,2016.

Same for California …

0.50

0.75

1.00

1.25

1.50

1.75

2.00

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

CaliforniaUS (solid area)

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Recipients of unemployment insurance benefits in California (number) Source:U.S.DepartmentofLabor.UpdatedthroughDecember22,2018.

… Giving Much to Cheer

290,000

310,000

330,000

350,000

370,000

390,000

290,000

310,000

330,000

350,000

370,000

390,000

Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018

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Say What?

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Selected broad stock market indexes Sources:HaverAnalytics;DowJones.UpdatedthroughJanuary4,2019.

Sudden Doubt …

0

2,000

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6,000

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26,000

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32,000

0

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800

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1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

3,200

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Wilshire 5000, float adjusted (right scale)

S&P 500 (left scale)

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S&P 500, log10 scale Sources:HaverAnalytics;DowJones.UpdatedthroughJanuary4,2019.

… Although Less Notable in Percentage Terms

100

1,000

100

1,000

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

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Unemployment (percent of the labor force) Sources:HaverAnalytics;U.S.DepartmentofLabor;CongressionalBudgetOffice.UpdatedthroughDecember2018.

No, Recession Is Not Inevitable …

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131945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Nairu (unemployment rate consistent with maximum sustainable employment)

Official unemployment rate (U-3)

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… Although Recession Predictions Are

WSJOpinion|CommentaryAnotherRecessionIsLoomingAndunlikeinthepast,theFederalReservehaslittleroomtoencouragegrowthbyreducingrates.ByMartinFeldsteinSept.27,20186:46p.m.ETTenyearsaftertheGreatRecession’sonset,anotherlong,deepdownturnmaysoonroiltheU.S.economy.Thehighlevelofassetpricestodaymirrorstheearliertrendinhousepricesthatprecededthe2008crash;bothmispricingsreflectlongperiodsofverylowrealinterestratescausedbyFederalReservepolicy.Nowthatinterestratesarerising,equitypriceswillfall,draggingdownhouseholdwealth,consumerspendingandeconomicactivity.Duringthefive-yearperiodbeforethelastdownturn,theFedhaddecreasedthefederal-fundsratetoaslowas1%.Thatdrovedown……….

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Nominal federal funds rate and core inflation (percent) ¹TheinflationmetricsthattheFederalReserveBoardusestocommunicateitspolicies.Sources:HaverAnalytics;U.S.DepartmentofCommerce;FederalReserveBoard.UpdatedthroughOctober2018(inflation)andDecember17,2018(federalfundsrate).

No, the Fed Isn’t Trying to Restrict Growth

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4

8

12

16

20

0

4

8

12

16

20

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Core PCE chain price

inflation (% ch.

from 12 months earlier)¹

Nominal federal funds

rate

Range of Fed assumptions about

neutral

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Excess reserves (billions of dollars) Sources:HaverAnalytics;FederalReserveBoard.UpdatedthroughDecember12,2018.

No, QT Isn’t Hurting the Economy …

0

500

1,000

1,500

2,000

2,500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Excess Reserves

Projected Excess Reserves, GivenBalance Sheet ShrinkageOld Series: Reserves Maintained atthe Fed Less Required Reserves

TheFednowisshrinkingitsbalancesheetby$50billionmonthly,$600billionannually

$1 to $2 billion

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Selected 10-year sovereign yields (percent) Sources:HaverAnalytics;FederalReserveBoard;BankofJapan;EuropeanCentralBank.UpdatedthroughDecember31,2018.

… Not if Bond Yields Don’t Know About It:

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0

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7

-1

0

1

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3

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5

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7

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

U.S.

Germany

Japan

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Selected 10-year sovereign yields (percent) Sources:HaverAnalytics;NBER-designatedrecessionbars;FederalReserveBoard;U.S.Dep.OfCommerce.UpdatedthroughDecember20,2018.

No, the Yield Curve Doesn’t See Recession …

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

-5

-4

-3

-2

-1

0

1

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1960 1970 1980 1990 2000 2010

Normal ("neutral") differential

If equilibrium real bond yields were 2 percent

versus Treasuries

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Global fixed income market and central bank holdings (millions of dollars) Sources:HaverAnalytics;BankforInternationalSettlements.Updatedthrough2018Q2.

… Because that QE Fogs the View

0

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100,000,000

120,000,000

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120,000,000

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

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Stocks and after-tax earnings (Wilshire 5000, flt. adj., December 31, 1970 = 830.27) (after-tax GDP earnings) Sources:HaverAnalytics;Wilshire;U.S.DepartmentofCommerce.Updatedthrough2018Q4(profits)andJanuary4,2019(stocks).

No, Stocks Are About Earnings, Not the Fed

1/1/1990 1/1/1995 1/1/2000 1/1/2005 1/1/2010 1/1/2015 1/1/2020

0

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1,000

1,500

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3,000

0

7,000

14,000

21,000

28,000

35,000

42,000

1990 1995 2000 2005 2010 2015 2020

ForecastLine is the Wilshire 5000 index, float adjusted (left scale)

Dark shaded area is actual after-tax earnings. The between that and the light-shaded area represents the excess of actual profits over the historical average of 6 percent of GDP (right scale)

Note: arrows mark times when the Fed began to raise rates

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Household saving (% of income) Household savings (ratio of net worth to income) Sources:HaverAnalytics;U.S.Dep.ofCom.;FederalReserveBoard.Updatedthrough2018Q3(networth)andNovember2018(saving).

Spending Responds to Wealth Effects …

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.02

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Saving rate (left scale)

Savings rate: household net worth (right scale)

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Household saving (% of income) Household savings (ratio of net worth to income) Sources:HaverAnalytics;U.S.Dep.ofCom.;FederalReserveBoard.Updatedthrough2018Q3(networth)andNovember2018(saving).

… More When They’re Viewed as Permanent

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4.0

4.5

5.0

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6.0

6.5

7.02

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Saving rate (left scale)

Savings rate: household net worth, average over the most recent 10 years (right scale)

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Unemployment (percent of the labor force) Sources:HaverAnalytics;U.S.DepartmentofLabor.UpdatedthroughDecember2018.

Slower Should be Cheered, Not Feared

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1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

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THE Event of Our Lifetime

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Labor productivity and real labor compensation (ratio to respective 1985 Q4 level) Sources:HaverAnalytics;U.S.DepartmentofCommerce.Updatedthrough2018Q3.

Capital in the Digital Revolution Is Unique …

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1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Labor productivity

Real hourly compensation

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Income share (percentage of Gross Domestic Income) Sources:HaverAnalytics;NBER-designatedrecessions;U.S.DepartmentofCommerce.Updatedthrough2017Q4.

… Driving This …

0.03

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0.08

0.09

0.10

0.11

0.51

0.52

0.53

0.54

0.55

0.56

0.57

0.58

0.59

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Profits

Labor Compensation

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Gini coefficient (0=maximum equality, 1=minimal distribution) Sources:HaverAnalytics;NBER-designatedrecessions;CensusBureau.Updatedthrough2016.

… and That’s What’s Behind This

0.32

0.34

0.36

0.38

0.40

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0.44

0.46

0.48

0.32

0.34

0.36

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0.48

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

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§  New developments—the Digital Revolution (Amazon, Google, ride-sharing services, commercialization of private assets, AI, autonomous transportation technology, Big Data) and China’s Industrial Revolution—may be socially and politically disruptive but they are sustained in market economies by the endorsement of consumers.

§  Well-meaning proposals such as, for example, a living wage or a hike in the minimum wage aren’t nearly as effective as education and job skills training in meeting the challenges driven by technological change.

Blame Consumers, Not Innovation

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The 2019 Outlook In Brief

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Real GDP in selected regions (percent change from four quarters earlier) Note:GlobalrealGDPisconstant2016dollars(PPPbasis).Sources:HaverAnalytics;OECD;WorldBank;IMF;CIA;U.S.DepartmentofCommerce;J.P.Morgan.Updatedthrough2018Q3.

26Global and National Economic Outlook Appendices

Uneven (but Still-Growing) Progress …

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

China

IndiaAll others (boxes)

US

Japan

European Union-28

Global real GDP (shaded green region)

Forecast

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Real GDP and aggregate hours worked (percent change from 12 months earlier) Sources:HaverAnalytics;MacroeconomicAdvisers.UpdatedthroughOctober2018(GDP)andDecember2018(hours).

Still Riding a Fiscal Swell Into 2019 …

-9-8-7-6-5-4-3-2-1012345

-9-8-7-6-5-4-3-2-1012345

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Real GDP

Aggregate hours

Forecast The Fed’s View¹ (Range of Forecasts): 2018 3.0-3.1 2019 2.0-2.7 __________ ¹December 18-19, 2018

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Core PCE inflation (% ch from 12 months earlier) Unemployment (% of the labor force) Sources:HaverAnalytics;U.S.DepartmentofCommerce;U.S.DepartmentofLabor.UpdatedthroughNovember2018(inflation)andDecember2018(unemployment).

Dual Mandates Met …

0.51.52.53.54.55.56.57.58.59.510.511.512.513.514.515.516.517.518.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026

Unemployment Measures (right scale):

U-6

U-3 + ex cess # working part-time inv oluntarily + 20- to 45-y ear olds who gav e up looking for w ork and dropped outU-3 + ex cess # working part-time inv oluntarily¹

U-3Short-term unemploy ment

Core PCE inflation (left scale)

The green band marks the region matching the Fed's Dual Mandate of "maximum employment" and 2 percent inflation.

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Unemployment rate (% of the labor force) Sources:HaverAnalytics;U.S.DepartmentofLabor;FederalReserveBoard.UpdatedthroughDecember2018(unemployment)andDecember19,2018(FOMCunemploymentassumptions).

“Maximum Employment” Evolves …

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Actual unemployment rate

Range of Fed views about the sustainable level of the unemployment rate

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Consumer inflation (percent change from 12 months earlier) Sources:HaverAnalytics;U.S.DepartmentofCommerce.UpdatedthroughNovember2018.

… the Inflation Target is Firm

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

The range of FOMC's forecast

for PCE chain price inflation, including its

longer-run goalOverall PCE inflation¹

Core PCE inflation¹

Forecast

¹ Chain price indexes for Personal Consumption Expenditures, the inflation measures the FOMC refers to in order to communicate its inflation goals.

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CONTACT:JamesE.GlassmanTelephone:(212)[email protected]

©2019JPMorganChase&Co.Allrightsreserved.Chase,JPMorganandJPMorganChasearemarketingnamesforcertainbusinessesofJPMorganChase&Co.anditssubsidiariesworldwide(collectively,“JPMC”).Thematerialcontainedhereinisintendedasageneralmarketcommentary.Totheextentindiceshavebeenusedinthiscommentary,pleasenotethatitisnotpossibletoinvestdirectlyinanindex.OpinionsexpressedhereinarethoseofJamesGlassmanandmaydifferfromthoseofotherJ.P.Morganemployeesandaffiliates.ThisinformationinnowayconstitutesJ.P.Morganresearchandshouldnotbetreatedassuch.Further,theviewsexpressedhereinmaydifferfromthatcontainedinJ.P.Morganresearchreports.Theabovesummary/prices/quotes/statisticshavebeenobtainedfromsourcesdeemedtobereliable,butwedonotguaranteetheiraccuracyorcompleteness.

REACHING FOR THE GOLD - Amazon S3 · Sources: Haver Analytics; U.S. Dep. of Com.; Federal Reserve...

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Transcript of REACHING FOR THE GOLD - Amazon S3 · Sources: Haver Analytics; U.S. Dep. of Com.; Federal Reserve...