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Has the Fed called the top in growth (again)?

January 19, 2022

Recent US economic news has surprised negatively when properly weighted for significance. The Atlanta Fed’s nowcast of the contribution of final sales to Q4 annualised GDP growth has been slashed from 8.1 percentage points at the start of December to just 2.0 pp currently – see chart 1.

Chart 1

The most recent lurch down was driven by shockingly bad December retail sales – inflation-adjusted sales have now dropped 10% from their stimulus-inflated March peak.

The consensus is discounting weakness as temporary and due to the omicron wave. The “monetarist” forecast is that a cyclical slowdown is under way related to a big fall in real money growth since 2020 – chart 2.

Chart 2

The distribution of money growth, moreover, looks unfavourable for demand growth. Broad money balances have risen fastest for high-income households with a lower propensity to consume. Money holdings of the bottom 40% of earners were stagnant in real terms in the year to end-Q3 – chart 3.

Chart 3

The Atlanta Fed’s Q4 GDP growth nowcast is still up at 5.0% but this reflects a whopping 3.0 pp contribution from inventories – consistent with the view here that the stockbuilding cycle is peaking.

The latter estimate is based on inventory data through November but the December retail sales slump suggests further stockpiling. So does another bumper monthly rise in commercial and industrial loans, which are strongly influenced by inventory financing needs – chart 4.

Chart 4

The Fed’s “hawkish pivot” was predicated on a strong economy* but the Fed is often facing the wrong way at turning points. Officials are likely to row back if activity data continue to disappoint, even if inflation news remains unfavourable.

*From Chair Powell’s testimony to the Senate Banking Committee on 11 January: ”Today the economy is expanding at its fastest pace in many years, and the labor market is strong.”

NS Partners Ltd.
January 19th, 2022