IMF Urges Fed Not To Raise Interest Rates Until 2016 by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 9, 2015
IN THIS ISSUE:
- May Unemployment Report Was Better Than Expected
- Consumer Spending Continues to Disappoint, Savings Rise
- IMF Urges Fed Not to Raise Interest Rates Until Next Year
- Kids Graduate From College With Master’s Degrees
On Thursday of last week, the International Monetary Fund downgraded its forecast for US economic growth this year from 3.1% earlier in the year to only 2.5% now. That is not surprising in light of the mainly disappointing economic reports we’ve seen recently, and other forecasters have been revising their estimates lower as well.
Yet in addition to the downwardly revised growth forecast, the new IMF report openly called on the Federal Reserve to delay any interest rate hike until sometime next year. In all of my years of Fed-watching, I don’t remember the IMF ever trying to influence Fed monetary policy. This is an unusual development, and it will be very interesting to see how it plays out.
The question is whether Fed Chair Janet Yellen and her fellow members of the policy setting Committee pay much, if any, attention to what the IMF has to say. We all know that the Fed really wants to raise short-term rates to give it some ammunition for the next recession.
This apparent disagreement is between two of the most powerful women in the world – Christine Lagarde, head of the IMF, and Fed Chair Janet Yellen. This issue will be our main topic today.
But as we often do, let’s first take a look at Friday’s stronger than expected unemployment report for May and the latest disappointing report on consumer spending.
May Unemployment Report Was Better Than Expected
The official unemployment rate rose from 5.4% in April to 5.5% in May, as reported last Friday. Normally, that is not good news. But as I have tried to explain over the years, the monthly unemployment reports are always complicated, and sometimes what appears to be bad news is good news and vice-versa. Such was the case with last week’s jobs report. Let’s get to it.
The headline unemployment rate did rise from 5.4% to 5.5%. But this time, the unemployment rate rose slightly because more workers re-entered the workforce with new jobs, or at least were actively looking for new jobs. That’s a good thing.
The Bureau of Labor Statistics (BLS) reported that employers added 280,000 jobs in May, the most in five months, which helped to dispel fears that a 1Q slowdown (-0.7% GDP) would extend into the 2Q. The BLS also revised new jobs in April down to 221,000 from 223,000 previously reported.
Hourly earnings in May climbed from a year ago by the most since August 2013. Average hourly earnings increased by 3 cents to $24.87 in May. That represented a 0.3% rise month-over-month, slightly higher than the 0.2% pre-report estimate. Year-over-year earnings rose 2.3%, slightly above the 2.2% consensus estimate.
Lastly, the labor force participation rate rose to 62.9% in May, up from 62.8% in April and 62.7% in March. That is the second monthly increase in the percent of working age Americans who actually have jobs. While this indicator has a long way to go to get back to “normal,” it is headed in the right direction at least for now.
While the labor force participation rate has improved modestly over the last two months, we should always keep in mind that there are still almost 93 million working-age Americans not in the labor force. The month of May saw 92,986,000 people not participating in the workforce, down from 93,194,000 in April according to the BLS.
The BLS defines those not in the labor force as people ages 16 and older who are “neither employed nor made specific efforts to find employment sometime during the latest four-week period.” According to the BLS, the civilian labor force itself rose by 397,000, reaching 157,469,000 in May.
The takeaway from last Friday’s unemployment report is that we get these stronger than expected reports from time to time, but we need to see a trend of better than expected reports to draw any meaningful conclusions. No single good report should, by itself, cause us to draw conclusions that the economy is really getting better.
We should also keep in mind that with each new report, there are always revisions to the two previous reports, and they may be revised higher or lower. The point is, it takes several months to confirm a trend – up or down. At this point, we just don’t know if we’ve turned the corner and the economy is finally ready to shift into a higher gear.
Consumer Spending Continues to Disappoint, Savings Rise
Unfortunately, US consumers continue to pocket their gasoline savings rather than spend it in the economy. Consumer spending was flat in April (0.0%) – the weakest performance in three months – after a revised 0.5% increase in March, the Commerce Department reported last week. The March increase was the biggest gain since last August.
The unchanged reading for consumer spending in April was not a big surprise given weakness previously reported in retail sales and auto sales for the month. Economists, however, continue to forecast that spending will rebound in coming months. Solid gains in employment and incomes should translate into more confident consumers who are willing to spend more. But that remains to be seen.
Consumer spending slowed to growth of just 1.8% in the 1Q, down from spending growth of 4.4% in the 4Q. The frigid cold in many parts of the country kept shoppers away from the malls. With the arrival of spring and warmer weather, analysts are looking for spending to rebound.
The weakness in April, the first month in the new quarter, reflected big declines in spending on both durable goods such as autos and nondurable goods such as clothing and food. Spending on services, which includes utility bills and rent, edged up 0.2%.
With income growing and spending flat, the personal saving rate jumped to 5.6% of after-tax incomes – the second highest level since December 2012 – according to data from the Fed. The personal savings rate was only about 3% before the Great Recession began.
Economists had believed that consumers would start spending the savings they have accumulated from the big drop in gas prices. While the cost of filling up the tank has risen a bit in recent weeks, prices are still nearly $1 below the levels of a year ago. Consumer spending is closely watched because it accounts for 70% of economic activity.
“The April income and spending figures are another reminder that even though their incomes are rising at a healthy pace, households are still reluctant to boost spending more freely,” said Paul Ashworth, chief US economist at Capital Economics.
Now let’s turn to our main topic today.
IMF Urges Fed Not to Raise Interest Rates Until Next Year
The International Monetary Fund (IMF) cut its forecast for US economic growth in 2015 last Thursday and simultaneously called on the Federal Reserve to delay its much expected Fed Funds rate hike until sometime next year. In all my years of Fed watching, I don’t recall the IMF ever openly attempting