Societe Generale’s Albert Edwards points to the S&P profit slump as proof that the US recovery isn’t as strong as the Fed believes, even if wages are improving
Most analysts expect the first Fed rate hike to happen this year, possibly the summer, and while he doesn’t necessarily disagree that a rate hike is coming Societe Generale uber-bear Albert Edwards warns that it could be coming at exactly the wrong time.
“The Fed always spins a bullish yarn. Their track record of over-optimism is only surpassed by the appalling record of private sector forecasters – most especially in forecasting recessions,” he writes. “I would also suggest that any Fed rate rise will be quickly unwound and the Fed could end up as big a market laughing stock as the ECB did after their rate rise in July 2008.”
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Payrolls aren’t a leading indicator, says Edwards
Even when unemployment had fallen to normal levels in mid-2014, the Fed saw lack of wage inflation was a sign that the economy still needed help and that labor markets hadn’t recovered. So the recent news that wages are accelerating is the Fed’s cue to lift rates off the floor sooner than later. But Albert Edwards points out that US payroll growth usually accelerates all the way until the next recession – it’s a lagging indicator instead of a leading indicator, so he doesn’t think the Fed should be using it to make forecasts.
Albert Edwards is worried about falling profits
Albert Edwards is more worried about US business investment, which he says ‘causes’ recessions in the sense that GDP growth is well above business investment growth during good times but the two nearly move in lockstep during a recession.
When profits and sales are down, you would expect business investment to fall in turn, and sales for companies on the S&P 500 are starting to fall, and not only in the energy sector. Falling profits, leading to falling business investment, and weak growth are what Albert Edwards fears could meet the rate increase that the Fed has in mind.
“Apart from the pathological over-optimism of public and private forecasters there is one other key reason why forecasters fail to anticipate recession. They do not put profits at the centre of their forecasting analysis,” writes Albert Edwards.
Although not directly related, Albert Edwards also points out that the ECRI weekly leading index has fallen sharply over the last few months. Even though this particular measure has fallen out of favor after calling a recession that didn’t happen, Edwards happily takes it as another sign that the US economic recovery isn’t nearly as strong as the Fed believes.