FedSpeak: Lost In Translation by Danielle DiMartino Booth, Money Strong
Bill Murray, who has never been one to be stumped for words, is considered to be a veritable master of improvisation. Few appreciate that the star comedian and accomplished actor has also proven himself to be a fair philosopher.
On July 25, 1980, exactly three months and 10 days after Jean Paul Sartre’s death, the comedy classic Caddyshack premiered. It was then that moviegoers nationwide first experienced Murray’s amazing gift for that renowned improvisation. It took all of six days for his character’s role to be filmed. One scripted line notwithstanding, every word Murray’s groundskeeper character Carl Spackler uttered was off the cuff. In one particularly memorable scene, Spackler came eye to eye with an infuriatingly fond and furry rodent and warned: “In the immortal words of Jean Paul Sartre: ‘Au revoir, gopher.’”
When asked in a 1984 interview about his uncanny ability to think in front of the camera, Murray waxed perfectly philosophical: “I don’t believe that you can give the same performance every take. It’s physically impossible, so why bother? If you don’t do what is happening at that moment, then it’s not real. Then you’re holding something back.” Over 50 feature films later, the world is a better place for his never having held anything back.
At the opposite end of the spectrum lie Federal Reserve speakers, most of whom appear to be suffering from an inability to contain themselves to the detriment of their audiences. So damaging is FedSpeak, so to speak, that it’s become the Fed’s greatest liability, chipping away at what little credibility monetary policymakers have left in reserve.
Perhaps what is most disturbing about today’s stretch of FedSpeak is how it parallels with the months preceding the Great Recession. Over the last few weeks, Fed officials appear to be mystified at the tea leaves staring back at them from the bottoms of their cups despite there being no question of ambiguity.
The most recent spate of broadcast obliviousness began shortly before Memorial Day. San Francisco Fed President John Williams, Yellen’s protégé and confidante, remarked that he anticipated that 2016 would likely resemble 2015 with, “strong domestic growth, especially in the service sector (with) some subtraction from growth because of the strong dollar and weakness abroad.”
Williams’ Council on Foreign Relations interview ended with his opining that quantitative easing could be deployed once again in the event of recession as it had been successful in, “improving financial conditions and boosting the economy. So we could go back to that.” (The stock market must be woefully disappointed he won’t vote again until 2018.)
Next up, in a perfectly timed CNBC interview taped the Thursday before the May jobs report, Charles Evans, Chicago Fed’s resident uber-dove, observed that timing was not of the essence with respect to future rate hikes. As for the possibility of a ‘Brexit,’ he played it down: “I’m not sure it plays an important role in our policy making beyond us just monitoring the U.S. data and general global financial conditions and having confidence that things are still on a good track.”
Among the gems voiced in the wake of the disastrous data, Boston Fed President assured a Finnish audience that it was his, “expectation that economic conditions will continue to gradually improve, which in turn would justify further actions to normalize policy, continuing a gradual return to a more normal rate environment.”
As for the Chair herself, in the weeks that preceded the payroll report, Janet Yellen pushed up market expectations for a June 15th rate hike to 34 percent from 28 percent with assurances that it would be reasonable to raise interest rates in, “the coming months.”
Then, in what can only be described as a quick flip, Yellen summarily dismissed the specificity of a time frame conceding that the jobs report left policymakers “wrestling” with fresh doubts: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy?”
Step back for a moment and ask yourself one question: What data are this army of 1,000-plus PhDs studying?
There is nothing subtle in the marked deceleration in the run rate of job creation. Two years ago, monthly job gains averaged 260,000. By the time 2015 had ended, that average had slid to 221,000. Narrow it down to the last twelve months and gains slow to 200,000. And over the last six months? 170,000. Last three? 116,000 dragged down by downward revisions of 59,000 positions in February and March. As for the merry month of May, that would be 78,000 including the striking Verizon workers. P.S. Temporary jobs fell by 21,000 last month.
Set aside all of the unemployment rates in their various forms; they’re beyond misleading given the unreliability of the denominator used to calculate them, as in the ever shrinking and decidedly un-dynamic labor force. A rudimentary observation of monthly job creation tells you everything you need to know, no existential crisis necessary, no grappling gray area to wrestle. Period.
The alarming lack of acuity in gleaning trends confoundingly reaches much deeper when you consider the leading indicator data to which all Fed economists have access. It’s not as if they’re cut off from the same information that helps their private sector peers guide their clientele.
Take AIG’s Jonathan Basile. He’s a unique economist among economists in that it’s his express mandate to detect trends, as opposed to the dreaded one-month aberration, before they emerge onto the scene. As Head of Business Cycle Research, Basile literally dissects the entrails of data releases for relationships and signals. One would have to presume (hope?) that the Fed too had such an individual, perhaps even a few, also directed to detect emergent economic developments.
Back on March 29th of this year, Basile heard an alarm bell ringing in the distance. It had been seven months since survey respondents had indicated that jobs were easier to get than in the prior month. The next three to six months would thus present a test to the economy that could well be on the precipice of recession. His warning: “We’re going to get a downside surprise in nonfarm payrolls in the next few months, something in the double digits.”
In late April, Basile worried that something would have to give seeing as jobless claims were at the lowest level since Nixon was in office while expectations for rising unemployment, which have since receded a bit, were at a 26-month high. At the time, he added that the number of mergers being called off, coupled with the rolling over in announced deal size could well validate concerns about a rise in joblessness. “OK, so we haven’t seen a better streak of low jobless claims since 1973,” Basile concurred. “The way I see it though, the only way for jobless claims to go from here is up.”
And then we got the bombshell of consumer credit increasing by $30 billion in March led by households tapping their credit cards at the fastest pace since 2001. I raised the data point with Basile at the time, which in turn set off yet another alarm bell sending him back to a relationship that hadn’t flared up since the onset of the last recession. A quick look at the data verified that households’ income expectations six months out and credit card usage had indeed begun to move in opposite directions, a telltale sign of budgetary stress.
In mid-May, Basile noted a shift in the “pain trade” in jobless claims. Beginning in January 2015, energy states had been in the unfortunate position of suffering the largest annual change in jobless claims. But that run finally ended in May, leaving Michigan in the dismal driver’s seat though Michigan is hardly alone. Some 24 states showed initial jobless claims were higher than a year ago leading Basile to quip, “We haven’t smelled breadth this bad in some time.”
The final straw came down on June 1st with the release of the Conference Board’s May data on Help Wanted Online ads. After a flat March and April, May suffered a sizeable falloff in online job openings, which slid by 285,800 to 4.8 million, the largest decline since the Great Recession. The Conference Board’s chief economist Gad Levanon said that May continued, “a pattern of weaker demand in 2016,” adding that, “we are now seeing some clear signs of softness in labor demand.”
Corroborating the Michigan move, the data showed losses were widespread across all states and major metropolitan areas. The March and April weakness would also be subsequently confirmed by the downward revisions announced to March and April payroll gains. And finally, companies have stopped reposting help-wanted ads, a sign their balance sheets can no longer withstand the additional labor costs that they could have just a few months back, as clear an inflection point as any.
“More and more I’m convinced the Fed wants to raise rates so it has water in the tank to put out the next fire,” Basile worries. “That said if the Fed raises rates this summer, it will be a policy mistake.”
Add it all together and Yellen’s favored “kitchen sink” labor market indicator, the Labor Market Conditions Index (LMCI), says it all. The index of 19 job market gauges fell to -4.8 in May, sliding by the most since the 2009 recession. Meanwhile, March and April were – you guessed it – revised downwards, further into negative territory.
Do you see any gray area? Or do you instead worry that Fed officials are willfully blind when they run their mouths as if everything is going to be just right.
In an effort to describe how beyond clueless Fed speakers seem to be of the destructive power of FedSpeak, one can once again borrow from Bill Murray’s screen moments. To quote his Ghostbuster character Peter Venkman, “Why worry? Each of us is wearing a nuclear accelerator on his back.”
“With respect to the potential response from the Fed, we are seeing writ large how much they have bungled the exit from their extraordinary experiment,” warned Bookmark Advisors’ Peter Boockvar. But it goes beyond bungling. Not only has the Fed failed to act, its policies have actually created the very impediments to growth the economy now faces.
In the real words of Bill Murray from a 2012 interview, “It’s extremely powerful to say no; it’s really the most powerful thing to say.” It would be nice to be on the other side of Fed officials having long ago harnessed the power of the word ‘no’ rather than staring down the barrel of an abundance of acquiescence.
To borrow one more line from Murray, this time from his Lost in Translation character who finds himself struggling with the foreign culture of Tokyo’s nightlife, “What kind of restaurant makes you cook your own food?”
My slight variation on this question to Fed officials who remain woefully out of touch with the damage their policies have inflicted is, “What kind of central bank doesn’t have to eat its own cooking?”