Why The Fed Can’t Tell When A Recession Starts

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Why The Fed Can’t Tell When A Recession Starts

February 15, 2016

by Harald B. Malmgren

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The Fed’s FOMC finally raised its target rate of interest by 0.25% at the end of last year. But by the time it met again on January 27, widespread public controversy had emerged over whether it had made an historic mistake. Driving that purported mistake were systemic problems that prevented the Fed obtaining reliable and timely data upon which to base its decisions.

In its January 27 meeting, the Fed’s FOMC monetary policy committee was once again confronted with a big gap between its expectations and economic reality. Late last year, the Fed said economic performance was “solid” and consumer and capital spending were likely to increase. Early in winter, the surface might have looked solid, like a sheet of ice on water, but when the Fed members walked out on that surface it broke, and they found themselves in icy waters.

The economy had turned downward.

The Fed’s choice of the word “solid” was inappropriate. There were evident signs of slowdown in retail sales and capital spending plans, and the inventory-to-sales ratio was extraordinarily high. Productivity was declining. Family incomes lacked significant growth.

Continuing weakness in oil did mean cheaper gasoline and fuels for households, but healthcare costs were rising last year by more than the gains from lower fuel costs. In 2016 healthcare insurance premiums have been raised by more than 20% in many cases, and deductibles (out of pocket expenses of the insured) had sharply increased. The quality of new jobs tabulated was rapidly weakening as part-time jobs were filled by workers unable to secure full time jobs. More and more workers were becoming “independent contractors” in part-time jobs with varying, limited hours of work. A better unemployment rate was illusory; it was the result of a decline in the labor participation rate (meaning a growing share of the working-age population stopped looking for work and “permanently” dropped from the official calculation of the total labor force).

Contrary to upbeat official reports of job gains, declining real-time government data on payroll taxes were showing a labor market decline throughout December.

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Why The Fed Can’t Tell When A Recession Starts

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