The Philadelphia Federal Reserve (Philly Fed) index of manufacturing shows further signs of rampant growth in the US economy, and its survey in its diffusion index shows that the increase in the rate of inflation continues unabated. No wonder the US Federal Reserve itself, in its statement yesterday, was forced to surprise markets, by adopting a far more hawkish tone on inflation, and its pace of withdrawing monetary support, and introducing rate hikes.
The Philly Fed Manufacturing Index came in at 30.7, against predictions of 30. Though that is below the 31.5 in the previous month, any reading above zero means growth, and so these readings indicate growth increasing at a rapid pace. The US Federal Reserve, yesterday, saw growth for 2021 at 7%, dropping to around 3% next year, but most private estimates have growth, for this year, at around 8-9%, with growth next year still at 5%. Growth is currently being limited by supply bottlenecks, for example, in the supply of computer chips, not to mention problems in recruiting labour. With the EU still not properly open, but which will contribute significantly to global growth when it does - German manufacturing is already showing a sharp upward move in activity - and with trade between the EU and US likely to increase under Biden, reversing the trend under Trump, the risk is clearly to the upside for US growth, which I expect to be closer to 10% for this year, and 7% next year. GDP is actually just a measure of new value created, i.e. the amount of labour undertaken, so compared to the last year, when labour was constrained by lockouts, a simple increase in employment, along with a longer working day/week, to meet sharply rising demand, more or less ensures growth of that kind of degree.
In June, 42% of businesses in the Philadelphia Fed district reported increased activity, as against just 11% reporting a decrease. The employment component of the index rose by 11 points to 30.7, indicating that US employment continues to grow rapidly, which is one factor meaning that workers can now afford to be more choosy about which jobs to take, and can hold out for higher starting salaries, thereby, boosting wage costs, whilst simultaneously providing an expanding workforce with a rising wage share, which can be spent on consumer goods and services, thereby boosting aggregate demand, and demand for wage goods yet further. At the same time, its estimated that 70% of all of the fiscal stimulus sent to workers has yet to be spent. That together with the savings that some workers have accumulated over previous months as they were locked out, and prevented from spending, and together with rising wages, means that a wall of monetary demand is waiting to hit the economy in the weeks and months to come. The first consequence, in conditions of high levels of liquidity, is going to be rising consumer price inflation, embedding all of that already seen in the last couple of months.
The Philly Fed's diffusion index of prices paid for inputs rose by 4 points to 80.7. That is the highest reading since June 1979, making the point that what we are seeing is reminiscent of the 1970's all that more clearly. In fact, as I've pointed out before, the comparison with the 1970's is wrong, as is the comparison with "The Roaring Twenties". The latter only applied to the US economy. Europe, in the 1920's, was already in the grip of the crisis phase of the long wave cycle, that turned into the stagnation phase by the late twenties, early 1930's. Similarly, the 1970's was characterised by crises, at least from 1974, entering the stagnation phase in the late 1980's. By contrast, today, we are still firmly within the bounds of the long wave uptrend, which began in 1999, and which has been hybernated by central bank and state action since 2010, by measures designed to slow economic growth, and inflate asset prices. That logjam has now been well and truly blown up.
The prices received index rose by 9 points to 49.7, the highest reading since October 1980. Looking forward, the diffusion index for activity in the next six months rose to its highest level in thirty years, rising to 69.2.
The Federal Reserve, in its positioning, as set out by Jerome Powell, last night, is way behind the curve, given that it takes two years for changes in monetary policy to take effect, unless, as with Volcker, in the 1980's, they are going to make a very large move that would send the economy into recession. All of this growth is now looking self sustaining, as employment increases, and wages rise on the back of labour shortages, providing the basis for future demand for wage goods, which will force firms to expand further to meet it, under the whip of competition. It is soaking up the vast oceans of liquidity pumped into the economy, partly in price rises, partly in an actual expansion of production and the market. But, we have vast amounts of monetary demand still in the pipeline, both from consumers, and from the state, which has in place trillions of dollars of fiscal stimulus in the form of infrastructure spending etc.
The Fed's next moves are going to be moving from talking about talking about tightening, a phrase Powell says should now be retired, to just talking about tightening. Indeed, they have said they are going to test the market by selling some of their holdings of Mortgage Backed Securities. Many see the annual meeting in August at Jackson Hole as the time when they will announce tapering. That they already shocked the market was no surprise to me, as I'd said several weeks ago that they would have to bring forward significantly the time when the tightening started. They will need to move it forward more yet. The market may make the choice for them. A Goldman Sachs spokesman talked today, about bonds now being in a bear market, and that when people get their mutual fund statements in the next few weeks, and see how much they have already lost, they will begin selling in earnest. There are now more central banks across the globe raising their policy rates than there are cutting them, and that is going to increase further.
The deluge is on its way.
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