Consumer sentiment declines; economic policy uncertainty on the rise; real interest rates declining. It’s all in the graph below.
Figure 1: University of Michigan consumer sentiment (top), Economic Policy Uncertainty Index (middle), TIPS 10 year constant maturity yield, % (bottom). U Mich sentiment is preliminary for July, EPU in July is thru 7/25/2020, TIPS in July is thru 7/24/2020. Source: University of Michigan and Treasury via FRED, policyuncertainty.com.
From the summary of the document, which reviews the literature and current macroeconomic state of play. Some key findings are germane to the current intra-Republican party debate over how to proceed with the current recovery package. I know it is the triump of hope over experience to think they will accede to expertise, but here goes.
Reverse radical or V-ish (or W?)
Figure 1: Nonfarm payroll employment (blue), industrial production (red), personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), and monthly GDP in Ch.2012$ (pink), Bloomberg consensus estimate at 7/24 (blue gray), Goldman Sachs Employment Tracker estimate based on data thru 7/7 (sky blue), all log normalized to 2019M02=0. Source: BLS, Federal Reserve, BEA, via FRED, Macroeconomic Advisers (6/26 release), Bloomberg, Goldman Sachs (7/23/2020), NBER, and author’s calculations.
Today, we are fortunate to present a guest contribution written by Laurent Ferrara (SKEMA Business School and QuantCube Technology), Alice Froidevaux (QuantCube Technology) and Thanh-Long Huynh (QuantCube Technology).
For instance, Goldman Sachs presents two forecasts for Q2 growth (SAAR): one for advance, and one for final. As of 7/19, the forecast of the advance release was -29.0%, and final was -33.0% (Seasonally Adjusted at Annual Rates, SAAR). Something to remember when contemplating the near future.
Given the Senate Banking Committee’s approval of Judy Shelton’s nomination to the Board of Governors of the Federal Reserve, it seems like a good time to see what stabilizing the price of gold in US dollars would’ve required in terms of the policy rate (akin to how the exchange rate is managed). Using the policy rate to stabilize the dollar price of gold at February 2020 levels would required the increase of the Fed funds rate by 1.15 percentage points higher than it was at that time. The Fed actually decreased the Fed funds rate by 1.5 percentage percentage points by June 2020.
Real interest rates are declining. Measured economic policy uncertainty is rising.
Public Letter on Recovery Policy (from Scholar’s Strategy Network), released today:
Comparing CDC tabulated Covid-19 fatalities, excess fatalities, and unofficial data (an update to this post).
I see Governor DeSantis say all is under control, as the Florida economy remains largely open. Economic activity as of mid-June did recover. But Covid-19 surges suggest a retrenchment in the future; the extent of this will depend on how much the epidemic progresses, and what the governor’s tolerance for fatalities/day is.