William D. Johnston


Economic Commentary

Federal Reserve Chairman Powell gave a recent speech titled “Building on the gains from the long expansion.” Within the speech, Powell focused on two important themes: maintaining a stable and reliable pace of two percent inflation and, somewhat surprisingly, spreading the benefits of employment more widely. Part of the Fed’s stated mandate has always been to balance full employment and inflation; however, Powell’s specific mention of spreading the benefits of employment more widely was somewhat unprecedented for a sitting Federal Reserve Chair. His messaging seemed clear. The Fed was not planning to do anything to cool the economy and was temporarily done with rate modifications. He amplified the benefits of a tight labor market coupled with low inflation even in the absence of productivity growth, a necessary driver of GDP growth. Powell spent considerable time clarifying that it was exactly these moments in economic cycles that most benefited the U-6 employment category typically referred to as last hired and first fired. The nuance was well heard and suggested that the risks of inflation were low enough that the Fed felt a moral imperative to maintain if not increase the rate of growth, thereby maximizing employment and wage growth opportunities.

Some analysts wondered aloud if the Fed’s messaging through Chairman Powell’s comments was to address the current polling on wealth tax proposals by Senators Warren and Sanders, which demonstrated broader support on both sides of the aisle than most expected. It’s not hard to get a resounding “yes” response in a poll when you ask respondents if taxes on other people should be raised, yet it is interesting that the Fed chairman chose to differentiate the conversation from the balance between inflation and employment to the balance between economic growth and workforce expansion opportunities for those most often left behind.

Real GDP

The second estimate revision for Q3 GDP was revised upward to 2.1% from the initial or advance estimate and was well within the range of expectations. The revisions for each of the major components such as consumer spending and business fixed investment were as you can expect small. Still troubling is the lag in business investing -2.7%, once again confirming that the consumer is in control of our GDP destiny. The holiday season is off to a stellar start as Black Friday, Cyber Monday and Giving Tuesday all surpassed an admittedly weak 2018 by 9%. Consumer surveys had anticipated the result as those surveyed expected to spend more this holiday season than last confirming the fact that aggregate wages are up 4.4% year over year, personal spending has increased 3.7% during the same time period, and the consumer price index advanced only 1.3% allowing for growth in real (adjusted for inflation) discretionary income.

ISM Survey

The Institute for Supply Chain Management released its November report and reported for the fourth month in a row that the index had declined, registering 48.1% from the October reading 48.3%. Any reading below 50% is considered a contraction in manufacturing activity. Most analysts expected automotive activity to pick up in November, due to the return of GM workers to the plants, but that evidence did not surface in the current data. The non-manufacturing ISM survey (service industries) remained stable at 54.4% while durable goods orders actually rose 0.6%.


At the current unemployment rate and labor participation rate, we need to produce about 100,000 new jobs per month to maintain unemployment. Our twelve-month moving average is currently 167,000 job gains per month, which is almost exactly what occurred last month. Some might wonder how the employment rate can remain the same when we create more jobs than necessary to maintain the current unemployment rate. Labor statistics are both amazing and really quite fluid. In essence, you might say there are a lot of moving parts to 152 million workers on a monthly basis. The number of people moving to, within, and out of the workforce in any particular month is amazing, as is the number of people moving from part time to full time status. In large part, the participation rate of the labor force (employed relative to total population) determines the directional change in the unemployment rate. If demand for labor remains constant and participation falls, the unemployment rate could actually fall and, clearly, the opposite is true. Jobs gained in excess of jobs growth required also demonstrates greater demand for labor, which in a tight labor market fuels job advancement, employment status such as part time to full time and wage growth, all of which Fed Chairman Powell was referring to in his most recent speech.

Q4 Projections

Absent of change to the primary driver of economic expansion, which is the consumer, it is hard to forecast anything except more of the same. We have no current evidence to see growth in business investment (-2.7%) nor residential fixed real estate investment (+ 3.7%). The net impact on import/export trade is likely to be a negative to GDP growth, though the gap did narrow slightly in October. Government consumption and spending — Federal, state and municipal — is budgetary controlled and therefore a constant in Q4 and will not affect growth in either direction for the remainder of 2019. Even the threat of new tariffs or the announcement that a China trade deal will wait until after the 2020 elections will not alter the next three weeks of the year. With all of the above taken into context we expect Q4 results to mirror the average of this year’s GDP growth and finish in the 1.8% – 2.2% range.

Economics Lessons

We always like to take advantage of the political landscape to advance economic education, especially during the political silly season. Recently the administration announced proposed new tariffs on aluminum from Brazil and Argentina as a punishment for devaluation of their currencies which made their export products cheaper (mostly agricultural) and therefore hurt US farmers in the world marketplace. Let us begin with currency valuation. There are direct relationships with economic health and currency valuation. Unless a country has a large economy with substantial foreign trade and a liquid currency, manipulation of currency value would be almost impossible. All currencies float in value based upon the economic strength of the country of domicile. Currency traders know the economic condition of the countries they buy currencies in as they know the back of their own hand. If a country is in weak relative economic health to the rest of the global economy, there will be less demand for other countries or traders to own their currencies and, consequently, the valuation of their currency will decline. Brazil’s economy is ranked tenth in the world while Argentina’s is ranked 28th. Neither is of the size that would allow for the necessary attraction of currency traders important to manipulation activity. Secondly, Brazil’s economy is 8.5% of the size of the US economy while Argentina’s economy is 1.2% in relationship to our total economy. The real gripe of the current administration is that China is buying more beef and chicken from both Brazil and Argentina due to the trade war and tariffs imposed on Chinese goods by the US. Tariffs have hurt our farmers as well as aggregate and ferrous metal producers, and the current proposal to add tariffs to Brazil and Argentina is about trying to gain political capital with constituencies, and not about a false narrative of currency manipulation. If we really wanted the economies of Brazil and Argentina to become strong and therefore increase the value of their currency, we would not take actions to impair their economies.