"Kee" Points with Jim Kee, Ph.D.


Last week’s Wall Street Journal Economic Forecasting Survey indicated that economists expect a fairly strong rebound (to +3.47% second quarter) from the first quarter’s negative GDP growth rate, with the economy growing at a 3% annualized rate by year-end. Much of the panelists’ optimism comes from expectations that wage growth will rise and that job growth will be the strongest since 2005 (WSJ; La Jolla Economics). That’s consistent with most private sector or proprietary forecasts that I see, but you have to keep in mind that the Wall Street Journal Economic Forecasting Survey has been overly optimistic since the Great Recession. So has the Federal Reserve and its economists…the Fed has been forced to revise its forecasts downward every single year for the past six years (Cornerstone Macro).


The Consumer Price Index (CPI) showed some signs of life last week, with May’s +.4% reading (2.1% over the past 12 months) the strongest thus far this year. The Fed target’s “core” CPI, which excludes the more volatile food and energy components, and the core came in right at 2% for the past 12 months. That’s good news, as the Fed has been targeting a 2% core rate of inflation for several years with little success (it keeps dipping back below 2%!). And keep in mind that the Fed has stated that it would consider raising rates if the core moved consistently about 2.5%, not 2%. As for interest rates, the 10-year Treasury yield is expected to end the year just below 3.2%, which is up from current 2.62% levels.


On inflation, the press continues to headline any uptick in CPI as a pending inflation threat, and any downtick as a deflation threat, but it is usually neither; just the normal variability inherent in any system. I know this is a little redundant for Kee Points readers, but what you don’t want to see is several years of highly accommodative monetary policy and yet inflation still declining (disinflation) with the risk of outright deflation. That would tell that you that something is seriously wrong or broken. And Janet Yellen, Ben Bernanke before her, the Federal Reserve Bank presidents and economists…none of them need to be reminded of the dangers of inflation, or how countries have been ruined by inflation. The notion that Federal Reserve officers have a flippant view of inflation stretches credulity.


And what about oil? I mentioned last week that it would take $150 oil to derail the global economy (it is currently at $113). A recent Morgan Stanley report indicates that a $10 per barrel sustained increase in oil prices will lower US GDP growth by .4 percentage point with a lag time of about 12 months. The key (I mentioned this last week) is whether the oil price increase is transitory or permanent. The Morgan Stanley report asserts that $150 oil would lead to zero/negative growth in the US, which is exactly what Daniel Ahn had concluded at our energy conference. However, the Morgan Stanley research found that a transitory oil price spike (lasting one quarter) would have almost no impact.