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

On Friday, the Bank of Japan lowered deposit rates into negative territory while (or in addition to) maintaining its aggressive asset purchase program (“QE”). The actual nuts and bolts of which types of deposits will be subject to the negative rates--which charge banks to hold deposits--is a little murky. But the goal is to encourage banks to lend out their deposits rather than hold on to them. In targeting negative rates, the Bank of Japan joins the European Central Bank and the Central Banks of Sweden, Denmark and Switzerland (Wall Street Journal). The market’s brief euphoria over this on Friday appears to be predictably short-lived. The ability for monetary policy to generate real economic growth is limited under normal times and it has certainly run up against diminishing returns in the current environment. I don’t think the central banks have over-promised in this regard; I think the press has read more into central bank statements than the banks themselves intended. Either way, if monetary policy was the answer to Japan’s or Europe’s problems, or the US’ for that matter, they would be BOOMING right now. Instead, they are struggling for positive growth.


Which can be seen in Friday’s advanced estimate for US GDP growth, that came in at just .7% annualized for the fourth quarter, versus 3.9% in the second quarter and 2% in the third. This weak fourth quarter data point was pretty much in-line with what we expected, and I wouldn’t be surprised to see a weak first quarter this year as well (but that should be the worst of it). Overall the economy expanded 2.4% in 2015 from 2014. I wouldn’t expect much beyond that for 2016, but I don’t see a recession in the current data either. Recall that GDP numbers are often revised substantially as more data becomes available. For example, the initial data in 2001 indicated a quarter of negative GDP growth (no recession) but when the government finished all of its revisions it turned out that GDP fell during three quarters of 2001. You may be interested to know that the National Bureau of Economic Research or NBER (which officially dates economic turning points) doesn’t focus much upon quarter real GDP but rather on monthly data. Specifically, they look at four key items: (1) Real Income (consumer income adjusted for inflation) (2) Employment (3) Industrial Production (4) Sales (wholesale and retail). They look at the Depth of changes in these variables as well as Duration (monthly data is noisy, but a pattern of several months is meaningful). They also look at breadth or Dispersion, which is important as today’s economy is much less industrial and much more comprised of services. These then are the four measures and the “three D’s” that the NBER watches. When all four move upwards it is unambiguously a good sign, and when all four move downwards it is unambiguously a bad sign. Often it’s like today, with some moving upwards (i.e. personal income, employment, sales) and some downwards (industrial production). That’s where expert judgement comes in or, even better, nowcasting models like the Atlanta Fed’s GDPNow model and others that I follow. Right now they indicate no recession (the above discussion borrows from texts by Roger Leroy Miller).


Looking globally, China data and oil prices continue to influence markets. I know this sounds redundant but the best bet is that these stabilize this year, and that US data gradually improves. We are already seeing core inflation move back up to the 2% range – a good sign – even while “headline” or CPI inflation just left negative territory (due to oil prices). The Fed targets the core, which excludes the more volatile components like food or energy, not because of any conspiracy to downplay actual inflation but rather because headline CPI is so volatile. So again, I expect a more challenging first part of the year for investors than the second.