Taking Notes from my Professor... Fed Watch

I thought I would take this opportunity to do a little brown-nosing. Tim Duy had a pretty awesome post yesterday about the overall state of the U.S. economy and the likely pace of recovery. Since you're the only one likely reading this, I'm going to write this post as if I'm just talking to you, I hope that's acceptable.

I really liked point number 3 in your post, about retail activity. I used capacity utilization as one of my metrics in the project. So the chart you made about trends in retail sales was really interesting because it visually showed me how excess capacity develops, whether in consumer retail, or in manufacturing. I know we'd looked at similar charts in class, but we didn't explicitly make the connection to commercial real estate. The spread between the expected vs. actual trend makes a pretty compelling case for an excruciatingly slow recovery in commercial real estate. So when you say:

"Retail activity remains well below the trend expected in 2007. A forgotten piece of the puzzle, in my opinion."

I can't help but agree. I hadn't made that connection previously but it makes perfect sense.

I also have a question and I'm hoping you might comment on it. You talked a little bit about the Chinese raising interest rates and how many (including myself,) logically concluded that it might lead to an eventual appreciation of the yuan, which would probably help U.S. balance of trade, which would likely help job growth. I don't necessarily live by Paul Krugman's "back of the hand" calculations, but he seems to think that an appreciation of the yuan could lead to significant job creation in the United States. Anyway, you say you're skeptical because:

"I can also see Chinese authorities attempt to use the external sector to compensate for waning domestic stimulus."

I don't yet know enough about Chinese currency policy or the Chinese government. But could you explain to me what exactly you mean by the Chinese authorities using the "external sector" to compensate for "waning domestic stimulus." I guess I just don't follow the language?

Lastly, you talk about pent up demand in manufacturing and the inventory correction as being reasons for the V-shaped recovery in that sector, but you note that households remain "financially hobbled." So I did a little brainstorming and now I'm wondering about labor productivity numbers. I did a quick check on the BLS website and found this: "In manufacturing, productivity increased 13.4 percent while unit labor costs fell 6.1 percent." Here's a link to the Q3 report, it's over a month old but until the next one comes out, it's all I've got. A 13.4% increase in manufacturing labor productivity is probably not sustainable, but it does parallel December numbers in the ISM PMI, and capacity utilization. Given that, wouldn't we have expected December manufacturing employment to be up, rather than down 27,000? Manufacturing is clearly in, or is at least developing a trend representative of an expansion, so why aren't firms hiring? They can't keep meeting demand through productivity increases though that seems to be the goal right now. It seems manufacturers will have to start hiring in the near future, should they continue to see consistency in demand growth.

Your analysis, alluding to "pent up demand," as a cause for the accelerated growth in manufacturing makes me think that growth in the sector could possibly decelerate looking forward. As in, "pent up demand" has yielded a temporary positive shock. Also leading me to that conclusion is firms showing an unwillingness to hire. It's as though they're largely looking to avoid longer term labor costs as a hedge of sorts against the possibility of lower long term demand. It looks like a possible argument in favor of the "inventory bounce" theory, rather than an argument for a longer term trend toward recovery.

Let me know what you think if you have some time.