So much for the Fed’s statements earlier this month hinting that the U.S. economy was strong enough for a rate hike.
Despite three dissenting opinions for higher interest rates, the Federal Reserve kept the benchmark interest rate unchanged at the September 2016 meeting, noting, “The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
Not only did the Fed wisely decline to raise interest rates on the reality of economic instability, it once again lowered its forecasts for 2016 GDP growth from 1.9% - 2.0% to 1.7% - 1.9%, and increased its unemployment projections to be around 4.7% - 4.9% this year instead of 4.6% - 4.8%.
It also kept its expectations for core personal consumption expenditures (PCE) at 1.6% - 1.8%. However, that’s still below the Fed’s healthy range of 2%, which the Fed expects to remain low because of a drop in energy costs.
At the meeting the Fed noted that the case for a rate hike has strengthened for this year, potentially paving the way for a 25 to 50 basis point hike by the December 2016 meeting. However, a spate of weak economic data has cast doubt that we’ll see any rate hikes this year.
Even those downgraded projections may be too rosy.
For years, the Fed has hoped that excessive “accommodative” monetary policy would be enough to spark a stronger economy and push inflationary numbers closer to its healthy range of 2%.
Unfortunately, none of that happened… leaving the economy poorly prepared for another rate hike.
The U.S. economy has only grown about 1% over the last few quarters. Business investments and productivity remain weak. Consumer spending is slowing. Inflation is running below target.
And while unemployment has remained near 4.9% in recent months, many of the jobs added were temporary positions. In fact, for August 2016, of the 155,000 jobs added (which missed estimates for 181,000), bars and restaurants accounted for 34,000 of those jobs.
Leisure and hospitality added 29,000 jobs, and retailers supplied 15,100 jobs. Meanwhile, the manufacturing sector cut 14,000 jobs.
At the same time, wage growth only grew at 0.1% also missing expectations and down sharply from the 0.3% wage growth reported in July 2016.
Meanwhile, the labor participation rate remained unchanged, as the number of Americans no longer in the workforce jumped by 58,000 to 94.39 million.
If unemployment were healthy, inflation would not be stuck at 1.6%.
We would also see evidence of rising retail sales from confident consumers. Instead, such sales fell 0.3% in August 2016 to $456.32 billion.
The ISM Manufacturing Index also showed sharp contraction for August 2016. In fact, The Institute for Supply Management’s index for manufacturing activity slumped to 49.4 in August from 52.6 in July. (Anything under 50 is a sign of contraction.)
Over the last 12 months, the index has averaged 50.2, which barely falls into expansion territory.
That number alone should tell you the economy is struggling.
On top of all of that, there was further decline in second quarter productivity to -0.6%, marking the biggest decline in the number since 1979.
A year earlier, productivity fell -0.4%, marking the first decline in three years.
Despite these bleak economic numbers, there are still a number of undervalued opportunities to be uncovered for smart investors.