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From economist Don Rissmiller at Strategas Research:
The significant risk of an economic slowdown in the U.S. economy, which is still 71% consumer spending, tends to come when you have the saving rate rising at the same time you have a shock, such as an energy & inflation spike. Looking at 2012, the personal saving rate has declined to 3.4%, and with inflation now trending lower (following the drop in energy prices), it does not appear that we have the typical pre-conditions for a domestic recession this year, despite the uncertainty in Europe. WTI oil at $82 is significant.
However, we must stop short of saying that these 2012 developments make the U.S. economy robust to shocks, including the 2013 “fiscal cliff.” The main reason is that nominal GDP still looks vulnerable, running at just below a 4% pace. A more robust expansion would typically be characterized by nominal growth of at least 6%, ie, something is wrong.
Not many investors we visit with watch nominal GDP closely. Many people got burned in the 1970s – you had 9% growth, but it was with 9% inflation, so there was zero real growth. That’s certainly a fair calculation. But there’s still some information in nominal GDP as well – it is telling us how rapidly the nominal dollar “pie” is expanding. All companies report revenues, costs, and profits in nominal dollars. With sluggish nominal GDP, it’s not clear we have fast enough growth to see both profits expand and labor compensation grow (to support future top-line growth).
That’s the “something” that is wrong. It’s tough to say you are in a self-reinforcing wage-income-sales spiral with the “pie” expanding so sluggishly. This doesn’t mean you have to be in recession, in inflation-adjusted terms, right away. But it does suggest the U.S. economy is vulnerable to shocks, especially if other exogenous sources of demand are waning (Europe is weakening, China is slowing, India is slowing, etc).
Given that, hear is what economist David Beckworth would have liked to have heard the Fed say today:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to begin a new conditional asset purchasing program tied to an explicit growth path for nominal GDP. The Committee believes that nominal GDP should expand to $16 trillion dollars and grow at a 5% annual pace thereafter. To this end, the Committee intends to purchase Treasury and Agency securities every week until this target is hit.
This program should raise expectations of future nominal GDP growth and cause a rebalancing of portfolios that will facilitate a rise in current aggregate nominal spending. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
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