Fed Watch: Ahead of Black Friday

Fed Watch: Ahead of Black Friday: "

Tim Duy says -- correctly -- "that a significant portion of policymakers are simply clueless":

Ahead of Black Friday, by Tim Duy: We are embarking once again into that
time of the year when reporters around the world become entranced and enthralled
with that orgy of consumerism that defines Christmas in America. Soon we will be
tracking the ups and downs of holiday sales with a zeal that is unmatched by any
other regular economic event. Weary reporters - those who clearly disappointed
their editors at some point during the year - will be dispatched to local big
box stores across the nation to record the lines forming in anticipation of 5am
openings on the fabled Black Friday. We will be bombarded with hundreds if not
thousands of conflicting reports regarding the amount and patterns of holiday
shopping, leaving overworked and underpaid analysts awash in data as they
desperately try to quantify, once and for all, the "true" state of consumer
spending - and thus by extension, the true state of the economy - in America.

Oooo, how I have come to loathe this exercise. And yet, here I am again,
fretting over the financial state of US households in between checking off items
on the Thanksgiving shopping list. It is like a car wreck - you don’t want to
watch, but you can't take your eyes off it.

Car wreck is something of an appropriate comparison. Recently I have begun
using charts of this sort to depict the current economic environment:

Not fancy econometrics, I know - most of my audiences are not interested in
unit root tests. The point, obviously, is that even as activity creeps
upward, the gap between the past and current trajectory of consumer spending is
likely still widening. Much, much faster growth is necessary to close that gap.
And households as of yet are seeing nothing to convince them their fortunes are
set to change, that some Christmas miracle awaits. To be sure,

Bloomberg trumpeted today's data:

Confidence among U.S. consumers unexpectedly rose in November as a
brightening outlook masked growing concern over joblessness.

How much did the outlook brighten? The story continues:

The Conference Board’s confidence index increased to 49.5 from 48.7 the prior
month. The New York-based Conference Board’s index, which focuses on the labor
market and purchase plans, averaged 58 in 2008 and 103.4 in 2007.

Not much brighter. Indeed,

Economix more accurately reports the dismal mood of consumers, noting:

Over the last 30 years, the index has averaged about 95. In November, it was
49.5, up from 48.7 the previous month.

Yes, for three decades the Conference Board measure of confidence has
averaged nearly twice current levels. This tells us something about the strength
of consumer spending. Using the parallel measure from the University of
Michigan:

Real year over year growth in the 1% range is not going to bring households
back to trend anytime soon. To be sure, given the dependence of household on
debt financed spending, it is arguably correct that past trends were
unsustainable, that the only possible outcome from this mess was a permanent
shock to the level of household spending. That, however, is likely cold comfort
to the millions of Americans - those not employed by Goldman Sachs, of course -
who are just now realizing that their standard of living has shifted permanently
lower. Lacking sufficient income gains and the ability to use debt to cover up
their relative poverty, households are not seeing a path to a brighter future.
And they will increasingly look for someone to blame. No wonder the knives are
sharpening for Treasury Secretary Timothy Geithner and Federal Reserve Chairman
Ben Bernanke. They are the public faces for an Administration that now owns this
economy.

And where are policymakers as we slog through the final month of 2009? The
Administration is
poised to do
virtually nothing:

The White House is lukewarm about proposals by congressional Democrats to
introduce broad legislation to create jobs, instead favoring targeted measures
that would be less likely to inflate the deficit, administration officials said.

There is as yet no agreement within the White House or in Congress on how to
try to curb the U.S. jobless rate. But the differences in opinion suggest that
rifts could emerge among Democrats as they wrestle with how to beat back the
highest unemployment rate in a generation.

...Hamstrung by the nation's $1.4 trillion deficit and his pledge not to
raise taxes on middle-class Americans, Mr. Obama is keen to avoid any measures
suggestive of a second, big-ticket stimulus.

Indeed, the failure of the Administration to take bold moves early in the
year now cripples it in any attempt to take bold action now. Apparently, the
best we can expect now is a "Cash for Caulkers" program that will dribble money
into the economy, ensuring that we do little if any better than limp along.

Likewise, monetary policymakers too are caught in the headlights. As has
already been widely noted, the

minutes of the most recent FOMC meeting reiterated the Fed's eagerness to
reverse, not extend, policy:

...Overall, many participants viewed the risks to their inflation outlooks
over the next few quarters as being roughly balanced. Some saw the risks as
tilted to the downside in the near term, reflecting the quite elevated level of
economic slack and the possibility that inflation expectations could begin to
decline in response to the low level of actual inflation. But others felt that
risks were tilted to the upside over a longer horizon, because of the
possibility that inflation expectations could rise as a result of the public's
concerns about extraordinary monetary policy stimulus and large federal budget
deficits. Moreover, these participants noted that banks might seek to reduce
appreciably their excess reserves as the economy improves by purchasing
securities or by easing credit standards and expanding their lending
substantially. Such a development, if not offset by Federal Reserve actions,
could give additional impetus to spending and, potentially, to actual and
expected inflation. To keep inflation expectations anchored, all participants
agreed that it was important for policy to be responsive to changes in the
economic outlook and for the Federal Reserve to continue to clearly communicate
its ability and intent to begin withdrawing monetary policy accommodation at the
appropriate time and pace.

Read that carefully and realize this: An apparently not insignificant portion
of the FOMC believes that there is a terrible risk that banks loosen their
credit standards and increase lending at a time when, even if the economy
posts expected gain, unemployment remains at unacceptably high levels. Silly me,
I thought increased lending was the whole point of the exercise to lower
interest and expand the balance sheet. That whole credit channel thing. If not
to expand lending during a credit crunch, then what else are they expecting?

I am in shock that this sentence made it into the minutes. One can only
conclude that a significant portion of policymakers are simply clueless. Or,
more disconcerting, they have lost all faith in the ability of financial
institutions to channel capital into activities with any hope of financial
returns. Has the Fed now embraced the view that they manage the economy
through little else then fueling and extinguishing bubbles?

At this juncture, only

St. Louis Fed President James Bullard is signaling a willingness to at least
keep the option of ongoing balance sheet expansion alive:

Federal Reserve Bank of St. Louis President James Bullard wants the Fed to
continue to buy mortgage-backed securities beyond the March 2010 cutoff to give
policy makers more flexibility as they seek to shepherd the economy toward
recovery.

"I have advocated to keep the asset-purchase program open but at a very low
level, and wait and see what happens, and as information comes in about the
economy we can adjust that program while the federal-funds rate remains at
zero," Mr. Bullard told Dow Jones Newswires in an interview Sunday. He said "no
decision has been made" about the program's fate.

Mr. Bullard will be a voting member on the interest-rate-setting Federal Open
Market Committee in 2010. In its statement after the November FOMC meeting, the
central bank reiterated that it will continue to monitor its asset-purchase
programs "in light of the evolving economic outlook and conditions in financial
markets."

Maybe if unemployment continues to rise Bullard's vote will matter next year.
Maybe.

Considering what all this means in light of Black Friday, I tend to think

Phil Izzo at the Wall Street Journal is on the right path:

New reports Monday didn’t paint an encouraging picture. The Conference Board
released a survey of spending intentions that showed U.S. households expect to
spend an average of $390 this season, down 7% from estimates of $418 last year.
That number is especially distressing because consumers were unusually
pessimistic last year as the financial crisis went into full swing just as
holiday shopping was getting underway.

“Job losses and uncertainty about the future are making for a very frugal
shopper. Retailers will need to be quite creative to entice consumers to spend,
both in stores and online this holiday season,” said Lynn Franco, director of
the Conference Board Consumer Research Center.

A separate report from retail-tracking firm NPD Group indicated consumers may
not be flocking to the mall for Black Friday. Just 32% of respondents said that
they expect to begin their holiday shopping on Thanksgiving weekend or earlier.

Still, more broadly, whether sales gain 2% or 4% this holiday season may have
great influence on the animal spirits that govern equity markets, I doubt it
would alter much what should be our overall assessment of the economy: Economic
activity is now increasing, something for which we should all be thankful this
weekend. The alternative would be very unpleasant. But that growth should not
lull us into policy complacency with regards to the very real economic stress
felt across the nation. By all forecasts, it simply falls far short of what is
necessary to restore confidence among households. 2.8% just won't cut it.

"