The Fed Report On Monetary Policy

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On Tuesday the Federal Reserve dropped a document in the laps of market participants and observes. Inside is 62 pages collectively known as the Monetary Policy Report. Picking through and grabbing the charts, we can see in context, what this recovery has looked like on a fundamental level. For example, let's take the spread between the U-6 value reported and the headline Unemployment Rate. For those unfamiliar, U-6 (Listed under Table A.12 In the BLS reports) is thought to be a more accurate account of the true unemployment level because of it's inclusion of discouraged worker groups in the equation. Many have argued about the impact of labor-force participation decline upon the headline U/E number. If a guy who is a Doctor is serving fries part-time or even is unemployed entirely. Should that be viewed as a good thing or a bad thing? The situation be reported as is which would be either a marginally attached worker or someone employed part-time for economic reasons? This is why U-6 is critical use and the headline is usually used by those who care not be bothered with the true classification of such important aggregate indicators of economic health.

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There is no shortage of misinformation in the world but to assume that this is a solid recovery because the U/E rate is dropping would be dangerous. Couple the movement in unemployment rates above with the Compensation Per Hour from the non-farm business sector and you can see that workers are at a greater disadvantage economically than they were six years ago. Yes, the cost index is down, which is great for employers but when it comes to earnings and compensation, workers are disadvantaged. The FED even states in the paragraph next to the image:

Continued slow increases in most measures of labor compensation offer further evidence of labor market slack".

Measures Of Change In Hourly Compensation

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All of this is taking place as inflation in food and energy begins to accelerate back toward the 2 percent level. The central bank noted

"...with wages growing slowly and raw materials prices generally flat or moving downward, firms are not facing much in the way of cost pressures that they might otherwise try to pass on". Anyone who's ran a business knows you cut costs and maximize selling price points to maximize margins.

Change In Chain-Type Index, Personal Consumption Expenditures

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Regarding actual wealth, the aggregate household net wealth reading approached 6.5x the value of disposable personal income in H1 2014. This is the highest this value has been since 2007 when wealth in terms of household valuations was approaching 7x the value of disposable personal income. It's truly amazing to see that on a price basis, nearly everything appears back to the pre-crisis levels. This is what happens when monetary policy is used to drive away depression, usher in euphoria, and left to run amok because of the simple nature of how easy it is to cut make money cheap and flood pockets of the system with drowning amounts of liquidity.

There is one bright spot here though. Even as the wealth-to-income ratio expands, the quality of borrowing conditions for households has eased dramatically thanks to banks easing up on standards for home purchase loans to prime borrowers coupled with easing credit standards for consumer loans.

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Though the citizens have managed their household debt situation, the same can not be said for the Federal government. The US Government has taking the nominal debt-to-GDP percentage to almost 75. Though debt has been paired with economic growth, the clear danger that was on citizen balance sheets has been transfer to the federal books.

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When Case-Shiller came out a few weeks ago the crowd proclaimed the virtues of a housing recovery. The problem is that the resiliency of this housing recovery is weak, at best. When rates spiked in late 2013 (Chart 1), the impact on total residential investment is clear (Chart 2).

(Chart 1)

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(Chart 2)

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Total residential investment is sensitive to interest rates. Though household debt has improved the burdens have been shifted from the citizens to the US government as it's debt-to-GDP ratio has swelled. The workforce in America is weak, at best. The true unemployment levels of America's skilled labor force is not allocation optimally. Thoughts costs are down, earnings and compensation have fallen while PCE appears to have caught some footing and is beginning to increase. Overall, the basic foundation of our economy is weak and all the FED did with its monetary policy was pull future demand forward when it started QE thus leaving the fractures to our economic policy open.

The performance of luxury retailers compared with discount retailers shows highlights a sample of the wealth gap that has increased in the wake of the Great Recession. The middle class has been left with the burden of tax increases to supplement state and federal spending. Single mothers earning a gross income of $29K annually with $57.3K in net income and benefits than to earn $69K gross annually with $57.0K in net income and benefits.

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We're in a mess and as each week passes we are coming closer to our day of reckoning.

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