Holiday in the US and FED - HATICE KARAHAN

Holiday in the US and FED

Nowadays, the US is again in a holiday rush. As Thanksgiving Day, which was celebrated last Thursday, and the Black Friday craze that followed led to a surge in people's emotions, economists focused on the performance of consumers.

In fact before it, surveys were conducted like every year. According to a study by the National Retail Federation, 136 million people were expected to go shopping on Thanksgiving Day and the day after. But according to the new forecasts the Federation announced on Sunday, this number reached 151 million.

According to data from another important source, ShopperTrak, although shopping was intense on Thursday and Friday, it declined slightly compared with the same period last year.

Of course all these data are temporary and the real situation will unfold as the final data are announced. Moreover it is another issue how the decline or increase will be interpreted.

However there is an uncertainty whether the rush for shopping on the “clearance days” was because the economic situation was good or average.

On the other hand, the reason economists wonder about holiday shopping is the Federal Reserve Bank (Fed) process.

However it is obvious that, there is a look for an indication of any opportunity to understand how the US economy is going.

I personally have been among those who believe that the panic started quite early as the Fed issue turned into a long-winded story. The reason was quite simple: The data did not seem to support the increase in the interest rate for a long time. Recently the volume of slogans related to the increase, as you know, have increased considerably.

Of course in December the expectation for a move became a prevailing statement but there are question marks on minds.

It is because of not being sure about the “power” of the reason that causes the increase.

Why can't they be sure and even Fed staff have disagreements, let's check it out.

Deficiency of Output

On the decisions concerning monetary policies the output in the economy is an important indicator. However the pressure amount of the economic capacity that the gap indicated is a strong determiner of the economy…

We can define the gap as the deviation of the real output from the potential output.

The potential output can be defined as the maximum production the economy will obtain, which is sustainable and will not surprise the inflation. Let's briefly say "full capacity." Then in other words, the problem for the central banks is not only the growth rate of the economy but at the same time whether it is above or below the potential...

Let's say with regards to the economic revival there is a positive output gap forecast.

Then the decision makers can be oppressed due to the upward pressure on inflation. However in the positive state, it is known that the economy will be overheating.

In this case it is suggested that the Fed increase the interest rates and begin cooling. Therefore, the level of the output gap allows us to decide whether the economy is heating or cooling. Which data?

All is fine up until this point, but the output gap is not tangible and visible only as a forecast subject to many uncertainties.

However, there is an issue for not to (be able to) distinguish the trend and periodical components of the output completely/accurately.

At this point, different methodologies are making different forecasts.

Here, depending on these the output issue causes difficulties in the determination of related policies, which burdens important responsibilities.

In this context, different indicators are being used to be able to measure the capacity pressure. Among these is the unemployment rate. As it is known since also the Fed targets to reach the full recruitment level, it has been carefully following the data on recruitment. Besides unemployment and other related data have been providing important information on the course of the economy, we have to be careful to separate the components of the trend-term which are the main problems in the output gap.

Shortly, it is not easy to understand whether the economy is overheating or not.

Is there an overheating?

Does the US economy show indications of “overheating?”

According to the latest forecast announced by the Congressional Budget Office, it is foreseen that there is a gap narrowing trend and at the end of 2017 it will be close to success. If we look at the main indicators the Fed always watches, we can see these:

As the October data on consumer inflation have been indicating a 0.2 percent increase in the yearly basis, the rate is 1.3 percent, except for food and energy. On the other hand, on the recruitment side the unemployment rate has been regularly declining.

The rate that regressed to 5 percent in October is at the lowest level since April 2008. In addition to this, if we look at the wages the hourly average has been on an incline trend in the recent months: The annual change of 2.5 percent in October is the highest increase after long years. Therefore we can say that the decisions which will be made in the next meetings will be shaped by the balances that will emerge as a result of these data.

Besides, it is necessary to add that the process to increase the rate of interest has to continue quite carefully and gradually.


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