The latest manufacturing reports are being taken out of context to present a picture of “hope.” Industrial production did rise in August, but as we can see above gains in this sector have been trending downward since a robust recovery following the Great Recession. August’s results do not reveal a manufacturing sector expanding at rapidly enough to significantly lower unemployment and raise wages. Stagnant wages are what is holding the economy back at this juncture.
Everybody has a reason why the Fed will begin purchasing less bonds over the next few months, i.e. the taper. These are often complex theories based on arcane points of monetary policy stuffed with jargon. The real reason is that the Fed is depleting the existing bond supply. At a rate of $65bn per month in U.S. treasury purchases, the Fed will purchase the entire projected issuance in the fiscal year ending in March of 2014.
The next Fed chairman will have a large mess to clean. The taper will cause interest rates to rise in two ways. The first is the adjustment of supply and demand for T-bills. The reduced demand for treasuries will bump up rates, though at least some of this is dynamic is already priced in.
The second is that the Fed standing by with its mighty printing press has beaten risk out of the market. As the big elephant reduces it bond intake, risk levels will begin rising prompting markets to reprice.
Over the next few months, the consequences of the wind down of bond purchases will become apparent much to the chagrin of the next chairman.
There are two troubling trends apparent on our unemployment chart. The first is just what the article is telling you; specifically, higher income groups have recovered much better since 2009 than lower income groups. High school and college graduates have retraced about half the increase in unemployment from the recession while high school dropouts have gained only about a third of their losses back.
The second is that each successive recovery from the last three recession has become less robust. Unemployment levels from the Obama recovery are higher than the lows from the Bush recovery, which are higher still than the low levels witnessed during the Clinton boom. The marginal returns from additional credit creation from cheap money are diminishing over time, but this won’t stop the Fed from reversing the taper if markets swoon post-taper.
Merkel is steaming towards victory in Germany’s elections Sunday. While euro cheerleaders hope for Germany to change its eurocrisis fighting efforts after a new government is secure in the Bundestag, I think they will be disappointed.
The most significant message from German voters is that they do not want change, but more of the same. Merkel can be counted on to maintain the euro for as little money as possible, which is exactly what Germans want. What they don’t want are the inevitable consequences from kicking the can down the road umpteenth times. Delaying the eurocrisis will just make it more severe when it eventually erupts.