The Fed Is Likely Trapped

The confusion at the Fed continues as Federal Reserve Bank of San Francisco President John Williams painted an upbeat picture of the U.S. economy in a speech on Tuesday. This, of course, comes despite recent disappointing data on both the employment and economic fronts.

“The economy is in good shape and headed in the right direction. As a result, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later.”

Of course, the Fed’s Williams is once again “jawboning” the media and Wall Street, as despite their best efforts over the last several years, economic growth has continued to slow to ever lower growth rates. This is clearly shown in the chart below which shows the Fed’s “predictions” versus actual outcomes.


However, despite Mr. Williams hopes of stronger economic growth in the months ahead, the data currently doesn’t suggest this will be the case. Let’s start with the manufacturing and service data.

In June, I discussed my Economic Output Composite Index (EOCI) which is a very broad measure of economic activity consisting of not just manufacturing data, but services as well as leading indicators. (The chart below compares the EOCI to both GDP and the Leading Economic Indicator Index. The EOCI is comprised of the CFNAI, Chicago PMI, LEI, NFIB, ISM, and Fed regional surveys.)


As I have explained previously, since 2009 the U.S. economy has remain mired in an ongoing rotation between inventory draw downs which lead to restocking cycles. These restocking cycles provided a temporary boost to economic activity but very quickly that activity fades and the economy softens once again.