The document summarizes insights into the 2016 US economy and the role of the Federal Reserve. It argues that while unemployment has decreased and GDP grown moderately, inflation has remained stagnant. This implies the Fed has boosted asset prices and confidence but not tangible economic growth. One indicator of economic growth not discussed is the gap between employer skills needs and the narrow skills of newly graduated college students, leaving the workforce saturated and unable to drive wages and inflation. The next crisis may be investors realizing the Fed's limitations as an economic growth instigator. 2016 will test the Fed's legacy as to whether rates should rise based on market expectations or remain low given only moderate economic data.
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US Economic Report
1. Insights into the 2016 US Economy:
Fed Conundrums – What Truly Drives Economic Growth?
March 21st, 2016
Brian Koralewski
Economic/Investment Strategist
Overview
As with all analyses, the data only tells half the story. It is what exactly one infers from the data
that must be highly scrutinized in order to distinguish “wishful thinking” from robust, objective
reasoning. Furthermore numbers and statistics relay multiple narratives. This is why it is of
paramount importance - no matter how solid the argument - to always plan ahead for the
absolute worst. It is better to be fully prepared for the least unexpected (i.e. Black Swans), than
attempt to predict exactly when an event or crisis will occur.
US Economic Condition
In 2015, general US economic data has been “positive” - moderate GDP growth, followed by a
decreasing unemployment rate1 (although the labor force participation rate has not been so
stellar). The elephant in the room, with all the generally glitzy data, are the inflation numbers
which have stubbornly remained stagnant. So what exactly does low unemployment, but little
to no inflation, imply? No one truly knows, not even the Fed. Markets have undeniably been
tentative throughout the first quarter of 2016.
1
The US UnemploymentRate,aswithall economicdata, shouldcertainlybe taken withagrainof salt,
as it doesnottake intoaccount the difference betweenfull-time andpart-time workers,aswell asif
those employedare trulyintheir“ideal job”wheretheircredentials/backgroundequatestotheir
currentpay rate.
2. One can argue that all the Fed has really accomplished the last seven years is to build a massive
house of cards (or dollars), that has bolstered asset prices and confidence in markets, but has not
concretely stoked “tangible economic growth.”
And what exactly is an indicator of “tangible economic growth?”2
Economists and analysts always hold a slew of indicators at their disposal, but one that has not
been generally mentioned is the labor market – specifically, the gap between the skills required
by employers, and those harbored by newly minted college graduates.
Never before has it been easier for someone to obtain a degree as the term “collegiate
education” has been turned into a cliché, not to mention an obvious business. Subsequently our
labor market is saturated with collegiate credentials. Instead of teaching students to “think on
their feet”- providing them with an advantage over a wide range of industries - colleges instill
a narrow scope of education, thus rendering those who can’t find employment within their
respective industry as either unemployed, or working at a non-skilled position far beneath their
credentials. Without a knowledgeable and skill-flexible workforce, wages remain stagnant, and
inflation fails to budge.
Thus what the Fed has truly done in retrospect is instilled confidence back in the markets yet
failed to really deliver on the labor force, which is a crucial component of the economy. Indeed,
the next crisis may be global investors’ realization of the Fed’s futility as an instigator of
economic growth.
Conclusion
2 Wishful thinkingalert*– more objective analysismustbe done on this topic.
3. 2016 may prove to be the Fed’s biggest test of its legacy - should rates be raised only because
investors have already priced them in, or should they remain at their current levels (despite
“positive” economy data)? Ratherthan pondering over those answers, it would be prudent to
prepare for the time when investors stop caring and ultimately realize the ineptness of the Fed
as a driver of the US economy.
