The New York Fed
reports that household debt rose in 2016 4Q. This is a positive sign. The scenario for continued recovery would center on housing recovery and mortgage recovery. Positive signals include a decline in shelter inflation, a rise in non-shelter inflation, a rise in interest rates, a rise in housing starts and prices, and a rise in mortgages outstanding. If that doesn't come together, I expect the Fed to overtighten and to trigger a contraction.
Last month's CPI data suggests a possible shift in this direction. Now, the 2016 4Q household debt data also suggests a positive shift. Mortgage debt increased by about $130 billion and other household debt also increased.
In both cases, I am concerned that these are just the latest head-fake. Data from commercial banks suggests that the mortgage data is (not sustained).
So, I remain tentatively neutral-to-bearish, in wait-and-see mode. There isn't any reason that the expansion should reverse simply due to its age, but this seems like a context where, nevertheless, the risks of being exposed to a contraction are higher than usual.
Last month's CPI data suggests a possible shift in this direction. Now, the 2016 4Q household debt data also suggests a positive shift. Mortgage debt increased by about $130 billion and other household debt also increased.
"There isn't any reason that the expansion should reverse simply due to its age, but this seems like a context where, nevertheless, the risks of being exposed to a contraction are higher than usual."
ReplyDeleteCan you expound on why the risk of contraction is higher than usual?
In a nutshell, monetary policy is probably the most important factor in cycles, and public and Fed sentiment are skewed too much toward contraction. So, unless we get a positive demand shock strong enough to move faster than the Fed, they seem destined to overtighten.
DeleteExcellent blogging. All my biases confirmed.
ReplyDeleteAlso, David Beckworth points out 70% of global central banking pegged to Fed.
If the Fed tightens with CPI core sans shelter at 1.3%, when would they not tighten?