Economic data following the financial crisis has continued to be subpar, causing economists to wonder if normal just isn't what it used to be.
This week Bank of America Strategist Chris Flanagan dived into the debate with a report examining 50 years of historical data in an attempt to define what might constitute 'normal' in today's economy. The exercise makes sense given continued focus on just when the Federal Reserve might feel comfortable raising interest rates to end six years of monetary stimulus, though the time frame is admittedly arbitrary -- a tribute to the upcoming 50th anniversary of a certain American rock band, rather than any scientific cutoff point.
As Flanagan puts it:
This week, after three fairly momentous events (at least from our perspective), we check some data to determine whether we need to re-think our view that persistent Fed dovishness is needed, and likely. In advance, the answer is no, we stick with our view: there is still much work to be done to get back to “normal” on the economy (whatever normal may mean) and the Fed will remain appropriately dovish, creating close to a goldilocks scenario for securitized products ... Tuesday, May 5, marked the 50-year anniversary of the Grateful Dead’s first concert performance, in Menlo Park, California. We recognize the anniversary by using a 50-year look-back on data that might matter to the question of “what is normal?” The timeframe is arbitrary, but we look at 50-year averages as a guide to normalcy.
The first chart Flanagan looked at was the S&P 500 vs the yield on the 10-year U.S .Treasury.
Given Fed Chair Janet Yellen's comments that stock valuations are "quite high," this is an important chart to look at and Flannigan says "the data support her assertion."
Next he took a look at the Fed's core mandates of employment and inflation.
There were positive and negative aspects to both of these. On the employment front, the unemployment rate is now below the 50 year average.
However, the participation rate is also below average, which would be considered a negative.
Taking a look at inflation, it's good news that it is running below the 50 year average, but not so good news that it's still below the Fed's 2 percent mandate.
As Flanagan says, "On the Fed’s stated mandates, inflation and employment, we see little currently that argues in favor of further tightening monetary policy any time soon."
When it comes to GDP and housing, both those metrics also continue to be below 'normal.'
The last time growth was above the 3.0% 50-year average YOY growth was in 2005. The caveat here is that this sub-par growth comes after six years of the most accommodative and aggressive monetary policy in the Fed’s history. One might have expected more robust growth at this point.
The homeownership rate is currently 1.6 percent below the 50-year average of 65.3 percent with little sign of finding a bottom, according to Flanagan.
When taking a look at his research, Flanagan concludes that "tightening monetary policy seems like an odd response to such remarkably weak data," and he stands by his prior belief that Fed dovishness is both needed and likely to continue. He adds that "premature tighting by the Fed is not something to fear." Or, as the Grateful Dead once put it: just keep truckin' on.
