By Raz Koroh
Lately, record high closes at Wall Street on successive days reflect investors’ confidence that upbeat U.S. data points ever closer to a long-anticipated U.S. rate hike. Indeed, official figures show U.S. retail sales beating forecasts, coming soon after blockbuster data on June 2016 jobs creation. Most analysts then conclude that the market is pricing in a greater probability of a Fed interest rate hike before the end of 2016; some even give a brave, 40 per cent chance of a 25 basis point hike in December! Analysts unanimously cite an intense round of U.S. data on the heels of strong June employment figures as the accelerator. Here is the interesting thing – is the Fed really bothered by these data, or if it is, is it barking up the wrong tree?
Here are several factors to consider.
Market maturity. The United States is way past the fully-developed economic phase. In other words, there is very little room left for it to grow internally compared to, for instance, when it had just expanded beyond the Mississippi River into its western expansion phase before and after the Civil War in the final third of the nineteenth century. Today, on average, every household has two to three motor vehicles, televisions, a complete kitchen, and indeed house ownership level is among the highest anywhere in the world. On average, every American already has a mobile phone. In short, it is quite a challenge for any business to increase its sales annually; it is not that Americans cannot afford to buy, they can but only if they see any reason to keep buying just to get rid of what they had just bought the previous year. Would anyone buy the latest iPhone model after he or she had just spent a good amount on last year’s iPhone model? Maybe, but that’s more like an exception to the general rule.
If that is the case, selling to an untapped market outside of the United States is the only way to support a continuous GDP growth, stimulate private sector investment, and sustain a continuous growth in new jobs for new entrants into the U.S. job market. Not doing so will ultimately result in a stagnant investment environment and growing number of unemployed youth.
Continually looking at the relationship between consumption data, job data and inflation rate is meaningless in that respect.
Inflation. For a developed economy such as the United States, inflation is not and should not merely be measured according to internal demand such as levels of consumption and investment activities. This in effect de-links it from the real objective of inflation for a developed economy and instead limits it to its traditional role of keeping cost of living as low as possible and thus maintaining or improving the standard of living of the average American citizen. But the real objective in this respect is to ensure that U.S. productivity stays competitive in relation to its major trading rivals in a global marketplace.
If that is the case, 2 per cent or 3 per cent inflation target should cease to be the Fed’s obsession and instead shifts its focus on whether rival currencies are stronger or weaker against the U.S. dollar at any given time. For instance, if the fallen British pound stays 15-20 per cent weaker than the U.S. dollar, then British exports to China will be 15-20 per cent cheaper than U.S. exports to China; in the end, U.S. exporters will lose market share in China and impact on U.S. domestic investment and unemployment rates. A rate hike in the United States when the rest of the world are doing the exact opposite will only strengthen the U.S. dollar even more, hence making Made in USA brands less attractive, and ultimately worsen the already high current account deficit.
Continually looking at whether inflation data has reached a certain target is meaningless in that respect.