The stock market wants fast economic growth, and they want the Fed to think economic growth is slow

Eureka!  Today we found out that NGDP (which the Fed looks at) grew at a 2.19% rate over the past 6 months and the more accurate NGDI grew by 5.06%.

Stocks soared on the news.

And shhhh!  Don’t anyone tell the Fed about NGDI!




28 Responses to “The stock market wants fast economic growth, and they want the Fed to think economic growth is slow”

  1. Gravatar of TravisV TravisV
    26. June 2013 at 12:11

    Right now, I feel that it’s challenging to disentangle the effect China news is having on markets with the effect Fed news is having on markets.

    FXI is a good example of something that’s influenced by both. Today, the S&P 500 increased 0.96% and FXI increased 1.74%. Yet the Shanghai Composite actually fell this morning 0.41%. It will be interesting to see whether the Shanghai Composite follows our increase later tonight.

  2. Gravatar of ssumner ssumner
    26. June 2013 at 12:20

    Travis, I’d guess it will increase.

  3. Gravatar of Ashok Rao Ashok Rao
    26. June 2013 at 12:23

    Sad. Yes. It’s the problem with the Evans rule (which is a lot worse than I first thought).

    “A well-designed QE policy would offset the market effect of information from the jobs report vis-a-vis its “natural” trend. What does this mean? If the job market was booming investors would face two countervailing forces 1) an expected tapering of QE and 2) increasing consumer confidence and demand (which moves in line with the market). If the jobs report sucked, investors would be confident in continued QE, but worry about falling demand.”

    The Fed should have a thought experiment. What would happen if they gave Wall Street a secret look at next months job report and it showed that -500,000 jobs were *lost*.

    I bet you stocks would soar. Because the Evans rule is asymmetric and makes no sense. It would be job report (or any economic indicator) neutral if it had a condition for easing and was based on # of jobs created.

  4. Gravatar of Doug M Doug M
    26. June 2013 at 12:36

    I would say that as often as not “good news” is “bad news.”

    That is, good news for the economy is bad news for the stock market and vise versa.

    So, the markets are hoping for goldilocks — enough growth to keep profit margins fat, but not enough growth to meaninfully move employment, inflation, GDP, or the Fed.

    Regarding the GDP report, most of market players I know say that this is old news. Revisions to Q1 GDP say nothing about current or future conditions.

  5. Gravatar of Steve Steve
    26. June 2013 at 12:48

    Steve Liesman survey on CNBC:

    “A full 44 percent said their current standard of living has fallen short of their expectations, compared with just 28 percent when CNBC last asked the question in 2007. Only 54 percent say their current standard of living has met or exceeded their expectations versus 71 percent in 2007.”

    “One strange result from the data is that while the official inflation figures have been very low, the All-America survey continues to pick up concern among the public over rising prices. The median expected rise in the price of everyday goods in the next year jumped to 4.3 percent from 3.8 percent in March.”

  6. Gravatar of maynardGkeynes maynardGkeynes
    26. June 2013 at 13:44

    Prof Sumner: Here’s what I don;t get about what you are arguing: When was the last time the stock market ever reacted positively to the Fed tightening (or even suggesting that it might tighten)? If the answer is “never” or damn close to never, which I think is the case over recent decades, how can you cite it as a credible indicator of what Fed policy should be? By your logic, the stock market has told us continually over the last 20-30 years (or more) that tightening is never good for the real economy. Do you believe that to be true? More generally, what kind of an indicator always says the same thing, other than the proverbial broken clock? Thank you in advance for taking the time to respond.

  7. Gravatar of ssumner ssumner
    26. June 2013 at 14:37

    Doug, Over the past 5 years stocks have usually gone up on good news.

    Steve, Yup, the public doesn’t understand inflation.

    Maynard, I don’t think the Fed should target stocks, I think they should target NGDP

  8. Gravatar of marcus nunes marcus nunes
    26. June 2013 at 14:59

    It doesn´t matter if the Fed ‘hears’ about NGDI. It´s not more accurate than NGDP. Over time they tell exactly the same story. A few quarters ago, for example, NGDP was growing faster than NGDI…

  9. Gravatar of jknarr jknarr
    26. June 2013 at 15:37

    Have you ever looked at (GDI-GDP)/GDP? It peaks in early 2000 and late 2006.

    This entire GDI discussion is only measuring the distortions built in by one-time financial asset transfer payments. SPX/GDP is almost equivalent to (GDI-GDP)/GDP.

    I’d drop this topic, and fast.

  10. Gravatar of ssumner ssumner
    26. June 2013 at 16:09

    Marcus, And a few quarters ago NGDI was also more accurate, as NGDP was overstating growth in mid-2012. Look at the jobs numbers.

    Jknarr, I don’t doubt that both are flawed. As I said in the post earlier today, the 4th quarter NGDP numbers were distorted by bonuses. But recently NGDI has seemed more accurate.

  11. Gravatar of Watch out for that Fed Reaction Function | Uneasy Money Watch out for that Fed Reaction Function | Uneasy Money
    26. June 2013 at 17:54

    […] The stock market wants fast economic growth, and they want the Fed to think economic growth is slow […]

  12. Gravatar of Michael Michael
    26. June 2013 at 19:03

    Scott, does that mean given that NGDP growth was 5% in the last six months, the Fed’s current policy seems reasonable? Or should they continue easing to help NGDP catch up to it’s pre-2008 trendline?

  13. Gravatar of Ricardo Ricardo
    26. June 2013 at 19:18

    I’ll second jknarr’s motion. I remember seeing a brief paper about periods where GDI > GDP: the discrepancy correlates with asset booms. At least part of the explanation was capital gains getting misclassified as ordinary income.

  14. Gravatar of Benjamin Cole Benjamin Cole
    26. June 2013 at 21:41

    Perhaps someone in the MM movement (which sounds too close to the BM movement, but anyway) will pen a retort to Martin Feldstein’s statement that the Fed is “saddled” with $3 trillion in QE bonds.

    I think the market is unsettled not only by a feeble, irresolute Fed, but the thought that the Fed is under building pressure to unload its $3 trillion booty hoard. Comments by Feldstein and others do not help, especially when the Fed offers no rebuttal.

    I would like to see someone write that $4 trillion or $5 trillion in Fed QE might be a good short-term target, and then maybe even higher.

    I still think the public needs reassurance (the Fed should be providing but isn’t) that the exit will be seamless, delayed, or maybe will never happen.

    I still say the GAAP accounting system for Fed purchase of bonds is bogus…..

  15. Gravatar of TravisV TravisV
    27. June 2013 at 03:18

    The Shanghai Composite is flat so far this morning. Confusing…..

  16. Gravatar of Mikio Mikio
    27. June 2013 at 05:37

    Chinese stocks have been in bear market since mid-2010, when the China started efforts to bring down excessive credit growth.

    The Chinese interbank market has experienced four major credit crunches and several minor credit crunches since.

    The only difference is that this last one last week made it to the international headlines, with some people screaming “oh my God, China is tightening!”

    But it’s nothing new.

  17. Gravatar of AldreyM AldreyM
    27. June 2013 at 06:04

    US May pending home sales +6.7% vs +1.0% expected

  18. Gravatar of Unexpected Blog Post of the Day Unexpected Blog Post of the Day
    27. June 2013 at 06:14

    […] Scott Sumner complaining that the Fed relies on NGDP when setting policy. (Yes, I’m sure “in context” we can walk through exactly what is going on here, but my sentence is correct as written.) […]

  19. Gravatar of wm tanksley wm tanksley
    27. June 2013 at 06:49

    I still think the best thing to track would be income tax receipts futures. That’s actually something that has both supply and demand, as opposed to NGDP or NGDI, which has neither.

  20. Gravatar of Growth is slow no matter what… | Historinhas Growth is slow no matter what… | Historinhas
    27. June 2013 at 07:02

    […] Scott suggests the stock market “soared on the news” that NGDI annualized was a robust 5.1% annualized on average over the last two quarters, while NGDP annualized growth was only 2.2%. And ‘pleads’: “Don´t anyone tell the Fed about NGDI”. […]

  21. Gravatar of ssumner ssumner
    27. June 2013 at 10:41

    Michael, I very much doubt that growth was 5% over the past 6 months, I’d guess around 4%. If it was 5%, I’d still say the Fed was falling short of its mandate. Now if they want to switch to a 4% or 5% NGDPLT, then I’d say “fine.”

    Ricardo, Maybe, I’ll keep an open mind.

    wm tanksley, Supply and demand of what?

  22. Gravatar of jknarr jknarr
    27. June 2013 at 12:31

    Hope that this helps:

  23. Gravatar of ssumner ssumner
    28. June 2013 at 06:24

    jknarr, You do know that there are studies showing NGDI is more accurate? What did those studies do wrong?

  24. Gravatar of jknarr jknarr
    28. June 2013 at 07:51

    Nalewaik arbitrarily begins his sample in 1978 and 1994-2006 when he could be using the full data set – that sort of thing is a major strike against his conclusions right there, IMHO.

    If you want to claim generalized conclusions, use the available data. J. Steven Landefeld I think has it right, and Nalewaik’s claim that they should be contemporaneous is bogus (BEA data clearly lags, and has always lagged).

    If a firm LBOs a company, pays itself a huge cash dividend (perhaps even structured as income), and takes the company public a year later, this boosts GDI, what does this mean for GDP? Pretty well nothing — it’s asset liability leverage shuffling, not real activity, and that’s why GDI ultimately washes out with GDP.

    Also, taking it at face value, if we are thrilled about reversion in GDIs favor over a quarter or two, we should also consider GDI’s vicious revision back to GDP over the longer haul (which happens to be connected with equity performance.)

  25. Gravatar of ssumner ssumner
    29. June 2013 at 05:10

    jknarr, So are you saying Nalewalk’s findings are only accurate for the period from 1978 onward?

  26. Gravatar of jknarr jknarr
    1. July 2013 at 05:28

    Scott, I’m saying that his cherry-picking time horizons calls conclusions into question. It would be better if he went back to 1947.

    If nobody cares that I cherry pick my time horizons, I would be an absolute wizard of proofs:

    For gold performance, I could show you that it’s a dangerously volatile numeraire that has no business in the realm of money.

    I can also prove that the USD is a dangerously volatile numeraire that has no business in the realm of money.

    I can prove that will be the largest market cap the universe. Somebody should call CNBC!

    But I don’t. I use all the available data if I want the glory of generalizable conclusions: garbage in, garbage out.

  27. Gravatar of wm tanksley wm tanksley
    1. July 2013 at 11:51

    Sumner, thanks… By “supply and demand” I mean that taxes can be measured in actual money paid by a specific group of people (taxpayers) and received by a single legally responsive entity (the IRS). The real point here is that the IRS actually receives the money, and could therefore be held responsible to sell unleveraged futures contracts, accepting money now in return for promising a future payment that’s bigger if the IRS collects more money — but the money is certain to be there, because the IRS is only liable to pay on money that it actually directly receives.

    (I admit that “supply and demand” is a little odd of a way to say that. I admit that if it’s right, it’s demand that’s enforced by law.)

  28. Gravatar of May Jobs Beat to the Upside with 195,000; What Will the Fed Do? | Last Men and OverMen May Jobs Beat to the Upside with 195,000; What Will the Fed Do? | Last Men and OverMen
    19. March 2017 at 05:28

    […] the Big Other not know the truth; to prevent the Other from knowing.      Mind you Sumner has written some catty stuff since that which I will look at […]

Leave a Reply