Insights into the 2016 US Economy:

Fed Conundrums – What Truly Drives Economic Growth?

March 21st, 2016

Brian KoralewskiEconomic/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 Unemployment Rate, as with all economic data, should certainly be taken with a grain of salt, as it does not take into account the difference between full-time and part-time workers, as well as if those employed are truly in their “ideal job” where their credentials/background equates to their current pay rate.

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 thinking alert* – more objective analysis must be done on this topic.

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)? Rather than 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.