SHI 6.19.19 – The Fed Holds Pat

“You gotta know when to hold ’em, and know when to fold ’em …”  croons Kenny Rogers.   Indeed. 

The FED decided to hold.  And this choice is telling.  Why?  For a couple of reasons.  First, no organization on the planet has access to more data.   Second, while what they say is important, what they don’t say might be even more telling.   Make sense? 

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   This has been the case for decades … and will be true for years to come.

But is the US economy expanding or contracting?

According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is about $80 trillion today.  US ‘current dollar’ GDP now exceeds $21 trillion.  In Q1 of 2019, nominal GDP grew by 3.8%…following a 4.1% increase in Q4, 2018.  We remain about 25% of global GDP.    Other than China — a distant second at around $12 trillion — the GDP of no other country is close.  We can’t forget about the EU — collectively their GDP almost equals the U.S.   So, together, the U.S., the EU and China generate about 2/3 of the globe’s economic output.  Worth watching, right?

The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:

The FEDs press release confirmed inflation is a challenge. And if you look closely, you’ll notice they unsurprisingly removed the word “transitory.” And now they are concerned about “muted inflation pressures.”  Of course, I’m not surprised by this comment.   Inflation remains elusive by most measures. 

But by leaving short-term rates unchanged today, I believe the FED is sharing “behind the scenes” information — information only they have access to at this time.   Information like the 2nd Quarter of 2019 GDP, due to be released on July 26th.   Yes, I think the FED gets an advanced “preliminary” screening of data we — the public — have yet to see.   And the choice to leave rates unchanged, in my view, suggests the laundry list of data yet to be released to the public … data like …

• June 20:  US International Transactions
• June 27:  Final GDP reading for Q1 and Corporate Profits in the first quarter
• June 28:  Personal income
• July 3:  International Trade, Goods and Services

… must be OK.  Because if it was really bad, I believe the FED would have cut rates today.  

That said, the FED  DID offer up some revised economic projections.   I’ll discuss a few important points below, but this forecast is worth your deeper review.  Here’s the hyperlink, if you want to take a look (remember:  Right click and open the link in a ‘new window.’)  https://www.federalreserve.gov/newsevents/pressreleases/monetary20190619b.htm

First, on page 1 you see their GDP growth forecast, compared to the March projection.  Their March GDP projection — posted just 3-months ago — is almost the same as today’s forecast.  Not much change … a slight decline in the forecast, but not much.   Interesting. 

More telling is the “Federal funds rate” forecast at the bottom of page 1.  For every year — 2019, 2020, and 2021 — the FED is now forecasting lower short-term rates in the near future.   So what THIS tells us is while they did not reduce rates today, a rate reduction is very likely in the near future.   The Federal Open Market Committee (known as the FOMC) — the rate-setting group at the FED — had 17 members participate in this forecast.   That’s why you see 17 ‘dots’ on page 3.   Individually, here’s what they believe about the future:

• 7 are forecasting two (2) one-quarter percent rate cuts;
• 1 is forecasting one (1) rate cut;
• 8 expect to see no change; and,
• 1 believes the next FED move will be a rate increase. 

Interesting, right?  Like I said above, open the hyperlink and spend some time with it.   It’s worth the effort. 

And then head to Mastros for a big, juicy T-Bone.  And that nice Bordeaux you’ve been hankering for.  Because, once again, there are plenty of open tables this Saturday, all across the country. 

It’s interesting to see the ‘spread’ between this week’s SHI10 and that of one year ago has shrunk to only 60 points.   That’s a nice improvement.  Equally interesting to me is the fact that this week’s SHI10 is identical to last weeks, but almost every individual number changed.  Odd, right?  Only Miami and Vegas were unchanged … all other city SHI numbers moved from the prior week. 

Speaking of the cities, let’s take a look:

Steaks are not flying off the shelf in any city — perhaps with the exception of Seattle.  Reservation demand — like inflation — is fairly muted.   The SHI, the FED and I all agree:   We’re all in ‘wait and see’ mode.    Enjoy that steak.

• Terry Liebman