Thursday, September 19, 2013

The Marginal Effectiveness of the Fed's Meddling

With the announcement that the Fed is continuing its purchases of securities, largely because of the perception of ongoing weakness in the economy and its concern that tapering could "slow the pace of improvement in the economy and labor market", I thought I'd take a look at just how effective the program has been, particularly when looking back to the previous economic expansion after the 2001 contraction that began in March 2001 and ended in November 2001 and the recession of 1991, admittedly, much shorter and less dramatic corrections than the last one, however, keep in mind that the actions by the Federal Reserve were very muted in those cases in comparison to their current five year program of economic experimentation.  

In case you've forgotten, here is a timeline of the Fed's multiphase "Grand Experiment":

With that as background, now let's look at a selected aspect of a few critical economic indicators; GDP growth, employment, commercial and industrial lending and construction and see how things have improved under the careful and measured guidance of the Federal Reserve and its banking brain trust.

1.) GDP:  Let's start by looking at the percentage change in real gross domestic product from the previous year:

Between the second quarter of 2003 and the first quarter of 2006, real GDP grew by between 3.0 and 4.4 percent after the contraction of 2001.  In contrast, the economy has seen real growth of more than 3.0 percent for only two quarters since the end of the Great Recession, peaking at 3.3 percent in the first quarter of 2012.  The last data point for the second quarter of 2013 shows real GDP growth of only 1.6 percent, slightly above the worst levels seen since the so-called end of the Great Recession.

2.) Employment:  Every week, the Department of Labor releases the Initial Jobless Claims data, one of the most followed economic statistics.  Here is a graph showing the four week moving average of the number of claims since 1990:

After the 1990 recession, it took roughly 18 months for the number of jobless claims to drop to its pre-recession level.  After the 2001 recession, it took three years for the number of jobless claims to drop to the midpoint of its pre-recession level. You will note that over four years after the end of the Great Contraction, the number of jobless claims is now just getting to the midpoint of the pre-Great Recession levels.  That, despite the "heroic" and unprecedented efforts of the Federal Reserve to prod the economy back to life.

3.) Commercial and Industrial Loans:  Here's an interesting graph that we don't normally see showing the value of all commercial and industrial loans by all commercial banks:

While the value of loans is now back in the range of what it was before the Great Recession, it is well below the value seen in the years before the recession in 2001 and about on par with the value seen before the Fed started its wholesale fiddling with the economy.  In fact, given that the Fed's ultra-low interest rate policy was crafted to stimulate borrowing, we can see that it has been quite a failure on that front particularly since this is what the average effective commercial and industrial loan interest rate looks like:

At least QE was successful at one thing.  Unfortunately, it did little good.

4.) Construction:  Now, let's look at one key aspect of the American economy, construction.  The money spent on the building of houses and commercial properties makes up about 5 to 10 percent of GDP.  Here is a graph showing total construction spending since 1993:

The last data point for July 2013 was $900 million, up from the post-Great Recession low of $760 million but just back at the levels last seen in 2003 and well below the pre-Great Recession peak of $1.2 trillion.  Given that interest rates are at multi-generational lows, you would think that investing in new construction, particularly on the non-residential side, would be growing by leaps and bounds, however, as shown here, that is quite clearly not the case:

Even spending on commercial construction looks pathetic and there was no bubble in that aspect of the economy like there was in residential construction pre-2006:

Lastly, it's obvious that with spending on construction down, that this would be the result:

Construction employment is down from 7.7 million before the Great Recession to 5.8 million now, up 7 percent from the post-Great Recession nadir of 5.435 million but down 25 percent from the pre-Great Recession level.  The prolonged low level of employment in construction (i.e nearly 2 million unemployed construction workers) goes a long way to explaining why many aspects of the overall employment situation have shown only modest improvement despite near-zero interest rates. 

With the head of the Fed sort-of admitting that his Grand Experiment has not been a resounding success and therefore, it should come to a quick end, it will be interesting to see how long Mr. Bernanke and his fellow bankers insist on persisting.  After all, the data certainly appears to suggest that, despite the long-term risks taken, it was an experiment that may have bailed the American economy out of the worst case scenario but that it left millions of Main Street Americans are still suffering from the after-effects of the greatest economic debacle of their lives.  

God help us all if the economic recovery gets any "slower" once the Fed lets the free market act like a free market.

1 comment:

  1. The reality is that much of what we see on the economic landscape is a mirage, all of us who own businesses would be adding workers if our phone was ringing off the hook or demand existed for our products, but that situation does not exist. Like everyone else in my industry I'm sitting on empty office space and buildings, cutting cost, and waiting for demand to increase.

    It is heart breaking to see the toll time takes on a empty building. Constructing more new buildings while paying the staggering cost of taxes, insurance, and maintaining a huge supply of empty space makes no sense except to those in government that are not using their own money.

    Pouring liquidity into the economic system is only helpful up to a certain point then begins to distort markets. Lower interest rates have then same effect but as they become the new normal they tend to lose their ability to push us forward and the cost they place on "savers" far outweighs their benefits. QE is not the answer and this will not end well or soon.