STOCK MARKET WATCH -- Wednesday, 16 September 2015

[Demeter]

26. Low Unemployment with Falling Capacity Utilization… Not a Good Sign for Fed Liftoff

http://angrybearblog.com/2015/09/low-unemployment-with-falling-capacity-utilization-not-a-good-sign-for-fed-liftoff.html?utm_source=feedly&utm_medium=rss&utm_campaign=low-unemployment-with-falling-capacity-utilization-not-a-good-sign-for-fed-liftoff

Should the Fed raise the base interest rate? They really shouldn’t at this point. Will they? They probably will because they still see years of growth. I do not see years of growth ahead… Let me explain.

Almost one year ago I wrote that capacity utilization would start falling. (link) It has fallen since that time, even until today’s report that capacity utilization in August was 77.6%. This number was below expectations but perfectly in line with a limit line in a model that I use.

The model plots the movement of capacity utilization and unemployment. The model has two limit lines that act upon the increasing utilization of labor and capital. One for Effective Demand (basically labor share) and one for Profit Maximization (equation in graphs). The utilization of labor and capital moves toward the limits during a business cycle to increase profits. Once the movement hits the limits, profits are further increased by only moving downward along the limits, which means that capacity utilization will decrease as unemployment falls. This pattern has existed for decades before a recession. When the plot starts to pull away from the limits, a recession is beginning...

Yves here. The premise I disagree with in this post is that the Fed is primarily concerned about the real economy in its decision as to whether to raise interest rates. The central bank is instead desperate to back out of its ZIRP corner. It appears to recognize that negative real interests rates are helping speculators and allowing corporations to prop up the stock market by funding share buybacks. But loan demand remains slack, a clear sign that more stringent rate policy is not warranted out of any concern of real economy pressures. The Fed instead appears to want to latch on to any semi-good run of economic data to increase rate levels, so it will have wriggle room to drop them in the event of a crisis.