Yellen to be first female Treasury Secretary - Capital Economics
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Yellen to be first female Treasury Secretary

US Economics Weekly
Written by Paul Ashworth
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This week the markets were buoyed by the news that President-elect Joe Biden intends to nominate Janet Yellen to be Treasury secretary but, while she is eminently qualified, her lack of political deal-making experience could be an Achilles heel.

This edition of the US weekly is being sent early ahead of the Thanksgiving Holiday. Happy Thanksgiving!

This week the markets were buoyed by the news that President-elect Joe Biden intends to nominate Janet Yellen to be Treasury secretary but, while she is eminently qualified, her lack of political deal-making experience could be an Achilles heel.

Yellen to be first female Treasury Secretary

Being US Treasury secretary is complicated. Some holders of the office have wielded enormous power – such as Alexander Hamilton and, more recently, Robert Rubin – while others – George W. Bush’s picks Paul O Neill and John Snow come to mind – were reduced to being little more than salesmen, selling the President’s own economic policies to Congress.

The Treasury secretary’s responsibilities are a curious mix. Since the power of the purse ultimately lies with Congress, he or she has a lot less control over fiscal policy than finance ministers do in other countries. Some Treasury secretaries have at least been pivotal in forming the administration’s economic policies, but others have been peripheral, with policy designed by the President and his key advisers behind closed doors at the White House. The Treasury Secretary also has responsibility for international economic relations, which includes promoting a “strong” dollar, managing international crises and liaising with institutions like the IMF and World Bank. Finally, he or she is also expected to take a leading role in managing domestic economic and financial crises, which normally requires working closely with the Federal Reserve, although the Fed is now largely responsible for supervising the financial system.

Because of the mix of skills required, Treasury secretaries have had a variety of backgrounds. There are the traditional industrialists like the aforementioned O’ Neill (Bush) and Snow (Bush), who tend to be good salesmen. Goldman Sachs alumni like Robert Rubin (Clinton), Henry Paulson (Bush) and Steven Mnuchin (Trump) who are also good promoters of the US abroad but have experience better suited to handling the inevitable financial crises. Then there are the professional politicians like Nicholas Brady (Reagan & Bush), Lloyd Bentsen (Clinton) and Jack Lew (Obama), who might have less experience in the private sector, but make up for that with deal-making skills that can be crucial to a President facing a potentially hostile Congress. There have been surprisingly few out-and-out economists as Treasury Secretary, with Larry Summers (Clinton) the only one in recent memory.

So, what can we expect from Yellen, the ex-Fed Chair and academic economist? There is no-one, except perhaps Ben Bernanke, who we would prefer to be in charge if another financial crisis blows up. Without question she will have a very close working relationship with current Fed Chair Jerome Powell, which will presumably include trying to revive the Fed’s 13(3) emergency lending facilities that Mnuchin will allow to expire at the end of this year. But as an ardent defender of the Fed’s independence and inflation-fighting mandate, she would seem to be the last person who would put pressure on the Fed to fund additional government spending via any MMT-style monetary financing by the Fed.

She has called repeatedly this year for more fiscal stimulus and, as an academic specialising in labour market issues, is well placed to design policies to get people back to work. But, as a relative outsider to the Biden team, it remains to be seen how much influence she will have on forming policy. And the big question is whether she will be able to sell Biden’s economic plans to a split Congress? At first glance, her quiet and deliberate demeanour suggests she might struggle. But we definitely wouldn’t under-estimate her and, besides, unlike the many State Governors who have little Washington experience when they become President, Biden knows Congress inside-out and can do his own deal-making. In which case, the only possible drawback to Yellen’s nomination may not matter that much in practice.

The week ahead

Although the activity surveys should have held up relatively well, we are concerned that the surge in coronavirus cases will limit the gains in employment this month.


Data Previews

ISM Manufacturing Index (Nov.) 10.00 Tue. 1st Dec.

Forecasts

Previous

Median

Capital Economics

Headline index

59.3

57.5

58.0

Manufacturing holding up well

Our model points to a drop in the ISM manufacturing index to 58.0 in November, though that would still be consistent with a continued solid recovery in manufacturing output.

The recovery in manufacturing has lagged the rebound in goods consumption, which has resulted in lean inventories. As a result, it is little surprise that both output and price pressures in the sector have remained strong, even as consumption growth has begun to tail off.

The national Markit manufacturing PMI rose further in November to 56.7, from 53.4, but that is mostly just catching up with the prior strength of the ISM index. The regional Fed indices, which have tended to move closer in line with the ISM, suggest the latter may have dropped back in November. Our model, which also accounts for the state of inventories as well as the strength of global demand, suggests the index will hold up a little better. Overall, we are pencilling in a small drop back to 58.0, from 59.3. That would still be consistent with manufacturing output rising at a 5% to 10% annualised pace.

Chart 1: ISM Manufacturing & Regional Fed Indices

Source: Refinitiv

ISM Services Index (Nov.) 10.00 Thu. 3rd Dec.

Forecasts

Previous

Median

Capital Economics

Headline index

56.6

56.4

55.0

Services strength fading

Our model of the services index points to a fall to 55.0 in November, from 56.6. (See Chart 2.) With the high-frequency indicators pointing to sharp drop offs in a range of dining and leisure activities at the end of the month, December could look far worse.

The Markit services index rose markedly in November to 57.7, from 56.9. That comes despite a range of indicators suggesting that services activity has begun to level off, as well as the gradual downward trend in the ISM services index since the summer. The early regional evidence points to a fall in the ISM services number. The broader weakness in the global services PMIs also highlights that activity elsewhere has weakened as renewed restrictions have been introduced.

As a result, we are pencilling in a drop back in the ISM services index to 55.0, from 56.6. That would still leave the ISM indices consistent on past form with fourth quarter GDP growth of 3.5% annualised. But the downside risks have grown in recent weeks so there is a growing likelihood that a renewed contraction in the economy in December could drag that figure lower.

Chart 2: ISM Non-Manufacturing Index

Sources: Refinitiv, CE

Employment Report (Nov.) 08.30 Fri. 4th Dec.

Forecasts

Previous

Median

Capital Economics

Change in Non-Farm Payrolls

+638,000

+500,000

+400,000

Unemployment Rate

6.9%

6.8%

7.2%

Average Hourly Earnings

+0.1%(+4.5%)

+0.1%

+0.3%(+4.4%)

Average Weekly Hours Worked

34.8

34.8

34.9

Payroll gains at risk of stalling

We expect a further slowdown in the pace of non-farm payroll gains to 400,000 in November, as the recovery in the employment-intensive restaurant and leisure sectors stall.

A drop in temporary census hires subtracted 148,000 from headline payroll growth in October. The drag in November will be around 95,000, as the remaining workers finished their jobs. There was also a further 159,000 decline in state & local education employment in October, which we doubt will be repeated this month.

Unfortunately, it seems that underlying payroll growth slowed sharply in November. Consumer surveys show people less willing to spend time in restaurants, suggesting we could see food service payrolls fall outright in November, and potentially plunge in December. (See Chart 3.) Consumer footfall in malls and other leisure venues appears to have held up well so far, suggesting that the hiring picture in other service sectors will be more robust, so we are pencilling in a 400,000 gain overall. Following the blowout gain in the household measure of employment last month, we expect a drop back this month, which will push the unemployment rate back up to 7.2% from 6.9%.

Chart 3: Share of Population Dining Out & Payrolls

Sources: Refinitiv, Axios-Ipsos

International Trade (Oct.) 08.30 Fri. 4th Dec.

Forecasts

Previous

Median

Capital Economics

International trade balance

-$63.9bn

-$65.0bn

-$63.5bn

Trade in both directions still recovering

We estimate that the trade balance was little changed in October, as both exports and imports continue to rebound.

The advance goods report showed goods exports rose by 2.8% last month, while imports were up by a smaller 2.2%. The larger dollar value of the latter means the trade in goods deficit still increased marginally. Both gains were broad-based, reflecting rising shipments of consumer and capital goods in both directions.

We suspect services exports and imports continued to edge up in October too, with the services surplus likely to improve slightly. Overall, we are pencilling in an overall trade deficit of $63.5bn, little different from the $63.9bn in September. The deficit may yet narrow further over the coming months, mainly because import growth should slow in line with consumption while the survey evidence suggests exports will continue rebounding. (See Chart 4.)

Chart 4: Real Goods Exports & ISM Export Orders

Sources: Refinitiv, Census Bureau


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (GMT-5)

Previous*

Median*

CE Forecasts*

Mon 30th

Pending Home Sales (Oct)

10.00

-2.2%

+2.0%

Tue 1st

ISM Manufacturing Index (Nov)

10.00

59.3

57.5

58.0

Construction Spending (Oct)

10.00

+0.3%

+0.8%

+1.0%

Wed 2nd

Change in ADP Employment (Nov)

08.15

+365,000

+500,000

+400,000

Initial Jobless Claims (w/e 28th Nov)

08.30

778,000

Thu 3rd

ISM Services (Nov)

09.45

56.6

56.4

55.0

Fri 4th

Change in Non-Farm Payrolls (Nov)

08.30

+638,000

+500,000

+400,000

Unemployment Rate (Nov)

08.30

6.9%

6.8%

7.2%

Average Hourly Earnings (Nov)

08.30

+0.1%(+4.5%)

+0.1%

+0.3%(+4.4%)

Average Weekly Hours Worked (Nov)

08.30

34.8

34.8

34.9

International Trade (Oct)

08.30

-$63.9bn

-$65.0bn

-$63.5bn

Factory Orders (Oct)

10.00

+1.1%

+0.9%

+0.7%

Selected future data releases and events

10th Dec

Consumer Prices (Nov)

08.30

16th Dec

Fed Policy Announcement

14.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

GDP

+33.1

+4.5

+3.8

+3.9

+3.8

+3.8

(-3.5)

(+4.5)

(+3.8)

CPI Inflation

(+1.3)

(+1.4)

(+1.7)

(+3.3)

(+2.5)

(+2.4)

(+1.3)

(+2.5)

(+2.3)

Core CPI Inflation

(+1.7)

(+1.8)

(+1.9)

(+2.9)

(+2.3)

(+2.2)

(+1.8)

(+2.3)

(+2.2)

Unemp. Rate (%), Period Ave.

8.9

7.0

6.2

5.9

5.6

5.5

8.3

5.8

5.4

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.69

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

S&P 500, End Period

3363

3750

3900

4000

4100

3500

3750

4200

4500

$/€, End Period

1.18

1.20

1.22

1.23

1.24

1.20

1.20

1.25

1.30

¥/$, End Period

106

105

103

102

101

105

105

100

95

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com