Yellen – Then & Now

  • A comparison of a June, 2012 and May, 2015 speech from Fed Chair Janet Yellen
  • Using this comparison to gain insight into how Yellen may view current economic data

“Recent unemployment benefit claims data and other indicators, appear to be consistent with an economy expanding at only a moderate rate, close to its potential ” is a quote from Janet Yellen that sounds like it could be very recent given today’s labor data. Only thing is, the quote is from a June 6, 2012 speech to the Boston Economic Club when she was still known as Vice Chair Yellen. At the time of the speech, the four-week moving average of initial claims was 374,500 whereas today, the average is 266,250 or 28.9% lower. Interestingly enough, 266,250 is the exact same previous low that was reached back on April 15, 2000 !! So if Vice Chair Yellen thought claims in 2012 reflected a moderately expanding economy that is “close” to its potential, then I would think Chair Yellen would say today’s data is a significant improvement. But as we see from her speech on Friday, we still have a labor market that is “approaching its full strength.” Dangling carrot, anyone?

So this past Friday, May 22, 2015, we got Yellen’s most recent thoughts on the economy as she spoke to the Providence, Rhode Island Chamber of Commerce. The part of the speech which got the most attention was her admission to raising rates this year assuming the economy continues to improve as she suspects it will. I found this to be rather hawkish given the removal of all calendar-based expectations in the most recent FOMC statement. That being said, other parts of the speech are much more telling as to how Yellen may be interpreting data especially when put into the context of her previous remarks. For example, in 2012, Yellen had this to say about housing:

“The housing sector remains a source of very significant headwinds. Housing has typically been a driver of economic recoveries, and we have seen some modest improvement recently, but continued uncertainties over the direction of house prices, and very restricted mortgage credit availability for all but the most creditworthy buyers, will likely weigh on housing demand for some time to come.”

Now, if we look at recent data on the housing market we can see that there has been a dramatic recovery since 2012. The S&P Case Shiller National index, which she refers to in the 2012 speech, is up 16.45% from then and only 9.6 % off its all time high. If we look at the FHFA House Price Index, which is a more broad index and is also equal weighted versus value weighted like the Case Shiller index, home prices are just 2.9% below their all time high set in March 2007. The important thing to keep in mind when looking at home prices and their peaks over time is the difference in lending standards. The 2006/2007 highs were driven by low quality and sometimes undocumented loans that were given to almost anyone. Today’s transactions are done under the strictest of lending standards helping to ensure the sustainability of the market. So for the housing market to again be just off its all time high is truly remarkable. This recovery in housing prices could only happen with purchasers having solid financials which is a reflection of a healthy economy.

In both the 2012 and 2015 speeches, Yellen refers to mortgages as being difficult to obtain for those without the best credit. While that is certainly a factor today, we can see in new (NHS) and existing (EHS) home sales data that transactions are growing. March NHS (April data not available as of this writing) were up 19% year over year while April EHS were up 6.1% year over year. April EHS were also qualified with comments stating that transactions were hindered by low inventory and high prices. Also, the new residential construction data we got for April showed building permits and housing starts with 10.1% and 20.2% gains, respectively, month over month. Clearly we can see that people are getting mortgages and that new household formation is picking up. Now, taking the comments from her 2012 speech, we see how critical Yellen thought the housing market was to the recovery. Given what housing has done since then, it would be impossible to say that it remains as a headwind. Hence the statement from the 2015 speech:

“In some respects, this headwind has diminished. Home prices have moved up appreciably in many areas of the country, alleviating the burden for many homeowners.”

The 2015 statement on housing still reads downbeat, but it’s not as dismissive as the statements on labor.

In Friday’s speech, I was happy to hear Yellen touch on the drop in oil prices and the positive impact it has had on household budgets and consumer confidence. This is a point that I and others have been making since the drop became significant in November, 2014.Yellen went on to cite information from the EIA which estimates 2015 annual savings of $700 per household with greater benefits accruing to those in the northeast. On a personal note, it bothers me whenever I read Wall Street research that looks at retail sales data and then says the drop in energy prices has done nothing for consumers. I find commentary like that to be both shallow in research and an insult to every person that drives to work everyday or pays to heat his/her home.

Wrapping up here, I wonder what Friday’s speech would have been like if Yellen had had Friday’s CPI data in hand before writing it. April came in with core CPI at +1.8 YoY with the below categories all 2% or over:

Category April Year over Year % Gain
Food 2
Food away from home 2.9
Electricity 3.8
Medical care commodities 4.1
Services (less energy services) 2.5
Shelter 3
Medical care services 2.6

This report will definitely get the Fed’s attention because accelerating inflation is something that even the doves can’t ignore. The CPI data also shows the strength in the services sector of the economy. As I’ve pointed out in other reports, we are a services driven economy, and this is where the focus should be.

So, what am I getting at in all of this you might ask…Well If we take statements from Yellen when she was speaking about the economy when it was in a weaker state, I think we get a good reference point for how she will judge future data. In 2012, Fed forward guidance was not nearly relied upon as much as it is today, so I think we got a much more clear view of things. Also, I don’t think Yellen would have downplayed data in a somewhat fragile economy; then again, she is a cagey one!! So now in 2015 with Fed forward guidance at full throttle, I think it’s very useful to look back at old statements to filter out the rhetoric of the Fed speak we get today. Given Yellen’s past comments on certain data, I think she is more bullish on the economy than current forward guidance would allow her to state. This is the environment the Fed has created, so as investors and traders, we have to try and figure out what is the Fed thinking and how do they really view the data? With all this, I think if labor data were to just stay flat from here and inflation continues to drift higher as it is, I think the Fed will act more aggressively than most people and certainly the bond market are expecting. As Gordon Gekko said in the 1987 classic Wall Street, “Every battle is won before it’s ever fought.”


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