Deutsche Bank: "This Is Not an Economy That Is About to Enter Recession"

Full labor market capacity ahead, says Torsten Sløk.

Janet Yellen at UMass Amherst

Janet Yellen, chair of the U.S. Federal Reserve, speaks at the University of Massachusetts Amherst.

Photographer: Scott Eisen/Bloomberg

Deutsche Bank's Torsten Sløk has spotted a ray of sunshine amidst all the doom and gloom about the U.S. economy.

According to the the bank's international economist, there is now a significant "disconnect" between one narrative dominating financial markets, where some investors maintain that the U.S. economy is still too weak to allow the Federal Reserve to raise interest rates for the first time in almost a decade, and actual economic data.

Here's what he said:

In my view, there is a big disconnect between the current narrative in both equity and rates markets and the actual economic data. This economy is stronger than its reputation and for some reason many investors want to hold onto the 2009 story of “the economy is not good”. We are likely to reach full capacity over the coming 12 months and that is why Yellen, Fischer, and Dudley continue to talk about liftoff in 2015.

A fair amount of Sløk's data comes from the University of Michigan’s preliminary consumer sentiment index, in which the bottom third of the income scale projected their pay over the next year will increase by the most in more than a decade. Nearly 50 percent of respondents also said they expect good times for the economy over the next five years, up from 41 percent in September. Thus, Sløk has one thing to say to people calling for a sharp downturn: 

Think about this statistic next time someone talks to you about the declining participation rate, the lack of wage growth, and QE4. This is not an economy that is about to enter recession.

Despite the brightness highlighted by Sløk, the same UMich survey also showed evidence of a persistent bugbear in U.S. monetary policy; deflation. Respondents expected an inflation rate over the next five to 10 years of just 2.6 percent, a tie for lowest figure since 2002. That's not good for Fed Chair Yellen, as inflation has been stubbornly low for some time and members of the Federal Open Market Committee have voiced concerns over this time and time again

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