A Lack of “V”
After the February jobs report, President Obama said “America’s pretty darn great right now.” He then went on to disparage the “doomsday rhetoric” of the Republicans, which he said was pure “fantasy.
I think that there is a good chance that this will enter the Hall of Fame of miss-timed statements, right up there with this jewel from Ben Bernanke in March 2007: “At this juncture, however, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.”
If you look hard enough, you’ll find it…
It is about time for an update on the US economy. It will be a bit pointillist, but I will try to give some backing.
My basic view of the US economy is the following: We have never had a proper recovery from the global financial crisis (“GFC”). Although GDP is above its peak prior to the GFC, the rebound has been very muted, particularly given the sharpness of the fall, which has historically produced a “v-shaped” rebound. There has been no “v” in this reco-ery.
The jobs growth, although seemingly impressive in terms of the headline unemployment rate, has remained un-validated in a whole variety of ways. The labor force participation rate, which normally would increase in the face of improved job prospects, has remained very low in a way that cannot be fully explained by demographics.
Wage growth has been anemic, including a negative print in the hourly wages and hours worked in the report just lauded by Obama. Productivity has also been poor, even though this statistic normally responds in a highly pro-cyclical manner: in the 4th quarter of last year,at one of the fastest rates in decades.
As I also pointed out in the “A Job Is Not a Job Is Not a Job” section here, much of the employment growth has been in low-earning and low-hours positions, a trend that continued with the February report. Finally, the allegedly booming jobs market has not been validated by a sharp fall in, for example, the number of families participating in the Supplemental Nutrition Assistance Program (“food stamps”).
As David Stockman has pointed out in another of his lacerating comments about the jobs scene and the official statistics, the reported figures are subject to a vast amount of estimation and seasonal and other adjustments. Even in the most stable of times, these make the numbers suspect.
At cyclical turning points, such as we may now be experiencing, they go from the suspect to the indicted; they are frequently massively revised downward after the smoke has cleared. This fact, combined with the lagging nature of employment, means that we should not be overly cheered by the latest figures.
Stockman and others tend to look at the payroll withholding taxes sent to the IRS as being a better indicator of current trends in employment, since these figures are not distorted by estimation and they proportionately reflect part-time and low-income employment.
As the chart about midway through the Stockman article shows, these figures have been flat in nominal terms, indicating that real labor input has been falling since the end of last year. This, to me, is some of the strongest evidence against the White House version of Everything is Awesome.
Finally, we have one of the biggest counter-indicators of all, which is the strong showing of political outliers such as Trump and Sanders. This is not the behavior of an electorate basking in a “pretty darn great” economy.
Maybe some more duct tape is needed….
Cartoon by Brian Farrington
Pockets of Bubbliness
The recovery hasn’t been validated in other ways, too. Capital expenditure has been very weak, something that we also would not have expected. Corporate earnings have increased greatly from the bottom, but this trend stopped last year and the trailing figures have now turned sharply downward.
The overall weakness of the US economy since the GFC has been partially masked by pockets of bubbliness. Like the tide, these are now in full retreat, leaving an economy that looks like a bunch of unclothed bathers.
The fracking boom, which lived off cheap credit and accounted for a large part of the growth of high-paying jobs and capital expenditure, is now in full rout along with the junk bond market that drove it. Record numbers of shale rigs are idled.
One area in which bubble activities have deflated rapidly
Likewise technology, which converted abundant VC funding into demand for software engineers, San Francisco and Silicon Valley real estate, and technology equipment, none of which could have been paid for out of non-existent earnings. This spigot has now been turned off and the pink slips are flying.
The automobile industry has been a bright spot on the personal consumption side, with record-high sales last year, but much of this has been financially engineered through looser auto loan underwriting and a surge of leasing. We all know how this ends.
It now looks like lenders have scraped the bottom of the credit barrel, which means that this one-time boost to consumption is over: recent inventory figures, which show the highest level of auto inventory to sales since the GFC, indicate that the industry may have gotten the memo late. Again. In fact, the inventory to sales ratio for the entire US economy is also the highest number since the GFC.
US automotive inventories to sales ratio
The commodities boom, manufactured by excess credit in China and directly in the countries that produced the stuff, died a long time ago. This drove a lot of the demand in the US capital goods sector. Companies such as Caterpillar have now experienced 34 straight months of declining sales. So much for the “renaissance” of US manufacturing.
Our old favorite, real estate (particularly in coastal or “gateway” cities around the world), had also been bubbly. This is now over. As I indicated before, this canary in the coal mine is now looking decidedly sickly. Upper end house markets are turning down in prices like London and New York City, and undoubtedly with a vengeance in San Francisco and Silicon Valley.
My contacts within the UK commercial real estate market indicate that rental growth and cap rate compression have come to a full stop, and the UK institutions are looking to dump their real estate holdings onto backward-looking foreigners.
A minute of silence for those no longer with us…
Weakness Around the World
The US can, of course, expect absolutely no help from the rest of the world. Seventy percent of the manufacturing PMIs around the world declined in February. International trade is collapsing, including the , which showed sharp falls in exports and imports, numbers validated by the figures coming out of other countries in the region. This is another sickly canary.
The emerging markets are in a shambles, led by the former BRIC stars. Japan goes in and out of recession with the blink of an eye. Europe is growing slowly, at best, with some major black swans circling (Brexit, the migrant crisis, populist parties, unresolved Greek debt issues, unstable or un-formable governments, continued rumblings out of the banks, etc.).
I put the probability of a US recession this year at 50% to 75%. If it weren’t for the possibility of strong consumption growth, aided by low energy prices, I would put the probability even higher. But I don’t think that even this will be enough since the added fillip of increased borrowing is unavailable.
The recession should be strongly manifest just at about the time US voters are entering the polling booth. The Democrats got their timing right in the 1992 and 2008 elections, but I don’t think that they will be lucky this time around. Hillary Clinton may come to regret her decision to run on Obama’s economic record.
She’s in a mild uptrend…
Cartoon by Marshall Ramsey
Charts by: St. Louis Federal Reserve Research, Baker Hughes / Bonner and Partners, Zerohedge, Bloomberg
Chart and image captions by PT
This article was originally posted at Economic Man.
Roger Barris is an American who has lived in Europe for over 20 years, now based in the UK. Although basically retired now, he previously had senior positions at Goldman Sachs, Deutsche Bank, Merrill Lynch and his own firm, initially in structured finance and latterly in principal and fiduciary investing, focussing on real estate. He has a BA in Economics from Bowdoin College (summa cum laude) and an MBA in Finance from the University of Michigan (highest honors).
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- Silver Speculators Gone Wild – Precious Metals Supply and Demand
Silver Gets Frisky Last week, the prices of the metals had been up Sunday night but were slowly sliding all week — until Friday at 7:00am Arizona time (14:00 in London). Then the price of silver took off like a silver-speculator-fueled-rocket. It went from $16.68 to $17.25, or 3.4% in two hours. March Silver, 30 min. candles. Someone certainly piled in last Friday... - click to enlarge. What does it mean? We don’t know. We would bet an ounce of fine gold against a...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...