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.”

 

in here somewhereIf 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.

 

1-Labor Force ParticipationUS labor force participation rate: flashback to the 1970s – click to enlarge.

 

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, it sank 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”).

 

2-food stampsFederal government spending on food stamps (a.k.a. “supplemental nutrition assistance program” in bureaucratese) – click to enlarge.

 

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.

 

economy-duct-tapeMaybe 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.

 

3-rig countOne 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.

 

4-auto inventories to salesUS 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.

 

Lower_for_longer_cartoon_05.28.2015_largeA 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 latest prints from China, 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.).

 

5-global-manufacturingGlobal manufacturing: in a downtrend since 2014 (i.e., since the “tapering” and eventual end of QE3) – click to enlarge.

 

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.

 

popularityShe’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).

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com