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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

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

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist