Not just a picture, but a picture in perspective:
Nothing really has happened since the economic peak of the 1990s business cycle, apart from a decline.
Total new manufacturing orders rose 1.56% in February following declines in January (1.03%) and December (2%). Orders are 0.6% below February 2013 levels. The bigger picture is of the course the more worrying:
And the bigger picture is that historically declines in orders have always been accompanied by declines in the Federal Funds Rate. I will not need to go too far into the fact that rates have not risen as they usually do. So why is the Fed tapering? Well, while asset prices have risen fine and dandy, underlying economic growth has not similarly responded.
And we see the same picture with respect to producer price inflation:
If QE has not worked and interest rates are as low as they can go and sovereign debt is as high as it can go, where do we go from here?
I was just looking through the GDP revisions: real growth was higher because a decline in the GDP deflator and nominal GDP fell from the last revision. Nominal net exports also fell while health care expenditure was a significant upward revision.
My concern rests with the underlying growth rate of the US economy, especially domestic demand and the PCE component in particular. I have referenced this issue before.
If we have income inequality we are likely to have an increasingly asset focussed capitalist system. That is the demand for non productive assets and securitised indirect investment in productive capital should increase as demand for goods and services as a proportion of national income declines.
Capitalism is not about wealth, it is about capital and its continuous productive employment. Increasing inequality combined with rising wealth in non productive assets is essentially anathema to a structurally sound capitalist framework.
A big part of the problem is that key elements of the operational economic model, that which determines revenues and that which determine costs, have become disassociated from each other – marginal costs and marginal revenues need to be related. Additionally the model itself is also suffering from leakage as less profit is reinvested and earnings are increasingly distributed to those who will accumulate and not eventually consume, with consequences for asset prices, which themselves have a feedback loop into the economic engine.
I was reading a couple of posts on FT’s Alphaville (Robots won’t make you rich for long & The UK’s squeezed bottom, charted) and a Stiglitz piece on Project Syndicate (Stagnation by Design). The second Alphaville post provided a link to an important document on income disparity, produced by the Resolution foundation.
I disagreed with the gist of the Robots won’t make you richer (a repost to Martin Wolfe’s Enslave the robots and free the poor), largely because the post confuses the price of an asset in the stock market (GM stock) with the value of the actual capital invested to produce the goods and earn the profits, but I felt that there was a thread between the subject matter of these different views that was worth expanding on.
This is the third perspective dealing with concerns over US employment and related US growth dynamics:
A great deal of the growth in employment over the last few decades has been concentrated in the health and education sectors. Student debt has become a major problem post the onset of the current financial crisis and health care has likewise become, over time, a tremendous economic cost and a structural barrier to growth.
Increases in private payroll employment are weak in historical terms. But if only that were the only issue: weak population growth, falling participation rates, elevated part time employment and continued weakness in self employed categories raise serious concerns for growth dynamics.
The last two employment reports have been casting a shadow over the strength of the economic recovery.
Just focussing on the last two months of data probably does some disservice to the underlying fundamentals. October and November were relatively strong months, and although we can see a slowing trend (blue line, 4 month average), the last two months may be more correctly viewed as an adjustment. The weather may or may not have had an impact.
I will touch on some of my views regarding the significance of all this in a later post and there is a disturbing significance.
Q4 US GDP (provisional estimate) was helped by a) an increase in personal consumption expenditure that may have more to do with earlier weakness than a strengthening trend, b) a continued rise in inventories and c) a significant increase in net exports (close to 40% of the increase in GDP).
I am just going through the Q4 data and I thought the following was interesting:
Very briefly, I just wanted to add a quick data point to “the US has completed its debt rebalancing argument”. In recent posts I made my views on this point known with respect to debt dynamics, but it is worthwhile looking at historical personal consumption expenditures as a % of GDP:
In a recent post on employment and Q3 US GDP, I made the point that inventories could be impacting employment data. Inventories are also likely impacting PMIs (new orders, employment, production components) and other data points, so I would be wary of reading too much into recent data.
Ed Yardeni also makes some valid points re inventories in his latest post -Another Soft Patch Ahead- (excerpt)
Financial sector debt (and as noted consumer debt) has fallen significantly since the crisis:
Yet, if we look at the financial sector assets with respect to non financial sector credit market debt, we start to see an interesting picture:
If you look at debt service ratios (Fed data), they are close to historical lows:
But what if we adjust for low real earnings growth and lower savings rates (source data BEA)?
Recent commentary from a number of sources suggests that the US balance sheet recession is over.
Perhaps if you just look at the context of the last decade, then yes, consumer debt has fallen back from the build up that immediately preceded the crisis:
Expectations for 2014 may need to be tempered against a weak/weakening Eurozone. Up until today’s flash Markit PMI, European economic fundamentals have weakened considerably since the summer. But even the positive flash PMI data is nothing to write home about:
From the Markit report:“On the downside, the PMI is signalling a mere 0.2% expansion of GDP in the fourth quarter, suggesting the recovery remains both weak and fragile. “The upturn is also uneven. Growth is concentrated in manufacturing, where rising exports have helped push growth of the sector to the fastest for two and a half years, while weak domestic demand led to a further slowing in service sector growth.
Two recent blogs on the FT’s Alphaville site discuss this issue:
At one level (the global whole) we likely have sufficient latent demand and supply dynamics to deliver the growth we need to maintain full employment levels and quite possibly to accommodate global debt – but that is all potential.
Zero Hedge showcases Hugh Hendry’s December news letter: it is worth reading. He is correct in many of his observations on past events and possibly so with respect to near term global monetary policy. The question he avoids of course, is “where does the madness end?”, because that part of the cycle that ended with the 2007 – 2009 crisis is starting to look like a lesser version of the one that Hendry envisions to be our immediate future. He is clearly not a happy bunny…. The dynamics are nevertheless core!
US employment data looks to be perched atop an inventory cycle, and given that the recent rise in inventories is high historically, recent employment data may well not be as strong an indicator of the health of the economy as some may think.
The following chart shows the real change in inventory levels as noted in the BEA quarterly GDP accounts:
The revision to Q3 data came principally from a rise in inventories over and above those originally reported. In fact the revision to inventories swamped the upward revision to GDP on both a nominal and a real basis.
From the start of the crisis it was clear that consumer demand was going to be hit because of debt, and as we moved throughout the crisis through high unemployment and low wage growth. If we were to just look at PCE, you could say the US was close to or in a recession.
“Should the US increase its minimum wage?”
In a competitive market place it is unlikely that we would see the current large disparity between incomes and wealth, although we would see disparity naturally. There is just no way that the pool of candidates able to run the few hundred of our largest companies is as small as it appears (human beings are de facto mass clones of each other) – in a competitive market place the pool of those capable of running a company would drive the price down.
If you knew where to look, the late 1990s stock market boom and the developing build in debt was easy to spot, but the timing of the unwind was much more difficult. You never knew how long asset prices were going to spiral higher even though you knew the pricing risks – the higher the market for a given economic profile the lower the future return.
Nevertheless, you knew when the trigger came that asset prices would react. This was the same with the build up of debt (asset focussed money supply growth) and structural economic imbalances up to 2007: if you were aware of the magnitude you would have been aware of the risks.
There are a number of reasons why Q3 GDP came in at its highest level for some time. One of them is a fairly large increase in inventories:
If we exclude inventories the trend in GDP growth is one of lower highs and higher lows – in other words boundaries of growth are narrowing, which is interesting when you assess the historical boundaries: