By Larry Kummer, Editor of Fabius Maximus, a multi-author website with a focus on geopolitics:
Every year, Wall Street economists see a spike in a few indicators and announce an imminent boom. This slowly fades away, leaving another year of slow growth — preventing full recovery from the crash. Readers of the FM website have seen this accurately reported since the crash, avoiding the boom-bust cycle of of crushed euphoria. Here’s a new update, as we start another slowing cycle. Eventually, inevitably, we will hit a bump that pushes slow growth to outright decline. Then, when we no longer can prepare, economic news will become exciting.
Seeing the US economy as it is
Slowly economists see the dilemma facing the Fed’s governors): they’re desperate to raise interest rates, but the US economy can grow only slowly, and so remains vulnerable to a shock that knocks it into a recession (probably a severe downturn, given its weakness).
Seven years of the Fed’s Zero Interest Rate Policy (ZIRP, since December 2008) have distorted America’s large and dysfunctional capital markets. Not just in the obvious bubbles in the stock market (e.g, biotech and social media stocks), in equity investors’ mad belief that bad news is good news (small cap stocks up 5% after the ugly jobs data), but also in ways we can only dimly see today.
Worse, ZIRP means that in the next recession the Fed will have to take America to negative interest rates — with consequences impossible to foresee (so far only small nations have crossed this Rubicon). Long experience in the US, Europe, and Japan has proven the ineffectiveness of their only other tool, quantitative easing.
On the other hand, the data suggests that raising rates now would be insane: near-zero inflation, a too-strong US dollar (already depressing exports), and slow growth (even slower on a per capita basis).
We’re in the coffin corner: can’t accelerate, can’t continue at this speed, and can’t afford to decelerate. All that maintains public confidence is the happy talk of the Fed governors and Wall Street’s gurus, at the long-term cost of destroying their credibility when it proves false. The only hint the Fed has given us is the slow downward ratchet in their forecast of US long-term growth.
What might spark a crisis?
Japan continues to teeter on the edge of a downward spiral, as the delusional promises of Abenomics prove chimerical. China lurches into the bust phase following their multi-decade boom, after its leaders’ failure to take any meaningful corrective action. The long fall of commodity prices depresses the economies of many emerging nations, creating ripples of depression and deflation to destabilize the world.
What to watch for signs of a crisis? There are no individually always reliable leading indicators (which is why the consensus of economists has never predicted a recession). I recommend watching the twin drivers (sales of autos and new homes) plus the wholesalers’ inventory/sales ratio. So far the first two remain strong, with inventories at worrisome high levels.
Graphs: see the pulse of America’s economy
Here is an eagles’ eye view of the trends in the US economy. This only hints at what comes next.
Deflation is poison for an economy with high levels of private sector debt, like ours. The Fed sensibly targets a minimum of 2% inflation, giving itself time to react before a deflationary shock. The CPI has been near zero during 2015 (YoY) — mocking conservatives who predicted rising inflation, or even hyperinflation. But core inflation (CPI not including food and energy) provides a better indication of the trend. It’s flashing yellow (below the floor), discouraging news for those seeking to increase interest rates.
Jobs and wages
Jobs and wages provide a powerful (but lagging) indication of the economy’s health. Both show an economy unable to accelerate to “normal” levels after four years of recovery and multiple rounds of stimulus. Perhaps this is the new normal (aka secular stagnation). Payrolls have grown at roughly 2%, while the working age population has growth at roughly 0.5%.
Wages tell the same story, with the majority of workers getting almost none of the gains from America’s rising productivity. Hourly wages for these workers (80% of all employees) have grown only slightly faster than inflation.
The bottom line
Per capital real GDP is the bottom line of the US economy from the perspective of its citizens. This is the slowest recovery in the post-WWII era (considering the 1980-83 Volcker recession as one event). We have been unable to break through the two percent ceiling; the next slowing cycle has begun.
By Larry Kummer, Editor of Fabius Maximus
Again the US stock market skates on the edge of an abyss, this time without the Fed holding a safety net. We’ve seen this combination of peaking economy and overvalued stocks; it never ends well. Too bad we don’t learn from history. But I suspect we’ll soon get another opportunity. Read… The Stock Market Gives us 2 Classic Warnings. Will We Listen?