US Economy Flies into “Coffin Corner,” But We Don’t Mind!

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.

Core CPI

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%.

Total nonfarm payrolls

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.

Wages vs 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.

Real GDP per Capita

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?

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  15 comments for “US Economy Flies into “Coffin Corner,” But We Don’t Mind!

  1. robert h siddell jr says:

    The pilot has his parachute and intends to kill us all.

  2. J P Frogbottom says:

    Nobody knew what lay ahead when the Maestro cut rates, and a housing bubble ensued. Nobody knew what lay ahead when we cut interest rates down to zero – .25% under Helicopter Ben, nor the effects of QE.

    Now we find the economy slowing quickly, the time to have started raising rates long LONG past! Indebted people with effectively frozen wages still face ever mounting health costs, food costs, while an over paid electorate twiddles their thumbs, again failing to deliver a Federal budget. While we all know it is a joke, we never suspected it would be upon us. Now what to do???

  3. dove says:

    they can sacrifice dollar to save the stock market by Continue QE to infinity, Negative Interest Rate, bank bail in… then the stock market will be a blessing. Those who are out of the stock market and put money in the bank will loss their shirt.

    • Wolf Richter says:

      wait…. if you “sacrifice” the dollar, you’re also sacrificing all dollar-denominated assets, including stocks. Then everyone loses. Except those short the dollar.

      • d says:

        Short dollar, not yet but I will be soon made heaps from Benny’s Qe’S when short dollar and I picked the bottom perfectly.

        One of the advantages of trading accounts outside the us is some of them have a straight dollar index to trade which on shore US citizens are not allowed to do.

        One reason CB policys fail to do much is that in an interconnected world the major CB’S are a doling different things at different times.

        Imagine each state in the US with different fed policy’s at the same time.

        In a financially interconnected world that’s what you have.

        • Jerry Bear says:

          I believe QE is an example of what is called “creating fictitious capital”.

        • d says:

          The way it was done, almost.

          After QE 1 which stopped the descent into a 1929 style massive double dip depression (nobody can deny it did) the stimulus should have gone into infrastructure, which would have fueled the economy from the bottom, as FDR proved.

          Instead the stimulus went to the financial sector (Paper, Bonds Stocks) and stayed there, really doing nothing for main street, which is not much better off than it was in 09.

          20/20 hindsight is a wondrous thing. The global CB’S which their new chairmen, may look at. The last thing they will do is admit that people who had seen it before and advised to stimulate from the bottom at the time were correct and the fed/CB’S weren’t. ,

      • Nick says:

        Or….invest those inflated dollars in a growing developing market. Plenty in Africa, MENA or even Asia getting 5-8% growthrate, record strong USD exchange rate adds another 20% (or more).

    • Winston says:

      “Those who are out of the stock market and put money in the bank will loss their shirt.”

      Whereas those who have their money in equities won’t lose their shirts, AGAIN, when the markets crash AGAIN?

  4. Scooby says:

    I find it simply amazing that nobody is calculating in just how much Obamacare has contributed to the issue. Everyone I’ve talked to has had to set aside huge amounts of money to cover rising costs, premiums and deductibles.

    Seems to me that if Ocare was included, we’d have a better idea as to why we’re treading water than what’s already been re-hashed several times.

  5. Kreditanstalt says:

    But all you’ve given us is more Fed charts and government statistics.

    The measuring system ITSELF is dysfunctional and should be entirely disregarded.

    All one needs to do is open one’s eyes while walking the streets, reading between the lines in the media, watching the shops, the businesses, the people, the state of the infrastructure, the foot traffic in the malls. How many properties are ‘For Rent’? Are homesellers getting desperate yet? Are asking prices falling? (They are here)

    Do small businesses look busy? Or are there ‘dead flies in the windows’? It does seem that small businesses are hanging on by their fingernails…

    Logging, the mainstay here, appears to be slowing: fewer trucks on the roads. Smaller timber (they’re desperate!). Layoffs from oil and gas. Fewer big, expensive new pickups in the mill and dockyard parking lots. Less active logging on new clearcuts. Fewer ships loading raw logs (used to be nearly weekly; now, one in the past month).

    The discount supermarket/superstore has ever more cars in their parking lot. And I notice fewer and fewer at the expensive, unionized full-service supermarkets. (Even walmart traffic appears to be down versus last year.)

    2/3 of my neighbourhood consists of retirees, service-sector-dependent low-wage employees or native Indians and welfare recipients on government money. (Walmart is always VERY busy right after check day!)

    What use are government’s faked and irrelevant macro-statistics – which measure only the increasingly few “big companies” that fewer and fewer people actually work for anyway?

    This economy LOOKS and FEELS very sick.

    • Jerry Bear says:

      Look at it this way. Money is the life blood of the economy. It has to circulate freely to have a healthy economy. But for 15 years or more now we have had a tremendous transfer of wealth from the people to the few at the top, the amount of money available to circulate through the economy steadily shrinks. Small business shrivels as people have less and less available to spend. Small towns shrivel as their business base dies. One of America’s cities is reduced to a shell and others are sure to follow. The devastation is comparable to some great natural disaster like an earthquake or hurricane, but the destruction is due entirely to economic causes. The flow of money is the life blood of society and what impedes that flow has as dire consequences for the health of that society as something impeding the flow of blood in your body would have for your health.

    • RandyD says:

      I’m not an economist but I do know something about the Census Bureau, the statistics collection agency for the US. The data the BOC collects is erroneous and of poor quality. To base any decisions on the results of their door to door interviews is stupid. The US simply makes up the numbers that they want to show the world. Unemployment is much higher than the official statistics. Inflation is at least 8% for the Joe Blow trying to eek out a living with a small family. The cost of medical care is skyrocketing. The Congressional Budget Office is a total joke and the corruption in government is rampant. Both parties are to blame however I want to personally thank the Democrats for finally forcing us to see the total bullshit our government has become. Without Obama we’d still be sliding along with the false notion that the Republicans really do care for sound economics. They’re all crooks!

  6. Nick Kelly says:

    Nothing to do with the subject but a note on ‘flying into a coffin corner’
    Some readers may not be aware that a plane can fly into a canyon it can’t fly out of and therefore crashes. A plane has no reverse, it can only turn to avoid a looming cliff. But if it has flown into a ‘box canyon’ below a certain size, it can’t turn sharply enough to avoid the sides.

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