Summary: Last week we gave a high-level look at the US economy. Here is the fourth in a series in which we drill down to see the trends playing out today, attempting to foresee what lies ahead. We see big hopes, as yet unfulfilled. The next post examines the strong aspects of the US economy.
Contents
- Expecting the boom!
- Asset Prices are rising!
- Economic trends
- John Hussman’s summary
- Other posts in this series
- For More Information
- Perhaps just as reliable as our present experts
(1) Expecting the boom!
GDP has grown at a bit over 2% for the past 3 years, stall speed below which the economy risks falling into recession. The Fed and the CBO see faster growth ahead, accellerating through 2016. As does Wall Street, per the Fed Survey of Professional Forecasters, 10 May 2013 (shown below). Hence the recent rise in interest rates, as investors can taste the coming boom and act now.
That’s the pattern of this cycle. Economists believe that monetary stimulus must work, so they expect the recovery to arrive soon. In 2011. No, in 2012. No, in 2013. As seen in the Fed survey forecasts of 2013 GDP:
- in Q1 2010: 3.1%
- in Q1 2011: 3.0%
- in Q1 2012: 2.7%
- in Q2 2013: 2.0%
- actual: probably something less than expected. Q1 was 1.77%, est for Q2 is 1.8%.
(2) Asset Prices are rising!
Prices of real estate and equities are booming! This has almost no effect on the US economy. The top 10% own almost everything, and their propensity to spend changes only little with more wealth. There have been brief periods when the masses benefited from asset booms, such as the tech and housing bubbles. Those were dreams. The Fed would have to continue QE3 for a long time before they boost asset prices to the point where many Americans trade up to larger homes, borrow against their home equity, or speculate on the stock market.
Why the focus on these prices? Reading the news media, one might believe these were the absolutely critical economic variables. That’s because those industries are the source of information about the economy. Real estate brokers tells us that existing home sales — the source of their commissions — substantially affect the broad economy, which is obviously daft. Wall Street tells us that stock prices affect the economy through the “wealth effect”, despite the little evidence and less logic for this theory.
(3) Economic Trends
The data is not difficult to interpret. But it tells us only about the present, not the future.
Note that these graphs show different measures: some are totals, some are rates of change — chosen to best highlight each trend. They give different perspectives on our large, complex, ever-changing economy.
(a) Employment: YoY % change in the BLS Establishment Survey, NSA
Slow but steady growth since late 2011. The raet of growth peaked in January 2012 at just under 2%, and since then has slowly decelerated (i.e., slowing rate of growth) — despite frequent predictions since 2009 that job growth will zoom very soon.
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(b) Purchasing managers have their fingers on the pulse of the US economy
What do they say? We turn to the monthly survey by the Institute of Supply Management (ISM). Here is their May report (below 50 is contraction):
“The PMI™ registered 49%, a decrease of 1.7 percentage points from April’s reading of 50.7%, indicating contraction in manufacturing for the first time since November 2012 and only the second time since July 2009. This month’s PMI™ reading is at its lowest level since June 2009, when it registered 45.8%. The New Orders Index decreased in May by 3.5 percentage points to 48.8%, and the Production Index decreased by 4.9 percentage points to 48.6%.
Let’s look at the trend. It peaked in February 2011, and has slowed since then.
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A narrower but stronger leading indicator is the Purchasing Mangers’ Index of New Orders. It has a roughly similar trend as the broad PMI.
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(c) Business borrowing: a driver of growth
Total outstanding Commercial Paper (asset-backed CP plus CP of non-financial companies), NSA. This peaked in July 2010.
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Total business loans outstand from commercial banks (NSA)
This peaked in Q3 of 2011, fell, and has recovered..
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(d) Exports of good and services
Contrary to what you’re often told, US exports have been growing as a share of GDP (i.e., growing faster than GDP) since WWII.
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But since Q2 of 2010 the YoY rate of export growth is slowing, as the US dollar rises and the world economy slows.
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(4) Update: John Hussman’s summary
Excerpt from the July 1 weekly report by John Hussman, former Professor of Economics at U-MI, now manager of Hussman Funds.
Even if the Fed reduces the pace of quantitative easing, there is virtually no chance that short-term interest rates will be raised in the foreseeable future.
… Based on a broad range of measures, economic activity continues to waver in a narrow band that has historically marked the border between expansion and recession. While quantitative easing has produced enormous financial distortion and very little growth, it has been successful – at least in fits and starts – in kicking the economic can along this band for a few months at a time. Historically, recessions have usually followed deterioration to this band fairly quickly. The QE-induced delay in the present cycle has put a temporary cloud over economists like Lakshman Achuthan at ECRI and I, despite accurately warning of the 2000-2001 and 2007-2008 recessions.
It’s probably needless to say that I continue to view recession risk as palpable.
(5) Other posts in this series
- The April jobs report shows continued slow growth, bought at great cost, May 2013
- The greatest monetary experiment, ever, June 2013
- Status report on the US economy. Recession? Collapse?, 25 June 2013
- Look at the US economy. Do you see the coming boom?
- Good News About the US Economy
(6) For More Information
Posts about the condition of and trends in the US economy:
- What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!, September 2012
- The lost history of money, an antidote to the myths, December 2012
- Monetary Magic applied to cure America’s economic ills, February 2013
- The World of Wonders: Everybody Goes Nuts Together, February 2013
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(6) Perhaps just as reliable a solution as relying our present experts
Future generations might say that we might as well have relied on the Blue Fairy as Monetary Magic.
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The beauty in the above picture might know more economics than the current president.
Thanks for the graphs. I see them all the time from the Federal Reserve and then some. The graphs paint a better picture than the delusional thinking of Obama and congress. They tend to ignore the truth about statistics. “Statistics is like a bikini. What they reveal is suggestive and what they conceal is vital.”
Ron
(1). I will stick up for our Presidents, few or none of whom knew any more about economics than Obama.
Expecting the President to know economics is asking a bit much. A president must make decisions requiring knowledge of economics, geopolitics, agriculture, criminal justice, the environment, the law, international trade, management of large organizations, etc.
He is a political technician. That is his job, a large complex one requiring many skills. He has experts to advise him on the particulars of the thousand aspects of public policy he must manage.
If a polymath ran for President, do you believe we would elect him (or her)?
(2). Delusional thinking
I sympathize with this view. But optimism is a valuable personality trait, for which I cannot criticize.
On Wall Street optimism is a professional necessity. The great economist Gary Shilling was fired twice as Chief Economist of Merrill Lynch for being bearish and correct. More recently, Merrill’s Chief Economist David Rosenberg was bearish and correct about the 2008 crash. He now works for a small firm in Toronto.
Most economists are now optimistic by theory, in awe of the massive stimulus by the Fed, BoJ, and ECB. They might be wrong, but it is not delusional.
“If a polymath ran for President, do you believe we would elect him (or her)?
Let’s put this one to a test.
I’ll start the write in campaign for FM right now.
America has been blessed with leaders of undeserved greatness. Not just giants like Washington, Adam, Jefferson, Lincoln, Teddy R, and FDR.
But men like James A. Garfield, who not only knew Greek and Latin, but used his ambidexterity to write both at the same time while carrying on a conversation on English.
I had a brief political career in GOP, failed as not a useful tool to our plutocrat rulers.
Mr Rosenberg was indeed bearish and correct about the 2008 crash and while he took flak for some time for those bearish views, he resigned and turned down a lucrative counter offer to remain at Merrill Lynch (by that time Bank Of American Merrill Lynch) in order to return to his home and native land, where he is employed as chief economist at Gluskin Sheff and Associates. Reportedly, he enjoys no longer having to endure weekly commutes between Manhattan and his home in Toronto after having done so for seven years.
Thank you for that backstory about Rosenberg!
Quite rare for someone to walk away from a post at the top of his profession.
“Prices of real estate and equities are booming! This has almost no effect on the US economy.”
I think Fabius Maximus is dismissing real estate too quickly.
Many people spend 30%-50% of their income on housing, and the industry makes up about 1/8 of the economy.
Maybe the price levels by themselves don’t mean a lot, but to say they mean nothing is obviously daft.
Although it might not be true everywhere, in the part of the country where I live, the local boom in real estate *is* substantially affecting the way businesses and households plan for the future.
Thank you for bringing this up. I was not clear. The post was already too long, and explaining that would have (I thought) become too technical.
Asset prices are by themselves mostly signals — with little economic effect. They can, under the right circumstances, drive actual economic trends. For real estate, new construction ( see tomorrow’s post). For stock prices, offerings of new stock. For both, borrowing against rising asset vales.
But in general, the effect of asset price is often grossly exaggerated by the news media — and ignores the fact that it is other things, not prices, which create growth.
Look at today’s circumstances. Rising home prices *depress* affordability, and first time home buyers are a major driver of housing demand (far more important than people trading up). That might account in part for the still low levels of real estate construction (see tomorrow’s post).
Rents and construction probably tell us far more about residential real estate. But neither puts money in real estate agents’ pockets, and so get too little attention from the NRA.
More broadly, America has become too focused on asset prices. Realistically, as Fed policy for many years appears to have been to encourage them. It is important to see that this is extraordinary, historically.
It make sense that rising asset prices have little to do with the state of the economy. Otherwise, GDP figures would include items that are resold, like stocks and real estate. It concerns me that much of the money being injected into the economy is feeding asset prices instead of the production of new goods and services. It suggests that little has changed and the age of financial bubbles will go on. Image what the country would be capable of if the financial industry served the real economy rather than itself.
Update: John Hussman’s summary
Excerpt from the July 1 weekly report by John Hussman, former Professor of Economics at U-MI, now manager of Hussman Funds.
It is indeed quite rare to walk away from a high profile post. One must also consider the personal sacrifices that are made in order to remain in high profile positions long term. It was widely assumed that Rosenberg was American and and a United States resident. He was not. He maintained his home in Canada which is where his family remained.
I can appreciate his decision to return to Toronto. I have visited almost every major city in the US and Canada, and Toronto is one of my favorites.