Look at the US economy. Do you see the coming boom?

Larry Kummer, Editor

13 years ago

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.

(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.

A narrower but stronger leading indicator is the Purchasing Mangers’ Index of New Orders. It has a roughly similar trend as the broad PMI.

Total outstanding Commercial Paper (asset-backed CP plus CP of non-financial companies), NSA. This peaked in July 2010.

Asset-backed CP + CP of non-financial companies

Total business loans outstand from commercial banks (NSA)

This peaked in Q3 of 2011, fell, and has recovered..

(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.

But since Q2 of 2010 the YoY rate of export growth is slowing, as the US dollar rises and the world economy slows.

(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