Summary: After a near-recessionary 4th quarter (and the start of the extraordinary QE3), the US economy slowly accelerated during the first two quarters of 2013. Much depends on that growth continuing. With monetary and fiscal policy already running at full throttle, another slump would force ugly choices. Today we survey the confident (but shrinking) forecasts of economists and the unexciting recent data.
“Physicians teach that there are three kinds of spirits: animal, vital, and natural. The animal spirit has his seat in the brain … called animal because it is the first instrument of the soul…”
— Bartholomew Traheron’s The most Excellent Works of Surgery by John Vigon (1543)
- Status report on the economy
- What the professionals expect
- Other posts in this series: waiting for the boom!
- For more information about the US economy
- Sunrise will come eventually
(1) Status report on the economy
“The Increase of our Foreign Trade … from which has risen all those Animal Spirits, those Springs of Riches that has enabled us to spend so many millions for the preservation of our Liberties.”
— William Wood’s “Survey of Trade” (1719)
Q2 GDP was +1.7%, below the 2.0% “stall speed”. Q3 is forecast to be +2.3% and Q4 a rosy +2.7% (see section 2). The data from June and July shows few signs of an acceleration in growth. In fact there are hints that the economy is slowing. And the doubling of the 10 year treasury yield has not yet had its full contractionary impact.
On the other hand, confidence surveys remain strong — some are growing stronger — which gives comfort to the optimists, such as builders’ confidence, consumers’ confidence, purchasing managers’ confidence. “Confidence” is a proxy for Keynes “animal spirits”. It’s become a new obsession of economists, and the foundation for belief in the stimulative powers of quantitative easing.
Since I lack confidence in confidence surveys as a measure of animal spirits, let’s look at some hard data: coincident indicators of economic activity. These show where the economy was, and what people did rather than what they say they will do.
(a) Freight traffic: slow growth
Traffic is a crude but effective measure of economic activity.
- US Dept of Transport Freight index down 0.2% SA in June (up 1.8% YoY SA), ~ unchanged from level in March.
- Trucking tonnage up 0.1% SA in June, down 0.4% in July (up 4.7% YoY SA).
- Rail carloads in July were up 0.8% YoY, but up roughly 3% ex-declines in coal and grain carloads.
(b) Credit: stagnant
Credit growth long has been a reliable indicator of US economic growth. Look at the YTD numbers in these kinds of lending, per weekly St Louis Fed report:
- bank credit ~ unchanged
- loans & leases up ~ 0.5%
- non-fin commercial paper ~ unchanged
- asset backed commercial paper down ~10%+
One type of credit is zooming:
- NYSE margin debt for July was up 38% YoY.
(c) Consumer Loans: growing at a steady rate
Consumer loans excluding Federal loans (which are college loans) through June, per the Fed G19 report. Consumer lending growth has been an reliable indicator, especially since 1980 — although perhaps less so in the future due to demographic change and increased inequality.
- YTD through June fell at 10% of the YTD 2012 rate, as deleveraging slowed to a crawl
- June YoY up 5.8% NSA
- June MoM up 5.9% SA annualized
This is important since economists expect that consumer borrowing will grow faster than income growth, boosting spending in the second half of this year.
(d) Housing starts: slowing fast
Home construction is by far the largest effect of housing on current economic growth. US new home sales for July from the Census:
- July YoY up 6% NSA
- YTD through July up 22% YoY SA (spiked up early this year, then slowed fast)
- July MoM down 13% SA annualized
Starts and applications for a mortgage to purchase are also weak. This should not have surprised anyone. Increase the home price by 10% and rates by 1% to 4.5% => the monthly payment on a 30-year fixed mortgage increases by almost one-fourth. The downpayment, of course, increases by 10% as well.
(e) Manufacturing: slowing
These are a leading indicator. Here are the new orders numbers from the Advance Manufacturing report for July from the Census:
- YTD through July up 3.3% YoY NSA
- July YoY up 9.7% NSA
- July MoM down 7.5% SA annualized excluding volatile transportation orders
(f) Global data: trade
The global data is also mixed, with manufacturing strengthening around the world. A review of data is beyond the scope of this post, but here is one indicator that is little known but quite useful: CPB World Trade Monitor for June 2013:
“Based on preliminary data, the volume of world trade decreased 0.5% in June from the previous month, following a 0.9% decline in May (initial estimate: minus 0.3%). Import and export volumes rose in advanced economies, while they contracted in emerging economies. The declines were most pronounced in emerging Asia.”
(2) What the professionals expect
“Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits — a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
— From Keynes The General Theory of Employment, Interest and Money (1936)
Much depends on the acceleration continuing that of the past three quarters: Q4 real GDP SAAR was +0.1%, Q1 was +1.1%, Q2 was +1.7% (they expect a revision on Thursday to +2.2). As has been the pattern since 2009, economists’ forecasts start off exuberant but drop as time passes. A year ago…
- 2013 was to be +2.1%, now expected to be +1.5%;
- 2014 was to be +2.7%, now +2.6%;
- 2015 was to be +3.1%, now +2.9%.
In January 2012 the Fed staff forecast for 2013 GDP was +2.8 – 3.2%. We’re now looking at half that growth, and estimates are still falling. But economists remain confident of a strong Q4 of this year, gaining strength through 2015.
From the Philadelphia Fed Survey of Professional Forecasters, 18 August 2013:
Another growth slump, like that following the strong growth of Q4 2011 (+4.9%) but from the current low level would put the economy at risk of recession. The 2012 slump was fought with the extraordinary QE3. What could reverse yet another slump, with monetary policy already at overdrive and US deficits still high?
To guess what comes next I recommend consulting your favorite economist, or a Ouija Board. The Q4 2007 Survey of Professional Forecasters, on the brink of the worst recession since the Depression, foretold accelerating growth through 2008 — with Q4 2008 GDP up 2.8%. It was down 8.3%.
Now for the worse news: normal forecasting tools might not work reliably after six years of government policy actions to stimulate the economy (the first interest rate cut was to 4.75% in September 2007 and Bush Jr’s fiscal stimulus bill was signed February 2008).
(3) Other posts in this series: waiting for the boom!
- The greatest monetary experiment, ever, 20 June 2013
- Status report on the US economy. Recession? Collapse?,
25 June 2013
- Look at the US economy. Do you see the coming boom?,
1 July 2013
- Good news about the US economy!, 2 July 2013
- The June jobs report: continued slow growth bought at a high cost, 5 July 2013
- A look at the state of the US economy. Join me in confusion!,
13 July 2013
- Is there a recession looming in our future? Let’s review the evidence., 2 August 2013
- How strong is the US economy? Let’s look at drivers of growth!, 5 August 2013
(4) For more information about the US economy
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Government economic stimulus is financial heroin, 28 December 2009
- The Robot Revolution arrives, and the world changes, 20 April 2012 — about structural unemployment
- America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
- America’s strength is an illusion created by foolish borrowing, 10 October 2012
- Portraits of a nation in decline. An unnecessary and easily fixed decline., 14 February 2013 — Why are we not using fiscal policy?
(5) Sunrise will come eventually