Status report on the US economy: darkening sky, rough waves ahead.

Summary: Time for a status report on the US economy, reviewing the economic data. Since the crash we’ve been playing out The Perils of Pauline, with repeated rescues from a recession that we’re in poor shape to experience. As usual, the picture is cloudy — despite the steady drone from the stuck clocks of the doomsters and perma-bulls. We don’t provide spuriously confident forecasts. I expect another year of slow growth, but recommend preparing for a recession while hoping for a boom.  {2nd of 2 posts today.}

Manufacturers’ New Orders: ugly, and falling

Many key economic indicators use components of this. New orders for core capital goods goes into GDP. New orders for consumer goods is a leading indicator, and leading down quite rapidly (the weakness is in nondurable goods). The report gives no details on the nondurable goods number. It includes fuel, but the decline seems too large for that alone to explain it.

Total New Orders are also quite ugly, down during each of the past six months.

New Claims for Unemployment Insurance

This is one of the most powerful leading indicators. But it’s not saying anything, despite the breathless coverage given each tick up or down (clickbait for slow news days).

Other indicators

The other major indicators show conflicting results. The regional data shows spots of strength and weakness. The Fed’s Texas manufacturing survey was down in January and February. New Orders fell in both months, with February having the lowest reading since June 2009.

From the ISM: “The Chicago Business Barometer plunged 13.6 points to 45.8 in February, the lowest level since July 2009 and the first time in contraction since April 2013. … New Orders suffered the largest monthly decline on record, leaving them at the lowest since June 2009.”

The big picture

How does Q1 look? This post opened with the GDPnow forecast by the Atlanta Fed’s model. It’s down substantially from the 5% peak in Q3 of last year, and well below the theoretical “stall speed” of 2.0%.

For another perspective, here’s a table of the big 4 economic stats that drive the calculation of GDP from Advisor Perspectives as of Feb 18. December was weak. Ditto January. The above data suggests poor results in the February numbers.

The current weakness might be a combination of falling energy prices (hurting that sector), unusually cold weather, and the West Coast longshoremen strike. But then every recession has causes; that doesn’t make the results less painful.

The government responded to the previous downturns with powerful fiscal and/or monetary stimulus. The first was met with QE2 (Nov 2010) and the 2010 Tax Relief Act (Dec 2010) — so that Q1 2011 GDP was only -1.5% (SAAR). The second was met with QE3 (Sept 2012), so that Q4 2011 was up 0.1%. I suspect we’d see the same response again. But each dose of financial heroin has had less effect, perhaps with as-yet hidden ill effects.

Follow the plot!

Seeing the past is vital if you wish to understand the present. Like the Harry Potter books, since 2007 the US economy has been a series of random plot twists — as we bounce between euphoria (“take off!”) and despair (“recession imminent!”). Or perhaps we’re reliving the plot of The Perils of Pauline. So far we’ve muddled through since the crash with slow growth (~2.4%) thanks to repeated massive bouts of government stimulus, hardly evidence of a strong economy.

1. The long-expected housing bust began in 2007, with collapse of mortgage brokers,
2. followed by the collapse of some US investment banks in 2008 (e.g., Bear Sterns in March, Lehman Brothers in Sept), and
3. collapse of the US banking system, shaking banks around the world and
4. collapse of world trade and a global recession in late 2008 (worst since the 1930s),
5. met by near-zero interest rates, a first round of quantitative easing (QE), and fiscal stimulus,
6. sparking a “v” shaped bounce in 2009, amidst predictions of return to normal growth,
7. which by late 2010 faded into another slump (real GDP in Q1 2011 was -1.5% SAAR),
8. met by another round of fiscal stimulus and a second round of QE, followed by
9. predictions of return to 3% GDP in 2012,
10. which didn’t happen as GDP peaked in Q4 2011 at +4.6%, slowing to near zero (+0.1%) in Q4 2012, which was
11. met by a third round of QE in September 2012 (ended in Oct 2014), producing
12. forecasts of big growth in 2014 & beyond,
13. which didn’t happen (2014 was +2.4%, growth peaked in Q3 at +5.0%).

We can only guess what happens next. But this series of unexpected events is a signal showing that we’ve entered a new world.

For More Information

For a look at one of our most important engines of growth see “The ‘Recovery’ in US Housing Prices“, Daniel Alpert (Westwood Capital). Also see these posts about our economy:

1. Dreams of a boom fade & attention turns to secular stagnation., 4 February 2015.
2. Listen to the slowing US economy, hear echoes of Japan, 6 February
3. How close are we to the next recession? — More indicators.

Also see these posts about “stall speed”: The dilemma of the US economy: can’t take off & too close to the brink and Has America’s economy entered the “coffin corner”?