What does our surprisingly slow economy in Q1 tell us about the future?

Summary:  This week’s economic status report looks at the remarkable stability of the US economy since the crash, despite repeated slowdowns. Like the one that began in the first quarter. The second half might bring the long-awaited good news, or a recession. Boom or bust, either one will tell us much about the new economic regime that began at the turn of the century.  {1st of 2 posts today.}



The amazing aspect of the post-crash US economy is not the crashes so often predicted by the bears (which never arrived). It’s not the booms so often predicted by the bulls (which never arrived). It’s the stability of the slow but steady economic growth during the past 5 years — ranging from 1.2% to 3.1% (YoY real GDP, SA). The large quarter to quarter swings are fodder for economists’ excited predictions, but so far inertia rules.

YoY: year over year comparison. SA: seasonally adjusted. SAAR: SA at annualized rate.


This stability is deceptive, as economic data so often is. The periods of slow growth, with high risk of becoming recessions, were met by fiscal or monetary stimulus. The boomlets faded away for various causes. While it looks like stability, it was actually a series of unfortunate events plus active economic management by the government.

Here we are again

Q1 real GDP was almost zero (0.2% SAAR). That’s ugly, especially since the consensus forecast was 3.2% a year ago and 1% the day before (although the forecast by the Atlanta Fed’s GDPnow model was spot-on at 0.1% — raising the prospect of mass unemployment of economists as models improve). Worse, Q1 GDP was boosted by a large inventory build (GDP measures production, not sales). GDP less that inventory build was -0.5% SAAR. Those stockpiles will depress Q2 growth. Not to worry, since most economists are excited about the second half of the year (as always).



Update: new data!

Today’s data continues the pattern of strong-weak-strong. The Chicago Purchasing Managers’ Index in April bounced from February’s 5½-year low of 45.8, rising 6.0 points to 52.3.  New claims for unemployment fell to the lowest level since 2000.

What about the world?

World economic growth mirrors the stability of the US. World trade volume and the OECD’s composite leading indicator have been flat since late 2013.

As with the US, 2015 has opened with dark news. World trade volume was -1.6% in January and -0.9% in February. Shipping rates suggest trade has continued to decline. The Baltic Dry Freight Index has recovered only slightly from its record lows in February. Also…

Freight rates for the shipping of containers from Asia to Northern Europe fell 12.5% to record low $349 per 20-foot container (TEU) in the week ended Friday, data from the Shanghai Containerized Freight Index showed. It was the 12th consecutive week of falling rates on the world’s busiest route, to the lowest level since the index was launched in 2009. {Source: AJOT}

So what comes next?

The internet overflows with people confidently making predictions — experts, experts in their own minds, and amateurs. But I believe in a different truth than those. Sometime at the end of the 20th century the post-WWII era ended and we entered into a transitional period. The economic equations are in flux. The constants change; the variables move into new ranges; the correlations take different forms.

What’s next? A return to higher, perhaps even “normal” growth needs little further analysis. It’s a script we all know well. Growth, rising income, falling unemployment, risks of inflation.

A recession would take us into the unknown. It might get ugly quickly since we would begin with so many households and government entities weak and rates at zero (hence little room for conventional monetary stimulus). Unlike the other downturns since the crash, I doubt there will be a rapid stimulus until the economy slides into recession.

There is a third scenario: continued muddling through, with slow growth, low inflation, and near-zero rates. That would be wonderful for investors and the wealthy, not so good for everybody else. Less obvious, it means increasing stress on the economy. Years of more market weirdness. Institutions with long-duration assets and liabilities (e.g., insurance companies), watch their balance sheets erode away. We desperately need rapid growth in the years before the shock of massive boomer retirements beginning roughly in 2020 (e.g., US aggregate demand drops since most Boomer’s incomes crashes at retirement; government medical expenditures skyrocket).

Interesting times lie ahead. I recommend hoping for the best and preparing for the worst

For More Information

For a more detailed analysis of Q1 GDP see “Consumers near collapse” by Alhambra Research. The Atlanta Fed’s GDPnow model forecasts Q2 real GDP at 0.9%.

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12 thoughts on “What does our surprisingly slow economy in Q1 tell us about the future?”

  1. Thanks for the post on the subject, I was wondering what you had to say about the Q1 numbers.

    I have a few additional comments that might be worth something. It is unlikely that we will return to normal any time in the near future, there are too many obstacles and too many politicians and members of the 1% have benefited from this situation. I would be glad to be wrong on this point.

    Your second point, with a recession taking us further into the unknown seems very likely at this point. The current set of data has been marching down the recession path with a certain clockwork precision but the data can always swerve at the last second and we could miss a recession. I am really curious what measures the central banks would take this time if a recession hits. The Republicans will expect to benefit from a recession in the next election so they are likely to stall or water down any fiscal stimulus. Will we go back to QE (the odds on favorite) or try something even more creative? I would appreciate your thoughts.

    I am not entirely certain that the boomer retirements will be as big a deal as expected in 2020, at least for the first 5-10 years. My reasoning is that the boomers are now mostly aware of the mess that they are in and have already fallen into 3 camps:
    1) Those that have enough money and will behave as you expect (this is, by far, the smallest group)
    2) Those who might yet save enough to retire. They got hit hard by the recession and have already cut spending to the bone, saving money for a delayed retirement. Since it is likely that they will retire later, diluting the effect of so many people hitting the age of 65 at the same time, and their retirement will mark a point of higher Medicare costs so total spending per person will stay about the same.
    3) Those that cannot earn enough money to retire. Most of them had to take lower paying jobs during the Great Recession and lost all of their savings. They will continue to work until their health deteriorates to the point where they get shoved into a retirement home to die or they die at work. Again, they have already cut spending to the bone and their retirement will mark an increase in medical spending as long-ignored conditions have festered to the point where our medical system senses an opportunity and the government is paying instead of the nearly bankrupt patient.

    There is a fourth group that will reduce the impact as well, reasonably healthy retired people, running out of money or getting bored, and returning to work in increasingly large numbers. Currently they are mostly working at Wal-Mart and the like but I expect this trend to go up the ladder of desirable jobs, edging out younger people using their contacts and experience. If they can do so without endangering their health, I expect that they would, overall, increase spending somewhat.

    The key statistic to all of these thoughts is the current amount of debt carried by the individuals relative to their income as they near retirement.

    1. Pluto,

      I don’t believe you got my point about effect of Boomers retiring. It’s not binary — can they retire or not? — although that’s how it’s usually phrased. My point was that frame masks the actual effect: only a few percent of Boomers have savings and pensions sufficient to retire at their current spending level. Hence I said that Boomers’ retirement will be a demand shock — a large one, but hitting over a decade.

      With that as the frame, consider your 4 groups:

      Only a few percent (10%?) have savings plus pensions (including SS) to retire at current spending levels.

      Only a few percent (10%?) are close enough to being in group 1 that they’ll reach it before retirement (people in this group include many white-collar workers who will probably retire at 65+).

      Almost everybody is in the two other groups. Most blue collar workers will be forced to retire relatively early (60 – 65) with lower incomes due to either bad health or inability to do their jobs (white collar people tend to be delusionally ignorant about the physical demands of most blue collar jobs). And age will force everybody out of the work force, ready or not — especially as the economy seems unlikely to produce all the jobs elderly boomers are able to do.

      Also: income, not debt is the key factor affecting boomer’s retirement. However, that the Boomers are retiring with large debt loads (e.g., cars, houses) will certainly have ill effects. I predict bankruptcies. Lots an lots of bankruptcies by boomers.

      1. Pluto,

        I plan to write about this in more detail soon, but the other factor that will depress aggregate demand is the boomers’ dis-saving. They’ll switch from borrowing (largely for cars) to paying down debt. They effect on spending of this rise in the savings rate will be large.

    2. FM, I don’t think you got my point about the reduction to aggregate demand caused by Boomers retiring. It is already happening and I do not think it will get much worse over the coming years.

      This is because most Boomers have already cut back substantially either to be able to afford any sort of retirement or they have cut back because they went from earning, in one extreme case I am aware of earnings went from $60/hour to $17.50/hour. Want to bet that family’s savings and expenditures took a big hit?

      Yes, I agree that the situation will get worse over time as more Boomers retire (voluntarily or for health reasons) but I do not think we will describe it as a “massive shock,” that occurred in 2009.

      Also I am not sure that the dis-savings rate will be particularly severe. Again, this is because the vast majority of the remnants of the middle class have not proven particularly adept at either savings or investment. They are spending nearly every dime they make right now and that will continue after they retire.

      1. Pluto,

        You are just making my point that people are delusionally misinformed about what’s about to happen. It’s just well-documented facts.

        (1) “It is already happening. I do not think it will get much worse over the coming years.”

        It has barely begun. Most boomers are still employed, and will have a large collapse in income upon retirement. Retirement for the first wave of boomers (born 1945-1954) is 66, so they turn eligable for SS in 2011-2020. The third wave (born 1960-1964) is eligable 2027 – 20310.

        (2) “This is because most Boomers have already cut back substantially either to be able to afford any sort of retirement…”

        False. That implies that boomers’ saving rate has risen substantially. It has not.

        (3) “In one extreme case I am aware of earnings went from $60/hour to $17.50/hour.”

        Beware of citing individual cases as representative of populations (they seldom are). That person’s income before the drop as $125 thousand, in the top 16% of US households. Most importantly, thta income decline is not representative of Boomers. Second, even in that case (assuming its full time work, 40×52), that’s $3 thousand per month income. Their income will drop substantially once relying on social security.

        “In June 2011, the average Social Security benefit was $1,180 per month. The maximum possible benefit for a worker retiring at age 66 in 2011 is $2,366. But to get this amount, the worker would need to earn the maximum taxable amount, currently $106,800, each year after age 21.” {source}

  2. Precarious seems to be the future. Recessionary scenarios are surely foreboding with the results of the Monetary actions in the past five or six years having such modest results.

    Mass unemployment of economists?Humor is essential as a small antidote to what is up ahead.

    The idea that older unprepared Boomers will work a lot longer is, IMO, a chimera. Physically there are real limits to that possibility as noted in this Post. BKs even cost money that may not be accessible. It’s a real problem now and in the very head future for the USA. Blame the Victim will be a new Reality show.



    1. breton

      (1) “monetary actions having such modest results”

      That’s not necessarily true, no matter how often the Right loudly says so. If the doctor treats but does not cure your seriously sick child, do you believe that the treatment had only modest effects — when he would have died without it?

      (2) “The idea that older unprepared Boomers will work a lot longer is, IMO, a chimera.”

      it’s not a Chimera. My local WalMart is staffed with two kinds of workers: minorities and elderly whites. The limiting factor will be the number of jobs the old Boomers can physically do. The problem is that these minimum wage part time jobs plus SS will not replace their former income — hence a spending drop reducing US aggregate demand (since I doubt job and wage growth of the millenials will offset it).

  3. Sobering SS income numbers.
    Accessing home equity seems to be the answer in many minds; and the solution chosen by the Fed. How do LTRates rise in that scenario? Who buys these properties?


    1. breton,

      That is a big question! The problem facing us boomers is that our generation is so large we’re always on the wrong side of the supply-demand equation. Our buying homes sent prices soaring (benefiting our parents). Their selling might crash prices, benefiting the millennials that follow them.

  4. I told my wife after the GFC that I reckoned there were three likely outcomes:
    1) The Federal government did nothing and we go into a depression.
    2) The Federal government maintains the status quo and props up the banking industry and we suffer for a generation.
    3) The Federal government enforces the law such as Prompt Corrective Action, changes the status quo through stricter regulation/protection for consumers, provides stimulus directly to the people and we go through a mini-depression with a solid recovery within a few years.

    I felt option 2 was the most likely because it supported those in power and was easier than option 3. I didn’t feel option 1 was remotely likely. Real leadership would have been required and we don’t elect leaders, just maintainers/enablers of the current power structure that vary in skin color and genitals.

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