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%.
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economics, about markets, and especially these about our slowing economy:
- New economic data only deepens the mystery.
- Updating the recession watch; & what might the government do to fight a slowdown?
- Economic status report: good news plus chaff from doomsters.
- Economics gets interesting as the economy darkens while stocks bubble.
- Today’s forecast for the US economy & stock market: cooling, perhaps with storms.
