Put the latest stats in larger context to understand the economy

Summary: Amidst the bursts of enthusiasm about the economy by bulls (boom!) and bears (recession!), the reality continues to be slow growth, and slowly falling forecasts for the future. Only slowly do people come to realize that, as so many sell hope and despair to their audience. This post looks at our economy from the present quarter to the unknown glories ahead. Understanding events requires seeing this broad context.  {1st of 2 posts today.}

Contents

1. Inventory to sales ratio.
2. New Homes Sales.
3. Retail Sales.
4. Fading hopes for the future.
5. Beyond secular stagnation.
6. For More Information.

(1)  Inventory to sales ratio

The total business inventory/sales ratio for April has gotten a lot of attention from the bears, but wrongly. Changes in technology and business practices reduced the rate steadily from 1.55 in 1992 to 1.25 in 2006, when its current range began. Nine years is too short a history to tell us much. Also, this is a lagging indicator. The wholesale inventory/sales ratio tells a similar story. I don’t know why this has increased since the April 2012 low of 1.25. The weakness this year reflects the slowdown early this year.

(2)  New Homes Sales

Due to our obsession with housing as an investment, this indicator receives attention disproportionate to its importance. April new homes sales were flat for the 3rd consecutive month, down 4% from the December post-crash high. It remains a strong although only small part of the economy.

(3) Retail Sales

Retail sales for May were strong, mostly from vehicle sales (although auto sales boost the economy just like other sales). Over the past year they’ve grown only slightly over the rate of inflation.

(4)  Fading hopes for the future

While most Wall Street gurus focus on short-term forecasts (the almost pointless quest to predict monthly data), more important for America is the trend and level of long-term growth. Forecasts have been falling since the euphoric post-crash bounce.

Although economists’ forecasts seldom include recessions, since Q2 of 2013 the consensus of the Survey of Professional Forecasters has shown growth peaking two years out and dropping three years out (now that’s 2018) — natural for such an old expansion.

At some point it will become obvious that we have become locked into secular stagnation. In January 2011 the Fed estimated the long-term growth rate of the US economy at 2.5 – 2.8%. By their March meeting it had fallen to 2.0 – 2.3% (update: they didn’t change it at the June meeting). That’s a large drop, which would have a massive effect on America over the next decade or two.

The causes are obvious, but appear beyond the ability of our dysfunctional politics to address: years of low investment by the private and public sector, a decaying education system, rising debt levels, and demographic headwinds (an aging society). Perhaps a continued fall in these forecasts might force our leaders to stop their aggressive work to build the wealth and power of the 1% — and address the needs of the nation. Anything is possible.

(5)  Beyond secular stagnation

The rate of technological progress has slowed from the heady rate of 1860 – 1960 (details here). Now other factors add to that, creating secular stagnation. The good news is that the next industrial revolution has begun, slowly — with unknowable progress ahead of us. The bad news: the past two industrial revolutions included periods of severe disruptions where the costs and damages of the transition outweighed the advantages. Since we’re making no efforts to prepare, we should assume that this will happen to us as well. See all posts about secular stagnation and the Third Industrial Revolution, especially these…

• Larry Summers gives us the bad news. Worse, the only solution is more of the same.
• Looking at America’s future: economic stagnation, or will computers take our jobs?
• Dreams of a boom fade & attention turns to secular stagnation.
• Do we face secular stagnation or a new industrial revolution?

(6)  For More Information

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economics, monetary policy, and stimulus programs. Of special interest are these about the state of the economy:

1. Dreams of a boom fade & attention turns to secular stagnation.
2. Updating the recession watch; & what might the government do to fight a slowdown?
3. Economic status report: good news plus chaff from doomsters.
4. What does our surprisingly slow economy in Q1 tell us about the future?
5. About our slowing GDP: are we near a recession? are the models accurate?
6. A secret of the new business cycle, & why good predictions have become so rare.
7. The bottom line of the May employment numbers.