Tag Archives: US Economy

US Economy Not Out of the Woods – Beware the Hype that Says Otherwise

You would think that, given the press coverage, much of the US economy is making great progress.  Apparently interest rates will continue to rise in response to the Fed’s feeling that the economy is doing well; near-full employment, GDP recovery, stock market growth, bond and dollar strength and all that jazz.  But these data points mask some other troubling items that suggest any recovery will likely be lopsided and even short-term based.  You only have to look under the covers at, say, unemployment, credit, or housing.  

  • Unemployment: despite low levels of reported unemployment many economists are concerned that the participation rate is at very low levels.  In other words, there is a lot of unemployed that is not being reported in the official KPI.  Some economists suggest that real effective unemployment maybe nearer 6 or even 9 percent.  Thus the result of economic growth may not lead to wage price pressure so soon, since the participation rate may improve the so pick up some of the slack.  This is good news overall but not if the Fed believes that they need to head off wage inflation likely to appear due to pressure on a really tight labor market
  • Consumer Credit:  Student and auto loans are running ahead at full steam, and mortgage debt continues apace.  While many firms have cleared their balance sheets of bad debts, consumers – which drive a massive part of the US economy – are amassing debt easier than looking for a hot meal.  On February 27th the US print edtion of the Financial Times carried an article, More US car owners behind on loan payments than at any time since 2009.  What is realy funky here is that if you go into the market now to look for a new or used car, you will be offered a loan for repayment now past the 5 year window.  It used to be that 5 years was the maximum and this was only a few years ago.  Now you can get a loan over 6 years or longer.  So the consumer part of the market is building up a nice bad-debt situation.
  • House prices: Yes, house prices have recovered, so we are told, to near pre-crisis levels.  So that part of the market is secure, right?  Wrong.  Home ownership is a its lowest levels in years.  It turns out that the buyers that are driving up prices are investment firms and conglomerates that are snapping up property then leasing them to. So first time buyers are being squeezed out.  The housing market has not recovered in the way we would want it or need it to for effective sustainment.

So we have a very lopsided economic recovery.  It is not stable and even the strong shoots are some challenging weeds hiding just under the covers.  Even if Trump can delivery on +2% GDP growth, I am not altogether sure that woudl mask the issues that are building up today.

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Creative Destruction In Hold – Slows Economic Growth

A problem, already known about, has been festering and getting worse. Now it seems it is more clearly explained and worse, not just a US problem. The FT Big Read today in the US print edition of the Financial Times, Decline of Start Up Nation, explains the sad decline of the growth of new start up firms across America.

To be fair, though the absolute density of start ups per 100,000 residents has fallen from over 160 in 1978 to about 80 in 2013, there are pockets of recovery in a few places in the US. But the facts speak for themselves. The article lists a series of reasons for the loss of entrepreneurial mojo, that sits at the heart of Schumpeters’ creative destruction (1942).  Creative destruction describes the cycle of innovation, growth, maturation, decline, and recycling of resources for the next round of innovation. Creative destruction is central to capitalism and without it, all manner of anti-capitalist rigor mortis sets in.
First the causes: there are several listed:

  • Change in education and demographics of our innovators and entrepreneurs
  • Lack of access to capital
  • Increased government bureaucracy and red tape

Now the results:

  • Entrenchment of large firms and subsequent maintenance and growth of lobby-based policy reinforcement
  • Polarization of income and wealth, where the investor class accentuates gaps to middle and lower classes
  • Weaker economic growth
  • Which then leads to majority pushing for socialist re-balancing polices that accentuate the problem even further

And in the most recent exceptional economic and business cycle:

  • Finally economic failure leads to market distorting polices of central banks who act in lieu of effective public policy needed to reestablish growth

It is difficult to determine what starts this entire cycle. It is quite likely that any one trigger along the path will set in motion the others. The fact is that our US economy, and to a large extent, the western developed economies, are in a similar bind and firmly at the end of the cycle. There seems no way out. Worse, using the recent Bank of England response to Brexit jitters and a new reduction in interest rates and more quantitate easing, the establishments only has one response to all challenges and it is to administer more of the same medicine.

I am not a fan of Hillary or Donald, but we need a schism to break out of this mound. Clinton promises more of the same; the promise of Trump is different. Question is, is Trump going to lead to a refreshing new cycle of growth, or mayhem? Is the gamble worse than more of the same weakness under Clinton?

Fed Rate Rise – Target now 2016

Headlines in today’s US print edition of the Wall Street Journal are now confirming what a few of us have felt all along: the next move by the US Federal Reserve in moving short term interest rates up, the first such move since 2006, will likely be in 2016, not 2015. I made that call in August (see “Timing is not in the feds favor for a rate rise in September”) – but it is taking time for others to grasp the complexity and dire situation of the global economy. 

The news today in the newspaper is grim:

So the smart money suggests 2016 and at this rate, taking China, commodity prices and other factors into account, middle of 2016 at best.  Only if really strong US wage growth persisted for two periods would the probabilities change significantly.  You have to remember that almost all the dials are glowing “yellow” and turning a darker color towards “red”. Here is my range of expectations based on current economic conditions:

  • Late 2016: 25%
  • Middle 2016: 40% chance
  • Early 2016: 25%
  • By end 2015: 10%

And I also have three bugbears at present.  I hate it when papers report on the how QE has ended.  It has not “ended” – it remains firmly in place.  What has happened is that the Fed has stopped issuing any more.  The billions of dollars the Fed pumped into the economy remains “out there” – if only we knew where all that money it went.  That money has to be brought back; the debt has to be repurchased.  A period of “quantitative tightening” is required in order to get the system back to normality.  A point or two here or there in terms of interest rate hike does not a normal economy make.

Second – Joe Biden should get off the pot.  We all know he will stand – even though his chances dropped after this week’s Democratic Presidential Debate.  Just stand already so we can be entertained and get it over with.

Finally – That fan-favorite of the Tea Party with big budget reform ideas, Paul Ryan, will shortly announce his plan to run for House Speaker, replacing John Boehner.  This was just the opportunity he was waiting for – albeit it coming out of the blue.  Of course he said he would not stand; and of course his supporters pleaded with him.  So please, let’s get that one out the way too.