In a recent post, I demonstrated that there is a large amount of optimism amongst many Keynesians. The general consensus was that if only the Fed could be allowed to perform more quantitative easing and thus allow the “fiscal cliff” issues to be deferred to yet a later date, the U.S. economy is something like a tiger ready to roar. They feel that the recent/current “soft patch” will give way not just to another mild wave upward in economic activity such as keeps happening since 2010, but something much better economically is due up.
As Bill McBride (aka Calculated Risk) said in his interview with Joe Weisenthal of Business Insider, he thinks the economy is in its best shape since 1997.
I hope he’s are right. I expect that politicians will kick the fiscal cliff can down the road again, though with some dramatic headlines so that each side’s partisans can feel their guys are fighting for certain core principles. But this fiscal cliff came about because the Federal government made certain economic assumptions in 2009 about the course of the recovery that simply failed to happen. And the data continue to disappoint. It’s hard to see that continuing to defer coming to grips with the fact that mainstream projections haven’t worked out as expected will suddenly yield much better results. It could be the case, but… why should it?
My economic and market concerns are much more related to recession and stagnation than this fiscal cliff. After all, did not the Federal government raise taxes in 1990 in the middle of a known recession? Then, less than three years later, during a “jobless recovery”, did not the Clinton administration push through yet another tax hike? If a recessionary U.S. economy could sustain two such tax increases a mere two decades ago, why is this fiscal cliff so in need of being a can that gets kicked forward yet again?
We can hope, but…
Increasingly the hard economic data simply provides no actual evidence that I can find to accept that this happy outcome is “in the cards”. Maybe, but can or should we actually plan for that in our business and financial lives? In that regard, a skeptical approach that a fresh business cycle upturn is imminet may be wise right now. There might be more pain ahead before the good times roll.
The Chicago Fed produces an aggregate economic score, the eponymous Chicago Fed National Activity Index. This aggregates numerous pieces of economic data. Please take a minute and read it. You will see a tepid recovery off the massive decline in economic activity, and a fresh downturn to near recessionary levels. The CFNAI also address “inflation”, and looking at that chart will at least make today’s record-low interest rates a bit more understandable.
This recent downturn in the CFNAI comes in a different setting from that at the outset of 1997. One can see that 1996 was a very good year for the U.S. economy. Not so, 2011 and 2012. By 1997, the private sector appeared so healthy that the Federal government was moving rapidly to a balanced cash budget. Now, the broad shoulders of the government are busily “supporting” all sorts of activities, as private sector activity has failed repeatedly to meet official projections ever since “Recovery Summer” of 2010 led instead to QE 1.5 in August followed by QE 2 in the fall.
The American Trucking Ass’ns says that “trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation” (LINK). Some of you will remember the much-derided ECRI call last in September 2011 that the U.S. economy was either in a recession or was tipping into one (time unspecified in the interview ECRI gave in the media). Perhaps that call was not so wrong. Here is the ATA’s chart of tonnage carried. The peak was precisely then, and there has been a sharp recent drop that began before Hurricane Sandy.
The Association of American Railroads in its latest Rail Time Indicators shows a roughly similar chart for rail traffic (charts on page 2).
The Federal Reserve attempts to measure industrial production (LINK). Its data, shown in summary form on Table 1, page 5 of its latest release, also show recent declines. Total industrial production has gone nowhere for about ten months. Manufacturing output peaked around the end of 2011.
Re actual people, officialdom had this to to say in late October about how real people were doing economically (LINK):
Real DPI — DPI adjusted to remove price changes — decreased less than 0.1 percent in
September, compared with a decrease of 0.3 percent in August.
Line 48 of Table 2 of this release also shows that per capita real disposable income was about the same in 2012 as in 2010, as the effects of the recession were finally waning. (Note: this uses “chained” 2005 cost-of-living data, which is said to methodologically understate cumulative price changes.)
There are also signs of stress on corporate America. From Political Calculations (courtesy of S&P):
If past is prologue, then by comparison to the “Great Recession”, the U.S. economy is already many months into another one.
Finally, Marcelle Chauvet is a mainstream economist who analzyes recent economic data to try to gauge a nearly real-time estimate of the chance that the U.S. has entered a recession. (The official recession arbiter, NBER, is careful and took about a year into the “Great Recession” to make its recession call.) Her graph showing probabilities that the U.S. recently was in recession looks nothing like that of 1996 or 1997 (LINK):
Any % chance of recession above 0.1 (i.e., more than 10%) is a rare event outside of an actual recession and indicates significant economic stress. So far as the CR analogy to the 1996-97 period goes, it is clear that this did not occur at any time in the 1990′s as soon as the 1991 recession wound down. Not once.
She also puts out a business cycle indicator:
The extent of the August dip below the zero line was only seen in the run-up to the 1990 recession and before that in the late 1970s. Of course, I am excluding the 2005 dip that was due to Hurricane Katrina, and which showed an immediate reversal.
Dr. Chauvet’s website is appreciated. So is she:
Brains and beauty (that really is she, LINK to second photo shows her academic affiliation in case you would like to take one of her classes, LOL). Just like my better half.
That’s all for this post. In a final follow-up, I will tie this one and its predecessor post together into some market-related comments. Please note that interest rates are dropping a large amount in Germany, the U.K. and the U.S. yet again today. Despite expectations of even more aggressive inflationary policies in Japan, their 10-year bond yield dropped yet again to approximately equal its lowest yield ever, except for a sharp spike bottom in yields in 2003. And, the Shanghai Index dropped again to yet another multi-year low.
Deflationary forces may still be lurking.