NFIB Continues in Recessionary Mode, as the U.S.-Japan Analogy Plays Out

The National Federation of Independent Business is now out with its December survey results.  Given all the politics going on, the optimism/pessimism part of the survey is not worth commenting upon.  The actual earnings trends, however, are.  Here is the relevant graph (LINK):

Small business earnings December 2012 data from the January 2013 report

For some reason, these companies have a baseline earnings trend of -10 in economic expansions.  Since this survey began, 0 to -20 has been the range seen during economic expansions.  Worse than -20 has correlated with the three defined recessions.  Early in 2012, the index dropped below -20 and has stayed below it.  

While the NFIB survey has some flaws, one advantage is that its members likely are skewed towards the domestic economy rather than foreign markets, unlike the S&P 500 companies.  

The headline optimism number from this survey was 88.  It was 88 in 2010, as well:

NFIB small business optimism index

This is what Bill McBride (Calculated Risk) had to say about the NFIB survey covering July, 2010 (LINK):

NFIB reported its optimism index fell 0.9 point to 88.1 in July…

Note: A large percentage of small businesses are in real estate related fields and that will keep optimism down.

Once again the key problem is lack of demand.

Hmmm… But it’s  2 and one-half years later, and vast amounts of Federal government and Federal Reserve stimulating has gone on.  NFIB’s headline optimism number is back at 88.  Only briefly did the earnings trend break higher than the -20 that in the past has correlated with recessions.

Sorry to differ with CR on this.  The problem was not real estate per se – if it were, the macroeconomy ought to be clearly booming by now.  Real estate took the boom and bust this past cycle; before it was tech; next time it may be something else.

 The case continues to strengthen that the problem was not “lack of demand” in a Keynesian sense.  This was not the Great Depression.  Then, there at least was a serious argument for a form of post-traumatic stress dysfunction (I am offering no opinion on that era) affecting spending and investment.  There was no possibility that that was the case now, at least not for more than a month or two post-Lehman.

Our insolvencies have been handled via money-printing but little real reform and relatively slow liquidation of malinvestments.  This is much more like the Japanese strategy of the 1990s and early 2000s than the successful, much more dramatic Swedish solution to their banking crisis of the early 1990s.

As I said four years ago (LINK):


Land of the Setting Sun

We are Japan.

(Though with nukes and military bases in about 92 countries)

Barack Obama made it more or less official today: trillion dollar deficits are here to stay.

“Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on.”…

Americans are looking at disordered finances, economic stagnation, and political discord rising from the above. The people are dispirited and see the rot in the body politic. The October bank bailout, supported with excessive force by no good reason and/or changing rationales by the Establishment, was a defining moment. Massive wealth transfers have gone and continue to go to the worst-run giant companies in America. All this in a world of domestic peace, good harvests, abundant raw materials, a hard-working labor force, a general culture of honesty and fair dealing among the people at large (excepting the higher levels of government and many businesses), and unchallenged world dominance. This should be among the best of times.

We deserve better than it looks like we are going to get.

As in Japan, so in the U.S.  Companies keep producing and people continue to go to work.  The world does not end.  There is no hyperinflation.  There are no signs of hyperinflation.  (Everyone still wants the dollar.  Everyone will want it next year.)  The parallels, such as with very low birth rates and rock-bottom interest rates, and unending exertions from the political capital, are finally too obvious to be denied.  And despite headlines, there is no political will in Washington or the public to take any drastic action.  So, once one adjusts for the inflation that the U.S. almost “has to” create as the printer of the world’s reserve currency, then simply deflate the Dow or SPY by the price of gold, and you can see that the stock market has also followed the Japanese post-crash trajectory, i.e., only a partial recovery.  

Now, the president has agreed to restraints in the growth of spending as part of a deal to raise the debt ceiling.  We shall see, but if that trend truly becomes law, then the second derivative of Federal spending growth will be turning decisively negative.  If so, when will ZIRP or near-ZIRP end?



3 comments to NFIB Continues in Recessionary Mode, as the U.S.-Japan Analogy Plays Out

  • Jesse_Fan

    Dr. -

    What do you think about Mr. Sinclair’s thoughts on currency-induced cost-push inflation?

    Also – your statement: /* Everyone still wants the dollar. Everyone will want it next year */

    Please see this graph. DO you think China’s drastic reduction in Treasury holdings has anything to do with the Fed’s open-ended QE?

  • [...] Sorry to differ with CR on this. The problem was not real estate per se – if it were, the macroeconomy ought to be clearly booming by now. Real estate took the boom and bust this past cycle; before it was tech; next time it may be something else.  [...]

  • Jesse_Fan: 1. My comment about the dollar was in relation to no hyperinflation. IMHO the US public is not even vaguely close to that.

    2. Jim Sinclair is an investment genius. I do not necessarily know all his thinking when he uses that term. To the extent I understand it, it’s not clear it’s correct. The USD appears to be tightly managed versus other major currencies. It appears to me that the Fed and the Federal government are perfectly capable of inflating the currency by domestic means, without a dropping dollar versus “sound money” as was the case, e.g., in the Carter years.