In Parts I and II, we covered Japan, China, the Euro Zone and the U.K. In Part III, we will look at the most powerful economy in the World, the United States, and its geographically close and economically dependent neighbor, Canada - and Canada’s political and economic look-alike, Australia.
The U.S. economy posted very strong jobs numbers in November that just about guarantee the Federal Reserve will finally undertake the most anticipated interest rate hike in the World, the raising of its key lending rate at the next FOMC (Federal Open Market Committee) meeting on the 16th of this month (December). The official unemployment rate now stands at about 5%, considered by the Fed as near full employment for the economy, and thus meeting the target of one of the two key economic indicators that were being watched by the Federal Reserve over the past years, as indicative of the economy’s recovery. It has more or less met the employment target, but the other, a 2% inflation rate, is proving far more elusive, as is the new third indicator introduced by the Fed at its last FMOC meeting, ‘developments abroad’. Currently, one target has been met, the other not; and the third, ‘developments abroad’ continues to deteriorate. But it’s a go for the rate hike.
As select current numbers are flouted as proof positive the economy has achieved reasonably good health, one must remember that what positive indicators there are, have been artificially induced by years of excessive cash injections, and near zero-cost money-flow to the top end, and historically low rates to induce spending and discouraging saving. Still, with all the stimulus and easing, the American economy is in questionable health.
We had said previously that the U.S. economy would be one of the stronger of the major global economies this past year. And, there have been induced signs of strength apart from job creation, in housing sales and prices, wages and consumer spending, and auto purchases, that give the impression that all is finally on the mend. Yet, we disagree the economy is healing, as it still needs intensive care. And, the same cash injections and the near zero-cost money supply, have also created over the past seven years, layer upon layer of deep, risk-sediment, that may just break the system when it all gives way in the over inflated bonds, stocks and real estate markets.
For one thing is historically certain, too many years of too much and too cheap money to the top end of an economy, always produces excessive greed in those who are well positioned to benefit, extraordinarily, by the government or Central Bank mandated largess. And, they get used to making ‘silly money’, and then come to expect it as proof of their own brilliance, and after a while their inalienable God-given right. Such an era of easy money, worldwide, brings on heightened hubris, ‘tallest’ building syndrome, ostentatious displays of wealth and consumption, frenzied speculation, and the feeling that ‘this time it is really different’ and hence it’ll never end.
But it never is really different, and it always ends.
Internal structural and political issues, such as the extreme concentration of wealth and the highly divisive bi-partisan governing system, are holding the U.S. economic growth rates down, and will continue to do so. To that is added global deflationary pressures, as economy after economy succumbs to the collective downward spiral of devalued currencies, hard fought over export markets, increasingly competitive labour markets, improved technological efficiencies, low commodity demand, uncertainty plagued and financially challenged consumers, gutted savers from years of ‘ZIRP’ (Zero Interest Rate Policy), corruption (in politics, business, financial institutions and markets), internal violence and external wars (it’s quite the list). And that is why we disagree that all is on the mend and will just keep getting better.
We recognize that we sound like ‘glass half full’ kind of people, but so far we have been consistently right on the relentless downward direction of the majority of the major global economies, and we don’t see any material change to give us comfort that the worst is over. In fact quite the opposite, conditions in key economies have deteriorated steadily. Parts of Europe, Japan, China, Brazil, Venezuela, Argentina, Russia, and South Africa are in real trouble. And then there are parts of Middle East and large swathes of North Africa that have been under relentless attack in the past decades, from the West, the ‘Near East’ and from inflamed radicals within, that are now exporting their destroyed and desperate people to Europe, and further afield. The fact is globally, conditions are bad and getting worse. Yet, the general consensus seems to be that globally conditions are getting better, and the U.S. economy is a lot better, and in fact may become the global engine of growth in 2016 (glass half full). In our view, this consensus is wrong and the global economies and the U.S. economy are heading for a steeper decline.
The labor market in the U.S. is supposed to have recovered as the unemployment rate is currently at approximately 5%, and the November (2015) job creation number came in at a robust 211,000.
No doubt the unemployment rate has dropped substantially since its peak in 2009, at the height of the 2008 Great Recession, and it certainly gives the impression that the labor market in the U.S. has tightened to almost ‘full employment’ on a historic basis. That is until one actually looks at the historic rate, pre-2008 crisis (See Chart below). It is only then one gets the proper perspective as to the correct status of the labor market today. From the ‘historic rate’ perspective, the labor market is not anywhere near historic levels, and is therefore still far from full potential.
The following Chart shows the true historic levels of the unemployed and the duration of their unemployment. Even with the strong steady decline since the peak in 2009, we are not there yet by quite a margin.
And, the year-on-year percentage change of average hourly earnings has continued to drop since the 2008 Great Recession, well into 2015, and has stayed well below the previous highs. This contradicts the perception that the labor market has tightened to pre-2008 levels, as a truly tightened market would have pushed up the average hourly earnings (supply and demand).
Additionally, throughout the ‘recovery’ period, labor productivity has been far below previous years. This speaks to the lack of quality jobs and the general low morale of the workforce since the crisis.
And, all numbers currently being calculated are based on a much smaller active workforce, as far less people are participating in active employment, or the seeking of it. Participation rate is calculated on the number of people working or actively looking for work. If someone gets discouraged and stops looking, for a month, they are not considered ‘unemployed’ by the government in its calculation of the unemployment rate, even though they are unemployed. The participation rate currently is steady at 62.5%, a 38-year-low, which skews the unemployment numbers favorably, ignoring the millions that got too discouraged and stopped looking for work, for a month or more. At the turn of the century, participation rate was well above 66%.
Below is a more accurate picture of the Labor Market. While the number of people finding work has certainly been rising through the ‘recovery’ years, but so has the number of people who have stopped looking, and faster, and as they are not counted as unemployed, the unemployment numbers are off.
So while Janet Yellen is going to use the latest November jobs numbers and the overall Unemployment Number of 5%, to claim that the Labor Market is near full employment, to justify the raising of the interest rates, the Labor Market isn’t at all anywhere near to previous average levels. Earnings and productivity are still well below historic levels, while less and less people are participating in the work force. Certainly, this seemingly permanent contraction of the labour market, as compared to historic levels, with its much higher levels of unemployment, lower productivity and earnings, and far lower participation rate, will, in our estimation, negatively impact GDP.
And so it has.
The American economy, after almost $4 Trillion in stimulus cash, and over 7 years of near zero percent interest rates, has posted about 2.1% GDP growth rate this year. Expectations for 2015 had been well over 3%. We had stated in our Report, earlier this year that the U.S. economic performance would be positive but soft, and the American economy is heading for a recession due to the global weaknesses. In our opinion, it is still heading that way. One can see from the Chart below that in spite of the extraordinary efforts of the Federal Reserve over 7 years, the growth rate never really picked up, solidly, and on the average economic growth has been volatile and languishing well below the historic average growth rates of 3.24% (from 1947 to 2015).
The current growth rates for a mature advanced economy would be understandable, and perhaps even acceptable, IF, no extraordinary means had been employed to directly boost it. But in this case, the most unprecedented stimulus was applied relentlessly for 7 years, and at the end of it, not even a sustainable 2% plus growth rate was achieved. This speaks of continuing deep residual weakness in the real economy, in spite of the superficial and dangerous ‘wealth effect’ being created in the pumped up bond, stocks and real estate (asset) markets in the past years.
Post recession, manufacturing seems to have peaked just past mid-year, last year (2014), and has, except for a brief upturn in the second quarter of this year, continued to head downward since then.
While housing prices and sales have been climbing for most of the post recession years, the trajectory is now flattening in 2015. And with the possibility of even minimally raised interest rates, along with the general conditions deteriorating, we are of the opinion that housing sales and prices will continue to moderate going into the next year (next two Charts).
Again, though the rebound in housing, prices and sales, was very healthy, the investment in the housing sector remains well below historic peaks, and averages.
Even though business profitability climbed steadily post-2008, due to lower costs – significantly lower commodity prices, lower wages, ultra low interest rates and therefore lowest financial costs, share buybacks boosting net income per share, and record cash hoardings, earnings and profitability turned increasingly negative this past year (next Chart).
Understandably, with profits turning negative, fixed investment also turned down sharply.
And personal consumption, which aided by the high dollar (cheaper imports) has been climbing the past three years, has also turned soft this year. There are certain exceptions, as in the auto sector, but on the whole we see personal consumption continuing to weaken this holiday season, and into the coming year as the population become more wary of increasing uncertainty and volatility.
The weekly Gallup polls show the American people positive about the prospects of the economy at the start of this year, and then becoming increasingly negative in their outlook as the year progressed, and even more so regarding the future prospects.
The American economy and the American dollar have been one of the strongest amongst the advanced economies and currencies these past 2 years. And while GDP cannot be compared on a ‘growth rate’ basis with the likes of China and India, or other faster growing emerging economies, yet, given its maturity as an economy and the less than enlightened political and economic policies, it has put in a credible performance. But, it’s been called ‘the cleanest shirt among the dirty laundry’, in other words, neither the American Economy nor the Dollar are by themselves in that good a shape, but that other comparable economies and their currencies may be in worse shape. It is hardly a ringing endorsement of the global economic conditions.
America is the biggest and most powerful economy, and military power, in the World. So much so that to think that countries like China are even competition, at this time, or even remotely in the same league is simply – well, not realistic. If there is general rot in the American economic system, then China is surely off the scale. But like all overwhelmingly dominant powers historically, America has been actively sowing the seeds of its own eventual downfall, if it doesn’t correct itself before too long.
Its foreign policy over the past decades has materially hurt it, internally and internationally. Its inability to deal with powerful internal self serving interests, be they individual, corporate, political, military, or the combination of some or all, at the cost of national good, has become legendary. Endless and powerful lobby groups are shredding the possibility of good governance, and the moral fabric of the nation, once known for strong moral fiber in the past. This deterioration in general conditions and particularly in leadership quality are starkly visible in the current races underway for the nomination of the Republican Party. The deck is stacked by light weight candidates, led at the moment by Donald J. Trump, which seems so appropriate, as it captures so perfectly America’s current problems, those of hubris, self interest over national interest, irrationality and self-inflicted damage.
Even now, the economic policies are high-jacked by the most powerful financial interests that have used the 2008 crisis to, in broad daylight, affect the greatest wealth transfer to the fewest (top 10%) from the most (the tax payers). Well, it has been said by someone (original source unknown) and last used by former White House Chief-of-Staff Rahm Emanuel: ‘never let a good crisis go to waste’; the last crisis was taken full advantage of by Wall Street’s biggest and best. And while the American population languishes (economically) and the top-end few revel in silly money, another major financial crisis looms.
We are sure the coming crisis will also be similarly exploited just as well by the few, at the cost of the many. The economic indicators are pointing to a soft underbelly of the American Economy that is ill prepared for the next crisis, whether it emanates from within, or from without, and right now the possibilities of a crisis looms big on both fronts.
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