Guest Post: The Dead Weight Of Sluggish Global Growth

Tyler Durden's picture

Submitted by PeakProsperity contributing editor Gregor Macdonald

Global Slowdown

The U.S. economy weakened appreciably in the first quarter of 2013. But what if this weakness persists into the second quarter just completed, and worsens still in the second half of this year?

Q1 GDP, as reported on June 26th, was revised lower to just 1.8%. And various indications suggest that Q2 could come in slightly lower still, at 1.6%. Might the U.S. economy be guiding to a long-term GDP of 1.5%? That’s the rate identified by such observers as Jeremy Grantham the rate at which we combine aging demographics, lower fertility rates, high resource costs, and the burdensome legacy of debt.

After a four-year reflationary rally in just about everything, and now with an emerging interest rate shock, the second half of 2013 appears to have more downside risk than upside. Have global stock markets started to discount this possibility?

As explained in my last piece, Marking the Four-Year Reflationary Rally (May 6, 2013) the stock market in 2013 was starting to become decoupled from the economy. What looked like a blow-off top in global equities has so far turned out to be just that - especially with the help of Japan’s Abenomics-driven Nikkei, which came close to doubling in just six months' time, from late 2012 to early 2013. As usual, however, the Fed has made a rather big call on future growth at a key moment, and has begun to advertise or hint at the tapering of quantitative easing (QE), possibly as early as this year. Here was the Fed’s forecast for growth, announced just one week before the recent downward revisions to GDP:

The Federal Reserve projects that the unemployment rate could fall to 6.5% in 2014, a threshold it has conditionally set to begin raising interest rates. Still, most Fed officials expect to hold off on a rate increase until 2015, according to assessments of monetary policy for the coming years that showed 15 of 19 officials expect the first tightening will come that year. The latest unemployment and economic-growth forecasts for 2014 are an upgrade from the last set of estimates, made in March. The projections reflect officials’ expectations and hint at their next monetary-policy moves... For 2014, Fed officials boosted their outlook on gross domestic product growth to 3.0% to 3.5%, versus a 2.9% to 3.4% estimate made in March.

The Fed sees much stronger growth and lower unemployment in 2014. Notably, the Fed's estimate of 2013 GDP, in the range of 2.3% to 2.6%, still looks rather high. But why this particular forecast now? Or more to the point, why start a tightening cycle now? The Fed has a habit of being chronically wrong and then notably wrong at turning points. Is this really the best time to change course?

The simple answer is that the Fed has normalcy bias. As an institution, it’s particularly weak on natural resources and ecological economics, and it is much likelier to embrace standard growth models and mean reversion in economic cycles. However, this bias is starting to come under pressure, as the Fed has spent the past 13 years since the Nasdaq bust trying to reflate the U.S. economy.

No sooner had the Fed, indicated more confidence in the U.S. growth outlook in its most recent June meeting than skies darkened in Europe, emerging markets, and new volatility appeared in U.S. markets. Justin Lahart at the Wall Street Journal noted that the Fed forecast for the 2H of 2013 suddenly looks very far away:

The Interest Rate Shock

Most agree: The recent stream of communication coming from the Fed is unclear, contradictory, and voluminous.

Despite the Fed's mish-mash of signaling, however, we’ve now obtained some useful insight from the back-up in rates as Treasury bond prices have recently fallen hard. Without the Fed constantly on the bid in the Treasury market, the yield on the 10-year Treasury note would still be low, given the weakness in the economy but it might not be quite as low as many presumed. Remember, many analysts long held the view that the Fed and QE really had no effect on long rates. The market, in their view, was pricing in slow growth, and rates were low because of the collective outlook. Fair enough, but perhaps even during slow growth long rates can’t really be sustained under 2%.

Unsurprisingly, these uncomfortable realizations hit the market very hard in the weeks after the Fed's June meeting. By contrast, during most of the reflationary period since 2009, whenever the Fed threatened to ease the pace of QE, discontinue QE, or was even thought to be vacillating about QE, Treasury bonds would rally in price (and fall in yield), as if the market was answering the Fed and saying “not yet.” Now, however, as rates back up, the market seems to be taking the Fed more seriously and possibly agreeing with the Fed forecast that stronger growth is indeed on the way.

But is stronger growth on the way?

The most recent jobs report, released on Friday July 5th, sent a fresh spasm through the Treasury bond market with the yield on the ten-year note soaring to fresh highs, for the current move, to 2.715%. With a seemingly strong headline number of 195,000 new jobs, and with previous revisions to the upside, the market initially seemed to come into better alignment with a pick-up in growth in the second half of 2013. However, closer examination of the report, in which the unemployment rate held steady at  7.6%, revealed that once again the quality of the jobs being created in the U.S. remains poor. Part-time jobs continued to outpace the growth in higher-wage, full-time jobs. Also, the broader measure of unemployment, U-6, actually rose:

The latest jobs report isn’t quite all roses. Behind the solid payroll gains are a few troubling signs. The number of Americans working part time because they can’t find full-time jobs and the number who want jobs but have given up looking both jumped last month. As a result, a broader measure of unemployment increased a half percentage point in June to 14.3%. That’s the highest level since February and the largest monthly increase since 2009 in that rate, known as the “U-6? for its data classification by the Labor Department. That measure is among the data points Federal Reserve policy makers say they follow closely...The number of workers employed part-time because they couldn’t find a full-time job increased by a seasonally adjusted 322,000 last month. There were 1 million so-called discouraged workers in June, those who say they are not currently looking for work because they believe no jobs are available for them. That’s an increase of more than 200,000 from a year ago.

The scale of the task ahead is also worth mentioning. The U.S. economy still needs to add millions of jobs to fill the gap left in the wake of the Great Recession. A certain number of jobs each month are required to simply meet the normal demands of present-day population growth. However, to make progress on unemployment, job creation over and above that level must be sustained. Dean Baker at CESP explains, in his piece, Upbeat June Job Report Still Leaves U.S. Economy in a Deep Hole:

The 195,000 new jobs reported for June was somewhat better than most economists had expected. The job gains, together with upward revisions to the prior two months' data, raised average growth for the last three months to 196,000. While this may lead some to be dancing in the streets, those who actually care about the economy may want to hold off. First, it is important to remember the size of the hole the economy is in. We are down roughly 8.5 million jobs from our trend growth path. We also need close to 100,000 jobs a month to keep pace with the underlying growth rate of the labor market. This means that even with the relatively good growth of the last few months, we were only closing the gap at the rate of 96,000 a month. At this pace, it will take up more than seven years to fill the jobs gap. After severe downturns in the 1970s and 1980s, we had months in which the economy created over 400,000 jobs. And this was in a labor market that was more than one-third smaller. That is the sort of job growth that we should be seeing after a recession like the one we saw in 2008-2009. Unfortunately, such growth is nowhere in sight.

Energy Recession in the OECD

Plaguing the U.S. and other western economies is the continued fall in demand for goods, services, and energy. Demand has oscillated since the Great Recession, sometime rising and other times falling, but at much-reduced levels. This lower equilibrium has carried on for years, with Europe pulling the OECD lower, Japan in the middle, and the U.S. struggling to obtain modest but positive growth. However, the whole of the OECD remains in an energy recession. Demand for oil and electricity continues to fall. And while some point to efficiency gains as the explanation, you can't really have meaningful efficiency gains in economies operating in a state of low equilibrium. Rather, in the OECD, it's the raw shedding of demand that has dominated economies over the past five years.

See OECD Total Energy Consumption All Sources in Mtoe (million tonnes oil equivalent) 2002-2012:

As with so many other data points in the OECD, total energy consumption from all sources is back to levels last seen a decade ago, with 2012's demand of 5489 Mtoe a nearly perfect match to 2002. Since 2007, OECD energy consumption has been declining at a little less than a percentage point per year, at an average annual decline rate of -0.83%.

It should not be a surprise, therefore, that GDP has been so weak, or that here in 2013, GDP would oscillate again, this time to the downside. The decline of energy consumption in the OECD is a proxy for lower throughput, lower levels of demand, lower transportation activity, and, of course, lower levels of labor participation. The recent GDP report in the U.S., for example, uncovered the fact that personal consumption of all goods, not just energy, is already turning down. This presents yet another hurdle for those who would forecast a stronger economy no, a much stronger economy in the second half in 2013.

Deflation Warnings

Probably the most dramatic market action in the first half of 2013 did not, however, center either in the U.S. or in Europe.

Instead, the titanic launch of the Nikkei under aggressive reflationary policy initially created hope and excitement. But the correction may have created new problems. Indeed, it seems that the OECD central banks (and especially the U.S. central bank) still have not learned a key lesson from the past decade: When you reflate asset prices on top of a stagnant economy and then asset prices begin falling, the ensuing deflation is often worse and certainly more intractable.

The crack in the Nikkei, which nearly reached 16,000 in mid-May, also sent tremors through the foreign exchange complex. The Japanese yen, aggressively devalued by the Bank of Japan all year, backed up considerably. And while the Nikkei has rallied back to the 14,000 level, it's clear that Abenomics is a fairly high-risk game. Interestingly, there seems to be almost universal excitement in the West, and especially in New York, about the prospects for Japan. However, as previewed in February's essay, The Arrival of Japan's Sunset, the idea that Japan can revive its moribund economy against the gravitational pull of imported resource costs and domestic demographics is specious.

Indeed, Japan is engaged in a classic battle with the Red Queen. As it tries to increase exports, it must also increase imports of raw materials. But to do this at the same time the BoJ is pursuing currency devaluation means that Japan is simply running faster to stay in the same place. It would be comical if it were not so tragic. In April, for example, Japan exported ¥5.7 trillion worth of goods. But to achieve such export volumes, Japan had to import ¥2.1 trillion of energy.

Japan, however, is simply a more acute version of the pressures that exist for both the United States and Europe. All three of these OECD giants need exports which is to say, they need other large economies to trade with them and import their goods. The U.S. has been lucky in this regard, as its exports of commodities from food to coal and petroleum products have soared in recent years. Indeed, exports have functioned as a kind of bright light for the U.S. economy in the period after the Great Recession. But now, notice that the U.S. dollar is soaring presenting the same kind of problem that has plagued Japan for decades.

In Part II: How To Break Out of Stagnation, we take a look at some of the steps Western governments may take as central banks like the Fed attempt to tighten. Recent communication from the BIS (Bank for International Settlements) indicates that fiscal rather than monetary policy will be the tool going forward, as central banks have perhaps become growth-impatient and frustrated at having to carry the weight of reflationary policy. With the structure of employment participation still at low levels, and with the ongoing energy constraint of expensive oil, what policies might OECD governments undertake to more aggressively put people back to work?

Click here to read Part II of this report (free executive summary; enrollment required for full access).

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DoChenRollingBearing's picture

Physical gold and physical FIAT$ work in a slowdown.

CPL's picture

Weird how the 'growth rate' is less than the inflationary rate.

maskone909's picture

Why is that weird? The monetary base is expanding while velocity continues to slow- COMPOUNDING economic problems. Complete divergence

akak's picture

It's weird only because it is still called "growth".

new game's picture

the wheels are spinning, mud is flying, but the vehicle is going nowhere.

shalom, give er more gas...

Big Slick's picture

... buy my newsletter 



johngaltfla's picture

I would not worry about the US as much as some other nations. It's about to get medieval on our asses....


The 67% Stock Market Crash Nobody Wants to Talk About

Tinky's picture

"...we take a look at some of the steps Western governments may take as central banks like the Fed attempt to tighten..."

At least he ended with a joke.

tango's picture

Governments are fighting a losing battle.  Technology is the real cultprit for slow growth.  Fewer jobs that pay less mean less discretionary income and spending (except massive personal debt).  The FED, our debt, the global game of sloshing debt from one computer to another - it's fun but secondary. Ironically (and logically) productivity with machines and AI is at an all-time high even as wages stagnate.

Industry after industry is falling to the onslaught of rapid technological advance -publishing, meter reading, CD and wire makers, anything relating to photography, book/cd stores, newspapers & magazines, manufacturing in general with the rise of 3-d printers, farm workers and before long, taxi drivers.  The FED could set rates at -10 or +20 but that won't result in more jobs for all these industries. 

max2205's picture


buzzsaw99's picture

yep. i don't have the heart to thoroughly read analysis like this anymore. I'm sure it's fine analysis but utterly irrelevant.

DaddyO's picture

So would the Tylers be better served by posting "how to" articles and other type stuff?

Just Askin...


W74's picture

What is "Growth"?  I'd be happy if I could live the rest of my life never hearing the term again.

Can't we focus on quality of life instead? What's the state of our land?  What's the state of our people?  What types of families do we have?  Are we working ourselves to death? How prevalent are social ills?

Seriously, if we focused on those things "the economy" would matter a whole lot less and we could chill the fuck out and focus on what matters.

Tinky's picture

"What's the state of our land?"

Along those lines, I strongly recommend Gasland Part II (now showing on HBO). Anyone who is unaware of the tremendous damage being done to our clean water sources (and the potential damage to come) by the Fracking industry should watch this documentary. No need to see part I (thought it was good as well).

It also provides clear (and sickening) insight into how corrupted politicians are (including the EPA).

W74's picture

Agreed with all of the above, now add to that the fact that we're setting ourselves up for Dust Bowl II by depleting the aquifers should have us alarmed.  My trip through Amarillo, TX and Oklahoma this summer only confirmed my suspicions.

shovelhead's picture


You need a subscription to Modern Angst Magazine.

CPL's picture

That in a nutshell is the direction we are going whether people like it or not.  Kicking and screaming if need be.

MethodMan's picture

If conservatively 25% of all federal government spending is grift, graft and pork, we're solidly in the negative true GDP. Every borrowed and spent dollar by the FedGov now leads to a net negative economic effect. This is supposed to be the point where things get ugly.

venturen's picture

Man the Printers....who cares about growth as long as the banks end up with the money!

Jim in MN's picture

I know ZH just covered this the other day but hey, the gift that keeps on giving is giving even moar!!!


Cesium levels soar in Fukushima plant groundwater

The operator of the damaged Fukushima Daiichi nuclear plant says radioactive cesium levels at one of the plant's observation wells have soared over the past 3 days.

Tokyo Electric Power Company regularly monitors groundwater around the reactor buildings to check for radioactive substances and analyze the accident's affect on the environment.

On Monday, TEPCO recorded 9,000 becquerels of cesium 134 and 18,000 becquerels of cesium 137 per liter of water at a well between the No. 2 reactor building and the sea.

Both radioactive substances were up about 90 times from the level logged 3 days ago.

The same well also showed high levels of beta rays on Friday. The rays would have been emitted from strontium and other radioactive materials.

TEPCO officials say they do not know why cesium levels have risen suddenly, or what effect the spike is having on the nearby ocean.

Seawater in the port next to the Fukushima Daiichi plant has been showing increasing levels of radioactive tritium since May. A water sample taken Wednesday last week contained 2,300 becquerels of tritium per liter, the highest reading since June 2011.

Jul. 9, 2013 - Updated 01:01 UTC

Tinky's picture

The good news is that the dangers of dining on Blowfish now seem quaint.

Seer's picture

Not sure which is more toxic, Fukushima or WallStreet...

JustObserving's picture

After it has been known that the NSA is collecting 94 billion pieces of intelligence a month illegally from the rest of the world, who in their right mind will buy US telecommunication and technology products?  Certainly no one in China, Russia, and Hong Kong.  And few in Brazil and India.

The US slowdown will be enhanced in the third quarter.  Sow the wind, reap the whirlwind.


LawsofPhysics's picture

Let's contemplate "global growth" shall we.  Tell me, exactly what is the earth selling and to whom is it selling to?  More importantly, what are these aliens providing us in exchange for all the resources and labor used during the production of these products? 

Femme Meatwad's picture

This article contains no new information and insights. It perpetuates the deflation myth: there is no deflation, and in fact if asset prices do fall it will be a buying oppty for those now priced out of markets.

LawsofPhysics's picture

Correct, no society/currency has ever collapsed/died because their purchasing power was too strong.

akak's picture

Historical knowledge and perspective is consistently and uniformly lacking among the flat-earth deflationary nitwits.

new game's picture

one step back and a billion fwd with arms in hand...

tango's picture

This is correct but we are starting to see exceptions to the old rules.  Massive increases in the money supply has not led to massive inflation (at least on the scale most ZHers have long been expecting).   In the past, rises in productivity inevitably led to rises in wages.  But the huge productivity boom today is the result of technological innovation replacing humans whose wages have deflated in real terms.  It's a new world.

Seer's picture

"Massive increases in the money supply has not led to massive inflation"

Because it's not actually in circulation?

Or, if it is, then it's essentially being hot-money-flowed into other countries where massive inflation IS taking place?

I don't think fundamentals can be defied.  It's either that people are being distracted from where to look (Fed is really good at hiding the pea), or they're being distracted by thinking that this time it's is different (that the fundamentals have somehow been made to defy gravity).

arcos's picture

Another article trying to explain, why growth is too low. Dozens of charts and theoretic bull shit is presented. But never people go to the root of the problem. Why are central banks pumping trillions of paper into system? What was the problem in the first place? Simply: too high crude oil prices!!! As of today crude WTI, parallel with a climbing US$ is 104!!!!

Please just keep it simple!

Seer's picture

"But never people go to the root of the problem."

And add yourself to that list!

THE ROOT OF THE PROBLEM is that our system is based on the premise of the finite earth supporting perpetual growth.  Earth/nature is catching up with oil (prices).  Keep in mind that prices have to be held up in order to keep margins from collapsing; and, yes, higher prices kill demand- welcome to the downward spiral!  Bankers are only players in the BIG GAME, yea they may be BIG PLAYERS they are players nonetheless- it's nature's rules...

eaglerock's picture

Yeah, perpetual exponential growth is a bitch, isn't it?

Seer's picture

And, really, none of this is "secret" or complicated.  The failure can only be ascribed to mass cognitive dissonance: people would prefer being lied to than having to confront the truth; the US deals with this my sticking soldiers heads in the sand...

fonzannoon's picture

Crude just broke through $104...

Seer's picture

That can only mean one thing: We ARE in recovery! because, we know that demand is... </sarc>

Handful of Dust's picture

Hostess is not GM (nor AIG):


Hostess employees unhappy with wage cuts The snack cake company returns with fewer factories, reduced employee pay, raided pensions and no unions.


The Journal shared the story of Craig Davis, a former forklift operator at a Hostess cake plant in Emporia, Kan., who was making more than $16 an hour before his plant closed in November, but was invited back at $11 an hour.


Also, the 79% of Hostess workers that were part of the Bakery, Confectionery, Tobacco and Grain Millers International Union has now dwindled to 0%.


Still, with former employee pensions reduced from $1,800 a month to $500, you'll have to pardon both former and current Hostess workers for lacking the same sweet nostalgia for Hostess shared by the new owners and their customers.

Seer's picture

Ho Ho... it was but a twinkie in their eye...

TrustWho's picture

HELL, how can you question this market's discounting scheme?

This market is as one dimensional as any market known to man! The addiction is "DADDY BERNANKE PUT" or better known as "fuck are you listening, "BUY THE DAMN DIP". Technical analysis has never been easier. Ask a technical analyst to compare this market trendline to any other in history. Almost everyone knows you don't fight the fed, except the Fed as never been so impotent for the economy that use to be their focus until they discovered the "Wealth Effect". What economist believes the Fed can create wealth? 

When the black swan, hell may be so obvious its a brilliant white, event occurs and the curtain is pulled from these bald, weak, arrogant Central Bankers, "Buy the dip" will be changed to "Hold on for your life, if its worth the effort".


ShrNfr's picture

RJG - The stepson of a quaker bed-pan salesman made good. But then it was always about selling shit wasn't it??

samsara's picture

Isn't that something, the graph of consumption peaked just after the 2005 peak in per day oil production.   Peak Oil.

Consumption now needs to decrease each year(like it is doing) to match the decline in oil production world wide.

Keeping these two rates close the prices stays stable.    NO new MAJOR oil found AND produced, means Consumption HAS to go down or else price WILL go up.


Flakmeister's picture

We are currently on the plateau. Once you correct for net Joules (or BTUs) total energy from liquids has been flat for 8 years despite slight volumetric increases.

The decline in US demand is because a component of the BRICs are now capable of outbidding the lowerend Americans...Hey, ~300 million people have recently become middle-class by US standards...

The world will roll over first in net BTUs from liquids, followed soon after by volume. What the inflationistas here don't factor in is that increased energy prices produce powerful deflationary forces in the economy as productive capacity exceeds the ability to service the cost of consumption. Real economic output shrinks in a environment where inflation is seen primarily is the energy/food sector while outright deflation can exist in other sectors of the economy...

The determining factor in the price of oil will be whether global production decline rates are greater than the drop in demand. We both understand that we will burn as fast as we can possibly produce short of some cataclysmic event changing the dynamic....

Sandy15's picture

Two things have kept the economy going:  1) Fed printing so government can spend -- BUBBLE and 2) Americans preping for whats coming.  I know we would buy a few more groceries, ammo etc to store up.  That allows consumer spending to look good, at least for the short term.