What Needs To Happen Before We See A Big Recovery?

Tyler Durden's picture

Submitted by F.F.Wiley of Cyniconomics blog,

In a Bloomberg article last May, Caroline Baum summed up the economy nicely in a single question:

Four-and-a-half years of an overnight rate near zero and aggressive securities purchases by the Fed have succeeded in raising asset prices. The question is whether higher asset prices will deliver jobs and economic growth before they become destabilizing.

In other words, will the real economy mend before excessive financial risk-taking kills the patient?

Baum called it a “horse race.”

With 2013′s economic data mostly complete, let’s have a look at where the race stands.

We’ll start by asking what needs to happen before we get the robust recovery that many economists have predicted for the past four years. Our answer is that one or both of two things need to occur:

  1. Households need to borrow at the pace we normally see in economic expansions.
  2. Household income needs to grow strongly.

Of these choices, the best result would be number 2 with as little as possible of number 1. The worst would be another credit-fueled expansion (more 1 than 2) that feels good for awhile but ends badly further down the road.

But isn’t capital spending the key ingredient?

You may argue we’re missing a third possibility – a capital spending boom. Many claim this is the best way to get things going again. We would say it puts the cart before the horse, at least as far as what’s prudent and realistic.

In America’s consumer-led economy, businesses have no reason to ramp up capital spending unless they expect strong gains in consumption. That seems unlikely. We’ll discuss capital spending in more detail in the future; for now, we’ll point to the economy’s ample unused capacity, tepid overseas growth, growing financial risks and President Obama’s bumbling incursions into private markets. Is this really the best environment for entrepreneurs to launch a capital spending spree? We doubt it.

Okay then, how about credit growth and household income?

We can’t rule out the possibility that the Fed gets the credit boom it’s looking for. But we don’t expect it in the near term for the same reasons that capital spending won’t take off, nor is it predicted by survey data.

Which leaves household income. According to the personal income report released Monday, annual growth in real disposable income jumped to 2.8% in January. Based on this alone, you might conclude that households are flush with cash. However, it’s not unusual for this indicator to bounce around between the end of one year and the beginning of the next due to tax law distortions. We screen out the noise by averaging all December figures with the subsequent January figures and using the average for both months:

what needs to happen 1

As indicated on the chart, real disposable income has been slowing for three years and currently shows no growth at all. We’ll see at least a small bounce next month, since the latest figures are held down somewhat by the 2013 increase in Social Security withholding and small increase in tax rates. There’s also a small effect from the expiration of extended unemployment benefits in January. But these considerations don’t fully explain the downwards trend.

A more important factor is that new jobs are paying poorly compared to the average existing job. Employers are picking up part-timers and low-paid service workers and creating very few “breadwinner jobs.” Therefore, disposable income is much weaker than you would think if you just focus on employment growth.

And not only does the personal income report give us another perspective on the quality of newly created jobs, but it seems to explain the overall economy pretty well. We see the same declining three-year trend in consumption:

what needs to happen 2

And in capital spending:

what needs to happen 3

The remaining components of private domestic demand – housing and commercial construction – are related to supply factors and credit growth as much as household income. Nonetheless, total residential and nonresidential (structures) investment shows a similar pattern to the other charts:

what needs to happen 4

What’s more, demand would be even weaker if households hadn’t compensated for poor income growth by reducing savings:

what needs to happen 5


For all the chest-thumping from policymakers about the declining unemployment rate and increase in GDP growth in the second half of last year, these statistics are easily misread. More telling indicators, such as private domestic demand, haven’t picked up at all. Nor would you expect a robust recovery as long as employers create mostly lousy jobs.

Getting back to Baum’s horse race between the real economy and the risk of financial instability, the real economy seems to be falling behind. Financial risks are growing steadily, as we discussed in “Tracking ‘Bubble Finance’ Risks in a Single Chart.” The real economy, on the other hand, is held back by weak income growth.

Looking forward, it’s worth keeping an eye on the personal income reports and other indicators of employee compensation. We’ll surely see some improvement as temporary effects wash out. But as long as the declining trend remains intact, don’t expect the big recovery that policymakers continue to predict.

Bonus link

For more on why employment growth isn’t as simple as Keynesian economists touting full employment targets would like you to believe, we refer readers once again to Arnold Kling’s PSST theory. Kling builds out an up-to-date variation of Joseph Schumpeter’s theory of creative destruction. He explains why creating sustainable jobs after a bust can be a very slow process.

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GetZeeGold's picture




I'll take kill Obamacare for a $1000 Alex.

icanhasbailout's picture

This problem predates Obamacare.

LawsofPhysics's picture

Yes, it really took off in 1971.

HardAssets's picture

Now is a 'recovery' defined as another bubble inflated . . .

or are we talking a real, steady, long term economic upswing which means average middle class Americans standard of living increasing in real terms each year ?

NoDebt's picture

At this point, you take the bubble and like it.

The current clowns in charge wouldn't know how to build or improve anything in the real world.  They only know how to tax and redistribute.  Name one thing they've touched that's gotten better or cheaper.  One.  

Harry Dong's picture

The tax burden on the elites?

Oooh #2- corporate profits?

This is getting easy

3- the afford ability of Lamborghini s

krispkritter's picture

I'll take 'The Big Crash' for $238 Trillion Alex.

doctor10's picture

Untiil the three letter alphabet agencies are back behind the Fourth amendment-capital is worthless in the USA

Gringo Viejo's picture

More cowbell................

buzzsaw99's picture

moar cowbell. get with the program gringo.

ZeroPoint's picture

It will not happen in a consumer driven, debt culture. The majority have no assets.

Tsar Pointless's picture

I get your point. (Pun intended.) You are correct, because the rich won the class war. You know - the one they and their paid shills denied was taking place when indeed, it was taking place. And they won because they convinced enough of "the majority" that it wasn't taking place, and that any of us in "the majority" who dared claim there was a class war going on, was trying to incite a class war.

Americans: A special kind of stoopid.

The_Ungrateful_Yid's picture

After years and years of being de-programmed and alot of it is (white-guilt) from reality and what made america strong (belief n God, hard work ethics, strong family), it was bound to happen. It just sucks that none of our leaders (yeah those motherfuckers) today give a damn except ron paul and a few other stragglers.

The_Ungrateful_Yid's picture

How is it fascist? Fucking idiot.

RevRex's picture

Spoken like a true homosexual democrat cocksucker!

malek's picture

You just sticking your nose into the rabbit hole for the first time?

donsluck's picture

Dear Ungrateful, I assume you have the missing qualities you lament. Look on the bright side, it gives you an edge, except maybe that god thingy, which won't help you at all.

Oldwood's picture

For people's incomes to rise their productivity relative to the rest of the world must rise. We have been told for the last fifty years at least that WE ARE AMERICANS! As such we don't need to try harder, thats what the Mexicans and Chinese are for. If we need shit we will just borrow the money at a super low interest and favorable payment terms. If we are lucky enough to live in states like MA, we don't even have to worry about losing our homes for a couple of years after failing to make payments. Our fucked up populist politicians will tell us anything to retain their power and by the time most realize what has happened, what they have allowed us to do to ourselves by concealment and enabling, it will be far too late for solutions.

elwind45's picture

The politician would shoot for the rapid. The central bank not at all. The politician wants the next election the central bank wants a little inflation as a visual substitute for growth. You did see last year when the central bank dumped credit and still had something called growth to report about? The last thing the fed wants is mercurial growth and that to them is any growth? The last thing the fed wants DC to do is turn up the pressure cooler because it knows there is way to much water in it. UNTIL WE RAISE RATES WHILE DOING QE OR VACATE OUR INVESTMNTS OVERSEAS we stew in the Feds HAPPY FUNK foreva

HardAssets's picture

I see your point, but there's more to it than 'work harder, you lazy Amuricans!'

Productivity is determined by investment in capital.

At the heart of the problem is the phony fiat money system snuck through congress during the Christmas holiday season of 1913. We are forced to use 'money' which is nothing but debt instruments created out of thin air. For the system as a whole, in order to pay the required interest payments, even more money must be created. This increases the interest and the cycle continues.  The system is inherently inflationary over the long term. This is evident by the fact that over 97% of the value of the dollar - which means peoples earnings and savings - have been inflated away. That is, - taken from their pockets and put in the banksters pockets, over the last century.

People are being robbed, but don't realize it. Some of that which is stolen is 'given' back to them in various programs instituted by paid-off politicians. It is a way to quiet the population and is a means of control. No, all the 'social programs' aren't because they love you folks !  And 'government' isn't really your Mommy & Daddy. They want to take down the national character & have people feeling powerless and dependent. They want them fighting among themselves (Divide & Conquer). Every aspect of the economy/society which they control is aimed at maintaining their game of theft & control. Remember 'women's liberation' and the move toward two earners in the family ?  Less obvious how much was stolen through inflation. Open up China as a manufacturer producing low priced slave labor goods ?  Less noticeable the price inflation over the years. Blow up various asset bubbles ?  Make people think they are prosperous - - - at least for awhile when it crashes & they are periodically fleeced.   If people understood how they were being ripped off and felt it fully - - - - well, you can imagine. Henry Ford said "It is well enough that people of the nation do not understand our banking and monetary system. For if they did, I believe there would be a revolution before tomorrow morning."

Like the British empire before it, the banksters are sucking away the lifeblood of America. Theyve been doing this for a century.  In addition, they transformed the national character by taking over and mandating public 'schools'. Americans don't even know what they had before & what they lost.  If what the banksters had stolen had been invested in physical capital and real education . . . . America would have been a far different place peopled by far different citizens.

This is my opinion, anyway.

Oldwood's picture

Yes we are being robbed, but people have been robbed since the beginning of time. The issue is when the theft is so great and the idea that work is futile, pointless or even unfair, then it is game over. And we are largely bing robbed voluntarily by participating in the corruption around us. The people continuing to buy stocks and bonds are a primary player. Doing what they believe to be in their own best interest is enabling the "policy makers" to drive us off the cliff. If we refused to invest in these sham markets they would end or reform. Instead we watch everyone engaging in a market that they KNOW is corrupt, fully in the belief they can beat the system.

RaceToTheBottom's picture

The pull yourself up by your own bootstraps story becomes progressively harder to sell to the FSA when all the Banksters got bailed out, don't you think?

Oldwood's picture

impossible sell. The center of the problem. People "believe" they don't need to work, or work very hard. We are entitled. Which is what ultimately will suffocate us. Surival requires productivity, even if it is in your own garden. People don't think they should have to mow their own yard, much less grow their own food.

HardAssets's picture

"A special kind of stoopid."

Well, I don't know about that - the populace of empires are often taught to believe all sorts of b.s.

One thing Americans were taught is the definition of 'the rich'.  They think that's the guy making a 6 figure income or the small business guy with a couple or three mil in assets living in what they consider a 'nice home' and driving 'nice cars'.

Class envy is stirred up and directed at these often productive people while the real controllers & blood suckers pull the strings. Divide & Conquer is so useful for them.

donsluck's picture

So, you are arguing there is no class warfare? I think there is, and it is enabled injustice, where the rich and connected are not prosecuted. This is felt by all and leads to a decay in our social fabric. The problem is multi-faceted and too complex to go into here.

Tsar Pointless's picture

Sell-side brigade hijacked the economic releases for the day, it appears.


53.3 actual vs. 56.7 prior.

buzzsaw99's picture

the maggots only want moar so moar we shall have. jobs got nothing to do with it.

Sudden Debt's picture

We're clearly just dreaming this depression. What would doctor freud say...

GetZeeGold's picture



Don't know.....I'm not allowed to see him anymore.

krispkritter's picture

?? You must have let something slip...

d edwards's picture

A recession is when your neighbor loses his job.

A depression is when you lose your job.

A recovery is when 0bozo and his regime lose THEIR jobs.


Just think of the ripple effect-hell a tsunami of jobs and productivity if the US quit sending 100's of billions of $$ per year to the ME for oil. If we started producing and using our own oil and nat. gas the money would be turned over and over and over in the US economy. You'd see a national boom just like N Dakota and TX.

corporatewhore's picture

give it up on obama.  his absence isn't the solution that will fix it all.  Nor was Clinton's , Bush's or Bush II's.

there is no answer.  accept it and live accordingly

Bonapartist's picture

"Those jobs are gone"- Steve Jobs to BroncO Bama.

snr-moment's picture

So as you look around your little corner of the world, you can't see ANYTHING that needs to be done, that could be done, that might improve the  standard of living of ALL  americans.

You'd rather we just have people sit on their asses and collect food stamps?


Shit, you could build a dozen dams and pay people to ferry the fish past them.

snr-moment's picture

Example.  Do you have ANY idea how much down, but not decayed, cedar is still sitting on the floor of Yellowstone.  And how much electricity could you generate from it.  That's some serious low hanging fruit there.

Except the environuts would kill you.

Acidtest Dummy's picture

Recovery? Go home Tyler you're drunk. (Can't blame the weather and hit rock bottom at the same time.)

Dollarmedes's picture

Kill Obamacare, regulatory reform, downsize government, tax reform, end wall street cronyism, stop defecit spending in Washington D.C., stop Fed printing.

This country is screwed.

Tsar Pointless's picture

It was screwed from inception. That's the whole irony of the situation.

RaiZH's picture

A more sustainable and prudent recovery? 

We've over shot by miles on that one... I can't see that happening without the system imploding first. 

Oldwood's picture

In order to change to occur, peoples perceptions must change, and that ain't going to happen until they are forced to change. Free Shit Forever!

Kina's picture

Another decade of delveraging before the 'consumer' becomes a force for growth. All are borrowed upto their neck....and the reality of increasing unemployment, or jobs below the poverty line...means the means for consumer growth are diminishing, not growing.


The transition to an entirely part time work force...where it takes two or more jobs to make ends meet means a stagnant economy...especially when it is already over borrowed.




Oldwood's picture

Sure, like the whole world is trying to deleverage. Interest rates at all time lows, credit consumption at all time highs, personal income falling...sure, everyone is racing out to pay off their credit cards....NOT! If anything, many are gaming the system, knowing its broke and unsustainable, so they are out borrowing what they can under the assumption that they will never have to pay it back. Default and reset. Just like so many buying gold in hopes of seeing a dollar crash that makes them rich overnight. The other side of the coin is buying stocks like mad assuming we will see inflation to the moon and still be able to cash out before it goes boom. Everyone is gaming the system, when the original system was never supposed to be a game. It was supposed to be about working and saving, an honst days work for an honest day's pay. Now, its about how to get rich on a bet. Fucked to the core.....

ejmoosa's picture

What needs to happen?  A REAL recession.  And fewer rules and regulations.

Eliminate the minimum wage.

Eliminate Obamacare.

Rewrite the Interstate Commerce Clause to eliminate activitites that it has been expanded to cover by the Supreme Court.