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If Everything's So Rosy, Why Is This Happening?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
New Orders are in recessionary territory.
The financial news is astonishingly rosy: record trade surpluses in China, positive surprises in Europe, the best run of new jobs added to the U.S. economy since the go-go 1990s, and the gift that keeps on giving to consumers everywhere, low oil prices.
So if everything is so fantastic, why are new orders cratering? New orders are a snapshot of future demand, as opposed to current retail sales or orders that have been delivered.
Like most other economic data, the series is noisy, meaning there are plenty of spikes up and down. To cut through the clutter, we look for trends and patterns, i.e. what did the series do prior to past recessions?
The answer is of course that new orders declined sharply. Take a look at this chart of new orders for consumer goods:new orders has reached levels below those recorded in the 2000-2002 recession.
New orders have spiked down briefly in non-recessionary periods, for example during the Asian Contagion of 1997 and a spot of weakness in 2006. But the current readings are significantly lower than these weak patches.
New orders for capital goods (excluding defense and aircraft orders) are not quite in recession territory, but the trendline is definitely weakening. Such weakening trends characterize pre-recessionary periods.
If we combine the two data series, we find New Orders are obviously in recessionary territory. Now maybe this is a temporary spike down that will be reversed next month, but if it is not reversed quickly, it is clearly divergent from the happy story of more jobs, global growth is picking up, etc.
New Orders is one side of the story; the other is real (inflation-adjusted) household income. Without more income, households must borrow more to consume more, and debt-dependent consumption eventually leads to households that can no longer borrow more, and an increasing number of households at risk of defaulting on their loans for vehicles, college, homes, credit card debt, etc.
In a period of strong global expansion, we'd expect to see median income rise not just in nominal terms but in real purchasing-power terms. But median income is still below levels reached in 2000. Courtesy of Doug Short:
In nominal terms, median household income is up a third from 2000--a strong showing indeed. But adjusted for official inflation (which understates inflation in key sectors such as healthcare and higher education), income has risen off the bottom (9.6% beneath 2000 levels) and is now only 3.9% below 2000 levels, but this is dismayingly at odds with the happy story of nominal gains.
This broad measure of household income doesn't tell us how much of the gains have been captured by the top 10%; the top layer may have gained much more than the 90% below.
This also doesn't reflect other potentially negative factors such as higher healthcare deductibles that lower actual take-home pay.
While "recovery" cheerleaders are busy predicting strong growth in wages going forward, they conveniently ignore that it will take another 4% of real gains just to get back to the levels of 15 years ago.
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I dunno. But I bet it's Bush's fault.
Of course, just like the $9 trillion of additional debt under Obumboy.
But none of this is actually rocket science. In an economy comprised 70% domestic consumption, for the economy to grow requires more consumption, which requires more income, especially as the essentials are costing a lot more. It's that simple actually...
Just buy stawks and sell gold. That's what the above charts and every other chart in the world "say."
Nothing matters anymore, so there's no point in studying anything.
That first chart is the most damning.
Well that and labor participation rate broken down by age bracket. That one is pretty damning as well.
However, when people quit spending money the velocity of money falls through the floor, and absent monetary expansion to offset the V contraction, spells deflation. Then there is the obvious "waterfall" effect a lack of consumer spending has on an exponentially growing economy. You'll see the Fed step in to save the day.
The problem is once inflation starts to pick up again (and it will) you will have a massive amount of money in the system as well as an increasing velocity of money, and Houston we have a major major problem. At that point you have banks explodings, necessities becoming ungodly expensive, pension funds becoming illiquid as the Fed rate will have to remain at 0 to preserve the solvency of the Treasury, but as inflation approachs 70s eras with 0% in the bank, people will start running into anything nailed down and still affordable. The value of cash will then become worth progressivly less as everyone is playing "hot potato" with the cash they have trying to get it into assets. This is how it ends, save something exploding somewhere.
Deflation, then inflation, then hyper-inflation.
This is the process. We are in (or about to be) in step 1 of 3.
I forsee the continued bastardization of the CPI to keep it "reasonable" in either +/- direction of 0.
Stockman in the Great Deformation, forecasts deflation -> inflation -> fast inflation as you suggest. Dollar may have some buying power now but when it ends look out.
Gasoline is NOT cheap. Pump prices are not saving anybody anything but pocket change. Let's loose the gas saving rhetoric please.
I agree with you for the most part. Most wealth is no longer stored in tangible assets or even cold hard cash. If the stocks and portfolios implode or when it does, money will be lost. Then inflation will arise in a race for real goods at least to those who still have money or able to make money. Inflation will continue on most items that aren't expensive-like food, energy and other consumables. But expensive items should stay deflated, like housing, land and automobiles cause 90% or so need to take out loans in order to buy them. When the stocks and 401k's implode, ppl won't have the purchasing power to cause inflation on items like housing and not enough new money will be generated to increase the demand to a point causing inflation. They will blame the banks again for bad lending instead of blaming the corporations for stock buybacks and not improving the infastructure of the US job market or future economy. No jobs, no income and no repayment of debt.
Will anyone blame 'Free Trade'? The one thing that has stolen the jobs while being subsidized by DC bond issuance to the tune of around $45 Billion per month for China alone. DC subsidizes the foreign competitors, by selling bonds to them so they can keep their currencies' values suppressed, while still taxing and regulating the remaining US producers. Recently, the Chinese have also started buying US real estate. DC, the western outpost of China.
And....to keep that 70% humming along (for the fortune 500) we need lots of 3rd world baby making machines to crank out 3 to 4 x as many consumers as the native population.
You may say, yeah but they're poor, illterate and their children have high drop out rates.
Do the Fortune 500 care about that? Pftftft.... Transfer payments are still money to them!
Welcome to the DemRep Utopia! Where profits come before the consent of the governed!
"In an economy comprised 70% domestic consumption..."
Old news. We're now an economy of stock buy-backs.
Don't stock buybacks count as consumerism?
Or is it three-card-monty?
That is the beauty of it all. Obama blames Bush. Back in 2002 I blamed Clinton (I'm not Bush but I did support him, especially after 9/11 but before clarity snuck up on me with a 2x4). Clinton got elected because we could all blame the elder Bush who could blame a senile Reagan who fixed the mess that Carter inherited from Ford thanks to Nixon.
Parties and politicians change over and over. What then, is the single factor that has remained constant?
Our real owners have not changed.
Why did you leave Johnson out?
Favoritism?
Because Obama
This has to be good for stocks.
I'm buying all kinds of shit at McDonalds.
MY CHOCOLATE RATIONS ARE UP!!
The best investment in this environment is paying down any existing debt you may have above say 3%. Somewhat safe returns do not regularly beat this so the doubling down on the mortgage, student loans or any other high interest credit starts to make sense. Too much risk out there.
Deleverage.... word.
Just a thought but maybe not? Savers are being penalised and debt is being encouraged and subsidized by the savers. When the SHTF there is going to be lot of "Resetting", so the alternative approach might be to go for broke (Pun intended).
The FSA and most of the rest of the 50% of Americans that don't pay any Federal income taxes have adopted this approach whilst the 1% squeeze the 49% to pay for the subsidies.
Yes the go for broke crowd may end up being right in the end but life ain;t like Monopoly where you get to start a new game. You might end up losing valuable years trying to recover going belly up counting on a yet to happen hypothetical situation.
The best way to make money is not to lose it.........Warren
Son, money don't come with instructions.......Grandpa(Great Depression survivor)
Things are rosy 'cause stawks are going up today ~ The FED.
Amongst other things, the effect of taking on debt (which is promptly spent) is to 'bring forward' economic activity that would only otherwise have taken place in the future.
That's why cutting interest rates can help push up economic activity.
FWIW, IMO, interest rates are now so low, everywhere, that that effect has now come to an end.
I think we have now reached the 'pushing on a piece of string' situation.
Watson
With subnormal rates, the string(velocity) is lower than it would otherwise be because, savers refuse to spend. The parasitic banks have become cancerous(since 2009). They are eating the host before our very eyes.
Don't worry.
We'll push it in the wrong direction.
Consumer spending? Anybody? Anyone? Bueller?
"Non-Defense Capital Goods"
Show the rest of the picture! ;-)
I guess you know that this post is essentially what Krugman is saying. eg, http://is.gd/SCbuDA
Better watch out, your inflationista buddies will turn on you.
Depression is so... depressing!
The economy is rosy, in a Point Break sense, going for broke.
Grommet: I feel like running.
Rosie: You do and you die.
Artificial demand is empty demand.
Companies have screwed themselved out of customers.
#AUDITHEFEDNOW
http://research.stlouisfed.org/fred2/series/ACDGNO
what is this?
Yes, WTF is it??
cars?
Then there's all manuf. UN-seasonally adjusted. -21% July to Jan.
http://research.stlouisfed.org/fred2/series/UMTMNO
Time for another retro-recession. We will have been in recession for the last two years, luckily we didn't know it, so it's almost over! Eat your cake too.