Submitted by Eugen von Bohm-Bawerk [11],
The idea of an imminent US recession may seem moot as all the self-proclaimed experts and talking heads still acts as we are well into a recovery and patiently waiting for the forthcoming escape velocity which will take care of all ills plaguing today’s over-indebted society. Never do they stop to think about why things looks as dismal as they do. Not once have it ever occurred to them that unprecedented accumulation of unproductive, or even counter-productive and destructive, debt in itself might be the very cause for low growth. No, these people have the audacity to claim low growth is the reason for high debt ratios, and only through even higher leverage against household and public income can economic growth rates be re-established on previous healthy levels to once again render out-of-control politicians lust for spending sustainable.
The sheer scale of the backwardness shown in such gross economic illiteracy suggest to us there is ulterior motives behind so-called Keynesian economic theories. No grown-ups would take this seriously if our monetary masters didn’t need to look out for their buddies running fractional reserve warehouse scams across the planet.
Perfectly in line with our thinking presented in Goebbelnomics [12] a key aspect of communication from our money masters is to put current economic conditions up on a pedestal. Take the latest GDP forecast from the Federal Reserve as a perfect example. Despite the fact that first quarter GDP fell at an annualised rate of 0.7 per cent and higher frequency data going into the second quarter have underperformed there are people within the Federal Reserve System who still believe the US will grow by 2.3 per cent this year. For that to happen, assuming quite generously a 2 per cent annualised growth rate in the second quarter, the third and fourth quarter must each grow by 4 per cent for the math to add up.
For 2016 it is even worse. Once again we are told to expect escape velocity, but as the two charts below show, the FOMC have consistently predicted higher growth than what turned out to be the case after the fact. The exact same is true for IMF, World Bank and ECB forecasts. We do not blame them for being wrong, GDP forecasting is a fools guessing game after all, but if they were truly guessing there should not be any consistency in their error. Always too optimistic. Or always trying to condition the great masses into creating their own wealth effect and presto escape velocity.
[13]
Source: Federal Reserve, Bureau of Economic Analysis, Bawerk.net
What our two simple charts goes a long way of proving is that Goebbelnomics has very much become bread and butter of institutionalised mass-manipulation.
However, asking the very same people where they think interest rates will be at the end of 2015 they all agree that the US economy will remain on life support.
[15]
Source: Federal Reserve, Bawerk.net (note, red dots indicate the median projection)
There are only two persons in the FOMC that have the interest rate expectation right; and they believe rates will be kept at current level even after the December meeting. Perfectly in line with continuous postponement of so-called lift-off. It will as usual turn out to be a dud.
What we know already is that the US “expansion” is among the longest on record and if history rhymes, as it often does, it is soon time for a new recession – and that with both fiscal and monetary policy stretched beyond recognition.
[16]
Source: Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), National Bureau of Economic Research (NBER), Bawerk.net
In GDP accounting personal consumption expenditure account for just under 70 per cent; which tells you just how lopsided the whole concept of GDP really is. The best monthly proxy for consumption expenditure is retail and wholesale sales. As the next chart shows, US retail sales has been struggling for quite some time. On a month on month comparison retail sales fell in December, January and February, had a good month in March before coming to a standstill in April.
[17]
Source: US Census Bureau, National Bureau of Economic Research (NBER), Bawerk.net
The May number was unexpectedly strong, but the seasonal adjustment factor suggest that number will eventually be revised down. Non-seasonally adjusted “core” retail sales fell compared to last year suggesting the underlying trend is weakening, not strengthening.
[18]
Source: US Census Bureau, Bawerk.net – Hat tip to ZeroHedge for adjustment factor
What is more worrisome though, from a retail sales perspective, is the build-up in inventories. The inventory to sales ratio has been on a downtrend for the last three decades due to improved demand management, but relative to trend retail inventories are pushing a two standard deviation difference. We didn’t even see this after the dot-com crash. Bloated inventories are highly indicative of a coming inventory liquidation cycle, in other words a “normal” post WWII recession.
[19]
Source: US Census Bureau, Bawerk.net
Activity in the wholesale market may be a leading indicator for what to expect in the retail business over the coming months. Wholesale trade has been falling while inventories has been building. The inventory to sales ratio is clearly in recessionary territory.
[20]
Source: US Census Bureau, Bawerk.net
The manufacturing sector is obviously not doing any better as the weak retail and wholesale trades reverberates throughout the supply chain.
[21]
Source: US Federal Reserve, Bawerk.net
And we know for a fact that the oil and gas extraction part of the IP complex, which contributed almost 50 per cent to overall IP over the last 12 months, will not fare well in the near future as the shale industry contracts on back of falling CAPEX. When the HY energy investor wakes up, maybe due to a quarter from Yellen, the carnage will be that much worse.
[22]
Source: US Federal Reserve, Bawerk.net
Judging by the level of factory orders, we should not expect a positive contribution from industrial production regardless of the whimsical allocation from the HY investor.
[23]
Source: US Census Bureau, Bawerk.net
While some may claim the latest hiring spree suggest things are not as bad we contend that without a spurt in labour productivity this development will soon turn for the worse. US productivity has been lacklustre over the last fifteen years, and while both employment and hours grew over the last five quarters, the marginal labour added came at a severe cost. Labour productivity actually fell suggesting hiring has been nothing more than “labour inventory accumulation” and will have to be liquidated along with the rest of capital misallocations witnessed in the US economy if interest rates were ever to increase.
[24]
Source: Bureau of Labor Statistics (BLS), Bawerk.net. Hat tip to Alhambra Investment for second chart
It is also worth noting that most of the new hires is in the less productive service sector which provide low paying jobs without benefits.
Summing it all up, the last chart of US GDP together with cumulative goods sale and inventory accumulation since 2000 should tell you everything you need to know. The US economy is now on the verge of a new recession.
[25]
Source: Bureau of Economic Analysis (BEA), Bawerk.net
Our prediction, which should always be taken with a grain of salt, is that the FOMC will maintain ZIRP (we consider a 25, or even 50bp hike within the range of ZIRP) well into 2016, the US will soon experience two consecutive quarters of GDP contraction and the strong dollar will change on the prospects of another round of QE.
