What a lot of conflicting news we have gotten. It feels like a storm is brewing. But, large patches of the economic sky look clear and sunny. Then again, dark clouds hang in all directions. Or, is that just fog? It has been very hard to make sense of contradictory economic news. In such times people often go with their gut feelings. Mine is that we are far from seeing the end of the credit crunch and that there will be real hardship for cash poor and debt strapped consumers over the next 18 months. I have thought this before. Often I was premature and off on the timing. I process economic information and attempt to make sense of it for a living. I am having a rough go of it. I imagine some of you are too. It is toward helping out in that regard that I write today.
GDP Surprise
On October 31, 2007 the Bureau of Economic Analysis (BEA) released its advanced estimate of third quarter GDP growth. Real -- adjusted for inflation -- GDP growth ran at an estimated 3.9% across the third quarter. I must admit, I was surprised. Advanced estimates are subject to rather dramatic revisions and are based extensively on guesswork and extrapolation -- much like the October non-farm payrolls number we got this morning, November 02, 2007. The last two quarters have been defined by tanking consumer sentiment, fear from large firms, financial turmoil, skyrocketing oil and food prices, plunging dollars and robust economic growth! Employment has weakened across the second half of the year. The Federal Reserve has been forced to loosen rules, cut multiple rates and reassure markets on several occasions. Financial firms are undertaking large lay-offs and senior management heads have rolled. The third quarter had distressingly low employment growth, an average of 97,000 new non-farm payroll jobs per month. Goods producing employment actually fell across the third quarter. Goods producing employment continued to fall in October. A look at third quarter GDP shows a curious fact, goods exports surged. This declining employment area was the single largest contributor to third quarter GDP growth. 44% of quarterly real GDP growth came from increases in export of goods. In case you thought we just consumed less here, we did not.
The other area of strength in GDP growth was personal consumption expenditure on services. Housing and medical costs led the way in this area. It would seem people are spending more on their homes and health care. Never mind that these two may be increasingly related as housing stress creates health issues. It begins to look like the good economic news flows from foreign buying of our now cheap exports and debt driven consumer spending on health and housing. Last but not least, the BEA reports data adjusted for their estimate of price increase. The inflation adjustment for the third quarter was very low. The lower the inflation level the higher the economic growth appears. The spiraling cost of energy and food suggests the BEA may be wise to use a higher number as an inflation gauge. If this happens for the revised GDP numbers, the revision will be downward. I strongly suspect the 166,000 new October 2007 payroll jobs announced this morning will fall in revision as well.
Government data on GDP and jobs growth are anomalous bright spots in a dark landscape. Happy times government data is joined by impressive results from the high tech sector that has boomed across the last few months. Energy firms have performed well as oil has risen rapidly, breaking record price after record price. This has been tempered by earning reductions from leading large integrated oil firms as profits from refining have slumped. Oil grows as the dollar continues to fall to new lows. This is also helping our exports as you have heard and heard again. This creates a strange feature of the recent GDP numbers. As our dollar falls and oil spikes, we are earning a pretty penny exporting. Or is our currency falling enough and fast enough to swell the dollar value of foreign earnings? As the dollar falls in value, foreign currencies rise in value -- this is two ways of saying the same thing. US Dollar weakness swells the dollar reported value of foreign currency earning. It is hard not to suspect this as we are employing fewer folks in goods production and earning more at it. This means we are celebrating the decline of our currency as economic growth. This economic growth is calculated using estimates of inflation that seem a bit low given what is happening to the prices of food and energy? As our dollar falls we will have to pay more for what we buy from abroad. That will have to show up at some point as rising prices. If we factor all the above, the third quarter GDP number loses some of its countervailing wisdom shine. This morning's jobs numbers are similarly odd. A third of new job creation occurred in the business and professional services area. What? The lay-offs across the financial space will be large and have just started. Thus, it remains hard to know and even harder to fully embrace the great news coming out form the BEA and BLS.
The Fed did not seem to feel like the economy was growing well when they cut both the discount and Fed Fund's target interest rates on Wednesday October 31, 2007. The Payroll and GDP numbers make the Fed look as hasty and focused on financial markets as they did in the last round of cutting. Our last round of cuts came amidst upside surprise data on the economy and jobs. The Fed is neither supposed to be focused on financial markets nor, do they admit to being so focused. The Federal Reserve is sufficiently fearful of the housing and financial pain to cut interest rates as dollars slide across the late summer and fall. They do this in the face of upside surprise after upside surprise in GDP and jobs numbers? Federal Reserve Policy action is consistent with economic weakness and implicitly doubts the macroeconomic health reported in the GDP and jobs numbers.
It appears that the economy is trending down. As is always the case, this is an uneven process across time and the sectors of the economy. The robust numbers on GDP and job growth seem to be generated by our falling dollars, debt driven consumer spending and a very low estimate of inflation. Employment has been slow to respond to changes. To date there has been only a tiny decline in housing employment in official numbers. Thus, epic pain and slump in all things housing and building related does not show up in employment numbers. Perhaps, enough is going right around the US economy and world to prevent trouble showing in official GDP and employment numbers. It is still a foggy picture. However, it looks to me like some of the fog is actually cloud.
On the lower sections of the mountain path it is wide enough to let our guides turn us round. But the closer we get to the summit the more everyone believes it is achievable. Mountaineers suffer the same problem. They call it "Summit fever" and it claims far more lives than bad luck ever did, by corrupting the powers of good judgement.
It takes a lot to turn one person away from a summit. Turning round a happy crowd is quite impossible. They would rather believe the optimism of the guides who talk of spectacular rates of ‘sustainable growth’. They prefer government statisticians who add mandated public sector expenditure into economic growth figures, and they listen to commentators who refer to ‘Goldilocks economies’ and ‘productivity miracles’. So they buy more sports utility vehicles on borrowed money and re-finance their houses.
Yet domestic economic activity has no real growth, and high imports cause huge trade deficits. Savings rates diminish, financial instrument yields evaporate, governments borrow and spend and call it ‘investment’, corporations report profits which have nothing to do with earned cash, financial trickery permeates all levels of society and credit is offered to an ever increasing set of less well qualified borrowers, whether sovereign states, companies or individuals.
The majority cannot see these signs for what they are. Only a few miserable realists look around and, seeing the dangers on both sides, turn back on their own and face the cheerful smiles of those who continue on up.
It’s a long lonely walk down and there’ll be no-one waiting at the bottom to cheer your safe return
After 26 years of real asset exploitation, there is not much left to pick over except bubble creation, collapse and bailout. Now the big money is being funneled out of the nation to wiser run economies.
In the mean time, the real economic strength of the nation rapidly declines while the inflated GDP grows at 3 or 4%. But as with the real estate bubble, real GDP is not being created.
If we were to consider our debt to asset ratio in honest terms, we would discover an economic system in mortal peril requiring draconian and other measures unparalleled in human history. Otherwise, we are finished as a major influence in the affairs of mankind. All this is the result of economic, trade policy since 1980. In human conduct, this squandering of a nation's wealth and virtues is unprecedented. And our decline is unmentionable within and across our political and intellectual establishments. Hiding the truth from ourselves is the true tragedy of our time.
Your disbelief and puzzlement are caused by data that derive from the fruits of negligence, incompetence and conflict of interest of American leadership.
On 2 November 2007 euphoria reigned in the US Equity and Commodity markets. Especially giddy and delirious are the traders in the high end of the high tech stocks and in the oil and gold commodities and stocks. A qualitative glance at a long term chart shows a blow-off phenomena in all of these sectors. The Federal Reserve - with ongoing and forward knowledge obviously beyond the recently reported last quarter 3.9 per cent GDP growth - lowered the Fed Funds rate by 1/4 percent on 30 October. With a plummeting dollar, 90 plus US dollar oil, high 700 US dollar gold, and PE ratios of 45-50 in the high end of high tech stocks, the Federal Reserve indeed has special knowledge of the true status of the defaulting and debt-drowning US macroeconomy. Now as speculators further borrow to malinvest, as mutual fund managers place their last cash reserves on the equity roulette table, and as advertising lenders encourage homeowners to take out equity in their devaluing homes 'and balance their deteriorating real estate portfolio' by investing in the lower-interest-rate-enabled stock equity market, there is a sadness that central bankers are damaging, albeit transient, the American consumer and the American savers of US dollars. Very soon when the ongoing money supply devolution becomes apparent, the Federal Reserve's will be able to justify its counterintuitive recent actions. The policy makers will have the weak alibi that they did all they could to stave off the collapse. For the academic monetary policy experimenters, the enabled ongoing speculative market activity should demonstrate that inappropriately low interest rates and unregulated lending practices lead to only further inappropriate debt, malinvestment, over production, and more extreme over-valuation. Value added wealth to the real economy at the wage earner level is not created. The ultimate intent of Lammert quantitative valuation fractal analysis is to remove the fog and clouds and show the US macroeconomy, under the influence of extreme debt, as a predictive mechanistic self-balancing system that conforms to ideal quantum fractal growth and decay.
From their economic standpoint, higher oil prices increasing the cost of gas, home heating, food and many other day to day expenses tell them the real story of the economy.
Add to that, multiple houses for sale on every street and road they travel on, the increasing cost or lack of affordible health insurance, along with stagnant wages and they see a bleak picture of the current economy.
No amount spin can change this.
Starting w/the 2001 recession Republicans DRASTICALLY CHANGED THE RULES on Unemployment compensation. After 9/11 and every December/Christmas they PREMATURELY removed hundreds of thousasands of people from unemployment.
W/today's lowgrade jobs growth, can't help but recall that since 2001 over 800 research labs moved off shore. That their $12B reduction in college loans shut the doors to hundreds of thousands of eligible young people.
Today, seems that innovative young are going into CATERING OVER SCIENCE..as Basic Science Funding (THE ROOT OF FUTURE DOMESTIC GROWTH) has been cut to the bone!
Well put: "celebrating" the decline of our currency: US companies get more dollars for same goods sold abroad...making it APPEAR they had increases in sales.
Certainly along those lines is US multinationals making and selling products abroad were holding cash abroad. Now allowed to repatriate cash for only 5% tax rate.
NOT FOR INTERNAL INVESTMENT IN GROWTHM but buying back their stocks, Thus reducing the shares outstanding, raising the Earnings per share...And while shareholders may interpret this as a company's confidence in its sales growth, bottom line is that this is another trick that makes it look like they made more money this year than last year
..While SELLING TO PEOPLE MAKING $2,000 A YEAR, as part of a BETRayal of the American Middle Class.
Perhaps a legitimate component is "in what way is the world growing that does not depend on the American consumer"
Also worthy of note in an uptrending stock market is oil rich kingdoms and Junta
members needing to put money somewhere buying the stocks.
So while the Republicans are against the interests of the American Middle Class (Traditionally the LARGEST CUSTOMER OF THE CAPITALIST WORLD)...along Wtheir appeasers the libertarians...it's not only Kansas that has voted against their own financial interests.
And where are we going? Will we be a nation of shareholders served by cooks and nurses? As OUR Stock market DISENGAGES from OUR Economy!!
The Fed's lowering of the target rate makes no macroeconomic sense. If their motivation is not as dubious as I stated above, at minimum it is corporate welfare to the financial sector.
The Bush mal-administration can fudge the employment, CPI, and GDP numbers. I don't see how than can cheat on long term interest rates. Is the Fed printing greenbacks by the trillion?