Courtesy of The Automatic Earth.
Dorothea Lange Broke, baby sick, car trouble, Missouri family, Highway 99, CA February 1937
There’s a persistent story that says (though I don’t think I can confirm it) that a pretty girl prefers to surround herself with less pretty girls – all in the eye of the beholder – in order to look prettier. After seeing yesterday’s -1% (-2% if you include Obamacare) US GDP ungrowth number, a fair segment of the financial press and punditry took a page out of the pretty girl playbook and ran with it. What should really be a deeply disturbing number in a 5 year old recovery (which is about 100 years in human terms) that has cost Americans trillions upon trillions in stimulus measures, is easily turned, without batting an eye, into a solid positive. The awful Q1 print, we are now told, serves to make Q2 look that much better.
I can tell you the problem with that notion with the same ease that these folk invent it. The chunk of the population that is increasingly moving towards becoming the Great American Unwashed has spent a lot of their money on winter heating and on health care costs. But the “experts” still see – since they were told to in school – huge amounts of pent-up demand – snow, don’t you know -, but it just ain’t so. The great unwashed have spent their money, and then some too. They’re not coming back for extra’s because they can’t afford any. The rosy stories about companies ‘slowing the pace of inventory accumulation’ in Q1, only to turn around and rebuilding inventories in Q2, are empty and void.
Companies didn’t leave their shelves empty because baby it was cold outside, but because they had no confidence inventory could be sold. And why would that change? US retail numbers are so bad they rival Japan’s. They missed expectations by the most in 13 years (so there hasn’t been any snow since 2001?). There’s no pent-up demand for housing either, and maybe that should be a wake-up call. In the 7th consecutive month of declining YoY sales, these are now down 9.4% YoY. Which won’t keep the industry from talking about more pent-up demand, mind you, but it’s still ugly for those who didn’t see it coming. Guys, on the ground, America is getting much poorer. That’s all there’s to it. Of course sales are still great for the 1%, but you can’t run a housing market or an economy on that.
One more number from yesterday’s GDP report that I think stands out – or should – is “Corporate profits fell at a 9.8% annual rate, the biggest decline since the 2007-09 recession”. Perhaps the pundits should try and justify that away instead of pretending they’re all such pretty girls. I mean, if you want to make the point that the US economy is in a recovery, and Q1 was just a black blimp, how do you explain that companies lost 10% of their profits since Q1 2013, the biggest loss in 5 years? Or try this on for size, hidden inside BusinessWeek’s cheerleading article: “Adding to growth was health-care spending, which, boosted by the Affordable Care Act, grew at a 9.1% pace.”
How is that growth? The average American spent 9.1% more on health care than they did last year, and that’s growth, that’s a positive? It could only be seen as that, and even then with a tome full of doubts, if those Americans had lots of cash on the side just waiting to be spent in pent-up demand, if after taking care of drugs and surgery they’d get into their newly bought vehicles, drive to the mall and see a real estate broker on the way there. Not even kids with a steadfast belief in the Easter bunny would buy it. And on top of that, heating costs went up significantly. Which is why people stayed home, and will continue to stay home, because their money’s all gone. I just, as I’m writing this, see a Bloomberg headline coming in that says “Consumer Spending in U.S. Unexpectedly Declines as Incomes Slow”. Given the above, how can that be unexpected? What do we call that, pent-up demand or job-related delusions? You got far more unemployed and underemployed Americans than official numbers tell you, you know they paid much more on healthcare and heating, and you’re surprised consumer spending is falling? Isn’t that a bit rich – or poor?
Here’s another reality checking sign, from CNBC of all places. Not something the financial press in general will be eager to confirm anytime soon, but no less timely:
The drivers that underpinned years of booming global trade, once the engine of the world’s economic growth, may be fading. In the past few decades, trade has played an increasingly important role in the growth of the global economy. But more than three years into one of the weakest recoveries in decades, slack demand from consumers in the U.S. and Europe is weighing on exports in the developing world. “Typically we would want to see trade growing at a few percentage points above growth in gross domestic product,” said Sara Johnson, an IHS Global Insight economist. “The fact that trade is so sluggish just reflects the weak nature of the global economic expansion.” But the days of rapid globalization—and the surge in trade flows it produced—are apparently gone.
Merchandise trade – the total import and exports of goods – rose steadily through the 2000s to make up nearly 53% of the world’s economy in 2008, before plunging the following year as the Great Recession went global, according to the World Bank. Massive government stimulus in the developed world helped revive growth, but as those programs wound down, global trade began declining again in 2011. With the European Union mired in a recession and the United States hit hard by a series of nasty winter storms, that slowdown picked up markedly in the first quarter of this year, according to data released this week by the OECD. On Thursday, a separate report showed that U.S. gross domestic product dropped by 1%, on an annual basis, much worse than economists expected. The U.S. economic reversal was led by a 6% drop in exports year over year, until recently hailed as a key driver of the U.S. recovery, and which had risen 9.5% in the last three months of 2013.
Deathknell, anyone? US corporate profits fell at a 9.8% annual rate, exports dropped at a 6% annual rate, and GDP is down -2%. But there’s nary an expert to be found who doesn’t claim the fundamentals are so strong that 2014 growth will be 3-3.5%. In other words, 5% or so for the rest of the year, just to make up for Q1. In sort of like the same vein, the IMF today stated that the Bank of Japan ‘may need to keep up its stimulus drive for an “extended period”‘. That’s not going to happen, though, because Abenomics has already run so far off track that consumer spending is down, consumer prices are way up, and industrial production is cratering. Not even the likes of Goldman and Barclays see the IMF’s wishes come true anytime soon. So, no, Japan doesn’t look that pretty either. That would make the US economy the ugly girl who fools herself into thinking she’s pretty because her ‘friends’ look even worse. But look into that mirror mirror on the wall, ask the question, and the answer won’t be anywhere near as rosy as the one provided by the punditry.