Promptly upon release of the GDP update, Steve Liesman and his
Wall Street economist pals spent 10 minutes bloviating about why
the negative print should be completely ignored. Herein is an
essay on why it is they who should be given the heave-ho.
According to Liesman & Co. the GDP shrinkage reported by the BEA
for Q1 was all a mistake due to winter, strikes and unseasonal
seasonals. So don’t sweat the small stuff, they brayed to what
remains of the CNBC audience, the US economy actually continues
bounding along at a 2.5% growth rate, as it has for the entire
recovery.
Well, hold it right there. I am all for ignoring the quarterly
jerks and flops embedded in the GDP data, too. But if you want
to talk trend and context — let’s do exactly that. And first and
foremost there is no such trend as 2.5% growth.
After all, Liesman and his Wall Street cronies have been
cheerleaders for the Fed’s insane 80 months of ZIRP and massive
QE on the grounds that extraordinary measures were needed to
combat the deep economic plunge known as the Great Recession.
In fact, measured from peak to trough, the latter was the worst
downturn since 1950. Real GDP shrank by 4.2% compared to an
average of 1.7% during the previous nine recessions, and handily
topped the 2.6% decline in 1981-1982 and the 3.0% decline in
1973-1975.
So you would think that after a recessionary plunge that was in
a league all by itself that some account of that would be taken
in assessing the recovery.
Indeed, that’s particularly pertinent in the present instance
because the depth of the Great Recession was exacerbated by a
violent inventory liquidation in the fall and winter quarters
right after the Wall Street meltdown in September-October 2008.
In fact, fully one-third of the $636 billion (2009 dollars) real
GDP decline from peak to trough was accounted for by inventory
liquidation; real final sales dropped by a far more modest 2.8%.
Accordingly, the appropriate way to measure the trend is to
remove the violent inventory swings from the numbers, and then
to look at the path of real final sales after the
peak—-averaging in the down quarters and the subsequent rebound.
Well, the present cycle is not even close to the purportedly
favorable, steady eddy 2.5% trend that the bubblevision
commentariat was gumming about again. The compound annual growth
rate over the 29 quarters since the pre-crisis peak in Q4 2007
is just 1.0%.
That’s right. This recovery is pinned deep in the sub-basement
of history. During the comparably deep recessionary cycles of
the late 1950s, mid-1970s and early 1980s, as shown below, real
final sales grew at 3-4% annual rates over the 29 quarters
subsequent to the pre-recession peak.
That is, the US economy dug out of its recessionary hole via
several years of above trend rebound, thereby generating a 29-
quarter gain that amounted to a cumulative 25-30 percent
expansion. During the current cycle, by contrast, there was no
compensatory rebound, just a languid climb from a deep
recessionary hole.
Cumulative growth in real final sales has been only 8%. There is
no 29-quarter period even remotely this bad since the early
1930s.
Indeed, what is truly notable about
this chart is that the next weakest cycle
on the chart is the subpar gain of 2.2% per annum for 2001-2008.
During that period the Fed expanded its balance sheet in an
unprecedented manner from $500 billion to $900 billion but got a
housing boom and bust, not an improvement in real growth.
Throwing the rule-book of sound money to the winds, it then
ballooned its footings by 5X to $4.5 trillion during the current
cycle, and got even less to show for it. That is, a 1% economy,
and that’s on the generous side.
During the same 29 quarter period, the BEA claims the GDP
deflator advanced at only a 1.5% annualized rate. Throw in some
windage for a more honest and accurate pick-up in the
economy-wide price level, and you have an economy that is
essentially impaled on the flat line
Needless to say, a flat-lining economy is utterly incompatible
with the Wall Street/Washington recovery narrative. Yet since
today’s real final sales number, which clocked in at a negative
1.1% rate for Q1, further dramatized that unwelcome truth—it was
simply ignored. The MSM financial commentariat, exemplified by
Liesman and Wall Street’s so-called economists and strategists,
is simply too invested in the Fed’s bubble finance policy model
to even notice what is really happening
On that score, another thing which is really happening is that
the current sub-basement recovery is getting long in the tooth
from both a calendar perspective and relative to leading
indicators that really matter, such as inventory ratios,
productivity trends and the quality mix of hiring gains.
The bullish chatter today was that since job gains have
allegedly been so robust, the long awaited — and perpetually
delayed — escape velocity is just around the corner. But why do
these purported financial experts keep assuming that the BLS’
one job/one vote establishment payroll number actually measures
economic progress?
The fact of the matter is that as of the first quarter, labor
hours in the business sector were essentially no higher than in
Q2 2000. During the last 15 years, they US economy has been
bicycling the same old labor hours; all the labor hour gains
since the recession bottom have been born again hours, not
additional inputs to economic growth.
The implicit assumption in the escape velocity mantra is that
the US economy has all the time in the world — that there will
never be another recession. Therefore the index line shown above
will keep rising indefinitely, transforming born again labor
hours into actual gains.
Why? This expansion at 70 months is already long in the tooth
from a calendar perspective, and faces the near certainty that
ZIRP will eventually end and that the dollar will rise with it.
In fact, the jobs report is a lagging indicator. That’s
especially true in the present US business world dominated by a
stock market obsessed C-suite. Just like in the run-up to 2008,
they are over-inventorying labor, believing that the stock
averages are forecasting higher sales and demand just around the
corner.
Unfortunately, what is around the corner is a flaming meltdown
of the Fed’s third financial bubble this century. When the
markets finally break, we will witness once again a dual
liquidation of excess labor and stockpiled goods.
Indeed, we are already at the highest ratio of business
inventories to final sales since October 2008. It is only a
matter of time before a black swan shows up in the casino,
causing the stock averages to plunge and the C-suites to lunge
into another panicked liquidation of labor and goods, as they
did in late 2008.
The same pattern holds on the productivity front. Just like last
time, bullish minded business is over-hiring at the expense of
productivity growth. On a year over year basis, Q1 productivity
in the business sector posted a tepid gain of just 0.5% — the
same figure as the prior year.
In fact, after an initial surge during the excess labor
liquidation of 2008-2009, productivity has flat lined ever
since.
Indeed, the CAGR for the 5-years ending in Q1 2105 is a paltry
0.6%. There is no comparable five-year period this bad at any
time since 1950.
It means that the business sector is building toward another
excess labor purge, awaiting only the C-suite panic that will be
triggered when today’s vastly over-valued options packages are
flushed in the next financial meltdown.
In fact, the current cycle exhibits a replay of the last
one—–only in even more exaggerated form. On a peak-to-peak basis
between Q1 2001 and Q4 2007, labor productivity in the business
sector grew by 2.7% per annum, but all the gain was in the early
years. During the final 5-years of the expansion, labor
productivity growth slowed to 0.8% per annum.
This time the comparable numbers are a paltry 1.2% annual gain
for the peak-to-peak period (2007:4 through 2015:1) and, as
indicated, just 0.6% for the last five years.
Needless to say, when the C-suite belatedly initiated its excess
labor purge in the fall of 2008, it turned into a bloodbath.
During the next six quarters, payroll employment dropped by
upwards of 9 million.
But check the CNBC archives. During the better part of 2008, the
narrative was still all about the “Goldilocks economy” and the
fact that plentiful monthly gains on the BLS establishment
survey meant clear sailing ahead.
So history is repeating itself, but here’s the irony. Now that
the household credit channel of monetary policy transmission is
over and done due to the arrival of “peak debt,” the Fed’s flood
of credits conjured from thin air never leave the canyons of
Wall Street. Furious money pumping reflates the casino, not the
main street economy.
The resulting false signals of returning prosperity, in turn,
have caused US business executives — who have become even more
stock options obsessed — to indulge in their own form of
irrational exuberance. That’s especially true for businesses in
the service sector which cater to the top 10% of consumers, who
own 85% of financial assets and are presently still feeling
bullish.
But they also account for 40% of total consumption spending, and
a considerably higher portion of discretionary purchases of
luxury and “aspirational” goods and services.
In keeping with the zeitgeist of our false bubble finance, the
top 10% will spend with abandon — until plunging stock averages
abruptly halt the party.
In short, the MSM cheerleaders like Liesman and his pals cannot
see the handwriting on the wall because central bank bubble
finance has essentially abolished the old rules of
macro-economics. Someone should tell them that an economic deja
vu is about to happen…….all over again!