US Economy

The markets have recovered!!  Is this a blip, or are things really going well? As always, the focus is on the USA.

The Good.

Banks:  Only 1 US bank has gone under so far this year. After about 500 bank failures from January, 2008 to the middle of last year, this is excellent news.

Personal Debt: Americans are paying down debt in spite of the lowest interest rates in history.  Personal debt to GDP has gone from about 98% in 2009, to about 79% today, meaning that Americans have far more financial resiliency than they had just seven years ago. Again, this is excellent news.  

Savings: From a low of 1.9% of income in 2005, Americans now save at a rate of about 5.4% of their income. Again, this turn around, in the face of relentless pressure from the US Fed to borrow and spend, is excellent.

Federal Finances: In 2012, the USA Government ran a deficit of in excess of $1.1 Trillion. Today, the projected deficit for the next fiscal year will be well under $500 Billion. This is not excellent, but it is still very significant progress.

Unemployment Rate: This rate is now 5%, but it is up a bit because more people are entering the workforce. There are jobs in the USA, and this number is encouraging some superficial confidence...more on this below.

Housing: The US Housing index is very positive, at 58, where 50 is flat.  Housing prices are also way up. While positive as this implies that Americans are accumulating equity in their homes, this would not be happening absent the most accommodative monetary policy in history. Because this probably represents another housing bubble, it could easily be in the Ugly column.

Federal Reserve Balances: Of the $4.05 Trillion provided to US banks via Quantitative Easing, about $2.33 Trillion never made it into the US economy to stimulate growth - it is still on deposit with the Federal Reserve system on behalf of US banks. While this speaks volumes for how confident US banks actually are about the US economic recovery since 2009. the fact is that they used to have in excess of $2.7 Trillion on reserve. The fact that US banks are now slowly starting to access these funds is excellent news as this money may actually be used for its intended purpose some day, namely, stimulating the US economy.  

The Bad.

Velocity of Money:  Money is moving at its slowest pace in about 30 years. The whole point of QE was to inject cash into the system so it will spark economic growth. This can't happen if the money doesn't move. The fact that it is stagnant strongly suggests very little confidence in the economy.

Food Stamps: The number of food stamp recipients in the USA has fallen over the last two years from about 48 million, to about 45 million. This is still awful compared to the 28 million who were on the program before the Great Recession, but this is getting better.

Student Debt:  While the overall debt load of Americans is dropping relative to GDP, student debt has almost doubled since the Great Recession, from about %600 Billion, to about $1.2 Trillion. This suggests that the next working generation will start out with a significant financial burden that will limit its ability to contribute to economic growth through spending for some time.

Auto Debt: Americans have borrowed $300 Billion more to buy cars over the last four years that then had previously, increasing total auto loan debt from about $700 Billion in mid-2010, to over $1 Trillion now. Americans spend about $500 Billion on new cars and trucks each year. This amount of auto loan debt represents a whopping two full years of normal buying.

Labour Force Participation: This used to be Ugly, but has improved to Bad. The Labour Force Participation Rate in the USA was 63% in March, 2016, seasonally adjusted. This is an increase from 62.8% the year before, and reflects a very slow recovery in the measure in the last year or so. The LFPR was 67% in 2007.  Some of the drop is owing to an aging workforce. Nonetheless, if even half of this drop is as a result of the continuing economic problems in the USA, this represents some 5 million people who do not have work compared to before the Great Recession - these people and their families represent the lion's share of new food stamp recipients. This is improving, but it still has a very long way to go.

Productivity Growth: This is one of the key drivers to long term economic growth. It has been essentially flat in the USA for the last 18 months, and actually fell by 2.2% in Q4 of 2015. While this measure is cyclical, the fact that there is basically no productivity growth while literally trillions of dollars are available for investment in R & D and other productivity improvements suggest that there may be an emerging imbalance in US corporate investment priorities.   

The Ugly.

Corporate Profits: Profits of major US corporations were increasing at a rate of about 5% for the three years between 2012 and 2015, but have recently started to decline significantly - down 3.6% year over year this month. This is the key bell-weather for the stock market. Simply put, declining profits means declining stock prices at some point.

Durable Goods Orders/Industrial Production: Goods orders have not posted a positive quarter in over a year.  In short, production of durable goods in the USA is in a significant recession, down a further 2.8% just last month. Industrial production was down 0.5% in February. Industrial production was only up in three of the last 15 months.

GDP:  The GDP for the last quarter of 2015 has been pegged at 1.4%.  "GDP Now" is saying that the GDP growth in the USA will be about 0.6% for the first quarter of 2016. The 6-month average is about 1% GDP growth. With slowing orders and production, the USA may be on the cusp of another mild recession.

Inflation(?):  The Consumer Price Index in the USA was negative, at minus 0.2% in February.  Import and Export prices were also negative, at minus 0.3% and 0,4% respectively. This is deflation, although no one is saying so. Deflation happens when not enough money is chasing too many goods...it is VERY bad.

Conclusion: There are some positives to the story of the US economy. Having said that, the recent stock market recovery cannot be said to be based on the fundamentals of the US economy, which include virtually no GDP growth; declining corporate profits and industrial production; deflation; flat productivity growth, and an economy where one in eight people still live on food stamps. The dead cats are bouncing...