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Why 95% of Traders Fail

What's Going On With The U.S. Economy?

Economics / US Economy Aug 30, 2011 - 10:39 AM GMT

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleThere's a very good post over at Mish's Global Economic Trend Analysis today. ("US in recession right here, right now") Blogger Mike Shedlock makes the case that the economy may already be in recession. It's all matter of whether if one uses the the consumer price index (CPI) or the the BEA's measure of price inflation to make their calculations. There's a fair amount of technical jargon to wade through in the article, but the charts are pretty persuasive and--if nothing else--they reinforce most people's suspicions that the economy is getting worse by the day.


It's too bad we don't have a financial media that's willing to explain what's going on in simple terms, but we don't. Instead, we're deluged with daily datapoints that have little meaning to the average working slob who just wants to know whether he's going to have a job tomorrow or if the company he works for is going to pack-it-in and head for Shandong Province.

Monday's report on consumer spending is a perfect example of how the media distorts the news to create a cheery narrative of "economic recovery". Here's a clip from Bloomberg:

"Consumer spending climbed more than forecast in July as Americans dipped into savings to buy cars and cool their homes, showing the biggest part of the economy is holding up.

Purchases rose 0.8 percent, the biggest gain since February, after a 0.1 percent decline the prior month, Commerce Department figures showed today in Washington. The median estimate of 74 economists surveyed by Bloomberg News called for a 0.5 percent increase. Incomes grew 0.3 percent, pushing the savings rate to a four-month low.

Industry data showed autos sold at the fastest pace in three months as supply constraints from Japan’s March earthquake began to ease, while outlays on services, which includes utilities like electricity and gas, climbed at the fastest pace since December 2009." (Bloomberg)

Hurrah! The slump is over! The indomitable US consumer has once again hoisted himself off the canvas and stumbled back to the shopping malls and car lots in a selfless effort to keep the global economy plugging along. Does anyone believe this gibberish?

Now, let's take a more sober approach to the data and see if we can figure out what's really going on behind the hype. This is an excerpt from a post at Zero Hedge:

"July personal income and expenditures were quite surprising in that while many were expecting the drop in the market to force consumer saving to upshift (lower spending than income), not only was this not true, but expenditures spiked by 1 whole percent from -0.2% to 0.8%, on expectations of 0.5%, even as Personal Income came in line with expectations of 0.3%, up from a revised 0.2% (concurrent with extensive prior data revisions).

This was the biggest difference between a monthly change in income and spending since October 2009. The net result was a plunge in the savings rate from 5.5% to 5.0%. And while on the surface this would be good news, as in Americans are spending again, a quick look at the PCE components indicates that virtually the entire surge is due to a spike in Energy goods and services. In other words, the entire spike in spending was to... pay for gas and associated energy expenses..... All in all: in July Americans continued to max out their credit cards to pay for gas." ("Personal Saving Rate Plunges From 5.5% To 5.0% As July Energy Expenditures Soar", Zero Hedge)

Okay, so which article is closer to the truth; Bloomberg or Zero Hedge?

Of course, consumers spent more money than before, but it had nothing to do "feeling flush" or being more optimistic about the future. Hell, no. They were forced to use their credit cards at the gaspump so they could haul their sorry ass to work in the morning. That's hardly a reason to celebrate.

So, what's really going on with the economy?

Well, oddly enough, it's not that hard to explain, and it doesn't require a Masters in Economics to grasp the main points.

To begin with, let's state the obvious: We're in a Depression. Yes, that's a "judgement call", but for 90 percent of working people in this country, the word accurately describes the slump we're in.

Second, the political process is broken. Again, this fact is so obvious that it's hardly worth mentioning. The vast majority of people are thoroughly disgusted with the craven Wall Street duopoloy that masquerades as "representative government". "Representative" of who? Corporate fatcats and bank vermin?

"American democracy" is a contradiction in terms; a complete farce. Neither party has any plan for lowering unemployment, correcting chronic trade imbalances, re-regulating the financial system, or growing the economy. Capital Hill is merely an annex of Wall Street, just as the White House is entirely in the clutches of the brandy-swilling swine who run the big brokerage houses and hedge funds. They own it all, every bit of it. America is just one of many properties in their sordid portfolio.

Okay, enough ranting. Now onto the facts.

US households are still underwater 3 full years after Lehman Brothers croaked. They've shed a good portion of their debts through default, foreclosure, personal bankruptcy and accelerated repayments, but the situation is still grave. There's lots more red ink to mop up and now that Obama's $787 billion fiscal stimulus has run out, it's going to be lot harder for them to clear their balance sheets.

Why is that?

Because government spending reduces the real value of debt making deleveraging easier. But--as you may have noticed--the government's share of total spending is actually shrinking. State and local governments are cutting costs and laying off workers as fast as they can--over 500, 000 state workers were fired in the last year and a half alone. It's a disaster. And the idiot Obama hasn't lifted a finger to reverse the trend. Instead, he's taken a sabbatical to Martha's Vineyard to see if he can shave a few strokes off his golf game. What a terrible president.

Anyway, household debt as a share of annual disposable income is currently 115 percent, down from 135 percent in 2008. Economists believe that the figure will eventually return to its historic range of 75 percent. And, there's the rub, because if consumers continue to slash spending and increase saving--as they need to do-- then the economy will slow down even more greasing the skids for another vicious downturn.

Consider this: In the peak bubble years of 2003 to 2008 US households withdrew roughly $2.3 trillion from the home equity to spend as they pleased. Ironically, only about 20 percent of that sum was used in home improvements. The rest was used to pay off medical bills, credit card debt and, yes, discretionary spending. (Don't workers deserve an occasional "night on the town"?) In other words, the housing bubble provided $500 billion in extra consumption per year for 5 years, and it was all borrowed money! (Keep in mind Obama's stimulus was $800 billion, but that amount was spent over a 2-year period. So the $500 per year siphoned from home equity actually exceeded that of the ARRA.) Now that housing prices are dropping, the home equity ATM has been shut down leaving households mired in debts that will take years to pay off. That means consumption--which traditionally leads the way out of recession--will flag, demand will remain weak, business investment will dwindle, unemployment will stay high, and the economy will continue to drift sideways.

So, what does tell us about the "recovery"?

The recovery was just another public relations fable with no basis in fact. Just look at the trajectory of GDP in the last couple years and you'll see what I mean: (4Q 2009-3.8%; 1Q 2010--3.9%; 2Q 2010--3.8%; 3Q 2010--2.5%; 4Q 2010--2.3%; 1Q 2011--0.4%, "revised" 2Q 2011---0.9%)

See the difference between the strong growth in 2009 to 2010, and the weak growth thereafter? The numbers coincide perfectly with the injections of stimulus. In other words, No stimulus, no recovery.

So, now that the stimulus has dissipated and the home equity jet-fuel ($500 bil per year) has evaporated, who's going to spend enough money to keep the economy bobbing along in positive territory?

Big business?

No way. Why would businesses make more products for people who have no money?

Consumers?

Nope. They died in the Crash of '08.

The only one who can maintain spending and keep the economy plugging-along while households get their balance sheets together, is the government. But that means more stimulus and bigger deficits, which both party's oppose. So nothing's going to get done, right? Oh yeah, there'll be more pompous pronouncements and political wrangling, but nothing of substance. The payroll tax holiday will end in December, unemployment benefits will get slashed, housing prices will continue to stumble, and ---by election-time--the economy will be in a shambles.

Bottom line: The political process is broken, so the economy's going to tank. Bet on it.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2011 Copyright Mike Whitney - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.
Individuals should consult with their personal financial advisors.

Mike Whitney Archive

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