Wake-Up Call For B-Dud And The New York Fed Staff—-This Isn’t “Transitory”
by David Stockman, Contra Corner
The “in-coming” data turned into a blizzard of bad news today, but the Cool Aid dispensers at the New York Fed urged us not to fret—–it was all a temporary blip:
New York Fed staff economists said in a new report growth should regain some of its swagger after stumbling during a chilly first quarter…… it believes first-quarter weakness was partly due to “transitory factors,” particularly harsh winter weather and labor disputes in West Coast ports: “Consequently, the staff forecast anticipates that growth will rebound to around 2.5% annual rate over the remainder of 2015 and 2016…..”
Well, here’s a wake-up call for B-Dud and staff: What you see in the graph below is what “transitory” doesn’t look like. In fact, its a searing indictment of your delusional belief that the flood of money you have pumped into Wall Street is helping the real main street economy.
No it hasn’t. The graph shows that manufacturing output growth has stalled-out since November, but also that this roll-over is by no means just a winter swoon. We are now in month 70 of the so-called “recovery”, and it has been seven and one-half years since the pre-crisis peak. Yet at its current plateau, today’s “disappointing” April number for manufacturing production represents just a 0.33% annual rate of growth since December 2007.
Surely you do not really believe that the vast build-up of inventory hanging over the US economy is going to dissolve on its own accord? Or that you have actually abolished the business cycle and reinvented Bernanke’s once and former Great Moderation. So this graph is a huge rebuke to your ritual optimism about the “second half”.
To wit, the recovery cycle is already long in the tooth, and there has been no trend recovery of manufacturing production whatsoever. And why would you expect it at this late hour—–when exports are faltering, the oilfield boom is over and the inventory-to-sales charts spell “liquidation” just ahead?
So zip it with your ritual incantations, shake your recency bias and look at the rest of the chart. What is supposed to happen in a recovery is that the old highs are quickly surmounted and the trend line wends higher—-at least until your colleagues on the FOMC get too exuberant and need to hit the brakes.
Thus, during the seven-years after the mid-2000 peak, industrial production grew at a 1.7% CAGR—-or 5X the rate of the current cycle. And during the ten-years after the 1990 peak, the annual rate of growth was 4.6%.
That’s what a recovery used to look like before your chronic banging on the stimulus lever pushed the US economy into the financial purgatory of “peak debt”.
And, no, you can’t dismiss the above as an irrelevant snapshot of yesteryear on the grounds that its all now about a service economy, not manufacturing cycles. In fact, the two largest components of the service economy have virtually nothing to do with the business cycle; and, most assuredly, they cannot be helped at all by your misguided notion that free money for the Wall Street gamblers is “stimulative” to the main street economy.
To be specific, during the just completed punk quarter—-total services spending amounted to $7.352 trillion in constant 2009 dollars, but upwards of $4 trillion of that was accounted for by health care and housing and utilities. As to health care spending, nowhere has even the most delirious Keynesian money printer ever claimed that ultra low interest rates stimulate more medical spending.
Yes, Obamacare apparently did, and the $1.5 trillion of Medicare, Medicaid and the other health care entitlements do. And so does the $200 billion per year of tax preferences help to bolster the $1 trillion per year spent on health care by employers and other private insurance plans.
In short, the combined fiscal arms of the state are stimulating health care spending like crazy. But not you. ZIRP has zip to do with it.
The same point holds with respect to the overwhelming share of the $2 trillion spent on housing and utilities. That represents the “imputed spending” that homeowners would send by check to themselves if they had time to set up the book-keeping fiction resident in the GDP accounts, and to keep track of their housing “selfies”.
But they don’t—-so the Commerce Department handles it for the 75 million homeowners of America. That is, it makes up the number!
The theory of the imputed housing thing can be debated in economics class, but one thing is quite certain about the housing services number. ZIRP has not a thing to do with it; nor does QE, nor “wealth effects”, nor the mumbo jumbo of forward guidance, nor any of the rest of the monetary voodoo by which you pretend to levitate the living standards and wealth of the American people.
So the point is this. The giant services component of GDP has grown from $6.684 trillion in Q4 2007 to $7.352 trillion in the quarter just ended. That’s a gain of $670 billion and represents a compound annual growth rate of 1.4%.
Self-evidently, that’s not much to write home about. And most especially not after a massive monetary stimulus during that seven-year period that ballooned the Fed’s balance sheet by 5X from $900 billion to $4.5 trillion.
But what’s especially not “transitory” about this is that fully $485 billion of the entire services gain of $670 billion over that period, or nearly 75%, was due to health care and housing.
All of your wild-eyed money printing had absolutely nothing to do with that gain. What it did do, of course, is stimulate the greatest stock market bubble yet, causing the C-suite to become delirious with bullish enthusiasm about the value of their soaring stock prices and bulging options.
So the mechanism of monetary policy transmission works in wondrous ways, but not through the household credit channel outlined in the Keynesian text books. It now works through the C-suite channel: Top executives and boards massively tap the credit markets where you have systematically falsified prices, and use the proceeds—-more than $2 trillion during this “recovery” alone—- to buy back their stock.
And the higher their stock prices go and the more munificent their options packages become—- the more bullish they get. At length, they begin over-hiring and over-investing in inventory. Surely a 3X gain in the stock averages since the dark bottom of March 2009, they presume, must augur “escape velocity” just around the corner.
It’s not. What’s around the corner is another bursting Wall Street bubble and another corporate go-round of liquidating excess inventories of goods and workers. Five months worth of falling wholesale sales and soaring business inventories are evidence aplenty.