The sentiment surveys indicate that the economy continues to perform well. The underlying data say otherwise. People take their cue from the stock market when it comes to assessing economic health. And, as long as the stock market is near dizzying heights, the sentiment surveys will say the economy is doing well.
The hard data
- January’s data showed negative retail sales vs. December, negative real weekly income, negative aggregate hours worked, and essentially flat manufacturing activity.
- New orders for capital goods fell in January.
- The U6 unemployment rate (the one that counts people interested in working but who have stopped looking, and those in part-time but wanting full-time jobs) rose from 8.0 percent in November to 8.1 percent in December and 8.2 percent in January.
- Loan delinquencies are rising. Personal and auto loan delinquencies are at four-year highs. Credit card delinquencies are on the rise (4.6 percent) and student loan delinquencies remain at a high altitude (11 percent).
- In the fourth quarter, productivity actually fell 0.1 percent; the consensus was for a 0.7 percent increase.
- Existing home sales fell in January and are 4.8 percent below year earlier levels. All the housing data has disappointed of late.
Anemic labor force growth along with flat to declining productivity with some signs of a cyclical upswing in inflation spells what economists call “secular stagnation,” more popularly known as “stagflation.” Yet the Wall Street narrative continues to be one of strong underlying growth.
Lost in the narrative is that without the boom in credit card borrowing and the fall in Q4’s savings rate to a 12-year low of 2.6 percent, and without the repair/rebuild stimulus after Q4’s natural disasters, GDP barely would have grown. The narrative of strong growth is just that — a narrative. Fourth-quarter growth appears artificial, not organic. I suspect that when we get the anemic first-quarter GDP report, the excuse will be, “There is something awry with the seasonal adjustment process, as the last several first-quarter GDP growth rates have all been anemic. Don’t worry!” (Remember this prediction.)
Was that a ‘correction’?
The early February sell-off shows just how fast markets can head south. Was that really a “correction”? Wall Street Economist David Rosenberg says that we never have had a correction in which Market Vane’s bullish sentiment indicator remained above 50 percent. In the latest “correction,” he says, this indicator dipped from 72 percent to 70 percent. Rosenberg also observes that when a bottom is put in, traders are normally short 30,000 contracts on the S&P 500. Just prior to the recent “correction,” long contracts on the S&P 500 were 37,800. At the end of the “correction,” traders were still long 32,000 contracts! Rosenberg concludes that sentiment is nowhere near where it needs to be for a bottom to have been put in.
Markets and liquidity
The “correction” appears to have been caused by concerns over rising inflation and the resulting shifting view of future monetary policy. Wall Street needs easy-money policies and high liquidity for markets to maintain their nosebleed valuation metrics. The Fed itself has told us that the terminal federal funds rate is 2.75 percent. This is the estimate of the “neutral” federal funds rate at full employment and with the economy at potential. The economy has been above both of these indicators for quite some time, yet the current federal funds rate (1.25 percent to 1.50 percent) is nowhere near the Fed’s own target. It is at least five 25 basis point moves away, not two or three that is currently priced into the markets. In his recent congressional testimony, Fed Chair Jerome Powell said that “market volatility won’t stop more rate hikes,” which is code for the Fed moving toward its 2.75 percent “neutral” rate.
Of further concern is the move away from any semblance of fiscal discipline, as the recently passed budget guarantees a record-high peacetime deficit/GDP ratio, at a time when the economy is running above its potential growth rate and at high employment levels. We only see deficits this high relative to GDP when the economy is in recession.
Liquidity is going to be an ongoing concern. With the Fed behind the rate-raising curve, with a huge built-in budget deficit (more Treasury paper), with a fully employed economy operating at or above capacity, and with the Fed shedding balance sheet assets (yet more Treasury paper needing a home), the question is, who are going to be the buyers of all of these fixed-income assets, and at what price and yield? (It certainly won’t be at current yield levels.)
Conclusions
It appears that, in the near term, rates are going to continue to rise, at least until the next recession appears. In this cycle, the U.S. economy added $14 trillion in debt, as much as it did in the ’02-’07 housing credit bubble. Just how far can rates rise before the income that is siphoned off to pay the higher debt costs impacts economic activity?
All of the above issues have now surfaced and will create market volatility over the foreseeable time horizon. That means that the automatic 1 to 2 percent monthly increases in equity market values are a thing of the past and heightened market volatility, like we saw in mid-late February, will be the order of the day.
Robert Barone, Ph.D. is a Georgetown-educated economist and a financial adviser at Fieldstone Financial (www.FieldstoneFinancial.com).
He is nationally known for his writings. Robert’s storied career includes his having served as a professor of finance, a community bank CEO and a director and chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a director of AAA Mountain West Group, the CSAA Insurance Company, where he chairs the Finance and Investment Committee, and Allied Mineral Products. Robert oversees the investment governance program at Fieldstone Financial and heads Fieldstone Research (www.FieldstoneResearch.com).
Statistics and other information have been compiled from various sources. The facts and information are believed to be accurate and credible, but there is no guarantee as to the complete accuracy of this information.