Postcards from Old Europe – Tales from the Soft Patch
US policy makers have been adamant about the fact that the economy is in (or coming out of) a transitory soft patch. The comments usually sound something like this:
“I’m hopeful that the soft patch is mostly behind us. I don’t see any good reason for the soft patch. I’m sure high energy prices are a big part of it and I’m hopeful they will come down even more than they have. I expect the third quarter and the fourth quarter to be better than the second quarter”
This quote comes from Federal Reserve Bank of Dallas President Robert McTeer.
I’m not at all that sanguine about the outlook for the coming months. Momentum has been bleeding out of all current data releases which leads me to assume that we are still firmly in the boggy midst of the soft patch.
Let’s look at some of the data. The closely watched manufacturing surveys are all off of the highs seen at the beginning of the year (or even a few months ago). Component indices show capital spending plans are being revised downwards and expectations of future prospects looking less bright.
The OECD leading indicator for the US is looking anemic as well. The most recent update tells us that
The CLI (composite leading indicator) for the United States increased by 0.1 point in July but its six-month rate of change fell for the seventh month in a row after nine consecutive months of strong increases.
The same story hold for the US index of leading indicators as measured by the Conference Board. The latest press release even goes so far as to say
The slower growth of the leading index so far this year is consistent with a moderate rate of real GDP growth in the near term.
This comes as no surprise considering the fact that the last couple of years saw an almost unprecedented amount of fiscal and monetary stimulus being thrown at the economy. Most of the tax breaks have worked their way through the system and consumers are now being forced to live off of their stagnating incomes whilst paying for debt incurred in happier times. This fact becomes evident if you look at the behavior of retail sales over the last six months.
In short: I believe that we are still right in the middle of the soft patch – irrespective what policy makers or candidates say. I’d say that the next couple of months will see a steady erosion of economic momentum which will then lead us to Q4 GDP rising at around 3%. The picture becomes even more bleak if we assume that the accelerated depreciation allowance for business investment led to investments being pulled forward into this year. What will then happen to capital spending and the economy next year?
If this picture continues to solidify we might see the Fed really start to squirm. Fading growth, no growth in real incomes, no stimulus from exports and prices drifting upwards on the back of higher energy prices. To this scenario I say: get out your bell-bottoms, it’s the seventies all over again!
You can find more market views over at my other home on the web, Curryblog!