Recessionary signals… (Guest post)
Guest post by Bruce Carman.
He first comments on an article from Jeremy Grantham who says that a coming bubble is likely.
“. . . There are massive reserves of labor in the official unemployment plus room for perhaps a 2% increase in labor participation rates as discouraged workers potentially get drawn into the workforce by steady growth in the economy. There is also lots of room for a pick-up in capital spending that has been uniquely low in this recovery, and I use the word ‘uniquely’ in its old-fashioned sense, for such a slow recovery in capital spending has never, ever occurred before.
“. . . I would be licking my lips at an economy that seems to have enough slack to keep going for a few years.”
(Now Bruce Carman writes…)
I suspect that Grantham does not understand the implications of effective demand. He assumes much more slack in the economy than there likely is.
I infer that he also assumes that the economy won’t experience the risk of recession until after the Fed raises rates and the yield curve inverts. But the yield curve does not invert before recessions and bear markets during debt-deflationary regimes, as in the 1830s-40s, 1880s-90s, 1930s-40s, Japan since 1998, and the US and most of the rest of the world in 2008 to date. Japan has experienced 4 bear markets and 3 recessions since the country’s yield curve last inverted in 1992. The US experienced a similar pattern from 1931 to the early to mid-1950s.
Moreover, the price of oil has accelerated YTD, yoy, and q-q annualized, resulting in CPI accelerating from 1.5% at the end of 2013 to 2.5% YTD and 3.8% q-q annualized for Q2, accelerating to a rate faster than yoy and annualized nominal GDP and reducing q-q annualized real income and wages for Q2 to ~0%. Therefore, we are experiencing a mini-oil shock (by duration so far) to an economy at a much slower secular trend rate of growth, risking no real growth or recessionary conditions most economists do not perceive (not publicly, in any case).
With the secular trend rate of real final sales per capita since 2000 and 2007 having decelerated from 2% to 0.8%, the US economy is much more vulnerable than otherwise to weather, energy, fiscal, and geopolitical shocks that cause periodic or consecutive q-q annualized contractions as occurred in Q1.
Thus, it appears that at the slow trend rate of real final sales/GDP, the US economy cannot withstand an acceleration of price inflation beyond 1.5-2% without stall speed or contraction. This is occurring in the context of the Fed implicitly targeting a 2% inflation rate, whereas some economists propose the wildly misguided policy of the Fed targeting 4-6% inflation to reduce the real interest rate burden from debt service. This would further obliterate real purchasing power of earned income for the bottom 90%.
As of the latest data releases for Q2, I have real final sales/GDP in the 2.1-2.5% range q-q annualized for Q2, which is 1.5% yoy, 0.8% yoy per capita, no growth or a slight contraction YTD, and no growth for 3 quarters running for real final sales per capita. This cyclical pattern of deceleration is historically recessionary.
Your trying to hard. I would ignore BEA data. It it is error and will need to be revised.
Ditto for “price inflation” when wages are rising along with the inflation.
Your post is huffing for little reason. You obviously don’t understand capital phases and intellectualize theory instead. 2 years from now, you will still be looking for “recessionary” pressures. Recession comes when either investment fatigue or debt servicing rises to high for the customers to recieve payment.
I am confused, wages are consistently flat or falling. What wage inflation are you seeing?
Wages aren’t falling and have not really “fallen” for 4 years. Follow the flows.
Your not getting it. Your don’t understand also how wages are ‘market specific”. When consumer prices rise, so do specific wages inside the rise outside a real “shock”. The so called “rise” in oil prices is not happening either.
The post was just poor.
In your world perhaps. Must be nice.
It isn’t recessionary signals you’re seeing, those signals are actually the reasons the economy has yet to break out of the low growth cycle its been in for years.
The good news however is that gas prices have fallen off, the labor market continues to show signs of tightening, manufacturing continues to grow, and judging by recent gallup polls (take these with a grain of salt), consumer spending and job creation are very positive in July.
All these point to the possibility that the 2nd half of the year will be far stronger than the first.
From: http://online.barrons.com/news/articles/SB50001424053111904255004580037561004275500
Jeremy Grantham writes:
“Accordingly, my recent forecast of a fully-fledged bubble, our definition of which requires at least 2250 on the S&P, remains in effect.”
So his awaited bubble would be in stock market prices.
I would note that the stock market prices have not reflected the health of the overall economy since at least 2008 with one exception. The exception being at the time when stock prices plummeted in 2009.
He does seem to believe that the economy is set up to break out of the doldrums but the only explanation given is the paragraph cited in your post.
In my opinion, he must believe that consumers can spend what they do not have and/or that producers will produce what they can not sell. In other words, he is a supply-sider.