Tuesday, May 31, 2016

Is the Air Leaving the Balloon?

It is interesting to watch economists try to describe and predict the current economy based on previous trends and once reliable economic indicators.  It is similar to watching the political experts and pundits try to analyze and predict this year’s presidential race based on history.

This is new territory; we haven’t been here before.  So how can we ever know what awaits us around the bend?  Yet, as we slowly make our way to that bend, one can feel a collective economic nervousness.

Most economists expect the economy to revert back to the slow growth mode of the previous seven years.  Some are calling for a mild recession, with a few calling for a deeper one.  Almost no one expects the economy to jump back into a strong growth mode very soon.  In the Wall Street Journal economist survey (over 70 economists), no participant is predicting anything close to a recession and only two are forecasting future growth at over 3.5%.

The best argument against a recession is that downturns are usually the result of excesses, or overheating, in some area of the economy.  A negative offset to some positive overreach.  Because you have no apparent excess in the economy right now, there is nothing to react to, no bubble to burst.  In other words:  no cycle up; no cycle down.

Yet, the economy has been slipping downward for months now and many signs I watch are currently turning, but not flashing yellow.

-         Manufacturing went into recession (six months of no growth beginning in August).  This recession stopped in March when the ISM Manufacturing Index hit 51.8 (over 50 equals growth).  April’s number went down to 50.8, barely growing.  So manufacturing did not “snap back” from its downturn, more like it crawled out from the pit, and it remains weak. 

-         Business inventories are bloated, because businesses continued to stock based on expectations that consumer spending would continue to increase at a healthy rate.  When spending slowed, stocks swelled, and manufacturing skidded (the weak world economy also hurt exports).

-         But what’s wrong with consumer spending?  Higher employment and the low-price gasoline dividend were supposed to boost disposable income and lead to greater economic growth. Retail sales did rise 1.3% in April, after a 0.3% drop in March.

-         Something is happening with disposable income.  My disposable spending index has been down the past two months.  I am hearing reports that charitable giving is weaker in 2016.  Could this be the result of higher healthcare costs?  Is this acting as an invisible tax?  Could the savings rate be increasing because people are reacting to higher deductibles on their policies?

-         Business investment continues to be tepid.  There is a lack of confidence in the future, and businesses are not spending much money right now.  Factory orders have been weak for several months now.  Normally a decrease in business investment precedes a recession; however, businesses were not spending much before (no excess bubble here), so it is consistent with a slow/no growth economy.

The latest Q1 GDP revision has the economy at 0.8%.  This is the third straight quarterly drop, but this particular pattern has been repeated several times in this recovery, with the economy then returning to moderate growth.  Could it be different this time?

This economy feels like the air is slowly being let out of the balloon, that it is sluggishly running out of gas and coming to a stop.  When I expressed this theory to a colleague recently, he challenged me by asking when this had ever happened to the economy before.  And, of course, I had no good answer.  The best I could muster is that it happened last when we had a Great Recession,
Our smiles are fading .....
due to a major bubble, which the government injected billions into the economy to save it and then held interest rates extremely low for eight years, in which GDP never exceeded 3% in any year.  What a strange mess of things, no?

Maybe this is what a downward adjustment looks like under these conditions.  A couple quarters of “resting” and then a continuation of growth, albeit slow growth.  The forecast?  Things are getting worse, but not real bad.  Then things will get better, but not that good.  Second verse, same as the first…or maybe the last seven, for that matter. 

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)