Skeletons in the Closet

Just when the mainstream press thought they had a solid theme to report, something unexpected happened.  No one quite knows what’s going on for sure.  But the economy’s popular storyline appears to be drifting off plot.

The general consensus since late last year has been that the U.S. economy is moderately improving while the world’s other major economies – Japan, China, and Europe – are becoming weak like an over breaded meat loaf.  Until a few weeks ago things were rolling forward according to script.

The presumed strength of the economy was finally pushing the Fed to raise the federal funds rate after six plus years of being zero bound.  June of this year was broadly thought to be the magic time when Janet Yellen would finally pull the trigger.  But things rarely go as man – or woman – ordains them.

“Jove does not give all men their heart’s desire,” observed Homer, some 2,750 years ago.  Homer probably didn’t have central bank intervention into credit markets in mind when he made this remark.  If he had, he would have laughed with the gods at the vanity of it.

What we do know is that more evidence is revealed each week that the unexpected is happening.  Instead of economic strength and robust growth, economic fundamentals are breaking down.  Manufacturing is slowing.  Consumer spending is soft.  And what’s this?…

No Laughing Matter

The jobs report, the granddaddy of all economic data, is suddenly coming up short.  Employers added 126,000 jobs in March, according to the payroll report from the Bureau of Labor Statistics released last Friday.  This is the weakest report since December 2013 and amounts to just over half the 250,000 new jobs the experts were forecasting.

‘“The main punch line is that it is a disappointing number but it bring jobs data more in line with the other economic data we have been seeing over the course of the winter,’” explained Luke Tilley, Chief Economist at Wilmington Trust.  “Durable goods, retail sales and the ISM Manufacturing Index have all pointed to a weak season while jobs data had remained strong.  This report changes that disconnect, especially in light of downward revisions to the previous two months.”

Although Tilley calls it a punch line we don’t find it all that funny.  Nonetheless, as you can see, the storyline’s moved to a plot that’s less sanguine.  Rather than a strengthening economy…it’s a weakening economy.  Rather than a forthcoming rate increase, we are back to indefinite ZIRP.

The Fed’s master plan is being scrambled by an economy that won’t cooperate.  Their desire to raise rates is being sabotaged by forces beyond their control.  What’s more, we could be moving towards another recession with the emergency monetary policies of the last recession still in place.

Certainly it could just be a bad report.  The economic fundamentals, including new jobs creation, could snap back next month.  Alternatively, the economy could be stagnating…

Skeletons in the Closet

“The Atlanta Federal Reserve’s GDPNow model forecasts economic growth of only 0.1 percent, as of Thursday,” reported Newsmax on Friday.  “And that’s an improvement from Wednesday when the projection was zero growth.”

“The 0.1 percent estimate represents a sharp reduction from 1.9 percent in early February.  The economy grew 2.2 percent in the fourth quarter.”  Based on the Fed’s models, economic growth is grinding to a halt.  Taken in context with soft jobs, manufacturing, and retail sales reports, the prospects for the economy don’t look good.

The next shoe to drop will likely be the stock market.  Given the six year bull market run that’s pushed stocks to record highs, the fall could be significant.  The S&P 500 may even be cut in half.

In the meantime, the new economic plot will be resisted.  Glimmers of hope will be held up to support the notion that the economy is improving.  Unfortunately, these glimmers will quickly be snuffed out.  Any lasting optimism will be crushed in the end.

The skeletons of the credit crisis and the Great Recession will escape from the closet in droves.  The decision to address a credit crisis with mammoth amounts of new credit issuances will be proven a fatal miscalculation.  The consequences will be exposed to the light of day.

Yet given the current state of economic thought from government policy makers we’re not too optimistic about what actions they’ll take.  It doesn’t seem they’ve learned a doggone thing.

Who knows?  Their misguided money games may succeed this time around in turning a credit crisis into a currency crisis.  After that anything could happen.

Sincerely,

MN Gordon
for Economic Prism

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