Submitted by David Stockman – The Contra Corner Blog
Thursday’s durable goods report for August brought more evidence that the US economy is stumbling toward recession, and that the Fed’s massive money printing campaign has been an abysmal failure. To wit, shipments of so-called core CapEx (nondefense capital goods less aircraft) were down 2.5% from prior year, confirming that last summer’s spurt of shipments is rolling-over on pace with the even larger 5.7% drop in orders.
This dramatic southward turn puts the lie to the “escape velocity” meme of Wall Street pitchmen who claim to be “economists”. They had been insisting for months now that there was nothing wrong with the US economy except some cold and snow last winter, and that with the arrival of flip-flops and shorts the growth genie would finally come leaping out of the bottle. That acceleration, in turn, would be accompanied by surging business CapEx because an economy bounding toward full employment will need more investment in machinery and equipment.
The funny thing is that these same Wall Street shills have not changed their tune, even as the data has once again foiled their endless hopium about the purported economic recovery and unseemly cheerleading for higher stock prices. As we have pointed out repeatedly, Wall Street gets away with this tommyrot in part because the mainstream financial press is just plain lazy, and possibly stupid, too.
Not surprisingly, therefore, Dow-Jones’ MarketWatch was johnny-on-the-spots after the August release helping the Keynesian chorus try to turn lemons into lemonade:
Although business investment is weaker compared to 2014, core capital spending has jumped an annualized 8.5% from June through August compared to the same three months of 2014.
“In short, investment in equipment appears to be recovering in the third quarter,” asserted Paul Ashworth, chief U.S. economist of Capital Economics.
What’s unclear is whether the upsurge will persist through the end of the year.
Say again. The chart above shows that there has been no “upsurge” in 2015 whatsoever, either in orders or shipments of capital goods. In fact, shipments during the three month period of June through August weredown by $630 million from the comparable period last year, not up 8.5%.
The reporter was either too lazy to even double check his math, or to note that the increase he mis-identified was actually for the eight months year-to-date, which, in turn, was statistical noise. That’s because the latter reflected an obvious timing aberration arising out of last year’s sharp climb from the early months of 2014, not any acceleration in shipments this year.
So the question recurs. Why can’t Keynesian pitchmen like Paul Ashworth, chief economists for Capital Economics, even acknowledge the difference between up and down?
Well, the simple answer is they don’t dare; it would invalidate their entire delusional economic model which supposes that the US economy is some kind of giant economic bathtub surrounded by high walls; and that it can be pumped to the brim of full-employment by Fed stimulation of an invisible economic ether called “aggregate demand”.
More specifically, after the Fed has reflated household demand through low interest rates, domestic production is supposed to be pushed toward high levels of capacity utilization, thereby causing capital spending to kick in and the recovery cycle to be extended.
In fact, the Wall Street Keynesians couldn’t be more wrong. The 1960s neo-Keynesian business cycle essayed by the likes of Paul Samuelson and James Tobin has long been dead and gone. The era of rampant sustained money printing inaugurated by Alan Greenspan in the 1990s, and subsequently exported to the entire world, has supplanted it with what amounts to a sequences of serial financial bubbles.
Under this new regime, the monetary policy transmission mechanism is no longer the main street credit markets, whereby low interest rates induce households and business firms to supplement spending from current income flows with outlays extracted from balance sheets in the form of incremental leverage.
That parlor trick doesn’t work anymore. Households reached a condition of peak debt back in 2007-2008 and have been reducing their leverage relative to income ever since. And that trend is unlikely to abate any time soon—–since the household debt-to-income ratio remains dramatically higher than it was before the Greenspan era of money printing incepted.
Likewise, the wrong-headed post-crisis effort by central banks to flood the market with easy money to induce debt shackled households to borrow and spend has backfired. What it actually did was transform the C-suites of corporate America into stock trading rooms, thereby insuring that the Fed’s massive emission of fiat credit never leaves the canyons of Wall Street.
Consequently, the $2 trillion increase in business debt since late 2007 has not stimulated CapEx but, instead, has been diverted into the stock market via buybacks and M&A deals. That is, it has not funded an increase in the stock of productive business assets, but has merely inflated the financial market value of existing claims on business income.
The proof of the pudding is neatly crystalized by today’s punk report on core CapEx orders. The $69.8 billion for August was less than 1% higher than the prior peak of $69.2 billion in July 2008; and, even more significantly, is flat with the post-recession rebound level achieved way back in February 2012.
Moreover, these are all nominal numbers, meaning that orders for core capital goods have actually been shrinking in inflation-adjusted terms for the past three years.
Nor is this the full extent to which the escape velocity myth has been invalidated. Since the turn of the century when Fed money printing commenced in earnest, even the Keynesians’ favorite but misleading metric on capital spending has faltered. To wit, gross real fixed investment in business assets has expanded at only a 1.9% annual rate for the last 15 years.
That’s less than half of the historic 4-5% long-term rate, but even that comparison does not fully comprehend the shortfall. The problem is that the preoccupation with “gross” investment spending is another typical Keynesian fallacy that confuses short-term “spending” with sustainable advances in real output and wealth.
The latter cannot happen without increases in net investment, which is to say outlays for capital goods after current period consumption (i.e. wear and tear) has been replaced. As shown below, net business invest has actually dropped by 17% in real terms since the year 2000.
Stated differently, real investment spending has been declining at a 1.3% annual rate for 15 years, not expanding by even the anemic 1.9% rate embodied in the misleading Keynesian metric.
The long and the short of it is that while the Fed is financing giant windfalls for the gamblers on Wall Street, the main street economy is actually eating it seed corn.
And the deterioration is about to get worse. That’s because there is no such thing as capital spending and corresponding capacity utilization rates in one country; now its strictly global, and not just in tradeable goods industries, either.
Central bank falsification of the price of debt and other financial asset prices is instantly transmitted around the global economy. Accordingly, the scramble for yield in a world of central bank financial repression can lead to over-investment and malinvestment in strictly domestic sectors such as malls, office buildings and warehouses, as readily as among internationally competitive facilities like mines, factories and containerships.
Needless to say, the gathering global deflation attendant upon the fracturing of the world’s 20-year credit bubble is a battering ram aimed at capital spending in both the tradeable goods and domestic sectors of the US economy. Today’s drastic retrenchment announcements by Caterpillar, the on-going collapse of capital spending in the shale patch and sharp cutbacks in material processing and other export oriented US industries is only the tip of the iceberg. As corporate credit spreads blow-out, new domestic commercial construction will be curtailed, as well.
What the Wall Street stock peddlers have completely ignored is that net domestic investment was already badly faltering during the greatest global CapEx boom in recorded history. Needless to say, after erupting by 5X during the last two decades, the already evident sinking spell in worldwide CapEx depicted in the chart below is just getting started, meaning that domestic capital investment will be body-slammed as the global contraction gathers force.
But never mind. Wall Street’s economic pimp shops like Capital Economics will always find some misleading noise in the incoming data to tout, and the lazy shills of the financial press will post it lickety-split.