Submitted by Jeffrey Snider – Alhambra Investment Partners
If the Wall Street Journal meant to reach for reassuring comfort, they fell far short. After spending late summer last year and into the fall proclaiming that manufacturing didn’t matter (12%), the newest round of talking points are “false positives.” In other words, manufacturing and industry does matter, after all, but just “not enough” to tip into full recession. That would seem to suggest some kind of balance on the plus side, but what they give us is actually the opposite.
The case for a downside is quite compelling, a point very grudgingly accepted in the article. In the truly forward-looking case, there are industrial production, corporate profits and the stock market (that latter is and has been dubious, but this is the Wall Street Journal). On those three counts there is nothing but growing concern rather than “transitory” irrelevance.
Industrial production has declined in 10 of the past 12 months, and is now off nearly 2% from its peak in December 2014. Corporate profits peaked around the summer of 2014 and were off by nearly 5% as of the third quarter of last year, according to the Commerce Department. Stocks have fallen viciously so far this year, with the Dow Jones Industrial Average down 7.6%, despite a rally late last week.
The economy is in much worse shape than just those, however, as the Journal makes no mention of the supply chain at any level other than production. That matters greatly because industrial production has already declined significantly (enough to suggest recession) without making the slightest difference in inventory. Retail sales just experienced the worst holiday season outside of 2008 and 2009 – and that includes auto sales. Wholesale sales continue to slump and inventory across the economy remains, despite production cuts to this point, elevated in the extreme.
These are truly forward-looking indications, where businesses will have no choice but to scale back now that “confidence” has been shaken enough to even dent the heretofore invulnerable stock market. The Journal dutifully reports the role of confidence in recession, being an organ of orthodox persuasion, after all. When confidence is lost in terms of rational expectations theory, that is saying something to an economist.
Again, however, the point of the article was clearly meant for encouragement. In transitioning to the “bright side”, it points out that false positives have occurred in the past with IP, profits and stocks; indeed they have, but in either 1986 or 1965 there wasn’t this tide of inventory, not even close (nor “dollar”, commodities crashing or very real global economic strain all tied together). But the real foundation of optimism is exactly what you would expect from economists:
On the bright side, the U.S. job market is perhaps the best recession indicator of all, and it isn’t flashing trouble.
In the past 50 years, every recession has seen the number of jobs in the economy decline by at least 1%. And jobs have never declined by that much outside of a recession.
Today, the number of jobs in the U.S. has been growing briskly—up 292,000 in December and up 2.7 million over the past year. This is why many economists remain confident the U.S. can avoid recession.
That’s it; false positives and the unemployment rate to balance out not just stocks but commodities, funding, and especially credit; not just corporate profits but actually revenue; not just industrial production but sales, trade and inventory. The US job market is not “perhaps the best recession indicator” at all because it is at best a lagging measure. It may not suggest that full-scale recession is in progress right now, but at the very least it tells us nothing about the immediate future. Even on its own terms, the purported level of job gains has failed to live up to itself for years now.
The very basis for this persistent over-optimism has been the BLS figures, both the Establishment Survey and the unemployment rate. Yet, despite robust numbers on either account we are in this mess already. And it was economists and their unemployment rate devotion who told us last year that the “best jobs market in decades” would almost guarantee nothing but the best for the rest of it. It was in many ways the entire basis for the assertions of “transitory.”
In viewing labor market statistics so very charitably, the Journal article points to one of its regular economists:
“I just don’t buy for a second the idea that U.S. households are so terrified by what’s happening that they’re going to behave like Germans and wean themselves off buying stuff,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, referencing the high-saving and low-consumption German economy.
Mr. Shepherdson has been very faithful to that interpretation of the unemployment rate for some time. Last April, he was quoted in the New York Times again suggesting that labor data in no way indicated any kind of rough economic future:
“The [jobless] claims numbers simply do not support the idea that the first quarter slowdown in growth is indicative of some underlying malaise in the economy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
And in February 2015, Shepherdson was named the Wall Street Journal’s “most accurate economic forecaster in 2014” largely on the strength of what he said were interpretations of labor statistics. It isn’t surprising, however, that despite being given that honor by the Journal, Shepherdson’s expectations were still quite conventional in this same respect:
Like many economists, Mr. Shepherdson was too optimistic about overall economic growth. The ranking was based on a survey conducted in early January 2014, before it became obvious that a very harsh winter would cause economic activity to contract in the first quarter.
Based on his view of the labor market at that time, he was, like all economists, undeniably enamored by the idea of “transitory” being completely overwhelmed by this fountain of job growth:
What do the numbers say about 2015? Mr. Shepherdson is forecasting the real GDP will grow a blistering 3.7% in 2015 and the unemployment rate will end this year at 5.2%.
“When oil was at $100 [a barrel] I thought we would see more growth from capital spending,” he said. “Now with cheap oil, we will see more consumption and less capital spending, hurt by oil companies cutting back.”
After suggesting about a year ago that the labor market would push the economy up into a real growth trajectory because of jobs, after factoring a collapse in oil to that point no less, now that the economy is falling far, far short of that and may actually be in danger of recession he now claims that same labor statistic is enough for the economy to actually avoid it? If the unemployment rate was not nearly enough of a positive factor last year, why would it be this year after significant damage already taken and spreading?
I am in some ways being quite unfair to Mr. Shepherdson in singling him out as his view was shared widely by economists up and down the line, not any different than the views expressed by Janet Yellen and the FOMC. It is the backwards priorities of economics; to view all modeled outlooks as if “more real” than observed condition including market prices. Such Aristotelian process raises more questions than confidence, especially surrounding labor statistics. If the labor market is so robust, why are there no wage gains? To the orthodoxy, it’s not a puzzle but an article of faith; there have to be wage gains, just pushed off to some point in the future. Thus, no matter what happens right now, that future expectation is all that is meaningful in economics; every negative until that future is just “transitory.”
Like Mr. Shepherdson, I looked at unemployment claims last April and came to a far different conclusion.
That would further explain as to why Janet Yellen and the FOMC are so confused about the economy, as they view the Establishment Survey with all its adjustments and stochastic processes as hardened gospel, unchallenged as to whether past assumptions still apply. Despite the dynamic nature of the real world, after all made more so by the“neutral” efforts of the Greenspan/Bernanke/Yellen complex, orthodox economics exists exclusively upon static assumptions, “laws” and “rules.”
If there is no longer a solidified link between jobless claims and the actual economic cycle, the FOMC and orthodox economists are relying, almost exclusively, upon afalse signal. Again, that would expound on their “ability” to see an economy that no one else does, nor certainly not one of majority experience.
The weight of lackluster wages, increasingly dour spending and the spread of consumer irregularity suggested not a robust jobs market at all, but one increasingly divorced as a statistical regime. If there were actual job growth, then it would be easily observed someplace other than the unemployment rate. Instead, the Establishment Survey seemed to tick only with jobless claims, suggesting not a labor market trend in the real economy but more so a statistical anomaly devoid of historical circumstance with which to draw upon for a baseline (or benchmark).
A broad survey of the economy outside of the BLS jurisdiction suggested something very wrong with the mainline payroll estimates, and that they would become even more divergent than the actual economic conditions signaled by funding markets, then credit markets, then commodities markets and now stock markets. The jobs number became a meaningless and tortured imputation shorn of any relevant context. I think that still the most likely explanation as to how the labor market might seem so tantalizingly robust yet in only that one, very narrow place. It is uncorroborated all across the statistical spectrum of economic accounts; a feature that grows rather than conforms.
Last year was supposed to be “the” year because of faith in only the BLS’ numbers. It was advertised as full deliverance of the promises of QE and ZIRP, but instead 2015 delivered only recessionary impressions. That contrast is itself enough to call into great doubt the reliance on the unemployment rate and Establishment Survey for suggesting real economic circumstances and, more importantly, what is to come. Yet, as noted by this Journal article clearly meant to reassure, that is all that remains on that account. If all the optimists have left to stand upon is the unemployment rate, we are in much worse shape than even I thought.