My thoughts on the US economy
The last revision for Q1 2014 released today at 8:30AM was the largest downward revision since second and third revisions began in 1976. Instead of contracting at an annualized 1.0% pace, the economy contracted at a 2.9% pace. That is a severe slowdown. While this is rear-view mirror stuff, I do have a few comments and two video clips.
First, yesterday and Monday we had three guests on Boom Bust who were talking about the US economy. Marc Chandler, Marshall Auerback and Cullen Roche all said that the US economy is improving (and I agree).
Cullen even wrote up a nice synopsis on his site:
- The US economy is still operating well below capacity. The gradual improvement in the economy over the last few years is a sign that we’re filling that capacity shortage slowly, but surely.
- It’s a mistake to get too bearish about Q1 data. This truly was a seasonal anomaly and the data in recent months has proven that we’re seeing a big comeback in the data after the Q1 lull. PMI at 57.5, recovery lows in jobless claims, double digit rail gains and recent housing data are all signs that the economy has thawed after the brief winter slowdown.
- The markets are forward looking. Focusing too much on the weak Q1 data at this point is leading people astray.
- The economy is improving, but the substantial amount of slack means the economy is probably still too weak for a sustained inflation to occur.
- It would be a mistake for the Fed to tighten sharply at this point as the economy remains fragile enough that a shock could tip us back into a deflationary or recessionary environment.
What I have been telling subscribers to Credit Writedowns Pro is that Q3 2013 likely marks peak growth for this cycle. And while we are not anywhere near recession, given low wage growth, I don’t expect 2014 or 2015 to show much more than 2% GDP growth. And now that we see a –.2.9% print for Q1, that’s pretty much guaranteed for 2014 at a minimum.
What’s more is many of the cyclical data points like sentiment, jobless claims, and the manufacturing ISM are reaching difficult levels to beat on a sustained basis. That tells you that unless we see wage growth or asset-based recovery-fuelled debt accumulation, we’re not going to take growth much higher.
The real question is whether the US can rebound well after the next downturn or whether the secular demographics and private sector debt problems will mean secular stagnation.