More and more the economic data coming out of the US seems to support continued recovery. The housing data certainly does. Consumer credit is increasing. And the Fed Flow of Funds data shows household balance sheets significantly repaired. Moreover, jobless claims continue to trend down. The missing link now is wage growth, which could well be on the horizon.
First, we have received pretty good confirmation that the US is unlikely to have a shutdown in the news that the House of Representatives passed a Republican-sponsored bill to avoid it. Now, the politics of austerity in the US revolves around the sequester and entitlement spending, with the President offering up cuts to entitlements in return for Republican movement on tax and spending issues. The Republicans are not likely to yield here since both issues are losers for them. Even though they talk a lot about deficits, the Republicans must respect that their base is older and that large cuts to entitlements would be unpopular. Recent Republican VP candidate Paul Ryan’s proposal to dial up the pressure on entitlements was beaten back by his colleagues fearful of the consequences of just that approach. So there will be some austerity, no doubt. However, it appears that it will not be enough to derail the recovery at this time. My prediction that fiscal consolidation would occur has proved right. However, my prediction that this would end in recession looks to be wrong.
And the reason for this is the economic data. I have already spoken a bit about consumer credit and housing data in past posts. Today we saw two other bullish data points.
First was the Fed Flow of Funds which showed households debt rising at the fastest pace since the recession in 2008 by a full $1.1 trillion in Q4 2012 alone. Much of the increase comes from education and auto loans as opposed to credit card and mortgage loans where credit was geared in prior cycles. In fact, household mortgage debt is down $1.2 trillion from its peak, according to the flow of funds.
Reuters talks about the flow of funds data as hinting at the end of deleveraging. I take a different view. For some time now, the deleveraging cycle has lessened as one would expect in a cyclical recovery. Two years ago I pointed out that the deleveraging was attenuating based on the flow of funds. The fact is deleveraging ebbs during a cyclical upturn and it reasserts itself during a downswing, as I wrote two years ago. The question is the severity of the releveraging and deleveraging cycles. During the secular leveraging phase post-1982, the cyclical deleveraging cycles were short and mild while the releveraging cycles were long and heavy. What a balance sheet recession means is not that the ebb and flow of credit cycles disappears but that it moves heavily toward deleveraging cycles of greater severity and milder releveraging cycles. This is what is happening. And none of the data says anything has changed.
I put it this way in late 2009:
“I draw the following conclusions :
- In an economic downturn, consumer credit has generally declined more than nominal GDP.
- The 1990-91 recession saw a very drawn out drop in credit and easily generated the longest time before credit regained its previous peak.
- The 2001 recession was unusual mild as it was the only time in the last 56 years that the U.S. has experienced a recession without a drop in consumer credit.
- The 2007-2009 recession has been unusually severe. The drop in nominal GDP is the largest in the last 56 years. However, the drop in consumer credit has been even worse at more than twice the largest previous decline.
“None of this necessarily helps me decipher whether we are in a secular deleveraging cycle. But, the severity of the fall-off in consumer credit relative to output may point in this direction.”
One could argue it both ways, even now. However, the next cyclical downturn will be very instructive in reinforcing whether we are in a secular deleveraging cycle or not. I suspect we are.
But, none of this takes away from the cyclical forces now at work. On the jobs side, for example, jobless claims were down yet again last week to 340,000. The change in average jobless claims is a coincident indicator because it is first derivative data point that is better at measuring cyclical turns than jobless claims levels. And claims data are not increasing as they do at a cyclical downturn. They are moving in the other direction. Moreover, productivity growth in the US has turned into a productivity loss, often seen as a sign that companies need to increase headcount during a cyclical upturn. So, it may well be that the labour market is beginning to or will begin to pick up.
All of this is good. Yet the froth in high yield markets, the spurious talk about Dow 36,000 and other signs of market excess do leave one questioning the sustainability of this cycle. Moreover, household releveraging when rates are zero percent and debt levels are well over secular norms leaves households extremely vulnerable to another downturn. For now, things look good though. Enjoy it while it lasts.
On continued recovery in the US
More and more the economic data coming out of the US seems to support continued recovery. The housing data certainly does. Consumer credit is increasing. And the Fed Flow of Funds data shows household balance sheets significantly repaired. Moreover, jobless claims continue to trend down. The missing link now is wage growth, which could well be on the horizon.
First, we have received pretty good confirmation that the US is unlikely to have a shutdown in the news that the House of Representatives passed a Republican-sponsored bill to avoid it. Now, the politics of austerity in the US revolves around the sequester and entitlement spending, with the President offering up cuts to entitlements in return for Republican movement on tax and spending issues. The Republicans are not likely to yield here since both issues are losers for them. Even though they talk a lot about deficits, the Republicans must respect that their base is older and that large cuts to entitlements would be unpopular. Recent Republican VP candidate Paul Ryan’s proposal to dial up the pressure on entitlements was beaten back by his colleagues fearful of the consequences of just that approach. So there will be some austerity, no doubt. However, it appears that it will not be enough to derail the recovery at this time. My prediction that fiscal consolidation would occur has proved right. However, my prediction that this would end in recession looks to be wrong.
And the reason for this is the economic data. I have already spoken a bit about consumer credit and housing data in past posts. Today we saw two other bullish data points.
First was the Fed Flow of Funds which showed households debt rising at the fastest pace since the recession in 2008 by a full $1.1 trillion in Q4 2012 alone. Much of the increase comes from education and auto loans as opposed to credit card and mortgage loans where credit was geared in prior cycles. In fact, household mortgage debt is down $1.2 trillion from its peak, according to the flow of funds.
Reuters talks about the flow of funds data as hinting at the end of deleveraging. I take a different view. For some time now, the deleveraging cycle has lessened as one would expect in a cyclical recovery. Two years ago I pointed out that the deleveraging was attenuating based on the flow of funds. The fact is deleveraging ebbs during a cyclical upturn and it reasserts itself during a downswing, as I wrote two years ago. The question is the severity of the releveraging and deleveraging cycles. During the secular leveraging phase post-1982, the cyclical deleveraging cycles were short and mild while the releveraging cycles were long and heavy. What a balance sheet recession means is not that the ebb and flow of credit cycles disappears but that it moves heavily toward deleveraging cycles of greater severity and milder releveraging cycles. This is what is happening. And none of the data says anything has changed.
I put it this way in late 2009:
“I draw the following conclusions :
“None of this necessarily helps me decipher whether we are in a secular deleveraging cycle. But, the severity of the fall-off in consumer credit relative to output may point in this direction.”
One could argue it both ways, even now. However, the next cyclical downturn will be very instructive in reinforcing whether we are in a secular deleveraging cycle or not. I suspect we are.
But, none of this takes away from the cyclical forces now at work. On the jobs side, for example, jobless claims were down yet again last week to 340,000. The change in average jobless claims is a coincident indicator because it is first derivative data point that is better at measuring cyclical turns than jobless claims levels. And claims data are not increasing as they do at a cyclical downturn. They are moving in the other direction. Moreover, productivity growth in the US has turned into a productivity loss, often seen as a sign that companies need to increase headcount during a cyclical upturn. So, it may well be that the labour market is beginning to or will begin to pick up.
All of this is good. Yet the froth in high yield markets, the spurious talk about Dow 36,000 and other signs of market excess do leave one questioning the sustainability of this cycle. Moreover, household releveraging when rates are zero percent and debt levels are well over secular norms leaves households extremely vulnerable to another downturn. For now, things look good though. Enjoy it while it lasts.