By David Stockman as originally published on Contra Corner and reprinted here with permission
We began Part 1 with the Donald’s bogus tax day boast that the American economy has come roaring back. But that falsehood merits further debunking because it succinctly embodies the kind of context-free, anti-historical, bad money-populism that prevails on both ends of the Acela Corridor.
On this Tax Day, America is strong and roaring back. Paychecks are climbing. Tax rates are going down. Businesses are investing in our great country. And most important, the American people are winning.
Au contraire. The US economic expansion is not roaring; it’s still stumbling into debt-ridden old age—fixing to be battered by another round of collapsing financial bubbles and payback for growth stolen from the future.
For example, since December 2016 paychecks have been “climbing” alright—-but as a factual matter they are up by the very same 2.8% as the CPI. That is to say, real earnings have gone exactly nowhere during the last 15 months.
Likewise, there is nothing special to write home about with respect to the Donald’s claim that “businesses are investing in our great country”.
Well, yes again, but at no faster rate than before. As is evident in the chart below, business investment during present day “recoveries” tends to slog forward in stop-go pulses. Accordingly, there is really nothing new in the trend that has prevailed since the recovery gained its footing in the second half of 2010.
In fact, the average quarterly (Y/Y) gain in real business investment during 2017 was 4.68%, which compares to an average Y/Y gain of 4.94% during the prior 26 quarters.
The only thing different last year was the timing of the pig-in-the-python effect. As seen in the chart, CapEx surged during the 2014-2015 global commodity and trade boom; then gave way during the subsequent 2016 bust; and finally rebounded modestly during 2017—-helped not a little by the weaker dollar, energy investment recovery and the global capital spending upturn triggered by Mr. Xi’s pre-coronation credit boom.
Just as the above can not be remotely described as evidencing a post-inaugural acceleration, the trend in real retail sales growth conveys the same story.
During 2011 through 2016, real Y/Y gains averaged 2.41%. During the past 15 months the have averaged 2.30%—-meaning that most consumers are still living paycheck to paycheck, not suddenly “winning” so much they can’t stand it, as the Donald regularly promised on the campaign trail.
In point of fact, they are not really “winning ” at all. They have actually been tapping into their rainy day funds in a desperate effort to tread water—-and to the tune of nearly one-half trillion dollarsper year.
That’s right. US households have cut their savings rate (annualized dollars) from $850 billion in Q2 2015 to only $380 billion in Q4 2017.
Too be sure, when consumers leave themselves high and dry in this manner, our Keynesian national GDP accounts imply its all to the good because spending is the be all and end all for any given quarter.
Then again, payback time always comes, and at just 3.0% of disposable personal income by the end of last year, the personal savings rate had plunged into the sub-basement of recorded history—just as it did on the eve of the 2008-2009 recession.
The same story holds true on the supply side of the economy. During the past year, labor productivity averaged 1.25% annualized growth compared to 1.23% during the prior 30 quarters. So we’d call this tiny uptake a rounding error and be done with it. Surely it’s not evidence that the American economy has come bounding back.
Indeed, the real issue in the chart is that after the one-time rebound from its Great Recession plunge, labor productivity remain mired at levels barely half of its historic average.
Finally, notwithstanding all the White House crowing about jobs, there has been no acceleration there, either, as is evident in the chart below. It measures aggregate hours worked by production and non-supervisory workers, which have averaged a 2.23% annualized rate of gain during the 15 months since Trump took office.
That compares to a 2.25% annualized average during the prior six years. But when it comes to government work, of course, second decimal place differences amount to rounding errors—even if you use a magnifying class to highlight them.
The larger point here is that there has been no acceleration of the main street economy since January 20, 2017—–just a continuation of the deeply sub-par recovery that has been underway since 2010.
In effect, the Donald is taking credit for the doings of the plain old business cycle, and at the worst possible time.
To wit, we are at the wee hours of a business expansion that: (1) is exceedingly long in the tooth by all historic benchmarks—-standing at 106 months compared to a 61 month post-1950 average and the 119 month all-time record expansion of the 1990s; and (2) was purchased with still another dose ofborrowed prosperity that is now coming check-by-jowl with payback time.
That much, at least, is evident in the chart below. Between the pre-crisis peak in Q4 2007 and Q4 2017, total credit market debt outstanding in the US grew by the staggering sum of $16 trillion, and now stands at just under $69 trillion or 3.5X GDP.
By contrast, during the same 10-year period, nominal GDP grew by only $5 trillion. It is no wonder that US economic growth has slowed to a relative crawl when it takes mountains of debt to move what amounts to a molehill of growth.
Absent the huge drawdown in savings last year, in fact, the already unspectacular real GDP gain of 2.6% year-over year (Q4) during 2017 would have averaged hardly 1.5% per annum.
The several quarters last year of 3% seasonally maladjusted annualized growth rates, therefore, were not signs of an impending supply side growth miracle. The were just an expression of the long running pattern of syncopated, sub-par GDP growth that is now facing another round of debt payback time.
Even aside from that impending skunk in the woodpile, however, the far right hand side of the chart bears no trace of a booming economic Waldo. The latter is nowhere to be found in Trumpite America…..except, except for the stock market.
Yes, the major indices are up 30% but that’s exactly the trouble. In the new world of Fed-driven Bubble Finance, business cycles end when bubbles crash under their own weight of distortion and rampant speculation in the casino. So the Donald is bragging about a Bubble that is fixing to crash, and t0 take his vaunted booming economy with it.
Stated differently, the trend performance of the-current so-called recovery has been exceedingly sub-par yet the speculation ridden equity markets have pushed PE multiples and growth expectations into the upper regions of the financial stratosphere.
For instance, reported earnings for the S&P 500 came in at just under $110 per share for the LTM period ending in December 2017. That represented a mere 2.4% annual growth rate from the prior cycle peak of $85 per share ten years ago during the June 2007 LTM period.
Yet the Wall Street hockey sticks are now pointing to $169 per share of S&P 500 earnings for the December 2019 LTM period. That amounts to a 24% per annum growth or 10X the actual growth rate of the past decade!
Needless to say, that is not going to happen in a month of Sundays, yet it does represent the delusional expectations that have been kindled by three decades of Bubble Finance; and it’s the reason why the next crash will be epic and take the main street economy down for the count still another time.
And that gets us back to the context-free, anti-historical, bad money-populism that prevails on both ends of the Acela Corridor. Just as the Donald has completely twisted the actual economic results on his watch to date, the perma-bulls on Wall Street have turned the worst recovery in history into occasion for the highest valuation multiples ever seen.
At the end of the day, the peak-to-peak trend in real final sales captures the strength of the economy about as well as any of the major macro metrics. Yet since the pre-crisis peak, real growth has clocked in at just 1.2% per annum or barely one-third the historic growth rate.
Needless to say, the logic of sky-high PE multiples at the tippy-top of the weakest business expansion in recorded history makes no sense whatsoever—-and especially if that lunacy includes a nod to the purported pro-business policies of the Donald.
The fact is, the Trumpite/GOP fiscal debauch is about as anti-growth as it gets under current real world conditions and in light of the headwinds arising from the 11th hour pivot to QT by the Fed and other central banks.