In the past couple of months, a disconnect has developed between the perception of the US economy and the reality.
The perception is that everything’s just fine: The continuation of a solid if unspectacular recovery that began in the summer of 2009. Stocks continue to rise. Corporate profits continue to boom. The unemployment rate continues to tick down. Wall Street continues to coin money.
But the reality is that the recovery has never been strong and that many key metrics have recently turned south–despite the fact that the government still has its foot stomped on the stimulus gas.
What metrics have turned south?
Well, first and foremost, GDP growth.
We learned this morning that the economy grew at a pathetic 1.8% in Q1. That’s way below the 3%-4% rate that most economists consider normal. And it’s miles below the 5%-7% growth that normally follows a recession as sharp and severe as the one we just had.
Meanwhile, the Fed still has interest rates parked at zero, and is still conducting emergency stimulus measures like QE2. And the government’s huge stimulus package from 2009 is still driving spending. And we’re still spending an absolutely mind-boggling ~$1.5 trillion per year more than we take in (federal deficit)–and piling up humongous debts in the process. And, needless to say, none of this spending–“stimulus” or just normal spending we can’t afford–has produced the desired private-sector growth.
1.8% GDP growth in the face of massive stimulus is the equivalent of your car sputtering down the highway at 45 miles per hour while you have the gas pedal floored. You might be glad that the car hasn’t broken down completely, but you certainly won’t conclude that all is well. And you also might conclude–wisely–that if 45 is the best you can do with the gas pedal floored, things may be about to get a whole lot worse.
And it’s not just growth that blows.
In the past few weeks, initial jobless claims have ticked back above 400,000 per week, considerably higher than economists expected. Jobless claims above 400,000 are generally considered a sign of a contracting job market, not a growing one. If the recent jobless claims trends continue, the monthly jobs figures may soon go from “OK, not great” to downright lousy again.
And then there’s the unemployment rate. It’s still almost 9%! Imagine if, back in 2007, someone had told you that in 2011 the unemployment rate would be 9% and that some folks would consider that encouraging. You’d have dismissed them as a flat-earther or Armageddonist. But here we are.
House prices are falling again–so quickly that, in many parts of the country, they’re now setting new post-bubble lows. Remember all the hand-wringing two years ago about how the economy would never really recover until we got a floor in house prices–and, therefore, how the government had to do everything possible to put a floor under house prices? Well, now the government appears to have given up. (And that’s actually a good thing, because there’s no government price intervention in history that we know of that has permanently prevented prices from reverting to the level the market will support. Governments can delay the inevitable, but they can’t prevent it. And house prices are still “expensive” on a historical basis.)
Inflation is taking hold. As anyone who actually buys things knows, things cost a lot more than they did a little while ago. Things like gas (double the price of a couple of years ago, up nearly 40% this year alone), food, rent, healthcare, insurance premiums, and so on. (Yes, houses are getting cheaper, but most people don’t have to buy houses.) Ben Bernanke can talk until he’s blue in the face about how there’s no inflation, or shouldn’t be because of the “slack” in the system, but people who actually buy things know better. A rise in inflation means that you’ll start hearing the word “stagflation” quite frequently. The word “stagflation” is not a happy word. It’s the word that characterised the 1970s: Crappy economic growth combined with wild inflation. Stagflation destroys savers and those who lived on fixed incomes (many retirees). It also punishes anyone trying to run a business. And it’s hell on stock prices.
[credit provider=”Vitaly Katsenelson” url=”http://www.businessinsider.com.au/is-a-booming-economy-even-good-for-the-stock-market-2011-3″]
Corporate profit margins are at near-record highs, but this party may finally be over. This morning, Procter & Gamble said that their margins are getting slammed by rising commodity prices. Like most companies, P&G will presumably try to pass these costs through to the rest of us, but given high unemployment, huge debt burdens, and crappy wage growth, it’s unlikely that consumers will swallow them. So corporate profit margins, which have helped levitate the stock market for the past two years, may finally begin to compress. (Which, by the way, they always do–despite all the great arguments about why it’s “different this time.”)Anything else? Yes, there are other things, too.
But the bottom line is, the economic recovery is not going well. It’s going badly. And the recent signs suggest that it may be about to get worse–just as the Fed’s latest emergency stimulus measure (QE2) begins to run out.
See Also: 10 Signs The Economy Is Slowing >