2016 Economic Outlook
“No matter how you slice it, the U.S. is mired in an Incomplete Expansion.”
Gregory Miller declares services are fine; however, the production of goods is in recession. We have been looking at a historic 2% recovery. Since 2012, we are on the verge of accelerating upward towards a 3% economy but it hasn’t happened yet because our entire economy is split along different lines and planes. Services production is fine and can sustain our entire economy; while goods production is in recession. Production of goods came back early, but have since dropped. Mining is down; construction is accelerating on residential and commercial side of the business, and manufacturing is in recession.
Overall, the U.S. is stable, but the rest of the world is on “eve of destruction”.
This is our first ever “non-home” sales expansion; typically housing is the first to recover. Corporate profits decline is out of sync with domestic fundamentals. Over the last four quarters, profits declined three times. Domestic profits fell .9% and global profits fell 2.7%. This is the weakest non-recession profit period in the past 15 years.
We are producing goods, but no one is buying them. This has led to an increase in inventory. Inventory movement is the most powerful element to predict recession/correction. The inventory is significantly smaller now without going negative, we must make the correction. Secondly, The Federal Reserve raised rates, but the market did not. This signals that the market doesn’t believe higher interest rates are real. The Federal Reserve still doesn’t have a grip on anti-deflation promise. Only one time in history has rates been 1%. Inflation numbers are closer to danger level when on low side vs. high side. We expect rates to go higher.
The most dangerous risk is consumer spending. 2% is not healthy as consumer spending should grow by 4%. Jobs grew, so did incomes, but spending did not – except for cars, consumers are buying automobiles but have recently slowed down. We had the worst holiday spending season since 2008 – real income: expansion was 1.2%; Last six months 3.5% but not as shiny number as one might think. The volume, wage increases, higher wages paid solely went to incomes above $75,000.
As for oil, “Explain to me how a major cost element affecting every consumer, every household, every small business, every corporate giant, and every global partner wants can be bad?” The world as we know it began in 1985, it was the year that we took control of our energy spending. OPEC started a series of self-destructive arguments pertaining to ramping up crude oil prices. In 1985, oil drilling shifted to technological processes out of the ground and in the Gulf of Mexico. Moving oil from one place to another became easier and it opened up supply significantly. Since 2010 (and really since 2015), prices continue to drop because of advances in technology. The U.S. is the biggest producer of oil globally. Oil will be low for quite some time, but will likely be back to $50/barrel soon.
The Federal Reserve has many ways to boost the economy. Quantitative easing is not new, we have done it before. It’s different from fiddling with short term interest rates. The difference is the people who have access to the impact, and with quantitative easing attached, it comes out of The Federal Reserve and into people who own bonds sequestered in a small part of the economy. Banks sold bonds, took in cash and did nothing. When banks sell bonds to raise cash they are deliberate on what they will use it for. Before quantitative easing, corporate America had a sizable pile of retained earnings. If they wanted the investment for the company they would have started it anyway. The Federal Reserve raised capital by going to the bank – when The Federal Reserve works on the short-end and lowers cost funds it makes it easier for banks to price loans that can grow small business. When small business raises capital they spend it now, they aren’t taking on debt. The primary reason is the difference in the transmission mechanism from the issuance of the new stimulus to the multiplier of the first taker who is spending it and letting it work its way into the economy.