The recently released figures showing a strong decline in job formation over recent months may be more than a noisy statistic it may be an omen of danger ahead. This is a reminder that the task before Janet Yellen and the Federal reserve will be getting much more difficult. Not only does this call into question claims the economy has reached escape velocity but lends credence to claims by others like me that QE and artificially low interest rates are not the answer. These policies and massive government deficit spending can only carry a distorted economy so far. Expect this issue to come front and center in coming months as the Fed will come under increased scrutiny and experience increasing demands to defend their policies.
The surprisingly bad numbers showed that back in December only 74,000 jobs were added to payrolls far less then half of what many analysts had expected. Still the headline unemployment rate was shown to drop to 6.7% a post recession low. Critics of the central banks action are quick to delve deeper into the jobs data and point out that many of the jobs created over the last several years are low paying and often part-time. Several factors distort the BLS unemployment numbers but by far the one that draws the most concern is that many unemployed workers have dropped out of the labor force because they are discouraged and simply given up on
the idea that they will be able to get a job.
In one of my recent posts I wrote about the false idea that a housing shortage exist and how we are doing a disservice to housing by encouraging new construction based solely on artificially low interest rates rather on true demand. We are pushing on a string
and calling it demand when someone who can barely pay their rent is
encouraged by the government to buy a house they can neither afford or
maintain. We have a shortage of "qualified" buyers and renters not housing. Many housing units sit empty across America. What is happening on the micro economic front as we look at families throughout America is not promising and has disconnected from other trends touted by the media.
As recent data shows auto makers have begun to see the supply of unsold cars stack up on dealer lots I'm again forced to wonder if the momentum from these policies is beginning to wane. Many of the new cars hitting the road are really leases which show up as
a sale, and many of them may be motivated because an automobile owner
faced with a costly repair may be oping for this alternative verses
putting money they do not have into their current vehicle. People in weak financial positions, such as those living on disability
or student loans, often choose to kick the can down the road and put
themselves into an ego boosting vehicle that they cannot in reality
afford, or need. The growing supply of unsold autos bodes poorly for manufacturing and production going forward.
Remember companies in past years have ushered savings from interest paid on their debt into
the earning column this has driven up earnings. A major reason inflation remains low is they are
sitting on a hoard of cash that has lowered the velocity of money. At the same time many companies have cut cost by reducing workers and turning to automation and technology. The artificially low Fed controlled interest rates have been a massive onetime tailwind that is mainly behind us. When rates can go no lower or reverse the positive effect ebbs and can become a major
headwind. The massive government debt in many countries and a weak economy
means this headwind has the potential to become devastating. This brings into question the quality of growth based on these policies and if the momentum is sustainable.
We must recognize that all economic growth is not created equal. If you spend money but afterwards have
little to show for it you have wasted it, government spending and
programs often fall into this category. The right kind of economic
growth propels us forward with a purpose, is
well directed, and has long lasting benefits. An influx of monetary stimulus has created the
illusion of more pent up demand then exist or can be sustained and results in an elevated baseline for comparing year on year growth. In
short we have to move forward faster next year just to keep growing. For
example, if we manufacture and sell twelve million automobiles this
year up from ten million last year because of low interest rates and easy money,
we now must sell the same number for the economy not to contract.
The whole concept of economic growth is based on the idea of an ever growing trend
of increased production. At times we see a sector rotation such as
computer sales increase when clothing falters, but overall we seek
numbers that reflect an upward and onward slope. History shows
that such trends falter when they become overdone and unsustainable. When it becomes apparent the economic efficiency of
is beginning to collapse and the additional money poured into
the system coupled with lower rates is no longer effective in driving the
economy forward options evaporate. When this happens the extra GDP growth generated by
each batch of loans drops and momentum ends this becomes the equivalent
of pushing on a string, this sign of exhaustion may soon overwhelm us.
Footnote; Your comments are welcome and encouraged. If you have time
check out the archives for other post that may be of interest. Below is
an article that delves into what happens when the momentum of current policies end.