Monday, March 14, 2016

Slow Economic Growth As Far As The Eye Can See

Slow Economic Growth Ahead
The term "the new normal" has not been used much as of late, but it has become the reality we face. The reference was created to describe an economy forever mired in slow growth. Investors and the public are beginning to realize that central banks can only do so much through printing money and lowering interest rates. These actions carry with them some very strong and nasty side effects that have taken hold in our economy. This includes capital being poorly allocated and markets being distorted by money flowing into risky assets in search of higher yields. The puzzle we now face is how this will play out going forward and what constitutes a reasonable expectation for future growth.

Over the last few years we have witnessed many companies cut their work force or rotate and replace higher paid workers with lower paid employees. We have also seen production continuing to be outsourced to offshore factories to increase profits. Many companies have seen profits grow as sales have remained relatively flat. In some cases where margins have been squeezed stock buybacks and cost cutting have been the only driver of higher profits. This has occurred as sales have been propelled forward by cheap money rather than by real or pent up demand. Few people have realized that record government deficits are also a driver propping up spending and America's GDP during the last several years.

Slow Growth And Growing Debt!
America continues to spend nearly $2,500 more than it takes in each year per man woman and child, such deficits were unheard of in the past unless it was during a major war. Deficit spending has been accomplished by borrowing money that will become a long term drag on the economy going forward. To make matters worse much of this money has been poorly spent, it was to be used to buy us time in which to address many of the structural problems that plague our economic future. Unfortunately, this has not been done, instead government has fiddled away the time in deadlock. Even the tailwind of lower energy cost through the massive expansion of oil and natural gas supplies has not been enough to move the economy forward. Much of what we have seen should be considered a one off that is behind us.

Bottom-line all this trickles down to job growth, and it could be argued this is nothing to brag about because the jobs being created are not "quality" jobs. Details of the last job report touted as proof of an economic resurgence indicate the job market is a lot weaker than the headline number leads us to believe. Of the 242,000 jobs added, 304,000 of them were part time. This means the economy in reality shed around 62,000 full-time jobs. We also saw average weekly hours of all private employees fall 0.2 hours to 34.4 and a decline in average weekly hours in the manufacturing sector as well by 0.2 to 40.2 hours at the same time hourly wages continue to stagnate.

The deflationary effects of increased supplies in my opinion are largely behind us, prices are already beginning to rise. What we should expect going forward is very slow growth as QE comes to an end and the government at some point becomes forced to deal with runaway spending. The reality is our America's future cannot be sustained on just the exports of Boeing aircraft, the manufacture of some kind of computer tablet, or internet usage. We need to look at more substantial and broader based benchmarks. At the same time it is not realistic to think the American consumer can continue to support exporting countries like China and Japan by racking up a 600 billion trade deficit year after year.

A strong case can be made that the economy is about to encounter strong headwinds as the burden of past debts and future promises made to those retiring and unable to find good jobs begin to weigh heavily upon society. Recent protest and outburst in countries like Brazil, Turkey, and throughout Europe may get worse. Tensions have become elevated in many parts of the world as ISIS and a flood of refugees flee war-torn areas. We cannot rule out the possibility of a major war, it is clear the world is rapidly changing and nobody has a crystal ball that will predict how this will all play out, but one thing is certain, and that is storm clouds do exist. This leaves the possibility at anytime the markets could morph into a "realizing market" that grinds slowly downward or that at some point the wisdom of buying every pullback changes and the market simply drops like a stone.

Speculation based on mere hope is not a solution to our complex problems, long term planning is in short supply. Silly talk about the fact that the deficit is beginning to shrink is like saying it is now safe to jump into the water because in is no longer as deep as it was ignores reality, the depth has dropped to ten feet after being at twelve. How America and countries across the world react to the stress that comes from slow economic growth and how it will effect our budget and culture as the long term cost burden of carrying the unemployed builds has yet to be determined. However, the logic and motives of those forecasting a bright and robust economy need to be scrutinized.

Footnote; Two other post written sometime ago remain strongly tied to this message, they are listed below. Other more recent articles can be found in my blog archive, thanks for reading, comments are encouraged,



  1. Slow growth is a result of a big economy with a lot of people unable to use more cheap resources to do marginal economic activities. Is it possible there are limits to growth on a finite planet? That was suggested 45 years ago and it has been ignored. Infinite growth is not possible and so at some point will "slow". Debt is making up the difference. We are also trashing the currency. At some point someone will be holding a lot of worthless "dollars". How much money can be created to do what must be done? The answer: An infinite amount and that negates your and my pathetic attempts to "save". Good luck with your "vote", I am not counting on it changing things.

  2. I can't argue with the points you make. As much as I'd like to think we'll all just muddle through and things will slowly get better I have an underlying feeling things ain't going to turn out well. I've been reading your blog for a short time now. Thanks for writing clearly and intelligently. I appreciate your perspective without the over the top doom and gloom musings of other writers. I'll continue to follow your thoughts and opinions as world events unfold one way or the other before our very eyes.

  3. Thanks for the comments. As a person in business who deals with real numbers and real money this is all becoming a bit over the top.
    Thanks again for the feed back.

  4. Of the 242,000 jobs added, 304,000 of them were part time. This means the economy in reality shed around 62,000 full-time jobs.

    I think this is a typo with the figures transposed.

    1. Sorry, it wasn't a typo. As the next sentence states, this is an indication we are replacing full-time jobs with part-time slots.