No Good News for the Economy

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On April 7, 2017, the Atlanta Federal Reserve cut its expected GDP growth rate in half for the first quarter of 2017, ending a week ago, from 1.2% to just .6%.  Weaker than expected consumer activity and reductions in business investment cut the anticipated percentage. In particular, auto sales have been weaker as sub prime auto loans are becoming more problematic (sounds familiar doesn't it) and lenders are tightening up on credit standards.

 

This after GDP grew at an anemic 1.6% for 2016.  Remember, not all GDP activity is necessarily good for the economy or the country.  When you take out garbage like Wall Street derivatives and businesses like payday lenders (one of the fastest growing lines of business in the US) GDP would likely be negative.  So much for the supposedly economic recovery.

 

The truth is that for 90% of Americans there has never been any meaningful economic recovery and it only looks to get worse.  Americans hold more debt now than in the 2006-2008 time period.  No one really knows what the true unemployment rate is and there is no empirical data on those vastly underemployed.

 

The very, very modest number of new jobs announced by Trump were already in play and do not put a dent in the problem.  A new $1 billion Ford plant will only provide 132 new jobs because the plant will be fully automated.

 

Assuming these GDP estimates for the recent first quarter hold, or are even worse, what do you think this will do for the unfounded stock market boom.  There is no reality or connection of corporate earnings to stock prices.  EPS/earnings per share are only up because companies have been buying back shares of stock in mass thus have lower earnings spread across far few shares.  However, stock buybacks are malinvestment because it doesn't put a single person to work but corporate executives certainly see higher pay and bonuses.

 

If the stock market implodes the Federal Reserve will be forced to bring interest rates back down to zero percent and again go on a bond buying orgy.  Essentially we will be right back to 2008-a stock market in freefall, zero interest rates causing even more poor investments that do not bolster economic gains, higher unemployment and underemployment, and Americans feeling they have been shafted again.

 

There will be more demand on public services and but less tax revenue coming in.  The deficit will swell as well as the national debt.  Increased military spending will widen the debt and deficit even more.

 

If this isn't bad enough we conducted bombing today in Syria causing outrage by Russia and Iran.  Are we headed to World War 3?

 

The Trump euphoria looks like its on life support.  Hang on its going to get very nasty again for many Americans that were told just a few months ago that happy days were here again.

 

 

Comments

John G Added Apr 7, 2017 - 6:36pm
And you want the government to cut spending, which will further slow the economy as well as put pressure on people to take out more private debt.
Jeffry Gilbert Added Apr 10, 2017 - 2:47pm
Hang on its going to get very nasty again for many Americans that were told just a few months ago that happy days were here again.
 
Indeed. 
 
Two more cases of Zacapa were dropped off yesterday to enhance my enjoyment of the spectacle. 
Bill Kamps Added Apr 10, 2017 - 2:48pm
We arent headed for WWIII, but the money wasted on the attack on Syria could have been better spent.  I accomplished nothing but used up a few Tomahawks, which will now need to be replaced help  that defense contractor out a  bit.
 
Every politician can "prove" the economy is doing great.
 
Stocks will be supported because companies are buying back shares of stock, this causes the price to go up.  They are buying the  shares back with money they borrowed at extremely low interest rates.
George N Romey Added Apr 10, 2017 - 2:52pm
And what happens if interest rates continue to rise because the Fed has been put on the hot seat to increase interest rates?  The Fed allowed the Wall Street economic heroine addiction to go on for too long.  So then companies stop buying back stock, earnings plummet and everyone goes running for cover.
Mike Haluska Added Apr 10, 2017 - 2:53pm
George -
 
There is some correlation between Wall Street and the economy, but the economy is NOT Wall Street.  All Wall Street does is act as a giant auction for people buying and selling stocks and bonds - and once in a while acting as an intermediary for raising funds for companies needing to borrow or accept cash for shareholder equity.
George N Romey Added Apr 10, 2017 - 2:58pm
But now Wall Street has commandeered the business cycle.  CEOs must bow down to the whims and jeers of Wall Street lest they see their stock price be put on a Sell rating and they being replaced.  Wall Street used to be the engine behind the action now its the primary action.
Bill Kamps Added Apr 10, 2017 - 3:27pm
For sure there is a problem if interest rates rise very much, because of the high amount of debt, Federal especially. 
 
The interest rates wont rise, unless the US debt stops being bought at current rates. The Fed is not going to raise  rates on its own, because they know that would worsen the budget problems. 
 
As we have discussed before, the debt to GDP ratio is high, and we dont know at what level the debt will stop being bought.  These are very difficult things to predict, and most of the time we are wrong.  Anyone who can predict interest rates with even modest amounts of accuracy, doesnt need a job because they will be a millionaire many times over.
 
 
George N Romey Added Apr 10, 2017 - 3:40pm
If the Fed stops raising rates it would be a signal the so called economic recovery has stalled.  Remember the Fed has hitched its wagon to the belief that we are in a recovery. The Fed has essentially screwed themselves over time.  Now they are damned either way.
George N Romey Added Apr 10, 2017 - 5:07pm
According to the BOL the economy added jut 95K jobs in March 2017, just enough to keep up with population growth.  Yet somehow the unemployment rate dropped to 4.5%, typical of full employment.
John G Added Apr 11, 2017 - 2:21am
As we have discussed before, the debt to GDP ratio is high, and we dont know at what level the debt will stop being bought. 
 
Yes we do. Never.
 
The excess reserves that buy the bonds have already been spent into the payments system by the Treasury.
 
The currency issuer i.e. the Federal government sets the coupon rate on so called government debt. The 'market' has no power whatsoever.
 
You can stop panicking now.
 
You're welcome.
 
Bill Kamps Added Apr 11, 2017 - 11:16am
John, Im not panicking since I think the risk of a bond default is currently low, but it might not always be low.  If the debt to GDP ratio rises to 3-400%, then the story may change, and while we are headed in that direction it will take another 10 years to get there.
 
However, I do disagree somewhat.  While the coupon rate is set by the Fed, the market does not have to pay 100 cents on the dollar for the  bonds, that is how  the market adjusts the interest rate.  When the bonds are auctioned, sometimes people pay 101 cents sometimes they pay 99 cents on the dollar for the bonds.  Similarly the bonds trade in the open market, and obviously dont always trade at parity.
 
Having said that, there is a great appetite for US bonds, because it is the best house in a bad neighborhood of government debt.  The US debt is the best of the lot, and  many countries and institutions need to buy bonds and need the liquidity they represent.  Even when the interest rates were near zero people still bought bonds, because the bonds are more safe than many banks.  The US government has never defaulted on a bond, while banks have gone under, or otherwise lost or stolen the money, especially in other countries.
Dino Manalis Added Apr 11, 2017 - 12:06pm
The economy remains stagnant, it can't get any better with current conditions, that's why the administration has to focus on business tax cuts first to galvanize economic conditions as soon as possible.  All other issues, including health care, need to take the economy into consideration. President Clinton credited deficit reduction for prosperity in the Nineties, Trump should deal with deficit reduction and elimination after business tax cuts.  He will need to do this anyway in order to get Republicans to approve raising the debt ceiling.  The objective should be to grow the economy more strongly and turn deficits into surpluses and pay down the debt before we become like Greece!
Bill Kamps Added Apr 11, 2017 - 12:13pm
Dino, the problem is that they are caught in a bind.  Deficit reduction means raising unemployment higher than it is through laying off Federal workers.  Trump has promised a defense build up ( not necessary ), and an infrastructure plan ( advisable imho ), but these both will raise the deficit. 
 
The only real places to go to get deficit reduction are defense, and entitlements.  Both of which help to prop up the economy.  When you reduce government spending  you at least temporarily cause a reduction in the economy and politicians are unwilling to take the short term pain for the long term gain.  Voters also dont want their government payments reduced.  While they dont want a deficit, they also dont want their payments cut, or their taxes increased.  Voters have irrational expectations.
 
For the past 16 years we have borrowed heavily to appease the voters, and now the politicians are stuck.
John G Added Apr 11, 2017 - 2:38pm
Bill. The market has NO power over the currency issuer. The US government doesn't need to issue bonds at all. It can maintain its target rates by paying interest on excess reserves and do away with the bond market altogether if its so chooses.
It is not a borrower in any realistic sense.
The appetite for Japanese bonds is also high. The debt to gdp ratio doesn't matter.
Cliff M. Added Apr 11, 2017 - 6:17pm
Gold is up and the ten year treasury is down. A lot of nervous money on the sidelines. What will it take to get some investment in the main stream economy?
John G Added Apr 12, 2017 - 2:31am
What will it take to get some investment in the main stream economy?
 
Fiscal stimulus. Much bigger deficit spending. Wage growth.
 
George N Romey Added Apr 12, 2017 - 11:29am
I'd run a five year $1 trillion a year infrastructure program administered by the private sector and overseen by a private board of regents (the federal government solely funding it and appointing the Board).  I'd have state governors make requests for projects to the Board.  I'd pay for it by cutting defense spending by $250 billion a year (out of its total budget and off budget annual spending of about a $1 trillion) and a Wall Street transfer tax and other misc. spending to get the other $750 billion a year. 
Autumn Cote Added Apr 12, 2017 - 1:27pm
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Cliff M. Added Apr 12, 2017 - 3:32pm
I believe there is a large chance we might have to wait out a period until we can come up with a new congress.What it will look like I'm not sure .Something pragmatic that gets things accomplished for more than just their cronies.Fiscal investment seems to have become toxic to the contributor class who control the puppets.Not giving Trump the ball to plow ahead and do the building so sorely needed immediately is a travesty and a  huge opportunity . It would be good for him and keep him busy on worthwhile issues .
George N Romey Added Apr 12, 2017 - 6:38pm
Cliff the neocons and the neoliberals have teamed up together to stop any progress.  We need to take both of these political parties and shove them off the government payroll.
Cliff M. Added Apr 13, 2017 - 5:32am
George, The current politics has become the legal arm of the "mob". Getting into elective office is very similar to being initiated a made man. The decision process has effectively been taken from the voter.
wsucram15 Added Apr 17, 2017 - 2:20pm
George you have some good ideas (never happen-not with money) and especially now that Trump found toys.   But I have to laugh, you have all these financial businessmen in office to solve our problems and they are all sitting around a table at Mar a largo bombing Syria.  
Cliff is right, we need to elect a new Congress, I mean ALL of them. I like some of them too. But first we need to eliminate the two party system or make it less than important.  We need candidates that run and vote on issues not on party lines.  People need to make a statement, until they do..nothing will happen.
George N Romey Added Apr 17, 2017 - 2:26pm
Jeanne you are correct.  The two party system is dysfunctional by design.  Trump either played a big con or just can't control the system very much like Obama.  We may never know the truth.  If this country somehow makes it to 2020 without an economic or social collapse will Americans finally reject this two party duopoly?

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