Recently, the mainstream media had a solid narrative about the economy, but unexpected developments have caused it to unravel. The current economic storyline seems to be moving in an unanticipated direction, leaving many questions unanswered.
Since late last year, the prevailing belief was that the U.S. economy was on a moderate upswing, contrasting with the declining fortunes of major global players like Japan, China, and Europe. Up until recent weeks, everything appeared to be progressing as planned.
Indeed, this perceived economic resilience was prompting the Federal Reserve to prepare for a rate increase after maintaining a near-zero interest rate for over six years. June was widely anticipated to be the turning point when Janet Yellen would finally take action. But as often happens, reality diverged from expectations.
As Homer famously noted, “Jove does not grant all men their heart’s desire,” a sentiment that seems fitting in the context of central bank interventions in financial markets. He likely would have laughed at the hubris involved if he’d been aware of such maneuvers.
Each week brings new evidence that contradicts the earlier narrative. Instead of a thriving economy, underlying economic indicators are faltering. Manufacturing is slowing down, consumer spending is underperforming, and troubling signs continue to emerge…
No Laughing Matter
The jobs report, often considered the most crucial economic indicator, has unexpectedly fallen short. According to the payroll report from the Bureau of Labor Statistics, employers added only 126,000 jobs in March. This figure marks the weakest performance since December 2013, representing just over half of the 250,000 jobs experts had anticipated.
Luke Tilley, Chief Economist at Wilmington Trust, remarked, “The main punch line is that it is a disappointing number, but it brings jobs data more in line with other economic data we have been seeing over the course of the winter.” He noted that durable goods orders, retail sales, and the ISM Manufacturing Index have all indicated weakness, and this jobs report ends the previous disconnect, especially when factoring in downward revisions of the past two months.
While Tilley refers to this as a punch line, many are not laughing. The narrative has shifted from one of economic strength to one of decline. Consequently, rather than anticipating a rate increase, we find ourselves returning to a prolonged period of near-zero interest rates.
The Fed’s grand strategy is being undermined by an economy that shows no signs of cooperation. Their efforts to initiate a rate hike are being thwarted by factors beyond their control. Moreover, we may be edging closer to another recession, all while the extraordinary monetary policies established during the last recession remain in force.
Certainly, this could just be an outlier report. Future economic indicators, including job creation, might rebound next month. Conversely, there is the grim possibility that stagnation is taking root…
Skeletons in the Closet
“As of Thursday, the Atlanta Federal Reserve’s GDPNow model forecasts economic growth at a meager 0.1 percent,” reported Newsmax on Friday. “That’s a slight improvement from Wednesday’s estimate of zero growth.”
This 0.1 percent estimation represents a drastic drop from the 1.9 percent expected in early February. Previously, the economy had expanded by 2.2 percent in the fourth quarter. The Fed’s models suggest economic growth is grinding to a halt. Coupled with the weak job, manufacturing, and retail sales data, the outlook appears grim.
The next significant impact may exploit the stock market. After a six-year bull market that has driven stock prices to new highs, any downturn could be severe, with the S&P 500 potentially halving.
In the interim, the new economic storyline will be contested. Optimistic indicators will be spotlighted to sustain the illusion of improvement. Unfortunately, those signs of hope will likely be extinguished quickly, and enduring optimism will be hard to come by.
The lingering issues from the credit crisis and the Great Recession will rear their heads once more. Relying on an avalanche of new credit to resolve a credit crisis will ultimately be a costly error, one that will come to light.
However, based on current economic policies from government leaders, optimism appears misplaced. It seems they have yet to grasp the lessons from past mistakes.
It remains uncertain whether their errant monetary strategies could inadvertently convert a credit crisis into a currency crisis. After that, anything could happen.
Sincerely,
MN Gordon
for Economic Prism
