In recent weeks, the economic landscape has revealed troubling signs indicating a retreat from growth. As we delve into the current state of the economy, it becomes evident that many individuals are feeling the weight of these downturns, particularly those like Joe Sixpack, who symbolize the average American worker. This article will explore the latest economic data and its implications for everyday people.
This week, new data emerged highlighting further declines in economic activity. On Tuesday, the Institute for Supply Management reported a Purchasing Manager’s Index (PMI) of 48.6 for November. A PMI figure below 50 indicates a contraction rather than an expansion in manufacturing activity.
Additionally, this 48.6 PMI marks the lowest reading since June 2009. This metric, reminiscent of the fragility seen during the Great Recession, suggests an unhealthy economy that is softening considerably.
Reflecting the decline in corporate profits released last week by the Department of Commerce, the strong dollar appears to be a significant factor contributing to the downturn in manufacturing. A robust dollar renders U.S. manufactured goods less competitive on the global stage, further widening the trade deficit and negatively impacting GDP.
It’s worth noting that the struggles aren’t solely confined to U.S. manufacturers; this issue seems to be taking a global toll. Economist Michael Montgomery from IHS Global describes the situation as follows:
“The manufacturing sector remains in a funk, which is true globally. The sector is dealing with widespread malaise; while some countries are showing slight improvements, others are retreating modestly. Overall, global PMI scores are lingering around 50 due to lackluster demand for goods.”
Global Output Gap Goes Negative
Unfortunately, manufacturing isn’t the only area of the economy grappling with difficulty. This pervasive decline is evident across various sectors.
“The evidence suggests that the global output gap is negative, indicating that the global economy is currently growing below its potential,” explained Citigroup economist Willem Buiter in a client note.
“As the negative output gap widens from what was previously near zero, ongoing sluggish global growth could push the economy back into a recession, especially considering whether the world truly emerged from the recession triggered by the financial crisis.”
A negative output gap suggests that actual production falls short of what the economy could generate at full capacity. This underutilized capacity stems from weak demand, despite aggressive low-interest rates.
Buiter’s concluding observation raises a crucial question: while there may have been a technical recovery from the Great Recession, what kind of recovery has it truly been?
Joe Sixpack’s Painful Plight
For Joe Sixpack, life has not improved—in many ways, it has worsened. Once upon a time, he enjoyed Budweiser beer paid for in cash; now, he opts for Boone’s Farm Strawberry Hill, purchased on credit.
This illustrates the reality that the anticipated robust recovery and economic boom following the Great Recession never materialized. The jobs created have predominantly been low-paying, service-oriented positions, lacking in the professional skill sets and pay one would hope for.
Moreover, the labor force participation rate has plummeted to a 38-year low. Real median household incomes remain significantly below levels from both 2007 and 1999. Average earners have endured shrinking paychecks for the past 16 years, while wealth at the top has ballooned.
American workers are now exerting more effort than ever while receiving less in return. They wake each day to face an uphill battle, feeling as though they’re trudging through increasingly difficult terrain.
Amid this struggle, central bankers tinker constantly with the global money supply, attempting to boost prices and spur demand. Their notable triumph has been propping up stock prices, but this is unlikely to be a sustainable path forward.
For example, just yesterday, European Central Bank chief Mario Draghi reduced interest rates to negative 0.3 percent and announced plans to create €60 billion monthly to purchase European government bonds until at least March 2017. Surprisingly, currency markets interpreted this as a hawkish stance, resulting in a 2.5 percent increase in the euro against the dollar.
Conversely, Janet Yellen, Chair of the Federal Reserve, is preparing to raise U.S. interest rates by a quarter percent, the first increase after seven years of near-zero interest rates. In her recent testimony to Congress, she confidently stated that “the economy has come a long way toward (the Fed’s) objectives of maximum employment and price stability.”
Clearly, Yellen missed the ideal moment for a rate hike, which would have been in 2014, before oil prices collapsed and global trade slowed. Now she finds herself in a position where she must raise rates for the sake of her own credibility.
This reflects the current state of what amounts to deliberate management of the money supply in 2015. Even Alan Greenspan, often seen as the benchmark for modern central banking, would likely find this situation alarming. Meanwhile, Joe Sixpack remains demoralized.
Sincerely,
MN Gordon
for Economic Prism
