Re­ces­sion or stag­na­tion?

Financial Mirror (Cyprus) - - FRONT PAGE - By Charles Gave

On Fri­day, US GDP data for 2Q16 was re­leased show­ing an ex­pan­sion that looks ever more anaemic and un­con­vinc­ing. Is this just the new nor­mal in an era of stag­nant global growth or is the US more per­ilously poised? To an­swer that ques­tion, imag­ine the US econ­omy hav­ing two parts in the shape of “con­sumer GDP”, which rep­re­sents about three quar­ters of ac­tiv­ity, and the re­main­der be­ing the non­con­sumer “pro­duc­tion” por­tion.

In or­der to ob­tain a clear view of the trends within these two eco­nomic seg­ments the chart shows the real 12-month rate of change for each series, sub­ject to a two quar­ter mov­ing av­er­age. The data reaches back to 1958, al­low­ing com­par­isons across mul­ti­ple cy­cles. Right now, the key take­away is that the non-con­sumer part of the US econ­omy is in re­ces­sion and has been for some months, while the con­sumer econ­omy con­tin­ues to reg­is­ter pos­i­tive per­for­mance — the for­mer is shrink­ing at -1.1% a year, while the lat­ter is grow­ing at about 2.5%. Such a di­ver­gence war­rants the fol­low­ing ob­ser­va­tions.

1) Only once since 1958 has the non-con­sumer part of US econ­omy shrunk with­out the pe­riod later be­ing recog­nised as an of­fi­cial re­ces­sion, and this was in 2012 when the Fed­eral Re­serve was in full mon­e­tary stim­u­lus mode. By con­trast, the Fed is now mus­ing about rais­ing rates and the US mon­e­tary base looks fairly well mori­bund.

2) Con­sumer spend­ing growth must be con­sid­ered du­bi­ous as the series is driven by items such rent and health­care, which must be con­sid­ered “en­forced” con­sumer spend­ing, lead­ing to lower con­sump­tion of other goods and ser­vices. I would not be sur­prised if con­sumer spend­ing (exrent and health­care) has also fallen into con­trac­tionary ter­ri­tory.

3) The spread be­tween the two series has sel­dom been higher and in the past this dis­crep­ancy has usu­ally cor­rected by con­sump­tion go­ing down rather than pro­duc­tion ris­ing. In fact, con­sump­tion, es­pe­cially at the end of a cy­cle, seems to be very much a lag­ging in­di­ca­tor.

What this says is that the “pro­duc­tion” part of the US econ­omy is plainly in re­ces­sion and his­tor­i­cal prece­dent points to the broad econ­omy go­ing the same way. And in my book, con­trary to the Key­ne­sian doxa, pro­duc­tion is far more im­por­tant to eco­nomic growth than con­sump­tion.

As such, there was lit­tle in Fri­day’s soft GDP data re­lease that was ter­ri­bly sur­pris­ing. What is un­usual, if not es­pe­cially star­tling, has been the ane­mic pace of US eco­nomic growth in this cy­cle, and on the other side the ane­mic rate of de­cline ob­served in these mis­er­able growth rates. The key ques­tion is whether, at some point, the pace of de­cline ac­cel­er­ates, or in­stead does the US econ­omy just main­tain its slow crawl lower? In other words, is the US on the same tra­jec­tory as the Ja­panese, French and Ital­ian economies in end­ing up in an ex-growth funk?

To put things even more suc­cinctly: are we see­ing the long term re­sults of a Key­ne­sian pol­icy as sim­ple stag­na­tion? There is plenty of logic to such a pro­posal, but as an in­vestor, I am left with the same “heads I lose, and tails I don’t win” propo­si­tion. Not an at­trac­tive out­look.

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