Economics and markets shrugged yesterday. The data said the US economy contracted in Q4. Economists dismissed the data as not very meaningful, while markets pretty much ignored it. Is such complacency justified, or are we seeing an awful lot of heads being buried in the sand?
I am a tad confused by the current feeling of euphoria. Maybe in time it will turn out that the current run of confidence is appropriate but I see precious little justification for it at the moment. It is almost as if economists, commentators and politicians have secretly agreed to start talking up the economy. If such a conspiracy exists, then I am afraid I didn’t get the memo. Alternatively, maybe we are seeing a kind of tacit consent. Perhaps it happened at Davos, and delegates there all quite spontaneously had an epiphany. Their collective conscious suddenly concluded that they had all better start being more positive, or the consequences would be dire.
I read that the euro crisis is past its worst, yet I read this morning that Spanish GDP contracted by 0.7 per cent in the final quarter of last year. At the end of 2012, Spanish GDP was 1.8 per cent down on the level seen at the end of 2011. Spanish unemployment is running at 26 per cent. This is not merely sad, it is downright tragic. Countries across the Eurozone are in economic depression; their numbers may well be joined by France. Yet we are told that the euro crisis is past its worst and the so-called existential threat to the euro has passed. Then we are told to celebrate. Celebrate the saving of the euro, and forget that the price we pay for securing its future is economic depression, social unrest, and the threat of eventually seeing a return to fascism in parts of Europe.
Okay, the news out of China has been encouraging. But again there is a question mark. How much of China’s recent growth has been down to one off stimuli? Can China really manage the transformation from export to consumer led growth, without suffering a nasty jolt en route? This question has not yet been answered.
Then there is the US. Sure, the job data has been steadily improving albeit at a pace which is much slower than one would hope. But how many newly created US jobs are part-time? How many US citizens have given up their search for work, and have dropped out of the official stats on unemployment?
The US is still haunted by exactly the same problem it was suffering from before the finance crisis of 2008, and indeed that it suffered from in 1929; namely that corporate profits to GDP are close to an all-time high, while wages to GDP close to an all-time low. Until that problem is fixed, the only way US consumer demand can rise is via greater household indebtedness.
The latest GDP data showing contraction was largely dismissed because it was put down to one–offs for example a 22.1 per cent slump in defence spending and falling inventories. In all US GDP contracted by 0.1 per cent in the quarter, so even the bears have to admit that – as contractions go – this was pretty modest. Paul Ashworth, Chief US Economist at Capital Economics, said that this was: “The best looking contraction in GDP you’ll ever see.”
Well, maybe it was. But drill down. Exports shrank 5.7 per cent on weak global demand. That was no one–off. But – and this was the bright spot – consumption rose 2.2 per cent.
It was the euphoria that greeted the rise in consumption that I don’t get. The main explanation for the rise suggests it was down to one-off dividend and bonus payments made in advance of possible tax changes. So the negative parts that made up the US GDP equation were dismissed as one-offs, but the positive bits may have been equally down to one-offs, but they were seen as more encouraging.
This is the news that worries me, however. According to the US Conference board, US Consumer Confidence fell from 73.1 in October (near a five year high) to 71.5 in November, 66.7 in December, and to 58.6 in January, which was a 14 month low.
It is important that we try to be consistent. When the US Consumer Confidence Index passed 70 towards the end of last year, this was hailed as just about the best piece of news on the US economy for a very long time. Indeed the data may well have been the catalyst for all that bullishness we keep reading about.
But the last few days has seen data showing that the US is in contraction and sharp falls in consumer confidence have also been seen. That does not strike me as very good.
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