The Z-Shaped Recovery

The recovering US economy is not recovering…and neither are the economies of Europe and China.

Manufacturing Activity in the Eurozone vs. in the US

As the chart above shows very clearly, manufacturing activity in the Eurozone has already slumped to recessionary levels, while US manufacturing activity is merely muddling along.

“New signs of a global slowdown are darkening the economic outlook,” the Wall Street Journal reports. “The US reported that businesses were slowing their orders of computers, aircraft, machinery and other long-lasting goods. Measures of business sentiment in Europe slipped, and reports from purchasing managers at manufacturers around the globe turned down. Among them, China, the world’s second-largest economy, registered its seventh straight drop in an important manufacturing index.”

Apparently, “flat” is the new “up”…exactly as Bill Bonner has predicted numerous times in this column during the last few years.

“When the recession of ’09 hit,” Bill remarked recently, “economists and pundits wondered what shape the recovery would be. V? or W? We said it would be an L. Down…then dragging across the floor for a very long time.

“A real recovery was ‘impossible,’ we said, choosing our words recklessly…but correctly. It was impossible for a debt-soaked economy to recover until the debt had been squeezed out, we said. Well, here we are, 5 years after the crisis hit, and we’re still at the bottom of the L. Debt is still being wrung out of the private sector…while the feds pour it on the public sector as fast as they can.”

Very true. In fact, without the federal government’s “beautification tactics,” the economy’s trajectory might look more like a “Z” than an “L.”

Without transfer payments — i.e. handouts — from the federal government, household incomes have barely recovered from the lows of 2009. The chart below shows the official measure of real disposable personal income (in blue). The red line is the same number, excluding transfer payments. The growing gap between the two numbers since 2008 shows the extent to which overall personal income relies on government handouts.

Disposable Personal Income vs. Disposable Income Excluding Income from Government Assistance Programs

Incomes from actual employment are stagnating for many reasons. Perhaps the most obvious reason is most of the jobs being “created” today are of lower quality than the jobs lost. The next chart includes data from the BLS household survey. The official number of full-time jobs remains well below the 2007 peak, while the number of part-time jobs is making new all-time highs:

Increase in Part-Time Employment Since 2007 vs. Drop in Full-Time Employment

Obviously, part-time jobs do not deliver the same paychecks as full-time jobs. But incomes are also stagnating for the following, yet largely unacknowledged, reason: The US economy now requires steady doses of monetary inflation to prop up unsustainable mountains of debt. The Fed feels it must force interest rates lower to make these debts easier to service. In 2008, the towering mountain of debt was in the private banking system. But the federal government is building up a mountain of debt that makes the private sector’s look like a molehill.

Soaring government debt usually invites hyper-inflation to the party. The Bernanke Fed last week announced that it plans to print as much money as necessary to keep its preferred measure of consumer prices rising at a steady 2% rate — regardless of trends in private sector productivity.

Put another way, the Welfare State and Federal Reserve are, in effect, seizing part of the private sector’s productivity gains. The result: Stagnating living standards. The benefits of innovation and expanded production aren’t accruing to consumers in the form of lower prices and to workers in the form of higher wages. Thanks to the Fed and ever-growing government budgets, prices will be much higher than they otherwise would have been…and employment growth will be much lower.

The inflationary actions of the Fed and the ECB, which investors today view as helpful, will ultimately destroy shareholder value at many companies. The mechanics of loose money flooding the banking system provides a feeling of euphoria (for a little while). Then the hangover comes when this monetary inflation boosts operating costs and compresses profit margins at the businesses that underlie the stocks in the S&P 500.

But the news is not all bad. Gold loves inflation.


Dan Amoss
for The Daily Reckoning

The Daily Reckoning