Why US Economic Growth May Disappoint Again In 2015 by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
May 19, 2015
Charlie Munger: Invert And Use “Disconfirming Evidence”
IN THIS ISSUE:
- Retail Sales, Consumer Sentiment & Manufacturing Disappoint
- US Economic Growth Continues to Disappoint Year After Year
- 2015: Yet Another Disappointing Year For The Economy?
- With ZIRP, Fed Is Out of Ammunition to Spur the Economy
- Could the US Economy Already be in a Recession?
- Why I Still Support the Trans-Pacific Partnership
Our main topic today is how the US economy continues to disappoint expectations, and 2015 looks to be no exception. Forecasts for GDP growth this year continue to be downgraded, and there is at least a small possibility that the US economy is slipping into recession, as I will discuss below.
But before we get into that discussion, let’s look at a few recent economic reports that are not encouraging. Retail sales that were expected to bounce in April were flat and have been trending lower since 2012. Consumer sentiment, which had reached the highest level since 2004 by the end of last year, dropped to a seven-month low earlier this month. And factory output slipped in April, the fifth monthly decline in a row.
We will end today with a new article on the Trans-Pacific Partnership from the Wall Street Journal, which explains why I continue to support this controversial trade agreement.
Retail Sales, Consumer Sentiment & Manufacturing Disappoint
Sales at US retailers were flat in April as American shoppers maintained their thrifty ways, a trend that’s intensified since last summer, despite sharply lower gasoline prices. In the past 12 months, retail sales growth slowed to a 0.9% annual rate, the smallest year-over-year gain since October 2009 just after the US exited the Great Recession.
The pre-report consensus was for a gain of 0.3% in April. For months economists have been insisting that the surge in hiring in 2014 would drive consumer spending higher this year and give the economy an added boost. Cheaper gas prices were supposed to help by letting consumers spend more on other goods and services. But the trend says otherwise.
The University of Michigan preliminary Consumer Sentiment Index for May came in sharply lower at 88.6, down from the 95.9 April final reading and well below the interim high of 98.1 in January. The pre-report consensus was for a small increase to 96.0, so the report was definitely a negative surprise.
Confidence fell in early May as consumers became increasingly convinced that there would be no quick and robust economic rebound following the dismal 1Q number which was exaggerated due to the harsh winter weather. While consumers have been paying less at the gasoline pump since last summer, they continue to save that money or pay down debt, rather than spend it.
Next, industrial production in the United States fell in April for a fifth straight month, in part because of a further decline in oil and gas drilling, painting a lackluster picture of economic growth in the 2Q. Industrial production slipped 0.3% in April after a revised 0.3% drop in March, the Federal Reserve said on Friday. Economists had forecast that industrial production would edge up 0.1% in April, so the report was yet another negative surprise.
Manufacturing, which accounts for about 12% of the economy, has been hampered by the strong dollar. Even as the dollar rally has faded recently, manufacturing is unlikely to rebound much because of the challenges in the energy sector.
The factory operating rate, better known as “capacity utilization,” fell to 78.2% last month, the lowest since January of last year, from 78.6% in March.
These reports and others confirm that 2015 is definitely off to a slow start despite predictions of a solid rebound this year. And that leads us right into our main topic on why the US economy continues to disappoint.
US Economic Growth Continues to Disappoint Year After Year
In 2011, the US economy expanded by a meager 1.7%, but forecasters assured us that 2012 would be the breakout year that the economy would rebound to above 3% growth. So what happened? In 2012, GDP expanded by only 2.3%. But again we were told that 2013 would be the breakout year. And what happened? In 2013, GDP expanded by only 2.2%.
Yet in late 2013 (surprise, surprise), we were assured once again that 2014 would finally be the breakout year to growth above 3%. And the result? GDP rose by only 2.4% last year. Yet again late last year, forecasters predicted that 2015 would surely be the breakout year with GDP growth above 3%. Now those hopes are fading fast.
GDP growth in the 1Q of 2015, which we learned at the end of April, came in well below expectations at only 0.2% (annual rate) according to the advance report. The second estimate of 1Q GDP growth will come out next week on May 29, and expectations are that the number will be revised down to negative 1.0% to -1.5%.
The sharp downward revision to 1Q GDP expected at the end of next week is blamed (once again) on the severe winter weather in the first three months of this year, along with the protracted port strike on the West Coast.
2015: Yet Another Disappointing Year For the Economy?
In a new Wall Street Journal poll out last week, economists revised their collective GDP growth estimate for the year from 2.7% to 2.2% on average. The economists polled cited worries about a slowdown due to the rising US dollar which hurts exports. Another factor is the slowdown of economies overseas. As experts ratchet down expectations, more and more of them have edged toward zero growth for US Gross Domestic Product in the 2Q.
The world of economists was surprised recently as the Atlanta Federal Reserve Bank moved its GDP forecast for the 2Q down to 0.7% annualized growth. Some analysts now believe that if the Fed raises short-term interest rates this year, recent growth in the business world, among consumers, in the stock markets and in the housing market will deteriorate.
This could have negative implications for the stock markets at long last. At what point will consumers – which account for apprx. 70% of GDP – pull back on spending even more if they see the value of their retirement funds drop, or if they believe that the housing market may dip again, even if it does not match the catastrophe of 2006 through 2010?
The point is, there is now the real possibility that 2015 could be an even more disappointing year for the US economy. The question is, could the US be in an extended period where the economy underperforms year after year? And could 3% GDP growth be a thing of the past? Let’s hope not, but we can’t rule out that possibility.
With ZIRP, Fed Is Out of Ammunition to Spur the Economy
Historically, the Federal Reserve has implemented monetary policy actions to spur the economy during recessions. Specifically, the Fed has lowered interest rates and expanded the money supply to stimulate the economy and consumer spending during economic slowdowns. Then after the economy recovers, the Fed has historically raised short-term rates back to normal.
This time around, the Fed’s zero interest rates policy (ZIRP) has been in place since late 2008 and most agree that the Fed is out of bullets to fight the next recession. The Fed is desperate to raise short-term rates to give it more room to lower rates again later on as needed, but the economy is simply not strong enough to allow it to do so now.
The next Fed Open Market Committee meeting will be held on June 16-17. The latest thinking is that the Fed will definitely not raise the Fed Funds rate at that meeting in light of all the disappointing economic news of late. As I have suggested for some time, the Fed is not likely to initiate “liftoff” until the September FOMC meeting at the earliest. There is growing talk that the Fed may not raise rates at all this year.
Along this line, here is a recent assessment by Steven King, chief economist with HSBC Bank. HSBC Holdings PLC is a British multinational banking and financial services company headquartered in London. It is the world’s third largest bank by assets, estimated at $2.7 trillion at the end of 2014. Here is a summary of what King warned:
HSBC chief economist Stephen King warned in a note to investors that unlike the 2008 recession, there is a lack of Fed “policy ammunition” to jump start the economy out of a downturn this time around.
Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery — both in the US and elsewhere — has been distinguished by a persistent munitions shortage. This is a major problem. In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out.
To use a favored phrase, central banks have “run out of ammunition. With interest rates near zero, the Fed would need to give money away to salvage a troubled economy.
Could the US Economy Already be in a Recession?
I’m not predicting this, but it is something we need to consider. A recession is defined as two consecutive quarters of negative GDP. If 1Q GDP is revised down to negative 1.0% to -1.5% at the end of this month, and if 2Q GDP comes in at less than 0.0%, we would be in a recession – which could have a very negative effect on the high-flying stock markets.
I mention this possibility only because estimates of economic growth have disappointed so badly for the last several years. If this trend continues for the next several months, the issue of a new recession could be on the national radar before the end of this summer. I’m just warning you in advance as to this possibility. Think about it.
Why I Still Support the Trans-Pacific Partnership
There are certainly things I don’t like about the Trans-Pacific Partnership, like the secrecy of its details and the fact that it gives President Obama more power, among other things. But the fact is, if we don’t do this deal, China is ready and waiting to scoop up these same trading partners in its own Trans-Pacific trade deal. We can’t let that happen.
In order to spell-out the pros and cons of the Trans-Pacific Partnership, I have reprinted a very good article from the Wall Street Journal on Sunday for your review:
An American Trade Watershed
The stakes are large for the country & the Republican Party.
Republican leaders sound increasingly optimistic that they have the votes to pass trade-promotion authority this week, but the fight isn’t over. Apart from the Iran nuclear deal, this is probably the most important vote that Members will take in the 114th Congress. It’s therefore crucial to understand the stakes of the trade vote—economic, political and strategic.
Start with the economics, which comes down to whether the U.S. is still going to lead the world or shrink from global competition. The U.S. needs “fast-track” trade approval in particular to conclude the pending pact with 11 Pacific nations, which would be the most important trade deal since the early 1990s. These deals invariably benefit the U.S., which tends to have lower tariffs and fewer trade barriers. Trade deals are crucial to opening these foreign markets to U.S. goods and services, as the economic facts show.
The U.S. has trade pacts with 20 markets around the world, and those markets account for 47% of U.S. goods exports, according to the U.S. International Trade Administration. U.S. goods exports to trade-pact countries rose 64% from 2009 to 2014, far more rapidly than the 45% growth with the rest of the world.
Exports have increased by 415% with Chile (trade pact in 2004); 378% with Mexico (1994); 111% with Canada (1994); 90% with Australia (2005); 84% with Singapore (2004); 74% with Central America (2006); 61% with Peru (2009); 42% with Colombia (2012) and 26% with Panama (2012) since the respective trade deals took effect.
Opponents cite the slow 2.3% annual export growth rate to South Korea since the 2011 trade pact. But that’s the result in part of slower growth in Korea, and it ignores the 25% growth in U.S. services trade with South Korea between 2011 and 2013. Seoul has opened up legal services to U.S. firms, and American investors can now own telecom operations in the country.
Protectionists focus on the U.S. trade deficit, but American manufacturers and consumers benefit from cheaper foreign imports. In any event, the U.S. last year ran trade surpluses with trade-agreement partners of $36.4 billion in machinery, $17.7 billion in plastics and $14.3 billion in aircraft.
According to the U.S. Trade Representative, exports have spurred one million new U.S. jobs since 2009. The highest export job growth has occurred in Texas (251,000), Washington (107,000), California (81,000), Louisiana (68,000) and Michigan (62,000). Exports have also fueled substantial job creation in Georgia (56,000), Illinois (56,000) and South Carolina (42,000).
Farm states in particular would benefit from agreements with the 11 Pacific Rim countries and the European Union, which like Japan imposes prohibitive regulatory and tariff barriers on U.S. agricultural exports. Both regions are also fertile markets for U.S. intellectual property and biotechnology. Politicians who vote against trade agreements are opposing these typically high-paying jobs.
The political stakes are also high—for the Republicans who now run Congress and the U.S. political system. Republicans complain with cause that they can’t accomplish much with President Obama in the White House, but he’s on their side on trade. It’s true he’s delivering precious few Democratic votes, but with GOP control comes responsibility. The GOP image as a pro-growth party would suffer a damaging blow if the trade vote fails.
So would the reputation of the U.S. around the world. Republicans have been telling foreign officials and American business leaders that the U.S. retreat from world leadership has been Mr. Obama’s choice. If a GOP Congress fails on trade, the message will be that both major parties have lost the will to lead. The unavoidable conclusion will be that America is choosing decline.
The big strategic winners in that event would be America’s adversaries, especially China, which is busy building economic alliances as a tool of its soft power. Chinese leaders are aiming to replace the U.S. as the dominant regional power in the Western Pacific, and a U.S. trade failure would speed that along. [Emphasis mine.]
“Fast-track” and the Pacific pact are also crucial to restoring Japan’s economic vitality. Prime Minister Shinzo Abe is using free trade to take on the calcified political interests that have slowed Japanese growth to a trickle. The U.S. needs a more confident, economically stronger Japanese ally to resist China’s inevitable advances. This trade-opening reform opportunity will not soon come again. [Emphasis mine.]
The sorriest excuse not to support freer trade is the one offered by some Republicans that they don’t trust Mr. Obama. We don’t either, but the language of the fast-track bill makes clear he cannot use it unilaterally to supercede American law. Mr. Obama is a short-timer in any case, and the next President may be a Republican who needs fast-track authority for his economic-growth strategy. Better to pass it now so he wouldn’t have to spend scarce political capital to pass it in 2017.
The trade vote is in sum a watershed about the kind of country America wants to be. Does the U.S. still have the right stuff to compete with and lead the world, or will it retreat behind barriers that provide the illusion of economic and political security. END QUOTE
As I said at the beginning, the Trans-Pacific Partnership is far from perfect; no international trade deals ever are. But in this case, I believe the pros outweigh the cons significantly, as was the case with NAFTA in 1994. Above all, we can’t hand this one over to China.
Gary D. Halbert