The economy – what we’re facing right now
Despite all the assurances by politicians that “things are turning around” and that while “we still have a long way to go”, we’ve “survived the disaster”, I’m not at all sure that’s true. Nor are a number of other people, to include Hale Stewart at FiveThirtyEight. He does an extensive analysis of why unemployment had “unexpectedly” stalled out after showing signs of recovery. He accompanies his analysis with a number of charts that demonstrate his point, but in essence his finding supports what we talked about last night on the podcast – the decline of the euro:
So, the central issue is a decreasing euro, which has led to an increasing dollar, which in turn has led to decreasing commodity prices. Recent reserve tightening issues in China have added downward pressure to commodity prices, which adds further evidence to the argument the US is facing an increased possibility of deflation.
That and a decrease leading economic indicators lead him to caution us that we may see a lack of further economic growth in the next 3 – 6 months unless a few things happen:
1.) A decrease in initial unemployment claims below the 450,000 level. In addition, the economy needs to keep up its current pace of job creation. Last month we had a great employment report. That needs to be repeated in the next report.
2.) The euro needs to stabilize. The European Union has proposed a massive $1 trillion dollar package, which was announced several weeks ago. However, the euro has continued to drop since that announcement. Markets are now concerned that austerity programs will hurt overall economic growth.
3.) Commodity prices need to rebound. An across the board drop in commodity prices indicates the markets think decreased demand is an issue going forward. An increase in commodity prices will indicate demand is picking up.
Keep your eye on number 2, because if the euro doesn’t stabilize the chances of 1 and 3 happening aren’t good. And that brings us to the second part of the story. Europe. It is there our fate lies at the moment. And it is a fragile thing:
If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.
But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.
For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.
“If what happened in Greece were to happen in a large country, it could fundamentally mark our times,” Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.
If you’re in the US that is not something you want to read. We’re talking, of course, of the possibility of a double dip recession with the second recession most likely more devastating than the first.
The writers of the Washington Post piece cited above don’t feel the “worst-case scenario” is a high probability noting that European countries have pledged hundreds of billions of dollars to fix the economic problems. And they repeat the assurance that the US economy “has been strengthening through the year” to include adding jobs and with higher consumer spending and better industrial output.
But, as FiveThirtyEight notes, that’s not at all what the leading economic indicators promise will continue. Manufacturer’s orders and supplier deliveries have dropped. Commodity prices have continued to slide (indicating demand has dropped) and building permits are way down. None of those promise that the economy is strengthening.
The Post goes on to paint Europe’s travail is at least temporary good news for the US. But I don’t see it – certainly not in the numbers Stewart cites. In fact I see it as more whistling past the grave yard. As they mention in their opening paragraphs, this all depends on a number of things going right among a group of European nations at financial risk for not doing what they should have been doing for years. My confidence in the ability of “the experts” to successfully negotiate the financial and economic mine field – given their history – is not at all as great as the Post’s. And, I’d further note, that while everyone is assuring everyone else that they have this crisis in hand, they’re winging it, having never done or had to do anything like this to the scale they’re now involved. The law of unintended consequences is sitting in waiting salivating at the possibilities this crisis presents.
Bottom line – keep your eye on the Euro and hope like hell the Europeans can pull off what they have to do to keep us out of a double-dip recession.