Wednesday, February 19, 2014

Still stuck in a modest growth environment

The brutal winter suffered by most of the country (with the great exception of the West Coast, particularly California) has been a drag on the economy. We see it in disappointing retail sales, housing starts, and builder sentiment. But that doesn't mean the economy is about to roll over and die.  It just means that where there was some hope a few months ago that economic growth was picking up steam, we now see that it was only temporary. Until the outlook for policies changes (e.g., tax reform, reduced regulatory burdens) we should expect to see the economy continue to grow at a 2-3% pace.


January retail sales were disappointingly slow.


Architecture billings looked quite promising until a few months ago.


Terrible winter weather had a predictable impact on housing starts and builder sentiment. 


But despite these signs of a slowdown, commodity prices remain firm. In fact, they haven't budged from their flat trend of the past two years.


Commercial and Industrial Loans have actually picked up in the past several months, and are now at a new all-time high. Banks are more willing to lend, and businesses are more willing to borrow on the margin, and that means confidence is coming back. A lack of confidence has been one of the major headwinds in this recovery, and the return of confidence is therefore one of the most promising developments.


Swap spreads, shown in the chart above, are about as low as they have ever been. This is an absolutely critical variable, and it shows no signs of any fundamental deterioration in the economy or in financial markets. Sooner or later the bad winter weather will pass—and we in California dearly hope the rains will resume—and the economy will likely continue to grow at a modest pace.

7 comments:

Benjamin said...

Nice post--actually commodities have been dead for five years even with the rural subsidy ethanol program...Dr Copper?...unit labor costs fell in 2013...lots of room to cut federal agency spending...The Fed should think growth...

Jerry said...

Great wrap up, thanks.

I agree that the headwinds are prompted by bad fiscal policies that suck the certainty out of individuals and businesses.

I think it takes confidence to inspire risk taking (job moves, entrepreneurship, investment). This is why I'm perplexed - Washington has to know they're slowing the recovery they desire so badly.

William McKibbin said...

We should all be discussing countries out there that hold the line on taxes and respect a wealthy man's privacy while providing sufficient security -- the US is not that country at this point -- Switzerland and Norway come to mind -- however, I am finding out that countries such as Spain and Greece are working to protect these rights for their wealthy classes -- my thought is still Switzerland -- one can acquire a really nice chalet for around $5 million (cash required) -- but, $5 million goes a long way toward a villa in Spain and Greece -- I am terrified for the future of the US -- as for confidence in the US economy, I have none -- I am not sure what Scott is selling us when it comes to being optimistic...

William McKibbin said...

PS: What I see is vast evidence of scale implosion across all large-scale enterprises, including public companies and governments -- scale implosion terrifies me more than al-Qaeda...

William McKibbin said...

PPS: Specific evidence of scale implosion includes making up numbers in most public enterprises, including public corporations and governments -- don't believe it -- check it out for yourself:

http://snips.ly/MCJ

For this reason, I do not trust growth numbers -- I only trust paid dividends and rents.

Benjamin said...

OT:

Of course, we are USA-centric.

But there are are other economies, and other major central banks in the world.

China is a bigger player n most commodities markets. I am hearing that the People's Bank of China (PBoC), traditionally growth-oriented, has been putting the brakes on, and China is slowing.

This has bad ramifications for all of the Far East and the USA.



William McKibbin said...

PPPS: Everyone should note that the generation born before 1955 has a legacy of leaving "hollow value" in equities, and that those trailing that path should beware of the emerging realities of scale implosion in all grand equity regimes -- the only defense against these "growth deceptions" is value investing, which means specifically tracking paid (not promised) dividends and rents -- I advise extreme caution when investing in growth equities in today's markets -- the bubble is real, and the consequences will be vast -- value investors have the best chance of saving themselves as this catastrophe unfolds -- unaccredited investors should be under cover watching out for the four horsemen of the apocalypse -- again, exercise extreme caution around so-called "growth" propositions...