The consistently hyped housing recovery, which I discussed here, has boosted hopes for an economic recovery. Certainly banks are getting well from the shenanigans that are artificially constraining supply. In addition, borrowers are repaying loans at a sharper rate, a sign of deleveraging. If you believe in the theory of the balance sheet recession, continued deleveraging is a good sign.
However, Work Wire found this ominous chart showing a potential pitfall for the US economy. The chart looks at the year-over-year change in core “capex” orders, which consist of business capital spending, excluding defense or aircraft. As you can see it’s declining into negative territory. Here’s what David Rosenberg has to say about it.
Housing may be reviving, but it is only 2% of GDP whereas business capex represents a 7% share of the economy. Paul McCulley, the former legendary economist and fund manager at PIMCO, who was once being touted to join the Fed as a policymaker, told me last year…the YoY trend in the three-month moving average of core capex orders had for a long time been his preferred indicator of how the broader economy was going to fare a few quarters into the future… Only once in the past did this NOT tip the overall economy into recession and that was back in September 1998 when the Asian crisis was at its peak, LTCM had to be wound up and Russia defaulted … not exactly a pretty sign even if the recession was delayed for another two years.
I tend to be a little wary of these obscure indicators that are “always right,” owing to the small sample size of postwar economies. However, this is a chunk of the economy going in the wrong direction. A better indicator of the future economy, which looks at long-term trends, may be this new paper described by Annie Lowrey, and the news there is perhaps worse.
In a new paper, the Northwestern economist Robert J. Gordon argues that the United States should get ready for an extended period of slowing growth, with economic expansion getting ever more sluggish and the bottom 99 percent getting the short end of the (ever-slower-growing) stick.
“A provocative ‘exercise in subtraction’ suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades,” he writes.
To put that in context, American households’ real consumption expanded by about 3 percent a year before the recession hit and has been growing about 2 percent a year during the recovery, according to statistics from the Organization for Economic Cooperation and Development.
Gordon doesn’t see any possibilities for growth on the horizon. I think there’s reason to be a little suspect about that; if we transform the energy mix, or continue the revolution of Internet communications, there are possible areas for growth. But Gordon correctly points out that the computing revolution has not led to the kinds of productivity and income gains we should expect. And the structure of the US economy, not to mention the forces that have extracted from it and funneled the gains to the very top, cuts against the notion of perpetual growth.
In other words, we may be in quite a bit of trouble in the future, especially as the country grows older, financialization dominates and inequality widens. It’s not necessarily the short-term economic performance that worries me, though the waste of human capital is obviously our biggest challenge right now. But if you think the near term looks bad, don’t even bother to look at the long term.