MacroScope

Another false start for the U.S. economy?

February 4, 2014

Since the global financial crisis ripped the floor out from underneath developed world economies, the world’s biggest one has had several false starts nailing the floorboards back in.

Stock markets have moved in almost one direction since their trough in March 2009 – up – but economic growth and job creation have bounced around.

There are some disturbing signs another false start is afoot, but it has become almost taboo to even raise the issue that the U.S. economy, for all of its progress in repairing bank and household balance sheets, may still be at risk.

Since the Fed began cutting back on its $85 billion of monthly bond purchases, the two most important economic releases for financial markets have produced spectacular upsets versus the consensus view – and even the most pessimistic one.

December net hiring collapsed to just 74,000 against consensus expectations of 196,000 – the biggest upset since the U.S. economy had one of its false dawns, in early 2011. It was well below the lowest forecast of 120,000.

Economists came up with a list of one-off explanations why that happened, most of them not terribly convincing. And they have lined up looking for a rebound in January when the data are reported on Friday. The latest consensus is for 185,000.

But on Monday, the most reliable forward-looking indicator for the U.S. economy staged its biggest upset versus the consensus since the collapse of Lehman Brothers, when the financial crisis began.

The Institute for Supply Management’s manufacturing index for January collapsed to 51.3, the lowest since May 2013, from 56.5 in December. The 50 mark divides growth from contraction.

The consensus was for a slight drop to 56.0 and the most pessimistic forecast was 54.2.

The barometer for new factory orders within the data showed a bit of growth on the month, but this growth indicator fell by its biggest amount since December 1980, which decidedly was not a good time for manufacturing.

Many blamed this on the weather, the easiest excuse for not getting something done.

The “Polar Vortex” did blow through the U.S. in January and brought freezing temperatures not seen since long before 1980. But the data are seasonally adjusted, something forecasters are well aware of, so clearly this is not the full story.

Universally panned for failing to spot the crisis ahead of time — despite the fact that the vast bulk of traders, investors and central bankers also got it wrong — economists appear to be clinging to a sense of optimism.

That may be because rising asset prices, until the last few weeks at least, seem to have paid less and less heed to economic risk.

Richmond Fed President Jeffrey Lacker said on Tuesday that the damage from the Great Recession to incomes and wealth has made households and lenders more cautious and businesses reluctant to spend. That means that economists’ forecast models predicting a return to normal are calibrated for the wrong definition – the one before the financial crisis hit. Lacker said he expects modest growth this year of just a little above 2 percent.

Many forecasters are citing the recent surge as support for projections of sustained growth at around 3% starting later this year.

It’s worth pointing out, however, that this has been true at virtually every point in this expansion. In other words, ever since the recovery began, most forecasters have been expecting the economy to pick up speed in the next couple of quarters with the easing of headwinds that have been temporarily restraining growth.

It may also just be that after so many years of depressing economic tales, no matter how high asset prices fly, it’s become too tiresome to have a negative disposition.

Either way, the sense of complacency that has set in seems out of touch, especially given the trouble brewing in emerging markets.

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