It's Not Coming

by: Alhambra Investment Partners

By Jeffrey P. Snider

Entrenched narratives die extremely hard, with all due respect to John McClane's [Bruce Willis] aging franchise, and I cannot remember something so cemented as the recovery idea this year. That is really saying something considering that each and every New Year's Day after the trough of the Great Recession has brought out the same exact sentiment, year after year like clockwork. While the expectations of the Recovery Summer have fallen short with what should be more shocking in terms of regularity, there was something about 2014 that elevated the rhetoric to almost Joe Namath guaranteeing it from Miami Beach.

Yet, almost from the start the storyline was in dire trouble. It still does not conform to any formal logic whereby snow storms can drop the largest global economy into something that has only been recessionary in our history, at least in terms of maintaining the credibility toward another stab at Recovery Summer. Regardless of how bad it was in the winter, that only seemed to reconfirm just how great it would be - eventually. Again, this is something more determined than usual.

While I'm not exactly sure of the origin, I think it a reasonable guess that the overwhelming need to end QE3 has something to do with it. To have the granddaddy of all monetary experiments (US) end as much more than a garden variety failure, as in with what looks like recession rather than just an absence of economic "boost", is unfathomable to the faithful. There is also the rational expectations theory component that proclaims "pessimism" as the fullest part of a recession - thus the closer to recession we get the greater the intensity of this cheerleading.

But here we are in summer once more, and the luster is again nearly gone. While there was winter to excuse Q1, April, May and June were to be the unquestioned springboard to the "guaranteed" promised land. There must be more than a little bitterness to the growing realization that the second quarter has not been all that much better than the first, and nothing like what was proclaimed. From the Wall Street Journal (normally more of a "mainstream" economic commentator):

Forget about escape velocity. The U.S. economy in 2014 is likely to record another disappointing year of growth, according to the latest Wall Street Journal survey of economists.

The main culprit cited by the 48 economists-not all of whom answered every question-is the absence of a big spring bounce following the winter's sharp contraction.

And that is actually still overly robust, since they are surveying orthodox economists rather than professionals with even a partial track record toward accuracy. We keep hearing the contradiction, namely that consumer spending, for "some reason", just won't take off despite the "strongest" payroll growth since 2009. Some might hold on to the optimism that the end to consumer frugality will lag, though we already lagging last year's purported "acceleration" in jobs so there is only so much lagging to be left. It may be finally dawning that such labor improvement is but a mirage, a statistical phantasm of mathematics that are ill-suited to the times.

Along with the downgraded GDP forecast, a new caution emerged in the July survey. When asked about an upside or downside risk to their forecasts, the respondents were evenly split. That is a sea change from the results of the six previous months. In each of those surveys, about 3 out of 4 economists thought the risk was that the economy would grow faster than their forecasts expected.

One problem has been the unexpected sluggishness of consumers. The survey panel estimates real consumer spending grew at a 2.2% pace in the second quarter. That is better than the 1% pace in the first quarter but slower than the average quarterly gain for 2013.

As if to prove my point, the article quoted above ends by noting the labor contradiction without admitting as much.

Slower growth, however, doesn't mean a weaker labor market. The average forecast predicts nonfarm payrolls to rise by about 212,000 jobs a month in 2014. That would be the fastest hiring pace since 1999.

That, to me, is confirmation of the lack of true payroll growth. In what world does slower growth not lead to a weaker labor market? To go to such lengths to justify the mainstream narrative, after almost being somewhat emphatic in destroying a good piece of it, is indicative of not just irregularity but simple falsehood. This is not an "and" situation, as in a very weak and disappointing economy together with a strong labor market; our current predicament is "either or" - either the economy is weak or the labor market is strong, but not both at the same time.

With incoming data continuing to disappoint, and the lengths to which the logic must be stretched to preserve the idea of an overexcited labor state, there has to be (or at least should be by those not ideologically committed) a reckoning to the dichotomy.

Lest we think it simply a domestic monetary problem, this downgrade away from the recovery fantasy is also taking place in almost every major economic system, from Europe (Germany just talked down their growth, and Italy, among others, dramatically cut "recovery" expectations to something not unlike continued contraction) to Japan to China. While in the purest sense correlation does not mean causation, the lack of sufficient alternate explanation for the appearance of massive monetary "stimulus" and the lack of recovery is more than a little compelling. Everywhere central banks experiment, growth is being serially overestimated only to be falsified shortly thereafter.

The global economic system seems stuck in a rut, except that it is not stuck by way of accident or even demography. Central banks are trying to create order, but economic systems need freedom, including the freedom to exhibit pathways and occurrences outside the bell curve - even a few tail events now and again. By forcing "markets" into narrowly defined boxes that appear to be in "good order", central banks are instead disabling efficiency - they are strangling true growth in search of a bunch of numbers in a regression equation.

And so it goes, downhill some more for a fifth year of "recovery."