It may be time to dust off the term "the new normal" - a reference created after the 2008 financial crisis to describe an economy mired in slow growth. The term has not been used much lately, but has become the reality we face. Many people are beginning to realize that central banks can only do so much through printing money and lowering interest rates. These actions carry with them some very strong and nasty side effects that have taken hold in our economy. This includes capital being poorly allocated and markets being distorted by money flowing into risky assets in search of higher yields. The puzzle we now face is how this will play out going forward and what constitutes a reasonable expectation for future growth.
Over the last few years, we have continued to see many companies cut their workforce or rotate and replace higher paid workers with lower paid employees. We have also witnessed production continuing to be outsourced to offshore factories in an effort to increase profits. Many companies have seen profits grow as sales have remained relatively flat. In some cases where margins have been squeezed, stock buybacks and cost cutting have been the only driver of higher profits. This has occurred at a time where sales have been propelled forward by cheap money rather than by real or pent-up demand. Few people have realized that record government deficits and a shift to more healthcare spending by consumers facing soaring insurance premiums as a result of Obamacare are also inflating and driving the GDP higher, but not in a good way that reflects quality growth.
|Slow Growth And Growing Debt!|
We are back to the reality that going forward we face slow economic growth for as far as the eye can see; with our future resting on job growth, it could be argued that the so-called recovery is nothing to brag about. Many of the jobs being created are not "quality" jobs and to make matters worse, an army of robots are being designed and built to take even those jobs away. Details of the last job report touted as proof of an economic resurgence indicate the job market weaker than many economists thought. The expected number of jobs missed the Econoday consensus estimate of 175,000 and also the ADP forecast of 263,000, with the BLS reporting an increase of only 98,000 jobs and downgrading the last two months. While the average weekly hours of all private employees held steady at 34.4 hours, and wages did increase as expected again, it is important to remember many of the jobs added were part time.
We should figure the deflationary effects of lower interest rates, increased oil supplies, and falling commodities are largely behind us. This means grinding stagflation is on the horizon. While oversupply in the auto sector pressures sales margins and provides lower prices to consumers, it will be more than offset by rising health cost and other increases throughout the economy. This means, going forward, we should expect very slow growth, as QE comes to an end and the government at some point becomes forced to deal with runaway spending. The reality is our America's future cannot be sustained forever on just the exports of Boeing (NYSE:BA) aircraft, the sale of phones and computer tablets we manufacture overseas, or increased internet usage. We need to look at more substantial and broader-based benchmarks. At the same time, it is not realistic to think the American consumer can continue to support exporting countries like China and Japan by racking up a 600 billion trade deficit year after year.
A strong case can be made that the economy is about to stall under strong headwinds as the burden of past debts and future promises made to those retiring and unable to find good jobs begins to weigh heavily upon society. Tensions have become elevated in many parts of the world as ISIS continues wreaking havoc and a flood of refugees flee war-torn areas. Protest and political unrest in countries like Brazil, Turkey, Pakistan and throughout the Eurozone may be about to get worse. In addition, we cannot rule out the possibility of conflict with North Korea or a major war breaking out. It is clear the world is rapidly changing, and nobody has a crystal ball that will predict how this will all play out, but one thing is certain, and that is storm clouds do exist. This leaves the possibility at any time the markets could morph into a "realizing market" that grinds slowly downward, or that at some point, the wisdom of buying every pullback changes and the market simply drops like a stone.
Speculation based on mere hope is not a solution to our complex problems, and today long-term planning is in short supply. Silly talk about the fact that the deficit is beginning to shrink is like saying it is now safe for someone who can't swim to jump into the water because it is no longer as deep ignores reality - the drop is small and the depth still great. Even with today's low-interest rates, we are adding to the deficit at near record numbers never witnessed except during major wars. How America and countries across the world react to the stress that comes from slow economic growth and how it will affect our budget and culture as the long-term cost burden of carrying the unemployed builds has yet to be determined. It is becoming increasingly clear that the logic and motives of those forecasting a bright and robust economy need to be scrutinized.