Trade Show Growth Expected
to Outshine GDP Growth in 2014
Oceanside, CA – We now know the strength of the U.S recovery is mostly a façade, according to Frank Chow, chief economist for Trade Show Executive Media Group. After the Federal Reserve (Fed) announced plans in May to begin tapering its Quantitative Easing (QE) program later in 2013, interest rates began to surge. The response was unmistakable. Major industries such as housing, manufacturing and commodities noticeably softened. Monthly employment reports disappointed economists who expected more hiring. The rising bond markets took a summer swoon. Investors withdrew investments from emerging markets. Even consumer spending, which had been steady the past three years, started to falter. The data confirmed the Fed has been propping up the economy, Chow asserted. “The surprise decision by the Fed in September to delay tapering its QE program is a realization by the Fed that the economy is still too weak.”
As we go to press, the focus now shifts to Congress as politicians need to pass a new budget deal by October 1 to keep the government running, then raise the Treasury's debt ceiling by late October. Tapering decisions and the budget issues are connected because the official Fed statement mentioned that “fiscal policy is restraining economic growth” as one of the reasons to delay tapering. “It was an acknowledgement that the three-year debt ceiling tug-of-war, along with sequestration, is unlikely to be resolved quickly and thus may drag down the economy,” Chow pointed out. Likewise, the Fed cut its 2013 forecast for economic growth to the 2% to 2.3% range from a June estimate of 2.3% to 2.6% and downgraded 2014 even more.
Profits from Cost-Cutting, not Growth
Fortunately, the U.S. still retains many world-class corporations whose innovation and technological advancements are unsurpassed and have kept the U.S. economy afloat during this anemic recovery, Chow said. However, profits have moderated this year from the record pace in 2012. After falling 1.3% in Q1 from the previous quarter, corporate profits rebounded 3.9% in Q2 as calculated by the Bureau of Economic Analysis (BEA). Similarly, Q2 profits for S&P 500 companies grew 4.8%, reported Thomson Reuters. But Q2 revenue growth was (0.6)%, the first negative revenue since Third Quarter of 2009. This indicates profit growth has come mainly from cost-cutting, Chow pointed out. This year, the cost-cutting has not focused on employees, but on taxes. “The U.S. currently has the highest tax rate and one of the most complex corporate tax codes among developed nations. Multinational firms are becoming incredibly adept at finding ways to reduce exposure to U.S. taxes,” he noted.
What about corporate profits for the rest of the year? Most economists predict profit growth will be slightly lower at 3.4% for Q3 and return to 10% in Q4 with financial firms leading the way due to the taper postponement. “The outlook though is still clouded, because it’s uncertain how much interest rates will sink back to the level prior to the May taper announcement,” Chow said. Robbert van Batenburg, director of market strategy at brokerage Newedge USA, LLC has estimated that the lower interest rates accounted for almost 40% of total profit growth since the recovery. But Morgan Stanley thinks higher borrowing costs aren't likely to pinch profits in the near-term because companies have shifted debt loads out to 2017 and further. However, higher long-term rates will influence new capital investment decisions.
The Wobbly Underpinnings of the Housing Industry
The rise in mortgage rates by more than one percentage point has led to a dramatic halt in applications, especially for refinancing. Citing lower demand for mortgages, Wells Fargo said it was laying off 1,800 workers in its home loan business. The 1.7% gain in existing home sales for August, as reported by the National Association of Realtors, was mostly due to and acceleration of sales in fear and anticipation of even higher rates once tapering starts. Many economists feel it’s just a matter of time before a spike in rates hits the housing market again.
However, Chow says the plight of the average U.S. worker illustrates the most vividly that the recovery is a façade. A recent report by Sentier Research using monthly Census Bureau revealed that the real median household income of $52,113 in July 2013 is (7.3)% lower than the peak in January 2008. It hit a low point in mid-2011, and since January 2012, it has basically gone sideways. More discouraging is that since the start of the 21st century, real median household income has not kept up with inflation. “The data makes clear that the typical household was struggling before the Great Recession and is in worse shape now than four years ago when the recovery began,” he said. “Furthermore, during the past four years, the number of people at the poverty level are up 6,667,000 to a record 46,496,000.”
Some economists have claimed Quantitative Easing has mainly benefited the banks and the wealthy. From 2009 to 2012, real mean income dropped for the bottom 95% of all households, while the top 5% gained. So what made the difference? “The answer is those with assets — the wealthy — benefited,” Chow pointed out. “The middle and lower class do not have many assets — some IRAs and 401Ks; they mainly have debt,” he added. Also, the elderly have not been able to grow their savings since savings rates are hovering close to zero. Evidence indicates QE and low rates have contributed to the massive rise in income inequality.
This declining household income trend may soon drag down consumer spending, which contributes 70% to the economy, despite QE continuing at full strength. The back-to-school season was lackluster, according to the largest retailers like Wal-Mart and Target. “This doesn’t bode well for the upcoming holiday season when most retailers experience 40% of their annual sales,” said Chow. “Also, keep in mind that the average household will probably not be aware of the 2% FICA increase and the 3.8% ObamaCare tax on investment income until they do their tax return next year,” he said.
Chows says his comments are not aimed at promoting class warfare, but to show why it’s unrealistic to think the QE program and its goal of higher inflation will improve the situation for the typical American family. “Some leaders in Congress and the Administration may think the Fed expansion policy will bail them out if they do nothing to address the economy. They may think all this wealth creation will trickle down to the masses,” he said. He concedes that eventually, that may occur, but in four years, the only wealth that has trickled down is a lot of part-time jobs and government benefits. “Unless the middle class situation improves, low or flat spending growth may become the norm,” Chow believes.
To make matters worse, the current 7.3% unemployment rate has two developments that most economists (and media) ignore: the rise of part-time jobs and the departure of millions from the U.S. labor force. According to Keith Hall, a senior researcher at George Mason University's Mercatus Center, 97% of all job growth from February through July 2013 has been driven by part-time employment. Hall ran the Bureau of Labor Statistics from 2008 to 2012. Over the six months, he noted that the Household Survey shows 963,000 more people employed, but 936,000 of them are in part-time jobs.
As part-time work has exploded this year, millions of frustrated Americans have given up searching for work and are no longer in the labor force. The labor force participation rate fell to 63.2% in August, the lowest since 1978.Nearly 90 million people are now out of the labor force, Chow noted. The Chicago Fed estimates that retirements accounted for about one-fourth of the drop since the recession began; the rest are mostly economic related. So why does the size of the labor force matter? Chow pointed out that if people are leaving the labor force for economic reasons, it means the economy is in much worse shape than the unemployment rate suggests.
Unless the U.S. does something dramatic to address this issue, the U.S. economy may fall into a period of Japan-style stagnation which could last for several decades, he warned. “Normal population and household formation growth will sustain the economy at this low level, but if we want something more vibrant, changes will need to be made.”
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