Consumer Metrics Institute: A Hard Year Ahead
The US economy stalled in the 4th quarter, but the analysis that accompanied the latest (slightly positive) GDP revision seemed to imply that the reasons for the weakness - a drawdown of inventories and lower defense spending - would be reversed out in coming months, making 2013 a pretty good year.
But the Consumer Metrics Institute, in its latest take on the data, argues that this year is more likely to be an extended version of Q4. Here's an excerpt from the much longer report which is available here.
Despite the new-found minuscule "growth" reported in this release, there are ample reasons to remain cautious about the economy:
- Even as revised this data represents an economy that is statistically in a dead stall, "growing" at a rate some 3% less than during the prior quarter (the greatest downward quarter-to-quarter change since the fourth quarter of 2008).
- This data is still reporting 4Q-2012, a quarter that in retrospect may be viewed as the last gasp of the "Great Recovery" -- before there were significant economic headwinds created by reductions in consumer take-home pay, rising gas prices, sequestered federal spending and accelerating contractions in global trade. If all other components of the economy stay the same, those factors alone could remove something like 3% from real-time economic "growth" by the end of the first quarter of 2013 : the normalization of FICA deductions alone could reduce consumer spending enough to pull the headline number down by 1%, the $.50 per gallon increase in gas prices could similarly remove another 0.5% from the headline number, weakening exports could easily reduce the headline number by another 1% and the federal budget sequestrations -- if fully implemented and sustained -- should eventually pull (at maximum, despite doomsday rhetoric) an additional 0.5% from the headline number.
- However, with respect to the "sequestrations" : political will and doomsday rhetoric notwithstanding, even if they are implemented by Congressional mandate (or inaction) there may be no reason to expect actual short term government spending to change. The budgetary shenanigans during the third quarter of 2012 (when a defense spending spree created a phantom boost to pre-election economic data by bringing some spending forward by a quarter -- and incidentally across a fiscal year boundary) probably taught the US Federal bureaucracy that as a practical matter they can spend at will and with utter impunity from the budgetary intentions of the fiscally conservative majority in the US House of Representatives.
In the day-to-day reality of this Administration there simply may be no legal or political consequences to overspending Congressionally-approved budgets in pursuit of the perceived greater good.
To summarize the most interesting points:
Q3 growth was artificially boosted by moving up future defense spending, which vindicates the people who said we can't trust an election year recovery. They predicted that the numbers would get worse as soon as the votes were counted, and they were right. Q4 GDP growth was essentially zero. And the incumbents got away with the scam. It's amazing what we've learned to accept from the ruling class.
Some of the things that made Q4 so weak will indeed be reversed out, but this will be more than offset by higher payroll taxes and gas prices and Europe's inability to buy much from the US or anywhere else in the year ahead.
When confronted with budgetary constraints, the federal government has reached the point in its moral devolution that it will simply spend whatever it wants regardless of what the law says. Again, it's amazing how low the "business as usual" bar has been set.
And finally, the stock market is behaving like it's entering another bubble, which sets up an interesting collision between the liquidity-driven boom and zero-growth visions. Since we're already two-thirds of the way through Q1, a resolution one way or the other should come soon.