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“None so blind, as those that will not see?”

Economic growth
By Paul Hodges on 02-Jun-2014

US GDP Jun14Every now and then, the blog scratches its head and wonders, “what would it take to convince US policymakers that demographics have an influence on demand?”

Suppose, for example, they loudly and consistently announced that the US was now in full recovery mode, and would be certain to achieve economic growth of 3% or more?  And that then, growth actually turned out to be minus 1% in Q1?  Would that make them look again at their theories?

This of course is what happened last week.  And so we know policymakers’ answer to the blog’s question.  Just as feared in April, they chose instead to “blame the downturn on the weather”.  Yet Canada had just as cold a winter, and managed GDP growth of 1.2%.

But the Q1 data tells the rest of us that the US Federal Reserve was wrong to assume a strong economic recovery was possible.   The core issue, as the chart shows, is that US GDP became over-dependent on personal consumption during the SuperCycle years:

  • Personal consumption was less than 60% during the 1950s, but is now around 70% (blue line)
  • Government investment was nearly 40%, but is now half this at 20% (green)
  • Private investment moved up from 10% to 20% during the Reagan/Clinton years, but is now 15% (red)
  • Net imports have only been recorded recently, and were neutral in the 1990s, but are now -3% (yellow)

Equally important is that the detail of the Fed’s GDP data shows that the key driver for GDP growth over the past year has been inventory changes.  GDP grew at 1.9% in 2013 as companies built inventory in anticipation of recovery.  When recovery failed to arrive, they had to reduce inventory again, taking GDP to -1% in Q1 2014

2 other features from the detailed quarterly GDP data are worthy of note :

  • Consumer spending was relatively strong in Q1, up 2.09%.  But this was not due to economic recovery: at least half of the gain was due to new healthcare spending as Americans signed up for Affordable Care coverage
  • There was also a major downturn in US exports.  These moved from a gain of 1.23% in Q4 2013 to a fall of 0.83% in Q1 2014.  This hardly suggests a solid expansion is underway in the global economy

The only conclusion is that the Fed remains in Denial mode.  This was confirmed by the topics discussed at The Fed’s policy conference last week, which focused on the risks of high inflation, even though key April statistics suggests recovery is as far away as ever:

  • US consumer spending dropped in April
  • Nearly half of all households expect their inflation-adjusted income to decline over the next 12 months
  • Income growth slowed to just 0.2% in April, the weakest increase so far this year
  • The main consumer sentiment index fell to 81, and remains at around half the levels seen during the SuperCycle

Even the Wall Street Journal, normally a strong cheerleader for the Fed, felt forced to express some doubts:

Fed officials expect economic output, as measured by GDP, to expand by 3% in 2014, according to their March projections. Taking the Q1 contraction in output together with projections of Q2 growth between 3% and 4%, the economy appears once again to be expanding at a sub-2% annual rate over the first six months of the year…To achieve the Fed’s growth forecast, an even larger pickup in the second half will be needed.”

Equally critical is that the housing market – supposedly the motor for the recovery – has clearly stalled.  Sales of single homes by banks (due to foreclosure or similar processes) are still running at twice the level of sales by home-builders – 5 years after the Crisis began.  As the Financial Times reported:

An unexpected slump in the US housing market has exposed the shaky fundamentals of recovery in the world’s largest economy, as a lack of incomes growth for middle-class Americans leaves them struggling to buy a home.

“Last week, Janet Yellen, the chairwoman of the US Federal Reserve, warned a risk that had seemed vanquished was once again menacing the economy. “The recent flattening out in housing activity,” she said in testimony to Congress, “could prove more protracted than currently expected.”

Thus the blog scratches its head, and wonders what it would take to convince policymakers that it is impossible for an ageing society, like the US, to return to growth levels seen when the population was in its prime wealth creation phase?

Is it simply that, as the saying goes, “there are none so blind as those that will not see?”



The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 10%. “Downstream polyester markets have been under pressure due to weak global macroeconomics and slower growth in demand in China”
Benzene, Europe, down 2%. “Offtake levels have only begun to recover following a ‘disastrous’ 2013 and European sellers struggle against lower global pricing.”
US$: yen, down 3%
Brent crude oil, flat
S&P 500 stock market index, up 5%
Naphtha Europe, up 3%. “ Demand from domestic petrochemical buyers remains stable, albeit at low levels”
HDPE US export, up 7%. “US prices are still somewhat too high to generate much interest from the global market”