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In "Have Consumers Gone on Strike?" CNBC.com's John Carney
discusses an issue I've raised many times at Financial
Armageddon:
the disconnect between what people believe is happening with the economy and
what is actually going on.
The economy may be in worse shape than
many economists and businesses expect.
Orders for US durable
goods—manufactured items expected to last more than three
years—were predicted to rise 1.5 percent overall, and to rise 2.5
percent excluding the volatile transportation sector.
Instead orders fell 0.9 percent
overall, and 0.6 percent net transportation.
That’s a huge gap between expectations
and actual numbers.
For several weeks, consumer activity
has been tracking significantly lower than the expectations of economists.
Similarly, the consumer numbers—consumer purchases, consumer sentiment,
home sales, home prices—keep showing up lower than you would expect
based on business numbers—employment, manufacturing orders, factory
production.
What seems to be happening is that
businesses have been ramping up their production and hiring in expectations
of strong consumer demand.
Consumers, however, have failed to
provide that expected demand.
The Obama administration’s
payroll tax cut may be contributing to this widening gap between expectations
and consumer activity. The administration expected the temporary tax cut to
stimulate more spending by consumers, boosting overall activity. But it now
appears that the stimulus effect was over-estimated, as consumers have
decided to save more of the tax cut than they spent.
The relationship between durable goods
orders, economic growth and stock markets is ambiguous. Sometimes drops in
durable goods orders are accompanied by falling stock prices and a slowing
economy.
Sometimes they go in opposite
directions. Although durable goods orders are described as a "leading
indicator," it's not exactly clear whether it is very good at
forecasting the economy or financial markets. Part of the problem may be that
durable goods is a broad category that includes both consumer appliances and
businesses equipment. This means that if economic expectations of businesses and
consumers diverge, the data may be more noise than signal.
If the increased hiring and production
by businesses can drag reluctant consumers into spending, the effect may be a
supply-side driven economic boost. But if consumers continue to hold
out—refusing to drive up demand at the cash register—businesses
could find themselves with a surplus of inventory and employees. Liquidating
the newly created inventory and jobs could push the economy into a renewed
economic slump.
What Carney is suggesting, in essence,
is that many decisionmakers have been lured by the false promise of
ultra-cheap money, quick fix stimulus programs, misguided regulatory and
accounting forebearance, and relentless economic cheerleading, into thinking
that the worst is over, and they've acted in ways that likely
ensure that is not the
case.
As it happens, this current disconnect
may represent one last opportunity for those who haven't been taken
in by all the delusions and chicanery to get their affairs in order. While I
don't believe there's any way to stop the coming train wreck, there may
be ways to capitalize on that knowledge.
That might mean selling or
swapping risky assets, which is somewhat easier when prices are artificially
inflated by low rates and high expectations (house prices, unfortunately, are
a bit of an exception, though I and others like my friend Charles Hugh Smith believe that if you can
sell now, it's still a good idea).
It might also mean paying down or
restructuring debt to take advantage of today's unrealistically low rates and
appetite for risky assets. And, finally, for those who are in a position
to do so, it might make sense to line up whatever job or freelance work you
can find with firms that are anxious to secure staff in anticipation of a
"boom."
Whatever the case, now is probably not
the time to be thinking that Financial Armageddon is history.
Michael
J. Panzner
Editor, Financialarmageddon.com
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