Talk about diminished expectations. This morning's estimate of 1.4% Q4 GDP
growth is being hailed as a pleasant surprise. Which is odd, considering that
for most of the past century a number this low would have been seen as weak
enough to require emergency action.
And that's just the headline number. Dig a little deeper and the picture --
at least when viewed through a non-Keynesian lens -- is of a system in crisis.
Consider:
Corporate profits are, as today's Bloomberg puts
it, sliding.
Meanwhile (also from Bloomberg),
A firm labor market and low inflation encourage households to keep shopping.
Today's fourth-quarter growth figure reflected more spending on services,
particularly on recreation and transportation. "It's really U.S. consumers
who are powering the global economy forward at this point," said Gus Faucher,
an economist at PNC Financial Services Group Inc. in Pittsburgh.
But if companies are earning less money, how likely is it that they'll step
up hiring going forward? Not very. And since today fewer Americans have full
time jobs than in 2007 (making the current stellar 4.9% unemployment rate look
like a cruel joke) a new round of mass layoffs will make the job market even
more dire for anyone hoping to support a family with full-time work.
"If profits remain depressed, the prospects for capex and hiring will come
under greater pressure," Sam Bullard, a senior economist at Wells Fargo Securities
LLC in Charlotte, North Carolina, wrote in a research note.
What are the chances of profits remaining depressed? Pretty good, considering
that two of the big growth drivers of the past few years have been student
debt and car loans. The former is, as everyone by now knows, at levels that
consign a whole generation of kids to life in their parents' basements -- not
a recipe for robust consumption.
Car loans, meanwhile, are starting to look like subprime mortgages circa 2006:
Unpaid
subprime car loans hit 20-year high
(CNN Money) - Americans with lower credit scores are falling behind on auto
payments at an alarming pace.
The rate of seriously delinquent subprime car loans soared above 5% in February,
according to Fitch Ratings. That's worse than during the Great Recession
and the highest level since 1996.
It's a surprising development given the relative health of the overall economy.
Fitch blames it on a dramatic rise in loans with lax borrowing standards
that have helped fuel the recent boom in auto sales. More Americans bought
new cars last year than ever before and the amount of auto loans soared beyond
$1 trillion.
Fitch points out that the subprime end of the market is where there's increased
competition to peddle loans. The ratings firm flagged an increase in loans
to "borrowers with no FICO scores," lower downpayments, and extended term
lending.
Toss in contracting global trade, turmoil in Europe and Latin America, and
a grinding multi-month decline in US manufacturing output and the year ahead
doesn't look any better. Here's the Atlanta Fed's GDPNow measure of current
growth, which shows a huge drop in just the past month:
What does all this mean? Very simply, if you borrow too much money life gets
harder and the things that used to work stop working. For a country, lower
interest rates no longer induce businesses and individuals to borrow and spend,
and government deficits no longer translate directly into more full-time private
sector jobs. Growth slows, voters get mad, politics gets crazy, and generally
bad times ensue. The only question is why this is a surprise to the people
whose choices brought us to the edge of the abyss.