2014: The “Flash-in-the-Pan” Recovery Stalls
I usually publish these predictions in November. I’m a little late this year. 2013 was a crazy year at the Murphy house.
This is the 7th annual installment of my predictions for the coming year. Over the years, I have learned that the closer I stick to the effects of the inverse relationship between population density and per capita consumption – rising unemployment and poverty, declining wages and benefits, worsening trade imbalances – the more accurate my predictions tend to be. It’s when I stray into other economic, financial and political arenas that my predictions are less reliable. Who can make accurate predictions when policy is based on flawed economics and, therefore, illogical assumptions? Nevertheless, as much as it’s an exercise in futility to make such predictions, it’s still fun.
So here goes. My predictions are based upon the economic theory I’ve proposed in Five Short Blasts. To very briefly restate my theory:
As our population continues to grow beyond its optimum level, forcing people to crowd together, per capita consumption inevitably declines as a lack of space constrains our ability to store and use many products, especially larger products. As per capita consumption declines, especially in the face of ever-rising productivity, rising unemployment and poverty are inescapable. This same effect occurs when we attempt to trade freely in manufactured goods with nations that are already overpopulated. The more overpopulated our trading “partner,” the worse the effect.
Only actions to stabilize our population (especially reducing immigration) and action to restore a balance of trade through a sensible return to the use of tariffs have any hope of mitigating these effects.
Back-drop for 2014:
In addition to the effect of my theory stated above, the following issues form a back-drop that will shape events in 2014:
- The world population will continue to grow at approximately 1% per year, adding another 70 million people. The U.S. will do likewise, adding another 3 million people. The corporate world welcomes all of these new consumers, but already has plenty of capacity to meet their needs. Thus, all are destined for the unemployment line.
- The U.S. had a “break-out” 3rd quarter in 2013 in terms of GDP growth. It may last into the 4th quarter as well, driven by holiday shopping. But this “flash-in-the-pan” recovery has been driven by two factors: the “wealth effect” of a rising stock market (driven higher by the Federal Reserve crowding investors out of the bond market), and by a significant increase in credit card debt. The Federal Reserve announced the beginning of its scale-back in its bond-purchase program. And credit card debt can’t continue to grow.
- The “recovery” that gathered steam in the 3rd quarter of 2013 is a 1% recovery (or top few percent). In other words it’s been driven by the stock market “wealth effect.” Evidence of this can be found in home sales, which have been predominantly cash transactions by the rich and by home flippers. Mortgage applications actually fell 11% in 2013. And, though car sales have risen dramatically in 2013, the average car loan payment is nearly $450 per month. In other words – luxury cars.
- Contrary to the efforts of the Federal Reserve to keep interest rates low through its bond-buying and purchases of mortgage-backed securities, interest rates have been on the rise as investors fled the bond market. The Federal Reserve recently announced that it would scale back these purchases, supposedly because the economy is doing better but, quite possibly, for other reasons too, which I’ll get into below.
- Median wages have continued to decline.
- Unemployment has fallen, thanks to a growth in part-time jobs that has more than offset a decline in full-time jobs, and thanks to the “smoke-and-mirrors” tactics employed by the Bureau of Labor Statistics, claiming that more and more people are dropping out the labor market. Job growth in 2013 tended to be primarily in low wage jobs.
- The U.S. and, indeed, the entire world is rapidly approaching a retirement crisis in which an aging population has been stripped of its pension benefits and has spent its savings to maintain an illusion of prosperity.
- Inflation has been muted, running at 1.2%, thanks to falling unit labor costs and steady commodity prices.
- 2014 is a mid-term election year. Time for congressmen to throw a bone or two to their constituents.
Given that backdrop, here’s what I see in the year ahead. These predictions run counter to those of experts who are forecasting that the recovery will continue to gain steam.
- The “flash-in-the-pan” recovery that suddenly materialized in the 3rd quarter of 2013 will gradually stall, with GDP falling back below 2% by year end. (I’m expecting the Obama presidency to end with a recession, just as the previous two administrations have done, as efforts to rein in deficit spending without first fixing the trade deficit inevitably yield a recession.) Results: It looks like I was a little early in calling the end of the “flash-in-the-pan” recovery. So, like most of the following predictions, this was a bad call. The year actually began with a 1.6% decline in GDP in the first quarter. But that was weather-related, and GDP rebounded strongly in the 2nd and 3rd quarters, when GDP cracked 5% growth – strong showing. The fourth quarter results aren’t in yet, and are widely expected to slow down, but only enough to drag down growth for the year to about 3%.
- Official unemployment will hold fairly steady at about 7.0%, while true unemployment (my “U3A” calculation which increases the labor force as the population grows) will actually rise from its current level of just over 10% to over 11% by the end of the year. Results: Again, this was a bad call. Official unemployment declined nicely to 5.8%. “U3A” unemployment fell from 10.3% to 9.2% (through November). Less spectacular was the gain in per capita employment – only 0.5%. It rose only 5 times in 11 months.
- Global unemployment – a new metric I plan to begin tracking this year utilizing data from the CIA World Fact Book web site, will rise as the world population grows. Results: I don’t yet have the data available.
- The U.S. will enter into new trade agreements with Europe and Pacific rim nations, and our trade deficit will worsen, rising from its current level of $487 billion per year to over $550 billion. Results: Obama made a high-profile trip to Asia in the fall to press for the Transpac trade agreement, but nothing is signed yet. But I’m afraid it’s coming soon.
- The Federal Reserve will scale back its bond-buying by another $10 billion per month in the 1st half of 2014, but will be loathe to reverse course when the economy begins to show signs of flagging late in the year. What no one talks about is that such quantitative easing, if continued for many years, actually becomes a net drag on the economy as mortgage payments on those mortgage-backed securities actually begin to suck money out of the economy (unlike when such payments went no further than banks and were quickly plowed back into the economy in the form of new loans). In fact, if such purchases of mortgage-backed securities were continued for another 16 years, the purchases would be completely offset by the money sucked out of the economy through mortgage payments. In addition, at that point, the Federal Reserve would effectively own all residential real estate in the U.S. Results: The Fed did, in fact, end its bond purchase program, though all interest continues to be reinvested in bonds to prevent the program from becoming the kind of drag on the economy that I talked about above.
- Contributing to the Fed’s reluctance to reinflate its quantitative easing will be a rise in inflation, ticking upward to 1.6% by year end, driven by rising commodity prices – still below its target rate of 2.0%, but high enough to begin making it a little queasy. Results: Inflation has been virtually non-existant, at least the official measurement.
- Following Detroit’s example, two more major cities (beginning with Chicago?) will file for bankruptcy in a bid to relieve themselves of their pension burdens. The rising poverty rate among seniors will become a major story by the end of the year. Results: Didn’t happen. There have been no further bankruptcies in 2014.
- The median family income will decline again in 2014, this in spite of an increase in the federal minimum wage. Results: Well, the official data for 2014 doesn’t get released until December, 2015. But here’s some private sector research into the topic: http://www.advisorperspectives.com/dshort/updates/Median-Household-Income-Update.php. As you can see, when expressed in “real” terms (adjusted for inflation), the median income barely rose at all in 2014. That’s not the decline I predicted, but it’s pretty anemic in light of the growth in GDP and the supposed dramatic decline in unemployment, and casts doubt on the quality of the jobs that the economy added.
In summary, 2014 didn’t yield the economic slowdown that I expected. Massive stimulus by the Federal Reserve and the market gains that it fostered did indeed keep the economy propped up. But with the stock market now somewhat overpriced, I have my doubts about 2015.
That’s it. 2014 promises to be another year of “new normal” – weak economic growth and stubbornly high unemployment. Time will tell.