Ronald Reagan famously said,"The most terrifying words in the English language are: I'm from the government, and I'm here to help."
Despite the temporary 'Shutdown' solution, the latest set of antics out of DC surely support that opinion. The issue is that we are likely witnessing enough fear in the consumer camp to drive slower growth for the next few weeks. Indeed, we could see a slower GDP than would have been read without the trouble in our Capitol.
Those comments from earlier in the week are supported now by the latest data from Dr. Ed. He tells us that this is turning into some "Depressing dysfunction."
"The US federal government's dysfunction appears to be depressing economic growth and the jobs market. That's the gist of yesterday's article with yet another sensationalist headline, "Stark costs of US conflict laid bare." It didn't appear in a tabloid newspaper like theNY Post. Instead, it was featured as the lead story on the front page of the US print edition of theFT. It observes that America's fiscal paralysis has already taken a "massive toll" in the country over the past three years.
Let's have a closer look at the economic consequences of the never-ending fiscal crisis:
ITEM: "Macroeconomic Advisers analysis. TheFT article notes: "In a report released on Monday, Macroeconomic Advisers, the research group, found that America's budget fights have cost more than 2m jobs and slowed annualised economic growth by 1 percentage point of gross domestic product since 2010."
The report was commissioned by the Peter G. Peterson Foundation, which has been pushing for a bipartisan deal to narrow the federal deficit over the long run. The report predicts that the partial shutdown of the federal government could lower the growth rate of real GDP by 0.3 percentage points if it ends soon. The impact could be much more severe if the government defaults on its debt, even if it is a temporary technical default. Unfortunately, we concur.
The report blames too much short-term fiscal austerity for depressing jobs growth without enough accomplished to reduce the federal deficit over the long run. It also estimates that the rise in an index of fiscal uncertainty has added 0.6 percentage point to the unemployment rate.
ITEM: FRB-San Francisco study. The 7/22 FRB-SF Economic Letter features an article titled, " Uncertainty and the Slow Labor Market Recovery" written by two of the bank's economists. They use an uncertainty index that reflects both fiscal and monetary policy. It is constructed using the volume of newspaper articles discussing economic policy uncertainty, the number of tax code provisions scheduled to expire, and the extent of disagreements among economic forecasters about such variables as future levels of inflation and government spending.
Their startling, though not surprising, conclusion is that the "unemployment rate would be down to 6.5% by now if not for all the policy uncertainty." (Sorry guys---but we could have told you that :) )
The implication is that the Fed's constant tweaking of its ultra-easy monetary policy, including all the discordant chatter from members of the FOMC, has contributed to the stubbornly high unemployment rate!
Talk about Black Swans right under your nose.
ITEM: Other studies. FRB-SF President John Williams, in a 10/3 speech, observed that numerous studies suggest that "each $100 billion of asset purchases lowers the yield on 10-year Treasury notes by around 3 to 4 basis points." As for the impact on the economy, he said that the Fed's $600 billion QE2 purchases might have lowered the unemployment rate by about ¼ percentage point."
That seems like a very tiny impact for all the money.
The Good News in This Mess?
Stocks are always cheaper when consumer confidence falls.
Worries rise, fretting increases, horizons become dark, headlines become darker, futures look "cloudy" and the ghost of Armageddon knocks on the door of our collective mind once again.
Then, things improve from their darkest hours.
We need to find a way to focus on what is beyond the now temporarily resolved mess.
The chart above (from Dr. Ed) shows that S&P 500 forward earnings rose to a record high of $119.73 last week. It tends to be a great year-ahead indicator of actual earnings when the economy is growing.
However, it doesn't provide a heads-up for recessions.
The forward earnings of the S&P 400 MidCaps and S&P 600 SmallCaps also rose to new record highs last week.
Let's hope there is a hiccup---so we can make sure few listen to the good news.
While we are waiting for more US economic data, life goes on in the rest of the civilized and uncivilized world. Washington's fiscal fiasco, even in its current 'kick-the-can-down-Pennsylvania-Avenue-for-3-months' phase, must be weighing on global growth, as evidenced by the weakness in the CRB raw industrials spot price index since the start of this month (namely oil).
Let's review some of the recent global indicators that might also be pushing this index lower (we thank Dr. Ed for the numbers):
(1)China. China's latest trade data for September showed a slight decline in exports and a slight increase in imports on a seasonally adjusted basis. Both have been in relatively flat trends for the past year.
Another troubling development is that China's total social financing rose rapidly again during August and September after a brief slowdown during the previous three months. Why is this troubling? It seems that China is getting less bang per yuan of debt, as the current pace of borrowing is about the same as since 2009 yet real GDP growth has clearly slowed over this period. One more troubling development is that the CPI inflation rate may be picking up, led by food prices.
The good news out of China for stock investors is that the China MSCI stock index is up 22.4% since the year's low on June 25, with forward earnings rising to a new high in early October. Forward revenues also have risen to new highs, and the forward profit margin has been recovering over the past year.
(2)Euro zone. The recession may be over in the euro zone, but it's hard to detect a recovery in the the region's latest manufacturing output figures. Factory production rose 1.1% during August, after falling 1.0% the month before. It is up only 2.0% from the latest recession low during November 2012.
The Europe ex-UK MSCI stock price index has already discounted a solid economic recovery, rising 53.7% from the June 1, 2012 low. Forward earnings have been flat-lining since early 2012, but may be starting to recover.
(3)Emerging economies. Recently released industrial production stats for the major emerging economies show mostly flat trends for the past couple of years. The weakness in industrial commodity prices suggests that manufacturing remains weak in these economies, as well as in Europe.
Our theory stands: hope for red ink....and a little panic never hurt anyone (long-term).
Recall that it is in the panic and worry that you find the good deals.