To attain the Fed’s forecast of 2013, growth must pick up significantly in the second half. First quarter growth was 1.8%, and 2nd quarter growth will not be more than 1.5% so the economy must expand by over 3% in each of the last two quarters to achieve the forecast number.
Optimism replaces realism when it comes to economic forecasts. The chart above shows how economic forecasts are scaled back as we approach the event horizon. It’s either time to throw out those pre-2008 economic models or the economists who continue to use them.
For the vast majority of Americans who work for a living, there has been no economic recovery. In fact, the chart reveals an ongoing labor recession. Unearned income will never be spent on houses, cars, clothes, food and other goods. The real story of the recovery is that there isn’t one. Cheap money has inflated asset prices primarily benefiting corporations and the 1% while not promoting a turnaround in the job market.
The mainstream media loves it housing recovery narrative. It is very excited that various measures of housing sentiment have reached their 2006 bubble highs while omitting what happened afterwards from its reports. Today’s Chart of Truth illustrates how rising rates are quickly making housing less affordable. Sales will drop precipitously shortly, but the housing recovery narrative will live on.
There is much excitement in the air because industrial production jumped the most in four months, but this is not saying much. Production actually decreased in two of those four months and five out of the past twelve. Moreover, high energy prices are stoking dormant inflationary pressures. The bottom line is that economic indicators are mixed with corporations and rich faring well while the U.S. worker remains stuck in a labor recession.
The auto industry is a huge driver of economic growth in Europe. There will not be a recovery in the Eurozone without a a recovery in auto sales, and the chart indicates that this is not in the cards. Furthermore, Eurozone exports have been falling for the last three months. If Europeans are not buying products, like cars, from each other and foreigners are buying less European exports, then what will spur the much-hyped recovery in the second half of the year? Sorry, that’s a trick question. There will be no recovery, just a continued recession and a lot of talk.
The effect of the Eurozone recession is creeping into the results of American multinationals. Coca Cola’s European sales dropped 4% in the second quarter. The soft-drink purveyor blamed the weather rather than the real culprit, the Eurozone’ recession. Why? Because the weather will change, but the recession is here to stay. How else can you forecast stronger sales in the second half without the underlying economic fundamentals?
The Chinese financial system has reached the Ponzi stage. Banks are desperately seeking more capital to keep the game going, also known as “extend and pretend.” Chinese banks create these wealth management products to maintain extra capital. Since most of these securities lack bank guarantees, they bolster bank liquidity more than demand deposits. In exchange for higher rates, Chinese savers are taking on a lot of risk while believing that they have old-fashioned, insured bank accounts. This did not turn out well for Spain, and it won’t end well here either:
India just surreptitiously raised its key lending rate. While there was no change in the 7.25% rate discount rate, the Reserve Bank of India limited the amount of funds available for overnight loans to 750bn rupees. This move has helped the rupee rally, but it still remains at inflation rates around 60 to the greenback. In order to strengthen its currency, the RBI must raise rates, but it will try to avoid this as long as possible so it does not crimp already tepid economic growth.