American Recovery More Hype Than Substance

Americans With Best Credit in Decades Drive U.S. Economy – Bloomberg.

This is the Internet.  Here, online in the virtual world, everyone wants to sell you something.  When they hype their claims too much, that’s when I go to work.  I write a blog.

In the midst of an unending labor recession, it would be big news if the American economy began to grow at the rate necessary to yield large increases in job creation, but the recovery has failed to materialize after all these years.  Sure, we have risen from the bottom, but the country is still under the peak of the pre-GFC years.

This article takes several pieces of data and attempts to fit them within the mainstream media recovery narrative.  Along the way, the writers rely on financial industry shills who have the sole objective of convincing people to do business with their firms.

Joseph Carson, James Paulsen and Michelle Meyer are all permabulls working at Alliance Bernstein, Wells Capital Management and Bank of America, respectively.  Googling their names yields many articles in which they are quoted.  If you don’t have time to do the research, basically they usually state that the economy is improving and you should invest in the stock market.

The main theme of this article is that households have improved their balance sheets to the point that they are about to embark on another borrowing binge that will lead to strong growth in the second half of the year.  Putting aside the irony that the authors fail to see that a borrowing binge in the aughts is what got us into all of this trouble in first place, let’s scrutinize some of the data used to support the theme and ascertain whether or not it holds up.

The writers and the shills are very happy that household net worth soared to a record high  in the first quarter.  The problem is that they fail to scrutinize the figures.  Virtually all of the gains are concentrated in the top 10% of the wealth distribution.  Federal Reserve money printing has inflated stock and bond prices and reinflated last decade’s real estate bubble, so if you rent and do not have a large stock portfolio, these gains have bypassed you.

People who derive their wealth from their labor are doing very poorly:

US Household Income Performance Since 2000

Incomes remain 8% below what their pre-recession peaks.  No matter what anecdotes the article uses to support the theme, the fact remains that the vast majority of Americans are in worse financial shape now then they were at the onset of the recession.

Another data point that is used to promote the theme is new vehicle sales:

Light Vehicle Sales Pace 1976-2013

In comparison to 2008, sales have improved markedly.  However, placing today’s sales pace in historical context we observe that sales have only improved to average while the country’s population has grown and the Fed has flooded the markets with cheap credit.

One of the permabulls states

Shares of financial companies such as banks “will continue to outperform as they’re right at the heart of the credit-creation process, which is becoming noticeable,” he said. The S&P 500 Financial Index of 81 institutions is up 26 percent this year, compared with a 20 percent increase for the S&P 500.

Once again, central bank largesse, not an organic recovery, explain the inflation affecting asset prices.  Note the correlation between the Fed’s balance sheet and the S&P 500:Fed Balance Sheet vs. SP500 07.2013

Two other sets of data used to hype the putative recovery are credit card delinquencies and the Financial Obligation Ratio.  Credit card delinquencies have fallen dramatically, but a great deal of the improvement can be attributed to the record number of charge offs in the wake of the Great Recession.

Credit Card Charge Offs 08.2013

More bad debts were written down leaving the performing accounts:

Credit Card Delinquencies

The Financial Obligations Ratio measures American income versus financial obligations.  It has dropped to lows just like the article says, and this should point to increased consumer spending.  What no one bothers to tell the reader is that the ratio has begun rising again:

Total FOR 1q2013

The totality of the data continues to support a slowly growing economy that is vulnerable to shocks.  As long as the Federal Reserve delays the natural clearing process that should have occurred after the last recession, economic growth will continue to disappoint, but that will not stop anyone from attempting to predict the start of the new American boom.


One thought on “American Recovery More Hype Than Substance

  1. So here is a question: what currencies are solid and dependable in your opinion? Canadian $? Russian Ruble? Yuan? It is pretty clear you feel the Euro and US$ are in major trouble, and I suspect you are correct. Thanks for the blog.

    By the way, if you ever get into the relation between demographics and economics that would be great. Seems like a very important relationship that is not discussed much.

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