Nature does not hurry, yet everything is accomplished – Lao Tzu
The US economy is headed for the long-awaited decline but people who are betting on a collapse this year are going to be disappointed. There is too much fiscal money still coursing through the economy’s veins for collapse to occur that quickly. Instead, it seems to me that we’re headed for a long, drawn-out downturn that defies formerly successful efforts to avert recession.
Employment
The greatest deception men suffer is from their own opinions – Leonardo da Vinci
The market holds its collective breath before every first Friday of the month in anticipation of one of the most heavily flawed pieces of economic data in existence. Not only is the data seasonally-adjusted for the observed data, the Fed also uses a “trend-line” benchmark that is also seasonally-adjusted so that the combined number is theoretically closer to the true payroll number.
The seasonal adjustment aspect makes sense because there are seasonal differences in the payroll number throughout each year but then using a “trend-line” adjustment to a benchmark lends itself to excess optimism. I don’t believe it’s a coincidence that we routinely experience intermediate term write-downs in the payroll numbers, sometimes years after the fact. These write-downs are almost always skewed to the downside.
Is the excess optimism a function of political pressures? Why are these intermediate changes almost always reductions? An objective measure would oscillate around the mean, both higher and lower. How about the birth-death model which seeks to anticipate new business formation. What’s wrong with waiting a few months for confirmation? Why is it necessary to add a further error factor into the monthly data?
If you have gone back through decades of revisions like I have, you would know that reductions such as the recent 800,000 over-stated jobs are standard operating procedure – and not some effort to defraud in favor of an incumbent in an election year. These revisions have been helping rulers from both parties for decades. Since markets trade on marginal changes, you get a favorable skew if you maintain positive marginal change most of the time.
Oftentimes, we’ll get the revisions around the new year so I do believe the 800,000 revision was timed to allow the Fed to start cutting interest rates immediately. The administration gets to keep showing positive marginal employment numbers in front of the election while giving the Fed the green light to lower rates. That’s just common sense.
So what is the payroll data telling us today? On the margin, things are still pretty good. The Establishment survey is telling us things are still moderately strong while the Household survey tells us we’re no longer growing the economy but not yet in decline.
Neither chart is warning of an imminent collapse but let’s be clear about one thing, labor is a lagging indicator. And with the headline numbers being extremely vulnerable to a positive skew, it’s not likely that the employment report will give us a negative surprise before the election. Yet, the devil is always in the details…
Drilling Down
Once you hear the details of victory, it’s hard to distinguish it from defeat – Jean-Paul Sartre
After reading the above explanation of my perceptions of the limitations of the employment report, it should come as no surprise that I favor 10-year and 20-year charts as opposed to mining for minute changes on the margin. As such, I’m looking for changes in the long-term trend lines to form opinions on the economy as opposed to monthly changes.
The first area of interest for me is full-time and part-time employment. This is where we get to see that full-time employment has been roughly flat since April 2022. Conversely, part-time employment is on a slight upswing, suggesting that labor is still marginally positive, on a lagging basis.
We’re seeing weakness in the Temporary Help and Leisure/Hospitality sections of the payroll data. Temporary Help is generally a good indicator when businesses are in growth mode and want to get people in place quickly. Leisure/Hospitality has been one of the non-government-driven stars of the past 20 years, perhaps reflecting the start of a long-term decline in our collective standard of living. It represents marginal consumption that can be reduced or eliminated from the monthly budget.
Temporary help and Leisure/Hospitality are flashing warning signs but we have some areas of strength that give an indication of the changing nature of the US economy. In the first chart, we can see that government hiring continues at a strong pace. It has been strong for the past 20 years.
We can also see that the growth in private education and healthcare remains a major driver of the economy and that it has been accelerating over the past few years. Keep in mind that much of the money that drives these two employment areas comes from the government, either directly from taxes, Medicare/Medicaid, or student loan guarantees. This makes it dependent or somewhat dependent on the further expansion of government debt to maintain funding. I will explain the importance of this point later in this piece.
The good news is that we’re finally seeing growth in data processing and IT, the two areas promised to transform the US economy for the better in 2000.
Neither area is large enough to sustain the US economy through an economic downturn but at least growth in these areas reflect a move back towards innovation. The only question is whether society can benefit from this innovation or whether it will be capture by the few?
Economic Effects
The disruptive power of excess national fecundity may have played a greater part in bursting the bonds of convention than either the power of ideas or the errors of autocracy – John Maynard Keynes
Personally, I believe the organic growth in our economy ended in 2006. Furthermore, I believe that the expansion of GDP and other economic variables has been purely a function of government spending since that time. The charts below bear this out.
The first two charts show the long-term collapse in the US economy better than any other. It comprises GDP multiplied by 1000 minus total US debt.
The collapse started in 2008 when the country created the “FrankenKeynes Monster” to deal with the financial collapse. The Obama Administration inherited the financial collapse from the Bush Administration but they made it far worse than anyone could have imagined. The Trump Administration made it marginally worse until Covid blew out the last vestiges of fiscal sanity.
The worst part of it all is that the US economy was maintaining traction on the debt growth as GDP was outrunning the increase in federal debt until 2008. This should be apparent from the chart on the right that tracks this measure back to 1966. We got traction despite the wars in Vietnam and the Middle East plus the onset of Lyndon Johnson’s “Great Society” which is a remarkable accomplishment.
The Biden Administration not only made it much worse, they let the inflation genie out of the bottle with hugely destructive increases in federal debt to ostensibly fund economic and energy experiments that are in the process of failing. We can see this from the charts of public debt below.
Notice how the rate of change of debt growth increased from Bush 2 to Obama/Trump to Trump/Biden. We’re presently on a track for the rate of change to increase further without a dramatic change in the structure of the US economy. Don’t read the chart as a measure of presidential effectiveness. Bush2 owns the financial crisis that set the conditions for the expansion of the rate of change on debt under Obama/Trump/Biden.
The private sector of the economy pays for the public sector. The public sector doesn’t create value on its own; the private sector creates the value and the public sector is supposed to enhance the private sector’s value-creation. That’s the only recipe that works. The problem with our economy over the past 20 years is that the public sector has ostensibly been leading the way. It’s why the Washington DC corridor is so congested today versus 20 years ago.
If you project forward, one thing is clear. You cannot continue to grow debt like we have over the past 20 years and maintain the US dollar as the global currency reserve. The chart of GDP minus debt makes this point abundantly clear and there is no magic pill or happy thinking that can change the fact that we, as a nation, need to decide on the path we take. Personally, I plan to trust the American people. Even with the insanity of the past 15 years, I can see where we have sown the seeds of a better, more cohesive society for the future despite the current amplified differences of the people at the extremes. People in the middle are quietly coming together.
Indicators
Waiting is painful. Forgetting is painful. But not knowing which to do is the worst kind of suffering – Paolo Coelho
I don’t expect the break in the global economy to start in the US. Things are weakening on the margin but not crashing. I expect a slow and steady decline from here. Instead, I think it will be China that starts the global decline and that Europe will decline before the US. But who really knows?
I’m keeping my indicators simple – just two. The price of copper and the relative value of the US dollar. For me, when copper drops below 3.50, the game will start to get interesting.
At the same time, when the dollar spikes above 110, it will indicate that the global economy is starting to fall apart. Despite horrendously bad fiscal management over the past 20 years, the US is still the dominant national entity in the world. We have agriculture, energy, semiconductors, banking, and the biggest, most powerful military on the planet. Russia and China don’t come close. Besides, both are on the edge of economic oblivion.
Europe may fancy itself a global competitor but they have been managing their fiscal situation worse than the US. They are a demographic nightmare that lacks the military capacity and energy independence to replace the dollar.
A sharp decline in copper will tell us that the global economy needs fewer inputs of this versatile metal while strength in the dollar tells us that global investors are running for cover. Oil is useful but is far too noisy thanks to geopolitics to be a useful indicator.
Both indicators seem to be under control which is why I’m not writing pieces of imminent collapse.
Conclusion
To act on the belief that we possess the knowledge and the power which enable us to shape the process of society entirely to our liking, knowledge which in fact, we do not possess, is likely to make us do much harm – Friedrich August von Hayek
I won’t be watching the debate tonight because I believe time spent researching pieces such as this analysis is far more insightful than watching bad Kabuki Theater. Besides, I’m tired of the political rhetoric and I’m weirdly grateful for people with differing opinions than my own.
Whoever wins this election will inherit a mess that can’t be fixed with more government spending, tax cuts or more Federal Reserve expansion of the money supply. But despite this negativity, there will still be places to make money in the United States. Whoever wins will be forced to act and by acting, new winners – and losers – will emerge. Time is better spent getting to know more companies than more contrived information about candidates.
I suspect we’ll have more time to accomplish this work than a lot of people who are calling for immediate collapse would have us believe. People underestimate how powerful our national financial authorities have become since 2009 when the financial system faced a true existential threat. I personally believe it will take an unexpected event from outside the US to provoke a major sell-off before the election. It could happen but we could also see a sharp rally to the upside.
My advice is don’t get fixed or rigid in your thinking because we are living in interesting times.
