Yves here. Wolf like to paint in bright colors, but the points he makes are consistent with business and financial press reporting, if you cut through the hype. Europe is still teetering on the verge of recession. Growth in Japan has gone negative. China is slowing down, to a degree that led the authorities to give it a monetary shot in the arm. And the US simply is not getting to liftoff. Even with official unemployment falling, consumers are cautious about purchases, with most planning to spend less on Christmas than last year. Corporate capital expenditures in the US are increasing, but so far, this is in the “a robin does not mean it’s spring” category. So with the US as the one possible engine for world expansion, and that one not firing robustly, it’s not hard to see the reason for global business leaders getting more nervous.
And to add a wild card into the mix: contrary to current conventional wisdom, bond maven Jeff Gundlach thinks the Fed will raise rates next year. That seems plausible, given that ZIRP gives the Fed no policy room if anything bad happens to the financial system and that the central bank is also coming under more political heat for its continuing extreme monetary policies. Crisis junkies may recall that the Fed went from 25 basis point interest rate cuts to 75 basis points (“75 is the new 25”), when it wasn’t clear that reductions that large were necessary (ie, signaling that the Fed was on the case and taking matters seriously was probably sufficient). The magnitude of the cuts brought the central bank deeper into super-lowe interest rate terrain. I recall thinking when the Fed cut the Fed funds rate below 2% that they would come to regret that decision.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at http://wolfstreet.com/2014/11/14/italys-economy-from-hell/” rel=”nofollow”>Wolf Street.
The plunging price of oil since June has been a leading indicator: global economic growth is in trouble, despite six years of unprecedented central-bank free-money policies that caused asset prices to soar but has accomplished little else. This scenario has now been confirmed by businesses that help drive the economy forward – not by economists and Wall Street hype mongers: their outlook for the next 12 months has plummeted since June to the worst level since crisis year 2009.
Business leaders are an optimistic bunch. Projecting a 12-month period that is worse than the past 12 months is frowned upon; because business leaders are supposed to make their business grow, even when it looks tough out there. They’ve been optimistic over the years, despite multiple recessions in the Eurozone, a slowdown in China, a quagmire in Japan, and disappointing growth in the US, where “escape velocity,” dangled out in front of our noses for five years, has become a figment of Wall Street imagination. Throughout, business optimism has been fairly strong, according to Markit’s Global Business Outlook, a survey taken in February, June, and October.
But results from the October survey, released today, are a doozie. The number of businesses around the globe that expect activity to rise over the next 12 months exceeded the number expecting a decline by 28%, the worst in the survey history going back to 2009.
This “net balance” was down from 39% in June. The peak of global business optimism in the survey’s history was in February 2011, when the net balance hit 48%. Manufacturing wasn’t that much of a problem; optimism fell “only” to the level of June 2013. But in the all-important service sector, by far the largest sector in most economies, optimism plunged to the lowest level in the survey’s history.
It was all-around lousy. In the UK, where businesses were among the most upbeat, so to speak, optimism about future activity fell to the lowest level since June 2013. In the Eurozone, which has been battered by a series of apparently intractable problems, optimism dropped to the already low levels of June 2013. The big drags on optimism in the Eurozone were in the two largest economies, Germany and France.
In France, the number of businesses expecting activity to rise over the next 12 months exceeded the number expecting a decline by only 12.6%. This was the second worst net balance of all countries in the survey. These businesses were the only ones in the survey projecting on average a cut in staffing levels. The report described the mood as “gloomy.”
In Japan, optimism hit a two-year low and came to rest even below the low level in the Eurozone, as businesses “have become increasingly disillusioned” with Abenomics.
In the emerging economies, business expectations about future activity plunged to new lows. While optimism edged up in China, it was barely off the near-record low in June. In India, it stagnated at low levels. In Brazil, optimism fell to match the previous record low. And Russia, oh my!
Russian businesses have struggled with sanctions, the swooning ruble, the shrinking price of oil, high interest rates, and waning domestic demand. They’ve been cut off from crucial Western funding sources. And key partnerships with Western companies have been thrown into turmoil. So the number of Russian businesses expecting activity to rise exceeded the number expecting it to drop by a tiny 9.8% – the most pessimistic of any country in the survey.
But the biggest hit on a global scale came from the largest economy, the US. While manufacturing businesses showed a decline in optimism, the big problem was the far larger service sector.
The Flash Service PMI for November, released today, hammered home the point: service sector growth slowed with nerve-wrecking consistency for the fifth month in a row, from its peak of 61 in June (above 50 denotes expansion) to 56 now. It was, the report said, a signal of “a sustained loss of momentum since the post-crisis peak seen in June.”
And so the outlook of US companies about future activity – “reflecting domestic concerns and a subdued external demand environment” – dropped to the worst level since the survey began in 2009. While hiring intentions remained positive, expectations for corporate profits fizzled, and the already weak link in the US economy, plans for capital expenditures, established a new post-crisis low.
The net balance of US businesses expecting an increase in activity over the next 12 months plunged from 69% in February 2012, when post-crisis hopes of escape velocity were at their peak, and from 51.4% in June this year, to 31.2% now, the worst on record. While manufacturers were hanging in there, with a net balance of 42.5%, the all-important service sector saw its net balance descend to a new low of 28.9%.
These businesses listed among their concerns “fragile global economic growth, heightened geopolitical risk, ‘Obamacare,’ domestic policy uncertainty, and strong competition for new work.”
On a global basis, businesses in the survey had a “long list of worries,” including:
- Fears of a worsening global economic climate
- A renewed downturn in the Eurozone
- Prospect of higher interest rates in the UK and US
- Geopolitical risk from crises in Ukraine and the Middle East
- Growing political uncertainty in many countries, notably the US, UK and Japan.
“Clouds are gathering over the global economic outlook, presenting the darkest picture seen since the global financial crisis,” explained Markit Chief Economist Chris Williamson. “Companies’ hiring and investment intentions have both fallen to post-crisis lows alongside the bleakest outlook for future business activity seen over the past five years.” And the rapid deterioration in US business optimism and expansion plans was “of greatest concern.”
The plunge in business outlook since June parallels the plunge in the price of oil, indicating that businesses expect a tough slog going forward, even in the US, the engine, presumably, of global economic growth. None of this, nor anything else other than central-bank jawboning and the continued flood of free money, seems to have any impact on the stock markets where the shares of these increasingly gloomy companies are being traded at record high prices.
But even as big money is gushing from all directions at US startups, there are new – and in my opinion, hilarious – indications that the resulting excesses are hitting limits. Read… This Is a Sign the Startup Bubble Is Totally Maxed Out: It Resorts to (um, Sexy) Junk Mail to Disrupt
Is anybody keeping track of Mr. Richter’s predictions? (Just a rhetorical question!)
It’s hard to make predictions, especially about the future. it’s strange to think how delusional the idea of economic growth is. Or even economic contraction. Both are algebraically the same.
What I figured out is this: Every day is like a huge 2 dimensional painting. Each day has it’s own picture. The pictures change over time. If the days go by fast enough, everything seems to move. the economy is just where people are on each day’s picture. Nothing grows. It just moves in a three dimensional space where time is the third dimension. When it goes by fast enough, it looks like it grows if you’re not paying close attention. But what you’re doing, if you think it grows, is your extrapolating the illusion of movement into more than 3 dimensions. If you think about this long enough, you’lll realize I’ m right. There is no such thing as growth. There is only change along an x-y axis, which results in the illusion of movement. You can think of the economy as a sequential stack of 2 dimensional realities angled away from you in a 3 dimensional space. See, you’re God. You can see it all from a multi-dimensional perspective. That should explain everything. There’s no need for textbooks or a PhD. All that will do is confuse you. hahaahahah
When you predict the future economically you’re predicting a two-dimensional reality, which remains the same size nomatter where you are along the time axis. That’s really what you need to understand.
‘And the US simply is not getting to liftoff.’
Oops: ‘The U.S. economy expanded at a 3.9 percent annualized rate in the third quarter, up from an initial reading of 3.5 percent and more than the 3.3 percent median estimate in a Bloomberg survey, Commerce Department data show.’
‘The Flash Service PMI for November, released today, hammered home the point: service sector growth slowed with nerve-wrecking consistency for the fifth month in a row, from its peak of 61 in June (above 50 denotes expansion) to 56 now.’
Markit’s PMI data are a newbie series, with a decades-shorter history than the venerable ISM indexes. What relation (if any) the Markit series have to GDP growth is unknown, since their history (a few years) is just too short. When its comes to Markit numbers, as ol’ Geo. Thorogood used to say, ‘That don’t confront me.’
But an index which does have a documented correlation to GDP, namely the Conference Board leading indicators, is on a furious tear:
Stock prices were the only negative contributor to the October LEI — a dip which has already been reversed (and then some) in November. So we can anticipate a fresh hike in the next LEI release in late December.
the secret to successful forecasting is to keep forecasting.
Actually, the secret is to keep forecasting mechanically, so that personal judgment isn’t required.
After the first quarter 2014, when GDP contracted but the leading indicators were blazing ahead, I decided to construct my own timely recession indicator to sort through the data fog.
It hit a low point in January and February 2014, but did not signal a recession. Since then, it has risen smartly. No sign of a recession for now. Carry on with your regular activities.
Well now! I feel better already then. I’m looking forward to seeing all that optimism reflected in my paycheck any day now. I’m beginning to think that craazyman is the only one on this board making any sense.
funny, how inflation and deflation is measured, depending upon location relative to disposable income…
Actually, Jim is one of the best forecasters that posts comments here. He’s a hell of a lot better than all the post authors. hahahaha. What a train wreck of failed doom & gloom prophecies. They’ve cost me so much money I can’t even think about it. It makes me so depressed. I thought reading all these macroeconomic articles would help me get rich quick! But it would have been better if I’d done absolutely nothing & put my money in a savings account. That’s how bad it’s been. But I feel for you though. Working sucks. That why I want a 10 bagger. So I can lay around and do nothing. I don’t care. I have no more illusions or delusions. They all gone. Each impact, each assault, each confrontation with reality. Each one chips a way and all that left is a big FOOOOCk YOu. Not you, personally. The generic variety. A middle finger held high at the world and all it’s torpid stupidities. Not that the world cares. hahaha. But so what. Virtue is it’s own reward.
Two indicators, which one is more important?
Focusing on one of the two indicators to the exclusion of the other seems stupid, yet, that is what is happening.
There is overcapacity in many industries and yet the interest-rate is pushed low to increase investment into creating more overcapacity….
People are cautious about spending as their employment is insecure and yet there is a push to make employment less secure….
Income-inequality is likely to lead to deflation – the many has not money to spend thus pushing prices down. Yet the proposed solutions is about putting more money into the control of the few who are busy blowing up asset-values into bubble-territory.
Deal with the root-cause (income-inequality) and the economy has a chance to recover.
@jasper, Keep in mind that for some people (i.e. the investor class) deflation is seen as a good thing because it is the opposite of inflation. I agree that is short-term thinking but the fact is that the idea that inflation is the work of Satan is so ingrained for some that they are even touting Bitcoin solely because it is the first “deflationary currency.” The fact that deflation is costly in a different way has not sunk in.
Agreed. The root problem in all of these the factors he and others cite is that people are not buying things. Yet the focus of all “serious” policy wonks (i.e. those with actual power in the capitols) has been to focus obsessively on the money supply without asking whom they are supplying, what they are doing with it, and whether that is getting at the root cause (is isn’t).
Ultimately the reason people aren’t spending is threefold: they don’t have the money to spend due to rampant inequality and falling wages; prices have not fallen to keep pace with wages; and most importantly they have no confidence in the “very serious people” who are running things. If you think the bus driver is drunk you won’t buy a ticket.
And yet GDP seems to be increasing. Is this because election is very near? Or are the “pessimists” missing something?
The GDP deflator dropped by ~1% quarter to quarter.
After awhile one cannot take seriously the endless predictions of disaster or major downturn that have come from a host of articles here at NC since 2010. Things have not gotten worse–they’ve gotten better for the system. What has gotten worse is the political situation and the relative status of the bottom 60% or so.
The U.S. economy is a highly complex system that is, increasingly, under the control of a web of networked authorities. As I’ve said many times here, there was a response to the 08 crisis and that was to tighten up supervision but not by publicly accountable institutions (that era is long-gone) but informal networked “emergent” structures. So far this has all worked pretty well. I do think that, in the long run, the system is going to get very muddy and confused but more due to political conflict than structural issues–at least that’s my best guess.
I largely agree with what you’re saying, except for one very large qualification, which is the Fed’s asymetric monetary policy and their insistence on over-stimulation to make reality conform to their models. The result is serial, ever-bigger bubble blowing, and ever-bigger crises. I believe we are now in the self-perpetuating phase of the latest bubble: the phase where the real economy responds and the multiplier effect keeps the bubble inflating, even as the Fed eases up on the gas. The basic problem with the Fed’s approach is that financial asset values are supposed to reflect underlying economic prospects; they are not supposed to drive them. That is what makes the Fed’s actions inherently destabilizing.
I am not such as fool as to try and predict when it ends; I only suspect (strongly, and in the company of smarter people than I, e.g., Grantham) that it will end very unpleasantly when economic reality finally reasserts itself. I have also learned (again, I say!) that bubbles get much bigger, and go on much longer, than ‘reasonable’ people can believe.
So, yes: I am net long the market.
You don’t appear to have read the economic posts carefully. Various studies all say the same thing: the income gains in the recovery have gone ENTIRELY to top income cohorts. Average real income has fallen when you look over medium to long-term time frames.
The decline in unemployment is due heavily to a discouraged workers dropping out.
One of my buddies who reads the economic releases carefully say that a consistent pattern in GDP releases is the components based on hard data are weak, it’s the ones based on interpolations (statistical manipulation) are what is producing the growth.
Not so hot growth based on continued corporate cost-shedding and central bank support of asset markets, which is mainly fueling speculation, is not the basis for a sustainable recovery.
Yves, I believe your first point is more important than the other ones. It doesn’t matter if GDP is growing if the gains go to (simplify) only one person.
On your other points. The labour force participation has been fairly stable in 2014 – although it’s lower than any of the years before. The big drops in 2009-2010 stabilised for a while, and then we saw gradual decrease (it’s almost linear from 2010, although that trend seems to be broken so far in 2014). So the news there is not entirely pessimistic, as in it seems to stabilise, albeit at a considerably lower level than before (by about 3% of the workforce compared to early 2000s).
Re the GDP. Off the top of my head, I don’t know which are hard and which are interpolated, but say gov’t spending went up in the yesterday’s GDP review, and I’d expect that to be reasonably hard. Exports/imports decreased, but they increased in Q2 – so either interpolated, or can’t be said to be consistently weak. My main concern with the GDP number (apart from its overall validity and usefulness) is inventories, which added quite a bit over the last few quarters – but inventories are always a wash (i.e. what’s added in one quarter will disappear in the future when destocking happens).
So, US GDP is not as stellar as it may look from the numbers, but it’s there, and it’s certainly not entirely doom and gloom. On a relative scale, only UK is doing better, and I wonder how long for. In the UK, the bank fines for PPI were, IIRC, about 0.3-0.5 of GDP per annum for the last few years. if there’s any money multiplier >1, the effect is even larger. Which all points to a simple fact – the best way to jumpstart is to give people cash directly, tax free, not to rely on “trickle down” (say corporate tax cuts, labour tax cuts etc.), since there’s too many players there who have incentive to keep as much to themseleves as possible.
An effective laborer has the entire organization on his or her back at all times. And the critters who went to ‘school,’ to learn how to operate an organization, with superstition, are constantly attempting to confirm their propaganda, employing increasing force and becoming increasingly fascist in the process, serving as a convenient counterweight.
The critters are now attempting to roll out complete global price and wage control, new same as the old, increasing income disparity, redundancy and demographic collapse, within the empire, in the process, making you more valuable and harder to find. Letting people stay home and build out the dress has its advantages, but propulsion will always be a function of labor, those capable of changing the channel at will.
As needed, just-in-time, is way too late, and as needed from the position of the magician, performing the illusion of monetary theory, is way, way too late. The dress is the habits within the event horizon, travelling backwards in time, forming the FILO bankruptcy queue. Drop them and you are automatically ejected.
In case it’s not completely obvious, increasing the minimum wage in a real estate inflation regime, rent to income leverage with disposable income, simply increases income inequality. Always begin at income = 4X rent.
The critters, incapable of feeding themselves, print money, give it to you on a credit inflation gradient, begin by taxing it back, and tell you that you must do what they say to pay it back. Play your role in the empire, but don’t take it seriously; it’s just a convention for cave dwellers. Only labor can mobilize labor. Drop the load when you are called.
Leave your SMART/stupid technology behind, look for input where and when the herd does not, sleep on it, and actuate. Funny, I learned physics to beat the wolves, with Vietnam Vets coming through Navy Hospital, subjected to amputation without anesthesia. Let the passive-aggressives have their theories, and move forward.
KISS, and take care of your feet, by walking. Remote control has its advantages, and disadvantages.
OK, let’s employ the wheel analogy mass simplification:
Draw a hub circle. From that circle draw spokes. Around those spokes draw a wheel. Inside the hub, write labor distillation. Inside the spoke write operations / promotion, with an arrow pointing toward the wheel. On one side of the spoke, write non-recurring income/control with an arrow toward the hub. On the other side of the spoke, write recurring wealth with an arrow toward the wheel. Inside the wheel, write board committee / FILO bankruptcy queue. That spoke is an escalator of event horizons, with connections back to themselves, creating a media compliance multiplexer. Family Law drops you to the bottom, just outside the hub. Economic mobility is the circuit creating the potential voltage and relative current. The hub is a double-sided mirror, employing relativity to complete the circuit.
The bully representing the passive-aggressives will take your fish; the passive-aggressive will give you someone else’s fish; the laborer will teach you how to fish. The problemsolution, of course, is that the vast majority just wants the D fish, and does as little work as possible to get it. You might want to teach your children how to fish, before you drop them off at the empire daycare center called government, which is systematically eliminating small business from its economy, globally.
We are all waiting for the CDS to sweep across the board with impeccable financial advise
liquidity beiing a mere nostrum such as the Rockefeller sell
gears that are frozen will not move
but the weather will be flakey