Recently I posted “Economy In Pictures: Have We Seen The Peak?“ which was simply a series of charts including GDP, wages, spending, production and employment from which you were allowed to draw your own conclusions. The point of this exercise was to allow your brain to juxtapose visual data to the ongoing mainstream diatribe of economic recovery. I stated then that:
“The general mantra from mainstream analysts and economists since the first of the year is that the ‘economy is set to finally turn the corner.’ The premise of the assumption is that the Fed’s continued monetary actions, and now specific targeted goals of suppressed inflation and targeted employment, is going to push the economy into ‘escape velocity.'”
Since then there has been more confirming data showing that whatever rebound was to be had, economically speaking, from the recessionary lows has most likely been seen.
The first two charts show retail sales. The first is the ISCS-Goldman Sachs weekly retail sales data smoothed with a 3-month average of the annual rate of change.
The second is the Census Bureau’s official retail sales data.
Notice that both of these data trends peaked in 2011-2012 which coincides with the peak in overall personal consumption expenditures seen in the previous report.
Even though I addressed production and manufacturing previously; the latest industrial production and capacity utilization reports confirm the data trends I showed in the composite manufacturing index.
Notice that, as opposed to all of the other data trends, industrial production and capacity utilization actually peaked in 2010 versus 2011.
The latest release of the consumer price index showed a decline to an annual rate of just 1.5% down from the previous reading of 2.0% last month. While there is much debate about the detachment of CPI from the real cost of living for the average American what is important is its historical relationship with economic growth. When an economy is growing; inflationary pressures rise. It is these increases in inflationary pressures that the Federal Reserve monitors closely to adjust monetary policy to theoretically control the rate of inflation and economic growth. (I say theoretically because history shows that the Fed’s monetary interventions have been primarily responsible for the economic booms and busts. That is an article for a different day.)
The chart below shows the historical annual rate of change in CPI and real GDP.
Not surprisingly, sharp increases in inflationary pressures which, not surprisingly, not only lag economic growth but stall it. As shown above peaks in CPI have been leading indicators of economic contraction historically. While it remains to be seen whether the latest peak in CPI is a forewarning of economic contracting it clearly confirms that economic activity for the current cycle has peaked.
Out of all of the metals copper is the one metal that has the most direct tie to economic activity. It is either a direct component of or used in the production of literally everything. Like energy, copper is directly affected by the pace of economic activity. The chart below shows the annual rate of change in copper spot prices versus GDP.
The most recent plunge in copper prices, like it has previously, has coincided with a peak in the current pace of economic activity.
Evidence continues to mount that we have seen the peak of activity for the current economic cycle. The implications of such an occurrence are broad and suggests that the Fed’s liquidity driven interventions, and zero interest rate policy, may have well seen the end of their effectiveness.
The problem for the financial markets is twofold. First, expanding economic activity is what drives revenue growth and expanding profit margins. The chart below shows that the annual rate of change in operating earnings peaked in 2010 along with economic activity.
Secondly, the financial markets have risen under the belief that the Fed will continue to “do whatever is necessary” to support the markets and the economy. However, to date, we have seen little evidence of “other policy tools” since the financial crisis began. In fact, outside of the Fed’s intervention programs, there has been little evidence of an organic economic recovery. Therfore, if the Fed, as I suspect, is closer to the bottom of their monetary magic toolbox than currently believed – it would put the economy, and the financial markets, into potential jeopardy.
I concluded last time by stating:
“Regardless of your personal views about the economy, the political environment or the markets – what is important is to separate emotion from investing. While the Fed’s continued liquidity injections have sharply boosted asset prices in recent months – the bond market, as shown in the chart below, has continued to show a preference of safety over risk. With rates plunging in recent weeks the indictment from the bond market concurs with the longer term data that the economy remains at risk.
While the stock market continues to ramp up due to the Fed’s interventions the disconnect between the markets, and the real underlying economic fundamentals, will ultimately resolve itself. I am not suggesting that a crash is looming as none of this data suggests that a recession is imminent, however, the data also does not support the mainstream view that the economy is set to accelerate or that the markets are entering into the next great secular bull market.
The reality is that the economy is continuing to muddle along through the greatest monetary experiment in modern monetary history. However, what is becoming more readily apparent is that the impact from these ever expanding programs continue to support Wall Street and the financial system but fails to improve the diminished state of Main Street.”