Short Note on US Economic Health

S&P 500 index at 12/1/2015                              Image courtesy of StockCharts.com

If you do a short search in the internet for signs on the U.S. economy’s health, you will find an economic punditocracy becoming slightly less sharply polarized. Examples of optimistic viewpoints are Bryan Rich’s  Four Simple Reasons an Epic Rally is Ahead for Stocks, Rising pay and healthy job market suggest steady US economy-and maybe solid holiday shopping by Christopher Rugaber, Stable Manufacturing, Auto Sales Reports May Indicate Stronger US Economy, Readiness for Rate Increase by Coco Alcuaz, and Budget deal’s big winner: U.S. economy by Ben White. However, I had to look for a fairly long time (about 20 minutes) to find posts with an unabashedly optimistic prognosis. There were many more posts with a negative economic outlook, such as There’s a New Massive Threat to the U.S. Economy by Rana Foroohar, The US economy is at risk, and the warning is coming from ‘the lowest of the low’ by Sam Ro, U.S. Economy Faces Threats of a Slow Down by Tom Ashbrook,  “Something is Not Right” Jeff Gundlach Is “Concerned About Health of the Economy & Financial System” by Tyler Durden, Dividends: Where the Distress Is in the U.S. Economy by Townhall.com, and Global economy woes hit markets by BBC.com Even some Keynesian economists on the Left have become pessimistic, such as Larry Summers dusting off the old Keynesian idea of Secular Stagnation.

I see a clear picture of a U.S. capitalist system struggling  mightily to adjust to a very precarious and fragile economic situation, and where the economic head winds may stop the economy in its tracks.  With the ultimate near-term result in doubt, how are you as an individual investor, family breadwinner, or voter to decide what is in prospect?

One possibility you have is to consult leading economic indicators. Among those I am currently following on these pages, one is bullish, six are neutral, and five are bearish. These indicators are certainly leaning toward recession, but there are enough neutral indicators to introduce doubt.

With this doubtful, wavering image in my mind, I read three pessimistic articles in a row this morning on the economy section of the Wall Street Journal (access requires subscription). They were the posts Companies Shy Away From Spending, CEOs’ Economic Outlook Dims as More Plan to Pull Back Investment, and U.S. Factory Activity Hits 6-Year Low. Together they made the following important points:

• “Business investment across the U.S. is fizzling out.” According to the U.S. Department of Commerce, the broadest measure of business investment advanced 2.2% in the third quarter from a year earlier, the weakest performance since the end of the Great Recession.
• A gauge of capital expenditures that includes orders for non-defense capital goods excluding aircraft declined 3.8% through the first 10 months of the year from the previous year. This fact makes one wonder if even replacement investments are completely covering the wearing-out of capital equipment. If such replacement capital is not being provided, recession is guaranteed to be imminent, as we learned in The Solow-Swan Model and Where We Are Economically (1) and The Solow-Swan Model and Where We Are Economically (2). I noted in the second of these posts that in the simplified Solow-Swan model I was presenting, foreign trade and investments were ignored. In fact, foreign investments in the form of purchases of long-term U.S. Treasury bonds had been saving us from the huge negative government savings caused by annual federal deficits. Currently, however, due to their own economic problems, foreigners are dumping large amounts of U.S. Treasuries at the fastest rate in 15 years. These facts make it even more doubtful the U.S. economy is supplying needed replacement investments.
• Several factors – large U.S. taxes making U.S. companies uncompetitive, uncertainty over fiscal policy, worries about terrorism, and a slow down of foreign economies, particularly China’s – have combined to make U.S. CEOs expect a slow U.S. GDP expansion of around 2.4% next year. This is enough to discourage investments.
• The U.S. manufacturing sector is already in contraction as the Institute for Supply Management (ISM) gauge of manufacturing activity fell from 50.1 in October to 48.6 in November. Any number under 50 indicates contraction.

If anything, the economic prospect appears gloomier than ever.

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