Powdering The GDP Pig - There Was No Escape Velocity Inside

The talking heads were busy yesterday morning powdering the GDP pig. By averaging up the “disappointing” 1.5% gain for Q3 with the previous quarter they were able to pronounce that the economy is moving forward at an “encouraging” 2% clip.

And once we get through this quarter’s big negative inventory adjustment, they insisted, we will be off to the ‘escape velocity’ races. Again.

No we won’t!

The global economy is in an epochal deflationary swoon and the US economy has already hit stall speed. It is only a matter of months before this long-in-the-tooth 75-month old business expansion will rollover into outright liquidation of excess inventories and hoarded labor.

That is otherwise known as a recession. Its arrival will be a thundering repudiation of the lunatic monetary policies of the last seven years; and it will send into panicked shock all those buy-the-dip speculators and robo-traders who still presume the central bank is omnipotent.

So forget all the averaging and seasonally maladjusted noise in yesterday’s report and peak inside at the warning signs. To begin, the year/year gain of just 2.0% was the weakest result since the first quarter of 2014. And that’s only if you believe that inflation during the last 12 months was just 0.9%, as per the GDP deflator used by the Commerce Department statistical mills.

Needless to say, there are about 90 million households in America below the top 20%, which more or less live paycheck to paycheck, that would argue quite vehemently that their cost of living—– including medical care, housing, education, groceries, utilities and much else——-has gone up a lot more than 0.9%.

So put a reasonable “deflator” on the reported “real” GDP number, and you are getting pretty close to stall speed—–even before you look inside at the internals. Indeed, even before you get to the components of the “deflated” GDP figure, you need to examine an even more important number contained in yesterday’s report that was not mentioned by a single talking head.

To wit, the year/year gain in nominal GDP was only 2.9%, and it represented a continuing deceleration from 3.7% in the year ending in Q2 2015 and 3.9% in the years ending in Q1 2015 and Q4 2014, respectively.  In short, the US economy is sitting there with $59 trillion of credit market debt outstanding, but owing to the tides of worldwide deflation now washing up on these shores, nominal GDP growth is sinking toward the flat line.

That’s critically important because this has never happened since the 1930s. Moreover, our modern debt-besotted economy rests on the assumption that nominal GDP growth will be sufficient to keep incomes—-both private and government—–growing faster than the carry cost of the debt.

The spurious ten-year forecasts for the Federal budget, for instance, assume nominal GDP growth of 5.2% per year——and that’s the essential driver of long-run government revenue projections. Even then, CBO projects that after purportedly hitting “full-employment”  around 2018 the Federal deficit will once again start rising, hitting $1.1 trillion per year early in the next decade.

Well, look out below! If the nominal GDP growth continues to sink toward the flat-line, as it has clearly been doing for quite some time now, Federal tax collections will fall sharply, causing the deficits and the national debt to soar.

And that risk is not appreciably different when it comes to the private household and business sectors, either. Each have credit market debt outstanding of about $13 trillion, yet the blue sky forecasts of Wall Street and the Keynesian professors at the Fed assume that nominal GDP will soon grow out from under these staggering financial burdens.

Not in this lifetime. Indeed, the underlying downshift in the nominal GDP growth trend is stark and indisputable, but entirely lost on the talking heads who specialize in gumming about essentially meaningless quarter-over-quarter deltas in the data.

Wall Street economists and financial media fellow travelers like CNBC’s Steve Liesman specialize in what amounts to looking for bubble gum in a chicken coop. That is, if they can find a few good deltas, it is purported evidence that all is well; that the Fed has the economy on track; and that the stock market should make another new high.

By contrast, the graph below shows nominal GDP for the last three business cycles. During the 1990s recovery it expanded at a 5.6% annual rate, and during the Greenspan housing/credit boom after 2001 it grew at 5.3%.

But now we are 94 months from the pre-crisis peak and the growth rate of nominal GDP has plunged to 3.0%. What’s more, that drastically lower trend rate includes the impact of  the deep recession of 2008-2009. If we look at the trend since June 2009 the picture is just the opposite of the Wall Street “escape velocity” mantra.

To wit, during the first three years after the recession bottom, nominal GDP grew at a 4.0% rate. While that’s still well bellow the historic trend, the more important point is that nominal GDP growth has been steadily decelerating since Q2 2012, not picking up speed as endlessly claimed by the Kool-Aid drinkers.

Therefore, when it comes to the single most important macro variable in a debt-driven economy—–that is, nominal GDP—–you can forget about the winter snow excuse or the inventory adjustment rationalization that have been offered to explain disappointing results in recent quarters.

The fact is, this quarter’s tepid 2.9% GDP growth over prior year is unequivocal proof that US economy is stalling——-and notwithstanding the massive monetary “stimulus” that has been thrown at it by the Fed.

When you look inside this deflating GDP envelope, the warning signs become even more striking.