Economic recovery in the US? The worst in fact is likely yet to come…

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Our newly coronated Fed Chairperson Janet Yellen it seems is feeling optimistic about the future of the American economy. During her first public speech after taking over from the infamous print and be damned Mr Helicopter Ben Shalom Bernanke she recently opined that the economic recovery gained greater traction in the second half of last year and so dropped clues that she will continue with the current tapering program, at present being slashed by some $10 billion per month.

She did temper this stance however with comments that the base interest rate will likely remain unchanged for quite some time yet. It seems the Fed’s job is not yet done as even though the unemployment rate has decreased from 10% at the peak of the financial crisis to the current 6.6% level, The Fed believes it is still “well above levels that the Fed finds consistent with maximum sustainable employment. Of course, given that most of the unemployment rate reduction has come about from people leaving the labour market as opposed to actually finding a meaningful job, then this is entirely believable! Indeed the labour participation rate recently hit a 35 year low.

The headline numbers seem mildly encouraging. Since the beginning of 2009, the US economy, albeit in fits and starts, continued its recovery and in the process posted modest growth numbers. But when we look at recovery levels from past recessions, the pace of the recovery has certainly been muted. The harder an economy is hit, the greater it usually grows thereafter. It is easier to improve a grade of 20% than one of 80%. But now imagine that you improve the 20% grade to 25% and then to 28% and to 30%. It is nevertheless an improvement but still feels a kind of unconvincing. The same thing is happening with the US economy…

If, instead of thinking quantitatively, we think about the quality behind the improvement, then the reality is really rather worrying. The middle class in America has been hit hard and certainly isn’t benefitting from this “recovery”. Just take a look at the retail sector, which mostly serves consumption from the middle classes. JC Penny is closing 33 stores and laying off 2,000 people, Sears is cutting its inventory and recently closed a flagship store in downtown Chicago, Macy’s will cut 2,500 jobs and close several stores, Target will eliminate another 75 jobs, Blockbuster closed every store it had, and the story doesn’t end here. What the numbers tell us is that the middle class is still in trouble and that monetary easing has had very limited effects in the real economy, at least on the part of consumption and as we detailed in this blog here –

As relayed already, the jobs numbers have experienced some improvement in recent years as the headline unemployment rate has decreased but a large part of this decline can be attributed to a reduction in the actual work force. At the same time, the actual quality of employment has been deteriorating with many people employed part-time and in lowly paid jobs. Let’s look at some alternative unemployment measures instead. The chart below depicts both the unemployment rate and the alternative U6 measure (blue). It is clear that the financial crisis contributed to widen the gap between the two measures and quantitative easing sure hasn’t helped here. Currently, U6 is almost double the mainstream unemployment rate!

While many people are marginally attached to the workforce, many have simply just given up looking for a job. At the advent of the crisis it took on average 19.8 weeks to get a job but now the number widened to 37.1 weeks. There are stories of people applying for more than 1,000 jobs without success.

With regards to the nonfarm payrolls numbers, we have also seen some erosion in the job creation growth rate of late. While the economy added on average 194,000 jobs per month in 2013, the numbers declined to 178,000 during the last 6 months and to 154,000 during the last 3 months, so further evidencing a slowing in momentum in the US economy.

Your average American thus has real trouble find a real job (although not in the league of the poor Greeks and Spaniards!). Disposable income last month experienced the largest decline since 1974 and real median household income is back at 1995 levels. Unlike what happened after the tech crunch, there has been no recovery in these numbers after the 2007-2009 crisis.

Adding to the problems in the US is the recent turmoil in emerging markets and which is undoubtedly a consequence of the extensive quantitative easing programs embarked upon by the world’s major central banks. After years of hot money flowing into these countries (due to the excess money created in the US), the warning bell has been rung and money is now flowing back to the States. To ride out the crisis, these countries will have to either apply capital controls or let their interest rate rise above their natural levels. And that means allow for domestic economic growth suppression.

When asked about the capital outflows from the emerging markets, Janet Yellen stated that “we have been watching closely the recent volatility in global financial markets… our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook”. That says it all! What she means is that she doesnt care about any negative results deriving from the Feds policies as long as they dont hit the 1% in the U.S that are doing very nicely thank you! If this is not a clue about the need to replace the dollar as international reserve currency, then I really dont know what is. But one thing I do know for sure, is that the worst is still to come…

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