Slow Growth To No Growth

SLOW GROWTH TO NO GROWTH:

Economy on Shaky Ground!

Asset prices reflect sentiment in the short term, and stocks are currently pricing in the assumption of a Fed pivot and a return to normal in the economy. However, reality always sinks in sooner or later, and the actual data points to a slowdown that could last for years.

This isn’t discussed much in the mainstream press, but the current regime of isolationism is bound to have repercussions on the American economy. In fact, the International Money Fund (IMF) estimates that tensions between the U.S. and China could result in a long-term loss of 2% of global GDP.

There’s an alarming trend of “friend-shoring” between nations, in which they essentially form exclusive cliques in which they conduct business with politically friendly allies. In effect, there’s a supply chain cold war going on. A prime example would be the U.S. imposing restrictions in order to reduce dependence on China for tech components. Beijing has made veiled threats of retaliation, pledging to take “resolute actions” in response to “provocation.”

The IMF connected the dots between “friend-shoring” and the inevitable impact on asset prices. “In a fragmented world with heightened geopolitical tensions, investors may worry that nonaligned economies will be forced to choose one bloc or the other in the future, and such uncertainty could intensify losses,” the IMF warned.

Meanwhile, the Fed’s persistent efforts to tighten the screws on the American economy seem to be working – with unfortunate consequences for U.S. workers and job seekers. Private payrolls in March rose less than economists expected with companies adding only 145,000 jobs compared to Wall Street’s forecast of 200,000.

Naturally, the optimists will point out that unemployment remains relatively low at 3.5% (though it’s well known that this figure is deceptive since it doesn’t include people who gave up looking for a job). What they’re ignoring is another issue that directly impacts American workers: anemic wage growth, which definitely hasn’t kept up with inflation.

Even as the Fed pursues its fastest interest rate hiking cycle since the 1980s, inflation continues to outpace growth (or the lack thereof) in American paychecks. As the ADP report for March revealed a contraction in wage growth, it’s evident that the Fed’s tightening of monetary policy is taking a toll on the labor market.

It’s all part of the central bank’s grand plan, a slash-and-burn approach to cutting down inflation at all costs with little regard for consequences on the middle class. The Fed wants “slower growth, slower demand for services, slower demand for workers, and slower inflation,” explained Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Bear in mind that there’s a long way to go because the Fed wants 2% inflation and, after peaking in the summer of last year, inflation is still at 6% – not even close to 2%. The assumption of a near-term policy pivot has already been priced into the financial markets, but optimism could easily switch to disappointment this year.

Other cracks in the foundation showed up in the data for March. For instance, weak growth in new orders and softening business activity drove the ISM services index to a three-month low, which reflects increased caution among companies and consumers.

This is extremely important because there can be no prosperity in America if there’s no demand for services. At the same time, the Fed knows that much of the “sticky” inflation in 2022 and 2023 has been due to the persistence of inflation in the service sector, so the central bank will undoubtedly consider the ISM data as confirmation that the current regime of monetary policy is “working.”

If there’s any positive news to be found in the data, it’s that supply chain constraints may be easing. March inventories in the U.S. reportedly grew at the fastest rate in two years while backlogs declined by the most since May 2020 (the pandemic peak).

That’s the silver lining, I suppose, but we can’t credit central bank policy for improvement in supply chain bottlenecks. Besides, growing inventories aren’t necessarily good for American businesses; for example, it’s a problem that semiconductor manufacturers are now facing a supply glut instead of a deficit.

No matter how you slice it, the preponderance of the evidence indicates either a slow growth or no growth scenario for the remainder of 2023 and likely all of 2024. It’s the unavoidable result of monetary policy at its most extreme – the Fed is getting exactly what it wanted, and that’s the worst possible outcome for 99% of the population.