Industrial production was flat in May with manufacturing down 0.4%. The employment report for the month also came in on the weak side of things, continuing a slowing trend. Wage pressures remain contained as well. Most commentators can’t fathom why that is the case with the “official” unemployment rate so low.
As we have discussed in prior posts, we suspect that the birth-death model that attempts to account for jobs derived from new business formation has been adding far too many jobs to employment reports for years. New businesses are not being created at the once normal rate, so the economists’ calculations are inaccurate. In addition, labor force participation remains low, so pressure on wages is muted in a world where new job quality isn’t what it used to be.
The negative retail sales print for May still can’t shake the faith of those who seem to believe a recession could never happen anytime soon. Inflation is trending lower as well. Though we never see that as a problem, it does fly in the face of all that central bank rhetoric perversely celebrating small increases in price measures that somehow reflected policy success when wages are not growing by enough for the average person to stay ahead.
Last week, the cover of Barron’s was emblazoned with the words “The Incredible Shrinking Consumer.” The story discussed the weak state of consumer spending in the U.S. that we have been talking about for quite a while. It could have been written at any point in the last few years, but we guess the trouble in retailing has become too hard for the media to ignore as stores close and bankruptcies mount.
The echo boom in “house flipping” can’t keep all of retail afloat it seems. Even Lowe’s quarterly revenues seemed a little on the soft side. When a real estate-crazed Uber driver tells one of our family members that he needs the additional income to support a mortgage on a second house because the rent won’t cover it, maybe there’s a problem, central bankers.
Consumers are once again sitting on $13 trillion in debt in the U.S., which was the peak of the last cycle. Now, more of it resides in student and auto loans versus mortgages a decade ago. Delinquencies are beginning to creep higher. In an act of desperation, the banking cabal has now turned to distorting consumer credit scores with tweaks that remove some of the bad stuff. We guess anything goes when you are trying to keep the music playing.
Borrowers may be wising up, particularly on the business side. We cannot emphasize enough that the recent slowdown in bank lending to a snail’s pace is an important signal. It is likely the result of a combination of Fed tightening, diminishing risk appetites, and borrower exhaustion. It is a major red flag for future growth because the cycle has been almost entirely driven by debt creation.
These concerns are being reflected in a number of places. Commodities except precious metals are generally continuing to trade off to multi-year lows, the dollar is falling, and the treasury yield curve remains flat. Bonds rallied strongly yesterday, although the Fed tightened. That’s a strong “suggestion” that a policy mistake is taking place.
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