The Donald was at it early this morning, tweeting his own horn at 6:50 AM. In case you weren’t paying attention to his manifold accomplishments, he left nothing to the imagination by describing himself as…..
….a man who is considered by many to be the President with the most successful first two years in history…
Here’s the thing. We know the Donald is uninformed, inexperienced, often delusional and frequently unhinged. Yet he’s only symptomatic of today’s surreal state of mind at both ends of the Acela Corridor.
The US government is literally on the eve of a monumental fiscal collapse, yet they are happily buying the dip on Wall Street and doing battle in Washington over trivial distractions like the Donald’s Vanity Wall or AOC’s latest loopy ideas about more free stuff.
In fact, however, we are probably only months from the onset of a budgetary red ink eruption that will envelope Washington and Wall Street alike as far as they eye can see. That’s because both Welfare State and Warfare State spending growth is accelerating—-even as Federal receipt growth is grinding to a halt, and will rollover into negative comparisons when the impending recession officially commences.
Another recent data release—for total business sales in December—provides a dramatic reminder about the revenue drought ahead. To wit, total business sales, which encompass results for manufacturers, wholesalers and retailers, went negative for the second straight month; and have now dropped by a 7% annualized rate from the sugar high peak reached last September-October.
But the issue at hand is not merely what the downward hook at the right of the chart below might portend about the immediate future and for the timing of the impending recession. The more crucial matter is what it records about the languid trend of the US economy and its implications for the budgetary calamity lurking in the decade ahead.
At the end of the day, business sales are where it’s at economically. The government sector obviously generates little, if any, economic value added, while not much domestic investment spending is going to happen if domestic business activity—including manufacturing production for export—is not growing apace.
Well, then, 2018 business sales on a December/December basis—the year of the purported tax cut ignited Trump Boom—grew by just 2.1%. At the same time, the regular CPI, the core CPI, the producer price index and the GDP deflator rose by 2.1%, 2.2%, 2.0% and 2.2%, respectively.
No matter how you average or weight these price indices, therefore, the truth is that $280 billion of credit-card funded tax cuts notwithstanding, inflation-adjusted business activity in the US economy barely kept its nose above the flat-line last year.
But that’s not the half of it. As is evident from the chart, US business sales—which are recorded in nominal rather than inflation-adjusted (or “real”) dollars—–undulate with the ebb and flow of global production, trade and commodity/industrial inflation rates. Accordingly, there was no Trump Boom at all—just a rebound from the 8.8% decline between the July 2014 global oil/trade peak (oil hit $114 per barrel that month) and the February 2016 bottom (when it touched $30 per barrel).
Likewise, the 6.6% rebound from that cyclical low thru last October’s peak had virtually nothing to do with the change in the occupant of the Oval Office or the Donald’s ballyhooed regulatory and tax policies; it was simply a short-term reflationary pick-up in the middle of what has been a deeply subnormal pace of business activity growth ever since the pre-crisis peak in Q4 2007.
In fact, the growth rate of total business sales during the six-year span depicted below—the so-called recovery period after the US economy broke free of the Great Recession and its aftermath—computes to just 1.98% per annum. And during that same span, consumer and producer prices rose by 1.8% and 1.7% per annum.
In short, inflation-adjusted business activity in the US economy has been growing at little better than stall speed for the last six years, and there has been no acceleration at all on the Donald’s late cycle watch.
It goes without saying, of course, that four year presidential terms have nothing to do with the underlying macro-cycles, which carry the burden of all which has gone before and which reflect global production, trade, inflation and central banking cycles that far transcend the pay/grade of the Tweeter-in-Chief and the economic pom-pom boys who advise him.
So the fact of the matter is this: The business economy is growing at 2% per annum on a trend basis while the Donald’s fiction writers have attempted to obfuscate the fiscal disaster they are actually proposing in the FY 2020 budget by assuming an economy that grows at 5% for the next decade and longer.
Needless to say, compound arithmetic is a potent thing. In the case at hand, a decade’s worth of compounded fantasy results in about $32 trillion of Fake GDP and $6 trillion of Fake Revenue. When you add that to the make-believe policy assumptions embedded in the new Trump fiscal plan, you get a Fake Budget the likes of which Washington has never before seen—-and there has been plenty of competition over the years.
It needs be pointed out here that the 2% growth story depicted above is not some kind of aberration that bedeviled the current recovery after the recessionary forces of 2008-2011 had full abated. In fact, what happened is that business sales collapsed by 22% between June 2008 and the March 2009 bottom, and then rebounded by about 35% from the cycle low through December 2012.
Yet that’s exactly what business cycles do, and why we insist that the trend of the economy needs to be measured on a peak-to-peak basis. Accordingly, if we go back to December 2007 and compute the CAGR thru December 2018, which we are confident will prove to be the peak of the current cycle, the very same answer pops up.
That is, the 11-year peak-to-peak growth rate of total business sales computes to 1.99% per annum, which is just a hair above the 1.98% annual growth rate of the most recent six year period depicted above.
So here’s the thing. During that 11 year period, Wall Street boomed but main street business activity was punk, resulting in a nominal GDP growth rate of only 3.22% per annum.
Moreover, this 11-year cycle represents a dramatic break from prior peak-to-peak periods. For instance between December 2000 and December 2007 during the so-called Greenspan housing boom, total business sales grew at 4.7% per annum and nominal GDP expanded at a 5.1% annualized rate.
Likewise, during the December 1992 to December 2000 cycle, total business sales grew at 5.4% per annum and nominal GDP increased at a 5.7% annual rate.
In a word, the recovery since the pre-crisis peak has been abnormal and bifurcated, thereby representing a sharp break from prior history. Accordingly, Wall Street and main street became radically uncoupled, yet the cult of the stock market in the financial press has literally buried the truth of the matter.
As shown below, the NASDAQ-100 is up by 250% from the pre-crisis peak, reflecting a 12% per annum gain over the last 11-years. By contrast, and as we indicated above, nominal GDP and total business sales have grown by just 3.23% and 1.99% per annum during the same period.
In part 2, we will address the reasons for this radical disconnect, and our basis for believing that the stock market performance is an aberration driving by the Bubble Finance policies of the Fed, which have now reached their sell-by dates.
At the same time, the utterly artificial financial boom of the last 11 years wreaked enormous damage on the main street economy—including burying it in $70 trillion of public and private debt and fostering a madcap outbreak of financial engineering in the C-suites of corporate America that has resulted in the strip-mining of business balance sheets and cash flows.
Accordingly, we do not see how the US economy can break out of its rut of low growth in business sales and nominal GDP; and we are quite sure that recessions have not been outlawed and that the laws of compound arithmetic remain in tact.
One illustration will suffice to implicate the enormous magnitude of the Debtberg ahead. During FY 2018, nominal GDP weighed in at $20.2 trillion. And if the 3.23% growth rate of the last 11 years were to be sustained over the next decade—including factoring in a recession and decline of nominal GDP during the interim—it would total $28.7 trillion by FY 2029.
By contrast, the pom-pom boys in the White House have projected that nominal GDP will hit $34.7 trillion by FY 2029 by growing at a 55% faster rate than the actual growth rate since 2007.
Needless to say, a $6 trillion annual difference in annual GDP isn’t chump change. It actually represents $1.1 trillion of annual Federal revenues at current tax rates.
As we will elaborate in Part 2, we have not labeled the Donald’s alleged best economy ever as “the fantasy of MAGA” simply to be contrarian.
Actually, when it comes to the fiscal dimension, “nightmare” might be the more apt designation.