Wall Street is so convinced that economic growth is about to surge with inflation remaining tame that it continues to ignore overwhelming evidence to the contrary. As if the case for stagflation needs any more support, this week provides an abundance of fresh evidence.
On Monday we learned that personal incomes rose a meager .1% during the month of July, the smallest gain since November 2002, while spending increased by .8 percent, no doubt due to inflation. This spending binge resulted in personal savings falling to a miniscule .6%. With stagnant incomes, rising prices, excessive debt, and no savings, American consumers will find it increasingly difficult to continue living beyond their diminishing means.
On Tuesday, the August Chicago Purchasing Index plunged to 57.3 from 64.7 while the July consumer confidence index fell from 105.7 to 96.6, well below the 103.5 that had been expected. Despite the decline, this index is still unjustifiably high, as consumer overconfidence is being influenced by false beliefs that current high real estate prices are permanent and unrealistic expectations of even higher prices in the future.
As it so happens, home equity, the collateral behind much of American’s borrowing and the driving force behind consumption, job creation and “growth”, may finally be in jeopardy. This week, fresh evidence from Orange County, California, my home town and what may be the epicenter of the housing bubble, suggests that the housing boom has reached its peak. According to the California Association of Realtors, the inventory of unsold homes in Orange County has spiked to a 7 1/2 month supply, its highest level in more than six years, and three times its average during that period. As recently as late March, the inventory was less than three weeks.
On Wednesday, the Institute for Supply Management’s factor index fell to 59 in August from 62 in July, with the employment index falling as inventories rose to their highest level since January 2000. Inventory accumulation is often an early warning sign of a weakening economy.
We then learned Thursday that the government’s highly suspect measure of productivity rose by only 2.5% during the second quarter, its slowest pace since the forth quarter of 2002, down form 3.75% in the prior quarter. Labor costs rose at an annualized 1.8%, the fastest in two years. Also on Thursday, the Labor Department reported weekly unemployment claims of 362,000, an unexpected rise of 19,000 versus an expectation of a slight decline.
On Friday, the lone “bright spot” was the 144,000 gain in August non-farm payrolls, only 6,000 below expectations. However 75% of the increase resulted from gains in the service sector, the very jobs which are the most likely to be eliminated as higher interest rates make it more difficult for Americans to borrow and a weaker dollar makes foreign creditors less willing to lend. The unemployment rate, which edged down to 5.4%, its lowest level since October 2001, did so not because the unemployed found jobs, but rather because they stopped looking. Interestingly, discouraged workers were counted as being officially unemployed until the Kennedy administration. In fact, if the current methodology for calculating the unemployment rate were applied to the 1930’s, we might find that the so-called Great Depression really wasn’t so bad.
However, shortly after Friday’s “good” news form the Labor department, the Institute for Supply Management released its August Non-Manufacturing Index, which fell to 58.2 from 64.8 in July. In addition, throughout the week, other evidence of a slowing economy continued to mount, including both GM and Ford announcing production cuts, Intel reducing guidance for both earnings and revenues, and a number of retailers reporting disappointing sales. On the inflation side, all of the various measures of costs showed solid gains, and crude oil prices resumed their ascent.
Perhaps the most troubling development was that despite all the evidence of a slowing economy, long term interest rates ended the week higher. But the most amazing aspect of the week was that despite the deluge of dismal economic data, two of the three major stock market indexes finished the week higher. Wall Street, toeing the familiar government line that prosperity is “just around the corner,” will probably not notice that Greenspan’s economic “soft patch” has turned to quicksand until after they find themselves buried in it neck deep.