Lies, Damned Lies, and Economic Data
With the stock market rallying sharply from recent lows, the media, the Fed, government and Wall Street spin doctors can't help themselves from stepping up the campaign of misinformation designed to keep the consumer happily spending and investing in the midst of the current economic slowdown. As the Fed knows very well, consumer confidence is a critical factor in averting recession and therefore, it's far better to deny reality and keep the bad news under wraps.
But let's take a closer look at some of the "positive" economic data which has been portrayed in such a fashion as to keep the consumer blissfully ignorant of the cracks forming in the foundation of our economy.
The latest "bullish" report was the March personal income report which showed that personal income grew by 0.5% in March and that saving increased from February's -1.0% to -0.8% in March. While the media touted the numbers as yet another sign that the economy may be happily back on track, the fact of the matter is that the increase in savings demonstrates that consumers are beginning to wise up and pull back on their purchasing. As the Fed's Roger Ferguson stated back in March, if consumers were to start acting responsibly, it "would put the economy at risk of unacceptably low growth."
Have consumers started acting responsibly, i.e. saving instead of spending? One month of data doesn't suggest a trend, but it's a factor worth watching. In any event, the consumer is the underpinning of our economic growth and any responsible saving on his part could send the economy into a tailspin. Witness the last decade in Japan in which consumers have saved at a very high rate while the economy suffers from deflation and continually teeters on the brink of recession.
Another half-story touted by the media was the latest GDP figure. Let's put aside the fact that the preliminary figures are subject to major revisions and assume that the 2% growth observed in the first quarter data is accurate. Sounds juicy, does it not? Twice better than expectations and a huge improvement of the fourth quarter. But as John Crudele of the New York Post wrote on 1 May, when excluding the trade deficit data, the actual rate of growth slips to a measly 0.4%. On top of that, were the government to use its standard "load of bollocks" inflation figures rather than the GDP-massaged numbers, the rate would come in at MINUS 0.1%. Mr. Crudele goes on to argue that in the absence of the usual government trickery and data-massage, first quarter GDP actually comes in at MINUS 1.0%. I don't know about you, but I don't think negative growth rates speak for an improving economy.
Another much ballyhooed argument for economic growth concerns the impact of low interest rates on the American consumer. Apparently, mortgage refinancing continues to surge in the wake of recent rate cuts and all those savings on mortgage payments are supposed to translate into big consumer spending. What the media hasn't spent much time discussing is the fact that consumers are NOT using their new-found "wealth" to go on a buying binge but in fact are struggling to make ends meet while sliding further and further down the slippery slope of excessive debt.
Credit card debt is expanding at a pace not seen since 1995 and according to Moody's Investor Service, the repayment of that debt is falling month to month. What that means is that in the midst of lower rates and heavy refinancing at lower rates, consumers are actually taking on MORE and very expensive credit card debt and having a harder time paying it off. At the same time, consumers are not increasing consumption as quickly as they are increasing credit card debt. This suggests that consumers are using debt to make up for decreasing income. In other words, they are borrowing in order to simply make ends meet, not to buy more toys, more SUVs, or bigger houses.
It seems that the U.S. consumer is going into heavier debt just to stay afloat. And Uncle Al Greenspan, committed exclusively to boosting the economy at any cost and thereby maintaining his reputation as a "great Fed chief", is making it easier and easier for the consumer to sink perilously deeper into the quagmire of an over burdensome debt load. How healthy is our economy when the consumer needs to load up on 18-22% interest rate credit cards in order to pay the bills? Will more debt solve our economic problems or will it simply create a bigger problem down the line?
While the Fed loves to see folks borrowing and spending, excessive credit will inevitably lead to more substantial challenges than a dip in economic growth. The Mortgage Bankers Association reports that mortgage delinquencies are at their highest level since 1992. Credit card delinquencies are rising. The annual rate of personal bankruptcy filings has risen by 17% over last year's rate. What happens when debt-burdened consumers fail to pay off their borrowings? For one thing, banks and other lenders take losses. For another, folks lose their homes and real estate drops in value as foreclosed properties go on the chopping block. And the consumer, already in dire fiscal straights, pulls back spending sharply. None of that translates into healthy economic growth.
But a major credit collapse is not necessarily the inevitable result of all this excessive borrowing. In fact, the consumer is not stupid. Nobody wants an excessive debt load, nobody wants to struggle to make ends meet and nobody wants to go bankrupt. The consumer is generally wise enough to recognize when he or she is having financial difficulty and is more likely to save and to curtail purchasing rather than buy into the Fed's ridiculous argument that more debt and easier money is good for the economy.
What's far more likely than massive debt problems is that the consumer will reign in his excessive consumption and begin acting responsibly, as the recent uptick in the savings rate is already beginning to suggest. With consumer confidence at a major low, it's unlikely that the consumer will continue buying into the Fed's and the media's "just keep on spending" spin campaign. And that translates into leaner economic times.
Have we averted a recession? And has the stock market bottomed in anticipation of increasing economic growth? Perhaps, but given a closer look at the "bullish" economic data, it's not likely. While the mainstream media enjoys digging up half-baked arguments for why everything is still economically "hunky-dory", a closer examination of the facts suggests that we're starting to run low on "hunky" and that "dory" is becoming an increasingly expensive commodity.
Mark M. Rostenko
May 5, 2001
Mark M. Rostenko is a veteran of Chicago's commodities pits and the editor of
The Sovereign Strategist investment newsletter.
To request a free sample issue of The Sovereign Strategist, please visit www.sovereignstrategist.com
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