Despite being about to begin the seventh year of an economic recovery, GDP growth has averaged a lackluster 2.2% the entire time, profoundly lower than in previous recoveries. The reason, a combination of slow labor force growth, primarily due to an aging population, and virtually no labor productivity growth due to firms not investing in plant and equipment. If both these variables remain weak, GDP growth above 3% won’t happen.
In 3/07, the unemployment rate hit a cyclical low of 4.7%. Today it’s 5.4% and a rate of 4.7% will soon be reached. The question is when. Assuming employment growth of 211,000/month, the 3-year average monthly rate, the unemployment rate will hit 4.7% in 10.5 short months. Even with employment growth of 170,000/month, just 70% of the most recent 12-month average rate, 4.7% unemployment happens in 18 months.
The Friday File: The Washington Nationals recently signed hurler Max Sherzer to a mind-blowing seven-year $210 million contract, payable over 14 years. Sherzer will receive $15 million/year. Beyond Sherzer’s performance, this is a bet on expected long-term inflation. If inflation averages 2% over the life of the contract, it’s worth $196.6 million. At 4% it’s $173.4 million. A fortune either way but a staggering difference of $23.2 million!
A dollar of government spending can create more than a dollar of tax revenue! About $60 billion/year of Medicare spending goes for “improper payments.” With a return of over $10 for each dollar spent, Congress should increase the Medicare fraud-busting budget. Similarly, with a return of about $5 for each dollar spent, Congress should increase the IRS audit budget and chip away at the $540 billion in annual unpaid taxes.
While Q1 corporate profit growth will likely be flat due to bad weather, a strong dollar and weak exports, global growth and oil prices, corporate profits have been lackluster for some time. Following a Great Recession annualized low of $674.1 billion in Q4/08, profits rapidly rose to an annualized $1.8 trillion in Q3/13, which pushed equities up, but profits have since stalled and ended Q4/14 at an annualized $1.84 trillion.
The Friday File: 25 years ago Wednesday, $500 million in paintings were stolen from the Gardner Museum in Boston, making it the greatest art heist. Other spectacular ones include the pilfering of the Mona Lisa from the Louvre in 1911 (recovered in 1913) and the purloining of Munch’s The Scream in 2004 (recovered in 2006). The true art isn’t stealing masterpieces, it’s unloading them. Absent clean provenance, it’s almost impossible.
The Friday File: While the NCAA college basketball tournament may or may not cost the economy money in lost worker productivity and sales, the sure losers are the 99% of Division I college players that don’t make the NBA. They work for a “benevolent” monopolist that strictly prohibits the players from monetizing their talent and that “pays” the players a subsistence wage. The winners: the NCAA, networks, universities and coaches.
With industrial output growing at its slowest pace since 2008, retail sales and fixed investment at levels last seen in 2005 and 2001 respectively, China is slowing. To boost lending, expect China to lower interest rates and the reserve requirement ratio. The real estate downturn, weakening exports, massive overcapacity, and the crackdown on anti-corruption and shadow banking have inflation at just 1%. Chinese GDP won’t hit even 7% in 2015.
While Q4 GDP was revised down to 2.2% from just 2.6%, things are better than they appear. The revision was entirely due to slower inventory accumulation. Excluding inventories and trade gets at real domestic demand, and it grew at a solid 3.2% while household spending was revised down just 0.1% to a healthy 4.2%. This shows demand is strong and 2015 GDP should exceed 2.75%, the best performance since 2005.
The Friday File: In a recently released and terribly designed study by brainless economists commissioned by Facebook, the social media site finds that in 2014 it created $227 billion in world economic impact and 4.5 million jobs! Are you kidding? Assuming 500 million users, who use Facebook 30 minutes/day and value their time at $10/hour you have $900 billion in annual benefits ignoring the trivial costs of running Facebook. OMG!