IS ECONOMIC GEAR STUCK IN REVERSE?
It is one thing to complain that the economy is not growing, or, that economic activity is slowing; but the charts below indicate something more serious. Economic activity is in decline and the decline might be accelerating.
First, lets look at industrial production…
Industrial Production
Real output for all facilities located in the United States manufacturing, mining, and electric, and gas utilities has reversed sharply. The trajectory is unquestionably downward and appears similar to last year’s decline.
Next chart is the capacity utilization rate…
Capacity Utilization Rate
Capacity utilization is “the percentage of resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States.”
Notice the similar chart pattern in both industrial production and capacity utilization. As demand for finished goods declines, the factories and production facilities incur increasing downtime. In addition to idle equipment and unused buildings, this can also lead to layoffs and higher unemployment.
Here is the chart for retail sales…
“Real” Retail Sales
The established decline in “real” retail sales started early last year at the onset of official Federal Reserve policy to force interest rates back to historically normal levels. The hangover from cheap and easy credit lingers on and might worsen.
Our last chart is housing starts…
Housing Starts
After a brief interlude in their pronounced decline, housing starts are dropping rapidly again. It is unreasonable to expect any near-term changes given the combination of higher home prices and higher interest rates.
There have been some declines in home prices, but probably not enough to offset the damage done to the mortgage market by higher interest rates.
WHAT DOES ALL OF THIS MEAN?
In an earlier article I said the following:
“A slow and progressive unwinding of unsupportable and unsustainable levels of debt and activity financed by cheap and easy credit is taking its toll. In addition to the signs discussed in this article, we are now seeing bank failures and hearing about the huge amount of commercial real estate debt.
All of these things are cracks in the foundation of financial and economic stability. In other words, it is not just a problem of a slowing economy. It is much worse than that and will take a long time to work itself out.”
Has anything changed? Probably not, at least as far as can be seen in the charts above.
If anything, maybe the entire situation has worsened. The charts above seem to say so.
With respect to trigger events, the threat from defaults in commercial real estate is fast becoming a reality. Also, more bank failures can be expected – especially with increasing capital requirements.
Cracks in the foundations of financial and economic stability might soon become chasms.
Unfortunately, it won’t matter where you step.
by Kelsey Williams for Neptune Global
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