Yesterday (Thursday), the US Department of Commerce published a revised estimate of economic growth in the first quarter of this year. The first estimate had shown GDP expanding at a minimal 0.1% on an annualized basis — effectively saying there was no growth at all. The second estimate was universally expected to be even worse, showing an actual decline, probably of about 0.5% in the consensus view.
In the event, however, the data were far worse than predicted, with GDP shrinking by 1%. That’s the “headline number” that the general public will see, whilst all the endless reams of analysis as to what caused the contraction and what — if anything — it signals for the future, will make little or no impact on the wider citizenry. On the other hand, most people will note that ‘the stock market’ — as represented primarily by the Dow Jones Industrial Index and, to a lesser extent, the S&P 500 index — continues to make ‘all-time highs’.
Anyone reading beyond the headlines will ‘discover’ that the main cause of the contraction in GDP was a sharp decline in inventory accumulation. This in turn was related to unusually bad weather in much of the US in the winter months. It is therefore not difficult to accept the logic of the economic analysts, whereby the first quarter represents an aberration which not only will not be extended, but will lead to a bounce back as both consumers and manufacturers catch up with what they missed.
Bottom line: the second quarter will show strong growth — of as much as 4% on an annualized basis — and after that business will get back to normal. This logic may also be employed to explain the continuing good cheer in the stock market, evidenced by the endless run of ‘new all-time highs’.
On the other hand, it does not explain — indeed, it contradicts and confounds — the extraordinary strength being displayed recently by the bond market, where prices have shot up and yields have fallen to their lowest level in almost a year — and back to historically very low levels on medium- and long-term maturities. None of this jibes with the expectation of strong economic growth in the current and coming quarters.
This column has already remarked on the extremely confusing nature of the activity in various financial markets, both in the US and abroad. It has also cited the widespread sense of perplexity that this has generated, especially among market professionals, veteran analysts and leading fund managers. The latest economic data on the one hand and the most recent market behavior on the other do nothing to resolve the confusion and much to enhance it.
That much can be gleaned just from sitting at one’s desk, anywhere in the world, and reading material. But it transpires that there is still value — considerable value — in face-to-face contact with people and this is especially the case with ‘ordinary people’. Although direct contact with the cognoscenti is enlightening, they will rarely tell you more — let alone something different — than what they wrote or said in public. Interacting with representatives of ‘the general public’ always holds the potential of learning new and often surprising things.
This was powerfully illustrated to me by spending a week or so along the NY-DC axis. Admittedly, I did not meet, or at least talk at length to, poor people. None of my interlocutors were among the 50-million-odd Americans now on food stamps. On the contrary, some of them were definitely well within the top 1% and the others were mostly near that level. Fortunately, many were not bankers or financial types of any sort.
That is what made the conversations so shocking. In the narrow context of the financial markets and the economy, noted above, the ‘disconnect’ between a chronically weak economy and a perennially strong stock market doesn’t faze people any more — they simply dismiss the market as a rigged construct. That message, that reality, has gotten home and been fully absorbed. It’s nice if you’re in the market, as rich people are, but no-one relates to it seriously anymore — because they see and live reality in their own lives and those of their friends and, above all, their kids. Real life is tough and the prospects are for more of the same or worse.
But more dramatic and even sinister is the degree to which even the upper middle-class and the rich now casually agree to — or proclaim of their own volition — ideas that recently were considered absurd or downright seditious. Such as that the United States is not a democracy. That you can’t believe or trust the government in virtually any respect. That ‘things are getting worse’ and likely to continue to do so.
These are now commonly-held sentiments, even among the ‘haves’. It therefore seems that only the extraordinary passivity of the ‘have-nots’ in the face of their steadily deteriorating situation and outlook, enables the social fabric to remain intact.