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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

January 14, 2015 at 11:01 AM

If we wanted to worry about the economy…

NOTE TO READERS: This is the second in an occasional look at the factors driving volatility in the market this year. For the first installment, click here.

Americans are an optimistic lot. Climate change? Hey, maybe it’s not real and if it is, we won’t be hurt! A completely destabilized Middle East? Hey, my gasoline is cheap! Falling stock market? Markets go up and down, so what! The hollowing out of the middle class and danger of another financial crash? Hey, third-quarter GDP growth was a roaring 5 percent and job creation is the best in 14 years. Stop being so negative!

No wonder most Americans and their economist tribunes didn’t see the housing crash coming. They didn’t want to.

But if we wanted to worry about the economy right now, here are seven good reasons:

1. World growth is slowing, with trouble in Europe, China and Japan. The World Bank just cut growth forecasts for almost everywhere but the United States. This is one of the key reasons for the decline in not only oil prices but prices for most commodities. Demand is way down. If this remains, it (and the strong dollar) will have a serious affect on American exports, no small thing for Washington state. Many U.S. companies get half or more of their revenues from overseas. So as they are hit by this weakness, the potential for job cuts here rises.

2. Treasuries are a red flag. The yield on the 10-year Treasury note was 1.890 percent Tuesday. On 30-year Treasuries, it has been as low as 2.375 percent. These are astoundingly low yields for this far into a recovery. They signal a flight to safety — safety from what, if all is hunky dory? It would be a good time to finance national infrastructure projects, but we don’t do such things anymore. Also, government bonds are in high demand in all safe havens. Japanese 5-year bonds hit zero for the first time.

3. Deflation is a major risk. It is already happening on some level in parts of Europe and in China and other emerging markets. The Treasuries situation shows it could begin to arrive here. Deflation is the kind of shock that hit the economy in the Great Depression, where falling prices made it impossibly to repay debts and led companies to slash jobs.

4. Turns out a healthy middle class is needed. Retail sales in the critical month of December actually fell 0.9 percent from a month earlier. As long as wages stagnate and the jobs replacing those lost during the recession are of worse quality, most Americans will be less able to play their role as “consumers.” Macy’s already reacted by closing 14 stores. This is only the first retrenchment we will see.

5. Prepare for new banking risks. Republicans in charge of both houses of Congress wasted no time in beginning to weaken the already tepid Dodd-Frank Act, which was meant to prevent the banking hustles that brought the world financial system near collapse in 2008.

6. Bubbles, we’ve got ’em: debt used to finance increasingly unsustainable fracking plays; student loans; tech sector (perhaps), assets bought with cheaply borrowed dollars, and all the capital financing towers in leading cities — partly from demand, but also in search of yield in a low-yield world. None of this rises to the level of 2008. But with the interlocking financial system, cascading defaults and redeployment of capital to safe harbors could bring some nasty surprises.

7. Price discovery is difficult. With commodities tumbling, punctuated by oil prices falling by half since last summer, it is problematic for markets, supply chains and economic actors — nations, purchasing agents, CFOs — to figure out the price of assets. This adds to the volatility of both commodity and stock markets.

None of this may transpire. Let us hope. But it’s better to be informed. The market tumble ravaging your 401(k) — if you have one — isn’t happening for no reason.


Today’s Econ Haiku:

Welcome Mister Musk

Satellites from Seattle?

In exchange for what?


 

 

 

Comments | More in Economy | Topics: Consumer spending, deflation, Oil prices

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