Former Federal Reserve Chairman Alan Greenspan told FOX Business on Thursday that the U.S. economyis poised to slow down very soon.
“Just wait until the fourth quarter number comes out, it’s going to be down around 2.5 percent,” Greenspan said during an exclusive interview with Maria Bartiromo. “We have monthly data which suggests that we are slowing down, we are not going negative, but we are definitely slowing down – the rate of growth as we go into 2019 probably at a 2 to 2.5 percent pace maximum.”
Gross domestic product (GDP) increased 3.5 percent in the third quarter, according to a revised estimate from the Bureau of Economic Analysis, but Greenspan said gross domestic savings, which consists of savings of the household, private corporate and public sectors, is a critical factor in determining his outlook.
“Gross domestic savings is the key funding to capital investment in the Unites States, and as a result we are seeing capital investments slowing down,” he said.
Earlier this week, White House Council of Economic Advisers Chairman Kevin Hassett told FOX Business a capital spending boom is giving the U.S. economy momentum.
“A capital spending boom like the one that we’re in usually takes three to five years,” he told Bartiromo. “We’ve had about a 10 percent increase in capital [spending] since this time last year and that should continue if it’s a normal spending boom for the next three to five years.”
However in Greenspan’s opinion, although a recession is unlikely, the U.S. has entered a period of stagflation driven by runaway spending and entitlement programs.
“We are not funding our entitlements and as a result we have this huge deficit – [a] trillion dollar budget deficit,” he said. “You can’t exist with that sort of phenomenon without inflation re-emerging itself.”
The annual inflation rate in the U.S. fell to 2.2 percent in November from 2.5 percent in October, according to the Labor Department.
Julia Limitone is a Senior Web Producer for FOXBusiness.com.
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Wall Street may have set new record highs this week, but the rally is masking an uncomfortable truth: Corporate America is still in the midst of recession.
Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits in the Standard & Poor’s 500-stock index will fall 5.6 percent compared with a year ago — the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.”
[Dow follows S&P to record high]
Corporate earnings are supposed to be the bedrock of stock market value, but at the moment, they appear to be pointing in opposite directions. Energy companies have been devastated by falling oil prices. Multinationals have been hamstrung by the stronger dollar. Banks have been hammered by ultralow interest rates.
The gloomy reality comes amid growing warnings that the risk of a full-blown recession is rising — not only for the United States, but also the broader global economy. Britain’s decision to leave the European Union is also sowing uncertainty in financial markets and threatening to undermine the recovery in the United Kingdom. One of the most pessimistic forecasts came from Deustche Bank this month, predicting a 60 percent chance of a downturn in the United States over the next year.
That all sounds pretty dismal, and it makes the record highs set this week by both the S&P 500 and the blue-chip Dow Jones industrial average even more perplexing. At least part of the rally — and, some analysts argue, most of it — is the result of the signals from the world’s central banks that the era of easy money is far from over. But investors are also betting that corporate America and the broader economy are turning a corner, if they’re not already back on track.
Many analysts think the earnings contraction that started in the second quarter of 2015 bottomed out early this year. Profits fell 6.7 percent in the first quarter compared with a year ago, which makes the 5.6 percent estimate for this quarter look a little rosier. The outlook for the third quarter is even better, with analysts forecasting a milder decline as oil prices and the U.S. dollar stabilize.
Then there was a blockbuster report from the Labor Department showing rock-solid job growth of 287,000 jobs in June. That gave many investors confidence that the U.S. economy was weathering the global storm, especially after the exceptionally weak addition of just 11,000 jobs in May. On top of that, a new prime minister has been selected in Britain, a step toward resolving the political turmoil that has roiled markets.
[Opinion: Theresa May must contain the Brexit damage — and more]
Anthony Valeri, investment strategist for LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely.
Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985, which he notes are periods in which the federal deficit was increasing, rather than decreasing as it is now.
The third is the one we’re in right now, and it is not done playing out.
Get Ready for $10 Oil
Rising oil production and falling demand will combine to drive oil prices lower.
By A. Gary Shilling – Feb 16, 2015, 6:00:02 PM
Black, yes. Gold, not so much.
At about $50 a barrel, crude oil prices are down by more than half from their June 2014 peak of $107. They may fall more, perhaps even as low as $10 to $20. Here’s why.
U.S. economic growth has averaged 2.3 percent a year since the recovery started in mid-2009. That’s about half the rate you might expect in a rebound from the deepest recession since the 1930s. Meanwhile, growth in China is slowing, is minimal in the euro zone and is negative in Japan. Throw in the large increase in U.S. vehicle gas mileage and other conservation measures and it’s clear why global oil demand is weak and might even decline.
At the same time, output is climbing, thanks in large part to increased U.S. production from hydraulic fracking and horizontal drilling. U.S. output rose by 15 percent in the 12 months through November from a year earlier, based on the latest data, while imports declined 4 percent.
Something else figures in the mix: The eroding power of the OPEC cartel. Like all cartels, the Organization of Petroleum Exporting Countries is designed to ensure stable and above-market crude prices. But those high prices encourage cheating, as cartel members exceed their quotas. For the cartel to function, its leader — in this case, Saudi Arabia — must accommodate the cheaters by cutting its own output to keep prices from falling. But the Saudis have seen their past cutbacks result in market-share losses.
So the Saudis, backed by other Persian Gulf oil producers with sizable financial resources — Kuwait, Qatar and the United Arab Emirates — embarked on a game of chicken with the cheaters. On Nov. 27, OPEC said that it wouldn’t cut output, sending oil prices off a cliff. The Saudis figure they can withstand low prices for longer than their financially weaker competitors, who will have to cut production first as pumping becomes uneconomical.
What is the price at which major producers chicken out and slash output? Whatever that price is, it is much lower than the $125 a barrel Venezuela needs to support its mismanaged economy. The same goes for Ecuador, Algeria, Nigeria, Iraq, Iran and Angola.
Saudi Arabia requires a price of more than $90 to fund its budget. But it has $726 billion in foreign currency reserves and is betting it can survive for two years with prices of less than $40 a barrel.
Furthermore, the price when producers chicken out isn’t necessarily the average cost of production, which for 80 percent of new U.S. shale oil production this year will be $50 to $69 a barrel, according to Daniel Yergin of energy consultant IHS Cambridge Energy Research Associates. Instead, the chicken-out point is the marginal cost of production, or the additional costs after the wells are drilled and the pipes are laid. Another way to think of it: It’s the price at which cash flow for an additional barrel falls to zero.
Last month, Wood Mackenzie, an energy research organization, found that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won’t be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.
Also consider the conundrum financially troubled countries such as Russia and Venezuela find themselves in: They desperately need the revenue from oil exports to service foreign debts and fund imports. Yet, the lower the price, the more oil they need to produce and export to earn the same number of dollars, the currency used to price and trade oil.
With new discoveries, stability in parts of the Middle East and increasing drilling efficiency, global oil output will no doubt rise in the next several years, adding to pressure on prices. U.S. crude oil production is forecast to rise by 300,000 barrels a day during the next year from 9.1 million now. Sure, the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the horizontal rigs that are the backbone of the fracking industry. Consider also Iraq’s recent deal with the Kurds, meaning that another 550,000 barrels a day will enter the market.
While supply climbs, demand is weakening. OPEC forecasts demand for its oil at a 14-year low of 28.2 million barrels a day in 2017, 600,000 less than its forecast a year ago and down from current output of 30.7 million. It also cut its 2015 demand forecast to a 12-year low of 29.12 million barrels.
Meanwhile, the International Energy Agency reduced its 2015 global demand forecast for the fourth time in 12 months by 230,000 barrels a day to 93.3 million and sees supply exceeding demand this year by 400,000 barrels a day.
Although the 40 percent decline in U.S. gasoline prices since April 2014 has led consumers to buy more gas-guzzling SUVs and pick-up trucks, consumers during the past few years have bought the most efficient blend of cars and trucks ever. At the same time, slowing growth in China and the shift away from energy-intensive manufactured exports and infrastructure to consumer services is depressing oil demand. China accounted for two-thirds of the growth in demand for oil in the past decade.
So look for more big declines in crude oil and related energy prices. My next column will cover the winners and losers from low oil prices.
To contact the author on this story:
A Gary Shilling at firstname.lastname@example.org
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China’s inflation figures just hit a five-year low. Price growth is falling for consumers, and companies producing goods are already recording sharp deflation.
Why does it matter? One simple reason: debt.
China’s debts as a proportion of GDP climbed to 245% in 2014 from 144% in 2007. That debt is worth one entire Chinese economy’s total output for a year, accumulated in just seven years. That’s a lot, and it puts the country in a pretty grim situation.
Here’s how it looks:
Debt was actually falling as a portion of GDP for the few years running up to the financial crisis before rapidly picking up afterward.
Deflation and lower inflation only make that worse. What matters for reducing your debts is nominal growth.
The economic growth figures that you usually see strip out the effect of inflation. Nominal GDP doesn’t do that: It is a simple measure of how much money is in the economy without trying to remove the effect of rising or falling prices, and it’s very important for debt.
Michael Pettis, one of the most authoritative voices in the world on the Chinese economy, explained this during the most recent round of Chinese inflation data (emphasis ours):
For nearly two decades, when nominal GDP growth was as high as 20-21% and the GDP deflator at 8-10%, (economists use a deflator to remove the effect of inflation) even if they were horribly mismanaged the nominal value of assets soared relative to debt … Under those conditions it was pretty easy to ignore debt costs, and even easier to pick up very bad investment habits. Now that nominal GDP growth has dropped to around 8-10%, and could be substantially lower in a deflationary environment even if growth did not continue to decline, as I expect it will, those bad habits have become brutally expensive.
In short, it’s easy to keep borrowing if your income is growing by a fifth every year, but those habits (and your existing debts) are a lot harder to deal with if that falls to one-tenth, or one-twentieth. Your debts are suddenly not being inflated and grown away as they previously were. That’s what’s happening in China, and the lower both inflation and growth fall, the worse that will get.
FROM Washington to Athens, politicians and economists who often have little in common all agree that Germany under Chancellor Angela Merkel is largely wrong about economic policy.
Germany’s apparent economic strengths–the lowest unemployment in two decades; steady, if low, growth; a balanced federal budget–mask weaknesses and policy errors, they say.
A first mistake is to insist that troubled euro-zone countries such as Greece not only make structural reforms to their economies, but simultaneously cut spending and borrowing (depressing demand).
But a second is domestic. Given low interest rates, now would be a golden opportunity to borrow and invest more at home, boosting the economy and providing a Keynesian stimulus to the entire sluggish euro zone. Instead, Germany is investing less than in the past and less than most other countries (see chart).
Raising investment could also deal with another imbalance in the German economy: its current-account surplus, the largest in the world, which has just set another record in 2014 of EUR220 billion ($250 billion), over 7% of GDP. By definition, this surplus measures the excess of savings over investment. Invest more, and the surplus would shrink or even disappear.
Such thinking has fans even in Germany. Marcel Fratzscher at the German Institute for Economic Research in Berlin thinks that German strength is an “illusion” given its large “investment gap”. Public investment in Germany–shared by the federal, state and local governments–has fallen from 6% of GDP in 1970 (in the West) to 2% now. Roads, bridges, broadband internet and much else could do with more money.
The German Marshall Fund has said that 40% of bridges in Germany are in “critical condition”. The Cologne Institute for Economic Research, another think-tank, reckons that the capital stock of German machines has not risen in real terms since 2008. Markus Kerber, director of the German Federation of Industries, a trade association, says that a “long-term investment-offensive is needed” to sustain growth.
But other German economists are sceptical about claims of underinvestment. Christoph Schmidt, chairman of the German Council of Economic Experts, which advises the government, thinks published ratios of investment as a percentage of GDP can be misleading when compared both across time and between countries.
France, for example, has a lot of public housing. Germany does not, and this skews the numbers. Reunification in 1990 caused a one-off investment boom in both parts of the country. And whereas other countries had property crashes, Germany did not. In that case, at least, skimping on housebuilding was sensible.
Yet the trend of declining public and private investment remains clear. A recalculation to fit European Union norms lifts Germany’s investment ratio from 17% to 19%, by including companies’ research and development spending. But that is still low. Why is this?
Most investing is done by private firms. But German ones have for years preferred to invest abroad, not at home. Mr Fratzscher regrets this: he reckons that German investment abroad has yielded an annual return of 10% over 20 years whereas foreign investment in Germany has made more like 15%.
The main reason for low domestic investment, says Michael Hüther, the Cologne institute’s director, is uncertainty and nervousness over the future. Continuing anxiety over Greece and the euro has been especially damaging.
More recently worries about Russia, which is more commercially entangled with Germany than with other big Western economies, have unsettled the business climate. But the biggest problem for many businessmen may be benighted government policies.
These start with Germany’s “energy transition,” a plan to exit simultaneously from fossil fuels and nuclear energy. The main policy is a huge subsidy to solar and wind. The surcharge that many firms have to pay on a unit of energy is larger than the entire cost of electricity paid by firms in America. Half the firms polled by Mr Hüther’s institute claim that this makes any new investment unattractive.
Many also complain, in a country that has an ageing, shrinking population, about a shortage of skilled workers despite Germany’s admired apprenticeship system. Mrs Merkel’s government, under the influence of her Social Democratic coalition partners, has made things worse by letting some workers retire at 63, rather than at 67, as previously envisaged.
In the housing market, owners are put off investment by a cap on rents in many cities. A new federal minimum wage is yet another measure that will add costs for business.
The best way to boost investment is to fix these policy errors, argues Mr Schmidt. On energy, even if the government insists on sticking to its emissions targets, it could leave the choice of technology to the market.
The pension age could be raised again; the minimum wage should be lower. And public investment should be raised. Gustav Horn, head of the Macroeconomic Policy Institute, part of a foundation with links to the trade unions, reckons that a 1% increase in euro-zone public investment would boost GDP by 1.6%.
Yet Germany led resistance to calls for more public money to be put into the European Commission’s planned investment programme. At home it is constrained by the constitutional “debt brake”, adopted in 2009, which requires state governments to balance their budgets by 2020 and the federal one to do so by 2016.
Wolfgang Schäuble, the finance minister, has beaten the timetable, balancing the budget in 2014. He and Mrs Merkel are proud of the “black zero”, which demonstrates that Germans sticks by the rules, as others should. The books may balance, but Germany is a long way from rectifying its investment shortfall at home.
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Anyone who has pulled up to a gas station this winter knows oil prices have fallen — down roughly 50 percent since June.
But it’s not just oil. Prices for many commodities — grains, metals and other bulk products — have been plunging too.
Here are a few of the changes since many prices peaked in recent years:
– Copper is $2.59 a pound, down from $4.50 in 2011.
– Corn costs $3.85 a bushel, compared with about $8 at its 2012 peak.
– Iron ore pellets go for about $104 a metric ton, down from nearly $220 four years ago.
The list could go on and on. Soybeans, tin, sugar, wheat, cotton — all are much cheaper than a few years ago. The changes have been putting a squeeze on farmers and miners, but so far at least, most of these commodity plunges haven’t done much to help U.S. shoppers.
With the exception of gasoline, “the price changes are not being immediately passed through to consumers,” said Sean Snaith, an economic forecasting professor at the University of Central Florida.
Snaith said U.S. companies know global commodity prices can be very volatile, so they are afraid to cut consumer prices — at least not until they are sure that cheaper raw material prices are here to stay.
“There’s an old saying: Prices go up like an arrow and come down like a feather,” he said.
But eventually, even a feather does float down. So some economists believe that later this year, retail prices for groceries and goods may start to decline.
Let’s look at what’s been happening with crops, like corn and wheat, and consider where we might be going this year:
Over the past decade, many people around the world, especially in China, kept getting richer and buying more food. That encouraged farmers everywhere to plant more seeds.
Global food output rose, but so did prices as demand continued to shoot up. By 2011, many people around the world were experiencing food shortages and steep price increases.
But the market adjusted and production improved. A recent report by the USDA said world wheat and soybean production are at record highs. The huge harvests are helping push down prices.
And it’s not just grains. In Florida, the mild hurricane season helped send orange juice futures down to about $1.35 a pound, compared with their 2012 high of more than $2.
Looking ahead to this year’s growing season, harvests may again be huge. That’s because cheap energy is making it easier to plant more. Farmers who are paying a dollar-a-gallon less since a year ago for diesel fuel can run their tractors longer.
If the weather is good this summer, corn silos will be bulging by fall. That means ranchers and farmers will have cheaper corn to feed livestock, helping restrain meat and poultry prices.
At the same time, the global economy is running at a sluggish pace, so demand for food is not growing the way it had been a decade ago.
Also, the value of the dollar is now at a 10-year high. That means Americans will be able to purchase foreign foods, like cheeses and fruit, for less. Also, foreign customers won’t be able to buy as much from U.S. farmers, allowing more U.S.-grown food to remain at home with U.S. consumers.
So put all of these factors together: the potential for huge harvests; cheaper food imports; and reduced foreign competition for food and cheaper energy costs for farmers. That sounds like a great formula for bargains at the grocery store later this year.
And a price downdraft may hit manufactured goods too. That’s because raw materials — tin, nickel, lead and so on — keep getting cheaper too. U.S. coal prices have tumbled back nearly to the lows set in early 2009 during the worst of the Great Recession.
Economists say these across-the-board price drops in industrial commodities largely reflect the dramatic economic slowdown in China, Europe and other regions. When they are growing more slowly, then they don’t need as many raw materials.
“The risk of deflationary pressure is much higher than the inflationary pressure or stable price scenarios for the global economy in the near term,” Wells Fargo Securities’ economic team wrote in a special report on deflation.
But any American who has been out shopping lately may be thinking: huh? What price breaks? New cars cost more. Meat prices have remained stubbornly high. Eggs are expensive. When exactly will these lower commodity prices translate into relief for U.S. consumers?
“It depends,” Snaith said. “If these factors persist through 2015, we would expect to see these price declines make their way to consumers. But it’s a waiting game.” [Copyright 2015 NPR]