UBS Makes A Striking Discovery: Ex-Energy, US GDP Growth Is The Slowest Since 2010

Last week, UBS released its Global Economic Outlook forecast for 2018-2019, which coming in at over 220 pages and with more than 270 charts, is rather "difficult to summarize" as UBS" chief economist Arend Kapteyn snarkily notes. Still, as Kapteyn helpfully summarizes, the 3 charts below capture some of the main themes from the report, the first of which is a doozy and crushes the Trump "economic recovery" narrative .

Message 1: The 2017 global growth acceleration was largely (70%) a commodity bounce. This applies even to the US which was 20% of the global growth improvement but, as the 1st chart below shows, it was entirely energy investment. Once you strip that out "underlying" growth is only 1% or so (ex inventories) - the slowest since 2010 - and a significant amount of rotation now needs to take place from energy to non-energy investment just to sustain the current growth pace. The surveys suggest that is possible but the surveys have also consistently overstated growth so far. As Kapteyn adds, due to "skepticism about that rotation is why we are about 20bp below consensus for US growth next year." It also means that contrary to conventional wisdom, the US consumer has not only not turned the corner, but continues to retrench and with the personal savings rate plunging to 10 years lows, there is little hope that personal consumption expenditures will be a significant driver of US growth for the foreseeable future.

More details from UBS:

In Figure 5 we show what we think the contributions to US headline growth have been from the energy sector (structures and equipment investment combined). This is depicted as the grey area. The blue line is headline growth (ex-inventories) and the red line is headline growth minus the energy sector investment contribution, which we call "underlying growth ex-energy". Taken at face value, the chart suggests underlying US growth has been slowing dramatically, from about 2.6% in 2015 to only around 1% in 2017. We do not quite interpret it that way, and view it more as a story of stability and "adding-up constraints". The economy can only produce so much, and when one sector is strong (energy), it absorbs labour disproportionately, while other sectors pull back. Furthermore, when investment is weak the consumer accelerates. US growth post-crisis has hovered around a 2% average and nothing in our recession probability models suggests that there is anything ominous going on. But the point of Figure 5 is to show that as energy investment runs out of steam, other sectors will need to accelerate 

significantly to maintain the current pace of growth.

Message 2: The one (developed market) country that no one thinks can generate inflation (Japan) is likely to create more inflation than any other developed market.

"Japan is cyclically 2 years ahead of most other countries and it has a textbook Phillips curve with higher Phillips curve wage and price coefficients than all the other countries we looked at. The labour market is already extraordinarily tight."

If unemployment goes to 2.5% by end-2018 UBS sees (BoJ) core inflation going up towards 1.5% (70bp above consensus) and Yield Curve Control starting to get tweakend (10y  JGB to drift higher.

Message 3 : The Fed is going to $4 trillion in US Treasuries by 2025 even absent a recession, $1.5 trillion more than they hold today. The is because the Fed will hit a trough determined by the "floor system" for monetary policy coupled with some other balance sheet changes, of around $ 3 ¼ trillion by mid-2020 and currency in circulation growth then starts to drive the dynamics of the balance sheet. If they still want to roll off the MBS book they need to buy UST. That is part of the reason that the aggregate size of the G3 central balance sheet by 2025 will still be roughly as large as where it was late last year. And that"s with some fairly aggressive assumptions about BoJ balance sheet roll-off. So good for term premium.

The Coming Debt Reckoning

Authored by MN Gordon via EconomicPrism.com,

American workers, as a whole, are facing a disagreeable disorder.  Their debt burdens are increasing.  Their incomes are stagnating.

There are many reasons why.  In truth, it would take several large volumes to chronicle all of them.  But when you get down to the ‘lick log’ of it all, the disorder stems from decades of technocratic intervention that have stripped away any semblance of a free functioning, self-correcting economy.

The financial system circa 2017, and the economy that supports it, has been stretched to the breaking point.  Shortsighted fiscal and monetary policies have propagated it.  The result is a failing financial order that has become near intolerable for all but the gravy supping political class and their cronies.

Take consumer spending.  This is the primary driver of the U.S. economy.  Yet it requires vast amounts of credit.  In fact, American consumers presently hold $1 trillion in revolving credit.  At the same time, they have nowhere near the income needed to finance these debts, let alone pay them off.

Remember, the flipside of credit is debt.  Obviously, the divergence of increasing debt and stagnating incomes is a condition that cannot go on forever.  But it can go on much longer than any sensible person would consider possible.

Debt Slaves

If you haven’t noticed, the financial services industry is extremely accomplished at compelling people to go whole hog into debt.  Moreover, the entire fiat based financial system, which depends on ever increasing issuances of debt, hinges on it.  Just a slight contraction of credit, like late 2008, and the whole debt repayment structure breaks down.

On an individual basis, there are only so many credit cards that can be maxed out before the shell game ends.  Wolf Richter, of Wolf Street, recently clarified the relationship between the economy and deep consumer debt:

“The US economy is fueled by credit.  Americans turning themselves into debt slaves makes it tick.  Take it away, and what little growth there is – nearly zero in the first quarter – will dissipate into ambient air altogether.  So it’s time to take the pulse of our American debt slaves.

“In a new study, life insurer and financial services provider Northwestern Mutual found that 45 percent of Americans that have debt spend ‘up to half of their monthly income on debt repayment.’  Those are the true debt slaves.

“Excluding mortgage debt, Americans carry an average debt of $37,000.  Of them, 47 percent carry $25,000 or more, and more than 10 percent carry $100,000 or more in debt, excluding mortgage debt.

“Most of them expect to get out of debt before they die, but 14 percent expect to be in debt ‘for the rest of their lives.”’

The Coming Debt Reckoning

Consumers with elevated debt levels are playing a high risk game.  They are one job loss or illness away from losing it all.  Even without such difficult life events, the compounding interest of massive amounts of debt relentlessly pile up like straw upon a camel’s back.  Eventually the breaking point is crossed.

The process may be subtle at first.  Later it’s abrupt.  Here we turn to a brief dialogue from Ernest Hemingway’s 1926 novel, The Sun Also Rises, for a succinct explanation of the process of going broke:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said.  “Gradually and then suddenly.”

By our estimation, the gradual trickle toward bankruptcy for many Americans is giving way to the sudden deluge.  On an individual basis, greater amounts of debt may be a temporary solution to a debt problem.  But greater amounts of debt gradually compound to a sudden bankruptcy.

First-quarter GDP, reported last Friday, came in at an annualized rate of just 0.7 percent.  Of this, personal consumption increased just 0.3 percent.

Up and down, in and out, of the economy, consumers are struggling.  Some are attempting to tighten their belts.  Others are at the end of their rope.  Is it any surprise that retailers are shuttering stores at a record clip?

Obviously, the effects of consumer retrenchments will spread out beyond just retail.  Commercial real estate, manufacturing, shipping and transportation, automotive, oil and gas – you name it.  A coordinated supply glut, fueled by excess debt, is upon us.

Make of it what you will.  By our estimation a debt reckoning is coming, and that doesn’t even account for government debt.  What better time than now to get your financial house in order?

Obama Oversaw The Weakest Growth In American's Personal Income On Record

Submitted by Eric Bush via Gavekal Capital blog,

Over the past 10-years personal income in the US has increased at a 3.39% annualized rate which is the slowest 10-year annualized growth rate since the data began in 1960.

Clearly, there has been a ‘stair-step’ decline in the growth rate of personal income over the past several decades. In the 1980s personal income averaged a 9.5% annualized growth rate, in the 1990s it averaged a 6.4% annualized growth rate, and in the 2000s it averaged a 5.2% annualized growth rate. Thus far in the 2010s, the average annualized growth rate has fallen to 3.9%.

Even as the growth rate in personal income has slowed during the course of this decade, the American consumer is saving more money by spending less than they are making. In the chart below we show the spread between the 10-year, annualized change in personal income and the 10-year, annualized change in personal consumption expenditures. When this spread is positive, as it has been since 2010, it indicates that consumers are spending less than they are making.

This chart illustrates just how rare it is for Americans to spend less than they earn in the post-WWII era. From 1976 – 2011, US consumers regularly spent more than they made. 

The global economy needs to recognize that there is a new “smarter” American consumer out there as two-thirds of Americans now say they prefer saving over spending compared to just about 50% agreeing with that statement prior to the GFC.

Soybean Exports Were Responsible For One-Third Of American Growth In Q3

As we highlighted earlier, while inventories and exports were significant contributors to today"s 2.9% GDP print, adding 0.61% and 1.17% to the bottom line respectively, or more than half of the total 2.9% number...

....the core component of US economic growth, personal consumption which is traditionally responsible for ~70% of GDP, was a notable disappointment, predictably sliding by half from its Q2 outlier print.

Likewise, fixed investment also known as capital spending, continued its recessionary ways, subtracting from growth for the 4th consecutive quarter, something never seen outside of a recession.

But digging deeper into the numbers reveals something even more fascinating, alarming and/or amusing.

As the following chart shows, the spike in exports - which curiously came a time of a stronger dollar - was the highest seen in over two years, and amounted to $49 billion in chainged dollars, or roughly 41% of the nominal $119 billion annualized increase in Q3 GDP.

Where it gets even more surprising is looking into just what the exported commodity was. The answer: soybeans.

As Standard Life economist Jeremy Lawson points out, "In a normal year, US soybean exports increase strongly in the winter months after the fall harvest. The Census Bureau then smooths these spikes out through its seasonal adjustment process. This summer, however, soybean exports from South America (Argentina and Brazil are by far the world"s largest exporters) have been very weak thanks to a poor harvest, leaving US producers to fill the gap.

"The application of the normal seasonal factors to the unusually large increase in soybean exports has meant that seasonally adjusted food, feed and beverage exports are up 121% in three-month-on-three-month (3m/3m) annualized terms."

A chart of food exports is shown below.

And for a little more context as to the sustainability of this surge.

So according to the US government Bureau of Economic Analysis, in the quarter, goods exports amounted to $41 billion of the $119 billion chained dollar increase, while Soybeans accounted for some $38 billion of this number.

Or, said otherwise, soybean exports were responsible for just under a third, or 0.9% of "growth" in the world"s biggest economy. Which is bad news: as Capital Economics" Ian Shepherdson said, “The soybean boost is indeed a one-time thing. It has no implications for trend growth and likely will reverse over the next couple quarters."

So doing some more back of the envelope calculations, if one excludes soybean exports, the inventory build, and the contribution from Obamacare which amounted to another 10% of the bottom line, the US economy grew by 0.9% annualized in the third quarter, 2% below the reported number.

Of course, that"s not what newspapers will blast on their front pages tomorrow, instead cheering the best economic "growth" in over two years, just in time for the elections.