On the Economy

Here's an interesting perspective from Martin Hutchinson in the Moonie UPI:

The optimism before Friday's report was truly startling -- many commentators explained carefully to their readers that actually the consensus estimate for job gains (128,000, according to Thomson FirstCall) was far too conservative, and the real figure would be well over 200,000, signaling the reality of an economy roaring back to life. As Larry Kudlow, chief economist of Bear Stearns wrote in National Review on Thursday: "Before the December and January jobs reports, I took the 'over' in the pre-announcement betting. ... Fearlessly, I'll take the "over" again."

Gee, Larry, let me know where I can get some of this action. For the 40 months that I have been writing this column, Kudlow has consistently taken the "over" on every economic statistic. On employment, he's been right maybe 3 times.

February's employment report was truly dreadful. Instead of the 128,000 job gains predicted by the Wall Street consensus, according to Thomson FirstCall, there were only 21,000 job gains, fewer than the downward 23,000 revision to January's gains. It's clear that we're not going to get the 3.8 million new jobs in 2004 absurdly promised by Bush in January's Economic Report of the President, far from it. But the interesting question (intellectually, if you're not hoping to be one of the 3.8 million) is: why not?

Employment patterns are not following those of a normal economic recovery (even the "jobless recovery" of 1991-93 had created millions of jobs two years after the low point) for one very simple reason: this is far from a normal recovery.

Its abnormality can be shown in a wide variety of ways, one of which is that in the first two months of 2004, the Bank of Japan is reported to have bought over $100 billion of U.S. Treasury bills and bonds, thus single-handedly financing approximately the entire federal budget deficit in those months. This has propped up the U.S. dollar exchange rate against the yen, presumably the Bank of Japan's reason for doing such a wealth-destroying (in yen terms) thing. More important as far as the U.S. economy is concerned, it has enabled long term bond rates to remain artificially depressed, well below where they would normally be given today's level of inflation and demand for money, thus further fueling reckless expansion in the U.S. housing finance sector. Since homeowners who refinance their mortgages frequently buy a Toyota with the "takeout" proceeds, there is I suppose some rationality to this from a "Japan Inc." perspective, but there's no question that it throws a thoroughly non-market-driven monkey wrench into the economy's price signaling mechanisms.

Some further signs. The U.S. corporate sector financing gap in the fourth quarter of 2003 was minus $74.7 billion, slightly lower than the third quarter's minus $78.8 billion -- the first time since 1975 that corporate cash flow has exceeded capital spending for three consecutive quarters. While good news for the corporate sector, this is not a sign of robust economic growth. It is instead a sign that corporate capital investment, having surged to unimagined levels in 1999-2000, is still severely depressed and is not about to return soon.

The dearth of capital spending is remarkable, since companies can benefit from 50 percent bonus depreciation for tax purposes until the end of 2004. It is not surprising, as capacity utilization remains below 75 percent and is showing no sign of fast recovery in spite of ebullient growth in gross domestic product. That's why there aren't any jobs -- in a normal recovery, by this stage, companies are hiring people and planning facilities expansion. Not this time.