It is very difficult to understand the current enthusiasm about economy.
Yet, the stock market is approaching a multi-year high, automobile sales are moving ahead at a brisk pace, industrial output and retail sales rose more than 10%. Nevertheless, those numbers are advancing at a significantly lower pace than earlier in the year.
All but forgotten are several items. Inflation pressure remains a threat in most of the world. The acceleration rate was driven primarily by increases in the prices of manufactured goods. Companies are trying to offset pressures on many items, notably food, but as well as non-food, manufactured inflation – the so-called core rate.
Also, it seems only a matter of time until Canada follows other nations such as Australia, Britain, and members of the European Union, in bumping up interest rates. Furthermore, bailouts seem to be the order of the day, with Greece being the latest beneficiary and with countries like Portugal and Ireland following behind.
What does all that mean? Despite the foregoing, favourable indicators, there are distinct signs of a sputtering economy. Oil prices, which are particularly good clue, have been hovering around $100 a barrel, and every time they look as if they are going to move up, a reversal takes place. Consumption of oil is flat compared to a year ago, and inventories and crude supplies are the highest they have been in more than two decades.
In fact, it appears that oil prices are at present only because speculator’s holdings have soared as they have been anticipating big increases in demand; that has not been forthcoming.
Consumers are beginning to reflect realities, but this process is just starting. Consumers’ demand remains at historically and unsustainably high levels, about 70% of gross domestic product, compared to 65% heretofore.
When consumption appetites slump, as inevitably they must, sales of cars and most other items will decline.
Then we have the additional shock coming to household balance sheets because of the renewed slump in home values.
The real estate market has yet to clear up huge inventories of unsold houses. There will be a further rise in home sales coming from mortgages defaults.
The negative wealth effect of that is bound to occur sooner rather than later.
While authorities have claimed that this is a completely normal recovery, that is nonsense, as they should have seen a period of stronger job growth – but that has not been the case.
As most nations try to cope with budget deficits, government spending will be curtailed, further depressing economy. A faltering economy will become evident. This is not just a soft patch as the entire economy seems mired in quicksand.