An economic slowdown points to low inflation and declining Treasury yields

The January employment report augments other recent evidence indicating the pace of economic activity has slowed. Those reports, as well as other developments and trends in the US and around the globe suggest that a slower economic growth pace will persist. That will come as a pronounced disappointment to those depending on the mistaken consensus forecast of a strengthening US and global economy, a US capital investment boom, rising inflation and rising bond yields.

Instead, Treasury bond yields are likely to retreat further from their recent highs along with slowing inflation and sluggish commodity prices. Equity prices are vulnerable after last years spectacular price rise, which far outdistanced the pace of  GDP or corporate earnings. Also, the 10-average price-earnings ratio at the end of last year was an excessive 25, versus a long-term average of 16.5. And the January decline in equity prices far more often than not points to weakness by year end. Even with slowing inflation, gold prices are likely to benefit from the likely continuing economic upheaval in the emerging world and political uncertainties connected with Syria, Iran and Ukraine and elsewhere.

The January 113,000 rise in non-farm payrolls is up from a revised 75,000 increase in December. But, that is down from three-month average increases near 200,000 in October and November and even higher increases early last year. Though adverse weather may have been a  factor suppressing employment gains the past two months, a relatively steep January rise in weather-vulnerable construction employment suggests the overall weather impact was marginal. There are a number of long-term employment negatives potentially at work including the adverse impact of the health care act (Affordable Care Act), the anti-capitalism thrust of the assault on the one percent and increases in the minimum wage, which cuts employment.

The January unemployment rate edged down to 6.6% from 6.7% in December, close to the 6.5% cited by the Fed as an interim objective. But the decline in the unemployment rate has been overly influenced by the plunge to near three and a half decade lows in the labor force participation rate.That is a reflection of discouraged workers unable to find employment and just leaving the labor force, thereby artificially reducing the unemployment rate. If the labor force participation were at normal levels, the unemployment rate would still exceed 10%. The U-6 unemployment rate, which includes the discouraged unemployed and part-time workers who could not find the full-time work they preferred, has come down but is still an excessive 12.7%. The Fed recognizes the disparity between the official but misleading narrow unemployment rate and the real state of employment. Accordingly, while the scaling-back or tapering in Fed purchases of Treasuries and mortgage backed bonds may persist, there will almost certainly be no rise in the essentially zero Federal fund rate until late 2015 or 2016 or later.  There are many other reasons beyond employment weakness for expecting a continuing accomodative Fed policy. These include a more sluggish economic and inflation pace than widely anticipated.

Car sales have slowed, manufacturing orders have plunged, home sales have weakened with the rise in mortgage rates and still tight lending constraints. Inventories are high and retail sales have been disappointing. This no inducement for the projected rise in capital spending despite low and declining productivity gains. The problems of Detroit and Puerto Rico are causing restraint in employment and spending in state and local governments across the country.

And in the rest of the world there are also pronounced economic problems.China is just beginning to deal with its private banking credit explosion to finance grossly overbuilt real estate. China's GDP growth rate has slowed to 7%, with the risk of still slower growth after years of  faster growth and even double digit  gains. China's purchasing managers index fell to 49.5 in January, indicating contraction.  China's economic slippage has slowed global demands for many basic commodities, especially affecting commodity producing economies in the emerging market. Recessions are projected for Argentina and Venezuela.  Europe is still far from experiencing a robust recovery. Indeed, deflation remains a threat for Europe.It is already a reality for Greece, Cyprus, Latvia, Portugal, and Spain.  That is raising expectations of rate cuts by the European Central Bank.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square, #249
East Northport, New York 11731

I can be reached a Philipbraverman@Gmail.com