Markets & Economy

Economy still sluggish, but tapering is justified

Commentary: Fears of new bubbles -- especially in stock markets -- are legitimate

Economic data this week were as soggy as we are (I write these letters from Colorado, which has been hit by record rains and flooding).

August retail sales, which had been expected to rise a pitiful 0.3 percent (minus autos), instead gained an even more pathetic 0.1 percent.

We tend to exclude autos because of volatility, and this year they’ve been goosed by credit steroids — auto and student loans surged $12 billion in July, while credit card debt fell $1.8 billion.

The small-business survey by the National Federation of Independent Business stalled again at the same mark as in 2010 and 2011, roughly equal to the bottom of the last two recessions.

The bifurcated economy marches on. Big business and tech-savvy globalized individuals are doing fine, but the lower half is just treadmilling. So even though the overall aggregates look OK, too many households look like our foothills — they’re underwater.

In any normal situation, news like this week’s would have broken the back of the long-term rate rocket, now four months without correction. Our situation is not normal, and in many ways without precedent.

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The rundown:

The financial bubble and banking get all the ink, but the real story, deep and underlying the bubble itself, is global competition. Allocating the kind of pain we've been through is beyond our federal government. Our adjustments have been made on the sidewalk.

1. The economy is obviously not accelerating as in Fed forecasts.

2. Yet, next Wednesday the Fed is likely to announce a taper of its $85 billion-a-month purchases of Treasury and mortgage backed securities (MBS). That’s been an annual pace of just over $1 trillion, versus Treasury borrowing only $775 billion and falling, and net MBS issuance probably negative.

Why taper in a still-muddy economy? Because of legitimate fear of new bubbles, especially stock markets. The Fed must wean us someday and may as well start. Getting tapering underway will make it a lot easier to get a new Fed chairman through the Senate.

3. President Obama says he will not get around to nominating a new Fed chairman until “after Syria.” Ben Bernanke has already withdrawn to invisible preretirement, leaving a void at the only economic branch of government to function in the last five years.

4. Overseas data could not be more confusing, but here is a spin-free baseline. Europe is not “recovering” and cannot. All of us who looked for imminent fracture there were mistaken, but hazard delayed is not hazard removed. Japan’s implosion is the most overanticipated worry on the planet. Other than yen devaluation hurting others, Japan is not an immediate threat to anyone.

The “emerging markets” are all soft, but independent and adaptable. China is the immense and opaque wild card. I’m guessing a ferocious power struggle is underway, reformers reaching for brakes but every slowdown gives the state-industry/Communist Party/Red Army crowd enough political force to stomp on the accelerator. That oscillation has an effect on other emerging markets.

5. The U.S. economy began to feel overseas wage competition as never before beginning in 1990. The marker: wage stagnation for most workers, followed by a roughly 10 percent decline during the Great Recession.

We may be regaining a little of that now, but imperceptibly. As grim as that thought, take heart: We have adapted as no other nation, and swaths of American labor are competitive again — at enormous cost. The financial bubble and banking get all the ink, but the real story, deep and underlying the bubble itself, is global competition. Allocating the kind of pain we’ve been through is beyond our federal government. Our adjustments have been made on the sidewalk.

6. We have had back-to-back dysfunctional presidents, further removing the federal government from action. We have done unbelievably well on our own, just us and Bernanke.

However, Obama faces a string of challenges all at once, is still feeling his way for how the government works, and has fewer friends in Congress if only because he’s in his arthritic, lame-duck waddle stage.

Withdrawals from Iraq and Afghanistan were correct and lucky-easy. Syria is neither, and wading into the Putin Marshes is beyond any duck.

A new budget crisis is weeks away, and the launch of Obamacare looks like the roads in my hometown — a mess.

Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.