Yesterday’s news on housing starts wasn’t great, but neither was it bad. Perhaps we might label it a mildly positive yawn. More of the same is coming, we predict, in a range of economic indicators.
It’s fun to forecast extremes. It makes the headlines; people pay attention when you scream the world is coming to an end, or that the next great bull market will commence on Friday at 2:39 p.m. But projecting middling results rarely taps the zeitgeist du jour. Popular or not, that’s the future we see coming for some period in the U.S. Oh, sure, there will be volatility, surprises here and there, and even some mayhem in the economy and the capital markets at times. But for the most part, the future looks rather boring, at least compared with what’s passed over past 12 to 18 months.
Boring constitutes progress these days, but it also creates a challenge and a new world order that, we suspect, the crowd isn’t quite prepared to deal with. Having fallen out of its chair, the U.S. economy—still the world’s largest, last we checked—is struggling to return to its former elevations of expansionary glory. The central bank, bless its heart, has been doing all it can to assist in the reflation game. And it’s clear that the Fed has had some effect, with more of the same on tap for some time. No wonder, then, that prices in the stock market, to take the obvious example, are up sharply this year.
But printing money, as necessary as that’s been for sidestepping a deeper economic collapse, only get you so far. We may be nearing the point where the monetary medicine has run its course. The marginal gains, in short, may be set to diminish. That doesn’t mean we’re headed for the ditch again, although the mass of debt weighing on the U.S. economy, both in government and on household balance sheets, inspires us to wonder. In any case, until a deeper, more fundamental rebound in the economy takes hold, the possibility of treading water in the months and quarters ahead should be considered as something more than a distant possibility.
The key challenge remains the labor market, which still shows limited capacity signs of expansion. Monetary policy is a blunt instrument for repairing this critical corner of the economy. And since the U.S. economy remains heavily dependent on consumer spending, it’s dangerous to ignore the current problem in minting new jobs. Indeed, in December it’ll be two years since American capitalism hit an iceberg and job destruction took hold. Almost no one thinks potent, sustained growth in the labor market is imminent, and so the very real possibility that we’ll be licking our wounds on this front for many months to come raises its ugly head.
That raises the issue of expectations. The rousing run higher in equities may have elevated hope that something similar is coming in the broader economy. But we’re inclined to err on the side of caution. The stock market, we believe, has recently become decoupled from the economy, which continues to confront a host of headwinds, the likes of which haven’t been seen in generations.
That’s not to say that recovery momentum is dead. Far from it. The seeds for restoring economic health have been sown to some extent, but the process has only just started. But it’ll be a bumpy ride. Yes, the worst is over, but the season of middling to mildly frustrating trends await.
Ours is an age that requires instant gratification. But speedy satisfaction will likely remain on a lengthy holiday.