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Don't be fooled by good economic news

Unemployment is going down. Consumer debt is going up. Even the housing market is showing signs of improvement. But the US economy is far from recovery mode.

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Danny Johnston/AP/File
A real estate sign is displayed in front of a home in Little Rock, Ark. Home sales rose in December to the highest pace in nearly a year, but Bonner argues that the improved housing market and other signs of improvement in the economy do not mean that things are getting better.

We have a wintry landscape here in Baltimore鈥r what is left of one. But forget the weather, happy days are here again.

At least, that is what you might think from reading the newspapers. Unemployment is going down. Consumer debt is going up. Even the housing market is showing signs of improvement.

Gold is rising 鈥 investors seem to think inflationary pressures are building. The 10-year T-note yield is back over 2%. And stocks are having their best January in 15 years鈥

And now, once again, the commentariat is talking about a 鈥榬ecovery鈥 from the Great Recession.

But we鈥檒l give it to you straight, dear reader. There wasn鈥檛 any Great Recession and there won鈥檛 be a recovery. You don鈥檛 recover from what ails the US economy. You die. Then, a new economy can be born.

Still, there are many recovery sightings. But so far, the recovery itself remains as elusive as Bigfoot.

贬别谤别鈥檚 Bloomberg, with more details:

A decline in unemployment and pickup in manufacturing point to accelerating US growth. Some economists say the numbers may not be as good as they look.

One reason: the severity of the economy鈥檚 plunge in late 2008 and early 2009 after Lehman Brothers Holdings Inc. collapsed threw a wrench into models used to smooth the data for seasonal changes, according to analysts at Goldman Sachs Group Inc. and Nomura Securities International Inc.

鈥淭he impact of the financial crisis does seem to have affected seasonal factors for several indicators,鈥 Andrew Tilton, a senior economist at Goldman Sachs, said in a telephone interview from New York. It 鈥渕ight tend to make things look a little better in the early winter and look a little worse in the spring time.鈥

Most economic data are adjusted for seasonal changes to facilitate month-to-month comparisons. Without those changes, for example, construction would always pick up in the summer, when the weather is milder, and decline in the winter.

The adjustment process is unable to distinguish between a one-time shock, like Lehman鈥檚 demise, and a recurring issue that would need to be smoothed away. For that reason, the mechanism gives some data a leg up from about September through about March before turning negative the rest of the year.

The economy contracted at an average 7.8 percent annual pace from October 2008 through March 2009, the worst back-to-back quarters in the post World War II era. The 18-month recession ended in June 2009.

The adjustment process 鈥渉as been knocked out of whack by the financial crisis,鈥 Ellen Zentner, a senior US economist at Nomura in New York, said in a telephone interview. 鈥淭he model ends up adjusting for a growth pattern that isn鈥檛 there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn鈥檛 happen late every year. It was a one-off event.鈥

In effect, the models are over-compensating鈥rying to make sense of the big collapse of 鈥08-鈥09 by treating it as though it were a seasonal adjustment issue. If the winter weather were so severe as to cause such a big drop-off, the machines reason, we must move the bar lower next year. Then, even a modest improvement will look spectacular.

But Goldman鈥檚 economists estimate that unemployment will average 8.5% this year 鈥 almost unchanged from last year. That is not a recovery. And we have to wonder鈥hat will power the 鈥榬ecovery鈥 analysts believe they seem coming?

Not household spending. Households don鈥檛 have any money to spend. What then?

Nothing. There will be no recovery. Instead, the US economy is in the process of zombification and ossification鈥hich is what happens when the feds refuse to allow dead-men industries to die.

Ottmar Issing, of the European Central Bank, is on the case:

鈥淭he problem of 鈥榯oo big to fail鈥 is that it has made society 鈥 more precisely, the taxpayer 鈥 hostage to the survival of individual financial institutions鈥he taxpayers鈥 billions committed to rescue supposedly systemic institutions has dealt a big blow to confidence in the free market system鈥nd has in turn become a threat to free societies.鈥

Well, yes. Now, the game is rigged. The fix is in. The zombies are dealt the aces. The rest of us get a bum hand.

But wait鈥idn鈥檛 the US government make a profit from its loans to the banks? Didn鈥檛 the banks pay back the money? Didn鈥檛 taxpayers come out ahead?

Oh dear reader, please stop鈥e can鈥檛 stop laughing. We鈥檙e afraid we might pull a muscle.

Imagine a bartender. He realizes that his customers have been handing out IOUs all over town 鈥 including to him. And he also knows his customers can鈥檛 pay. People are beginning to wonder鈥hey鈥檙e beginning to discount the IOUs. A crisis is coming鈥

What does he do? He lends the customers more money and buys the IOUs from the other merchants! Naturally, the value of the IOUs goes back up. Because now, holders know they鈥檒l get their money. Even the value of the IOUs owned by the bartender go up. Wonder of wonders, he has even made a profit on the deal!

Happy days are here again.

Which reminds us of Hemingway鈥檚 conversation between Bill Gorton and Mike Campbell.

Bill asks; 鈥淗ow did you go bankrupt?鈥

Mike answers: 鈥淭wo ways. Gradually. Then, suddenly.鈥

We鈥檙e still in the 鈥榞radually鈥 phase. Stay tuned鈥

Bill Bonner
听蹿辞谤 The Daily Reckoning

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