Even if you believe that the economy we find today is irrelevant to one that will result from a range of better policies under a Trump administration, you still have a timing problem. I fully believe that “reflation” has to this point been about promise, and that mostly relates to what can “only” be different now that the age of QE has drawn mercifully to a close. Janet Yellen will continue to speak about how the jobs market is “strong”, but that, too, is a word that has been redefined by the past that no longer matters to this wave of optimism.

If we suggest that Trump will get more right than wrong, there is still a matter of lingering effects from all the past wrong. The fact that Industrial Production, a significant and historically deep economic statistic, has contracted for each of the past fifteen months is not nothing to be simply set aside. Given its shallow trajectory and state, we have yet to see the full effects of that past. And those may just now be catching up with the current economy:

General Motors will temporarily close five factories next month as it tries to reduce a growing inventory of cars.


Spokeswoman Dayna Hart says the factories will close anywhere from one to three weeks due to the continuing U.S. market shift toward trucks and SUVs. Just over 10,000 workers will be idled.

IP records that domestic auto assemblies first hit a 12 million SAAR all the way back in July 2014. The latest figure for November 2016 is just 11.91 million.


Though the production trend that has been broken for nearly a year and a half already, automakers are just now starting to adjust in more serious fashion. That is because despite the plateau in production, marginal product still went more to inventory than home with customers. As my good friend F. Everett pointed out at the end of November, the Federal Reserve Bank of New York has been noticing some stress in the subprime channel. This is not to say that subprime auto loans shall turn the banking system into 2008-redux, instead the implications are what you see above.

In the arena of auto sales, there is consumer willingness to buy (meaning primarily lease) autos and then there is consideration of their ability. If the credit cycle starts to turn, and there is evidence including compelling anecdotes for that case, there are going to be serious negative implications including feedbacks as automakers here and overseas struggle to adjust more seriously from what had been a stellar baseline trend – a trend that has clearly lost a great deal of luster already.

The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments. Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households.

That quote was from a FT article recording an alarming rise in repossessions. By itself, rising repo of autos isn’t necessarily a troubling indicator, as there are clear technical factors to consider alongside more possible macro aspects. However, it is the combination of all these and all at once that is most compelling.

You could make the case that the coming tax cuts and reduction in regulations, including Obamacare, will be more than enough to overcome these looming negative feedbacks; that the “right” stimulus will boost consumer demand for autos once again and bring back the rising, stellar trend from 2014. Even if it could, however, those possible positive effects are at least a year away. The economy that is will be relevant for a while longer no matter what, and I believe that consumers are likely to be far more fickle about it than markets have already been. You can’t really blame them given what has transpired over the past few years, especially as it has related to this very subject.

How many times have they heard Janet Yellen talk about how “strong” the labor market is? Just as they have listened often enthusiastically to Ben Bernanke say such things for years before, including, we must not forget, “subprime is contained” and what was incredibly worse his June 2008 “worst is behind us” rhetoric. Consumer sentiment has been of late measurably higher in all the surveys, but it was measurably higher (and surging on rhetoric) in 2014, too.

Hope and reality aren’t always acquainted, and, I would suggest, have been rarely so since August 2007. That might be especially true if hope meets broadening factory slowdowns in the coming months. It’s not recession, rather it is the same slow, almost undetectable erosion that has undermined every “genius” idea that “reflation” advocates have regularly fallen in love with for almost a decade. I have to figure that there is a great deal more caution in the real economy than in the commentary currently being employed to describe it.

The past economy is not yet its splendid future’s prologue.

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