WHAT ECONOMIC GROWTH?
From its low in 2020, the economy seems to have rebounded reasonably well, generally speaking. Net of the effects of both inflation and higher interest rates, reported statistics seem to indicate that the economy is growing, albeit slowly at times. Setting aside temporarily the issues of accuracy, revisions, and manipulation, there is plausible evidence of economic growth.
However, a spate of recent announcements by major retailers says that momentum and direction is changing. Target, Walmart, and Walgreens highlight the list of firms that are taking conscious and deliberate action (broad-based price cuts) to attract and encourage increases in customer traffic. Spending, particularly discretionary spending, has declined measurably. (see Thoughts About Target, Retail Sales, And The Economy )
There is also evidence that large firms worldwide are clamping down on employee expenses; namely, travel and entertainment. Cost control is coming back with a vengeance. Question: Are these the delayed effects of serious damage that was inflicted during the forced shutdown of the economy four years ago? If so, might what has been presumed to be potential resumption of a long-term economic growth trend be considered a “dead cat bounce”?
DEAD CAT BOUNCE
A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—during which prices temporarily rise.
The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough. (Investopedia)
For our purpose, we are not referring specifically to asset prices, but to economic activity. In order to see if the term applies in this case, or has merit, let’s look at some charts (source) of economic activity. Below are four charts which can be considered indications of economic activity. The shaded areas are recessions. I will make some comments after each chart and then talk about how the term “dead cat bounce” might apply and discuss some possible implications.
Durable Goods Orders (inflation-adjusted) Historical Chart
It is apparent from this chart that people are spending less ‘real’ money on cars, boats, televisions, and appliances. The declining, long-term trend in durable goods orders dates back twenty-five years. Since peaking in 1999, the “prolonged decline” has been interrupted by three “temporary, short-lived” recoveries which were each followed by a “continuation of the downtrend”. Sounds like dead cat bounce(s) to me. Question: How many times can a dead cat bounce?
Capacity Utilization Rate (percentage) – 50 Year Historical Chart
Capacity Utilization refers to the percentage of “resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States” (source). As the rate continues to decline it indicates that production plants and factories are being used less; and, more of them are sitting idle. The long-term decline in capacity utilization dates back to the late 1960’s and is more than six decades old. There are five dead cat bounces which are followed by continuations of the downtrend to new lows.
Auto and Light Truck Sales (number of units) Historical Chart
In the case of auto and light truck sales the volume peak came at the turn of the century. There are two cases since then which could be considered indicative of the term dead cat bounce. While a long-term decline in sales isn’t clearly apparent, neither is there any evidence of a long-term increase. There is, however, a great deal of volatility; past and potential.
Housing Starts (number of units) Historical Chart
The peak in housing starts came in the early 1970s. Since then, there have been four instances of extreme lows followed by extended bursts of activity (“if you build it, they will buy it”). The chart refers to actual construction starts – not sales, not prices, not units under construction, etc. The long-term trend for housing starts is down and the periods of increase are followed by a resumption of the long-term declining trend. That fits the definition of dead cat bounce.
CONCLUSION
Long-term economic growth most likely stopped twenty-five years ago at the end of the most productive and prosperous period in U.S. and World history. Since then there has been a series of ups and downs which have taken us broadly lower as far as productivity, abundance, and growth are concerned. Overall quality of goods and services are questionable and customer satisfaction is missing.
Indications that long-term growth is a thing of the past are evidenced by the frequent reversals and declining trends in economic activity shown on the charts above. The latest focus of consumers and retailers on discretionary spending, price conscious actions and policies, customer satisfaction surveys, etc. are warnings that all is not well.
Moreover, what is presumed to be economic growth is not growth at all. Measured progress refers to efforts attempted to recover what was lost and return to where we were before the most recent crisis occurred (pre-Covid; pre-2008 Great Recession, etc.).
The past four years have been highlighted by increases in the effects of inflation, rising interest rates, overblown asset prices, and a general decline in economic activity. Slow growth/no growth is about the best we can hope for. As far as dead cat bounces go, the next one won’t come until after the cat “falls far enough and fast enough”.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!