Friday’s GDP number was a disappointment. The consensus among economists was that growth for the first quarter would be at least 3% (at an annual rate adjusted for inflation). The actual number was only 2.5%. And even that wasn’t as good as it looked. Growth late last year was very weak, so part of the first-quarter gain was simply a short-term bounce back from the previous quarter. Nonetheless, those results appear to fit with conventional wisdom: A lethargic economy has managed to crank out minimal but steady growth for almost four years. And the outlook is slowly getting better rather than getting worse.
Some contrarians challenge that view. They sees signs that the U.S. economy is losing momentum and is heading for another slowdown, if not another recession. The leading indicators of such a future downturn include price trends for important commodities, as well as for Treasury bonds.
The most significant bellwether is the recent drop in the price of gold – the sharpest in 30 years. Since the U.S. abandoned the gold standard in the mid-1970s, consumer prices have quadrupled, but gold has risen more than ten-fold. The gold price hasn’t moved higher consistently – it was relatively flat during much of the 1980s and ’90s. But there have been only three periods in which gold prices suffered a significant and rapid decline. The first was from 1980 to ’82, when Federal Reserve chairman Paul Volcker raised interest rates to crush double-digit inflation and the U.S. economy experienced two closely spaced recessions. The second was in 2008, when the financial crisis caused a credit crunch and a worldwide recession.
The third period began in 2011, when gold peaked at $1,896 an ounce. Since then, the price has fallen to $1,440. Strikingly, this decline is occurring at a time when the Fed is pumping money into the banking system, interest rates are extremely low, and the U.S. economy has not had a negative quarter for nearly four years. Why is this drop happening? There are three plausible explanations:
Fears of short-term deflation. The price of gold more than quadrupled in the past decade even though inflation has remained relatively restrained (consumer prices are up about 27% since 2003). One reason for this boom is the belief that the Fed’s easy-money policies will lead to serious inflation in the future. But that could be counteracted in the near term by deflation resulting from another recession. The sudden drop in the gold price could reflect growing concern that the U.S. economy is about to experience a sudden deflationary slowdown because of tax increases or budget cuts.
Gold dumping by central banks. Another possibility is that the sudden drop in the gold price is the result of a sudden increase in the supply of gold. This could occur if the central banks of financially troubled countries are forced to sell off their gold reserves to raise cash. Cyprus, for instance, was rumored to be considering large-scale sales of gold.
Slowing economies in countries that are traditionally gold buyers. Affluent people in countries such as China and India have traditionally kept a chunk of their wealth in gold. The latest data shows the Chinese economy continuing to slow. And India continues to be less than robust. Growth in other gold-buying regions, such as the Arab countries, also seems likely to remain sluggish.
Concerns about a possible U.S. recession, shaky foreign economies, and a general global economic slowdown are supported by trends in two other important commodities and the Treasury bond market. The price of oil largely reflects the level of global economic activity. It has topped $100 (in today’s dollars) three times in the past half century – before the recessions of the early 1980s, during the 2008 recession, and most recently in April 2011. Since then, oil has pulled back by as much as 25%. This could, of course, partly be due to the cheap natural gas made available by fracking. But it also suggests that the global economy has lost momentum over the past two years.
Copper also responds fairly directly to the level of economic activity, and it too signals a sluggish global economy. The copper price rebounded after the recession ended, hit a high in 2011, and has since pulled back. Currently, it is not far above its two-year low.
In addition, Treasury bond prices have been rising over the past few weeks. That could mean investors are moving money out of stocks and into bonds in anticipation of disappointing earnings; or that foreigners who are worried about their own economies are looking for a safer haven in the U.S.; or that expectations of future inflation have declined, allowing long-term interest rates to come down a little.
None of this proves that the U.S. economy is headed for a major slump. But several conclusions can be drawn from these trends. First, global economic activity is weaker than it was two years ago. It may be that this slowdown has occurred chiefly in Europe or in developing economies, but it will be a drag on the U.S., too. To the extent that central bank sales are contributing to the gold price decline, or that hot money is boosting Treasury bonds, it could be a sign of deteriorating finances overseas. Some part of the drop in gold and rise in bond prices probably also reflects growing expectations of near-term deflation in the U.S.
In short, the conventional wisdom that the economy is steadily recovering, just not fast enough, seems overly optimistic. If you believe the commodity and bond markets, the U.S. economy is stagnating — and is likely to get weaker still.