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In recent days, statistics have shown new doubts about the level of consumer spending, together with rising unemployment, and a fall in the inflation rate. In the normal course of events these would be pretty good signals of an economic downturn. Yet capital markets are bubbling along, with headline stories of new highs, rising house prices and such like. Today's GDP figures are only preliminary estimates, subject to revision. Revisions can go down as well as up.
Something is obviously disconnected but just what is it?
We have been looking at the statistics. Probing beneath the carefully chosen words of press releases, we've discovered a deeper malaise. The reported fall in retail sales growth is concentrated in consumer goods. People are cutting back on luxuries to provide funds for essential living expenses and food.
The rise in unemployment is quite sharp, taking unemployment back to the levels of 5 years ago. However, this rise in unemployment is concentrated in short term unemployment, so it has yet to ripple through the labour market. By putting the total amount of work in the economy alongside the number of people working, it reveals that part-time work is continuing to displace full-time work. Since the first quarter of 2002, the reported numbers in work have risen by 3.3%, yet total hours worked have risen by only 2.7%. The difference may seem small, but it accounts for £2.5 billion spending power that has, in relative terms, disappeared. No wonder inflation is falling and retail sales are in trouble. Plainly inflation is not as bad as feared!
One would expect markets to understand that economic deterioration such as this is anything but good news for equity and property bulls. But markets have taken on a life of their own, completely disconnected from the real world.
There is a simple explanation: credit (or, looking at the other side, debt). In the current debt binge, banks are pouring money into hedge funds and property lending. We saw an article recently about a large UK lender offering City bonus mortgages, minimum borrowing £500,000. It is this debt binge which is the explanation for the disconnection between capital markets and economic reality.
Sooner or later, something has to give. Previous debt binges have unwound through bear markets and crashes - if you have a long enough memory to recall Telecommunications, Media and Technology, you will recognise the symptoms. The only thing that is certain is that the statistical picture revealed beneath the surface is more likely to prove true, than the wildly optimistic assumptions of the borrowing binge.
Data taken from National Statistics on 19th and 20th October 2006.
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