Growth in the U.S. economy, as it stands, can be explained with one word -- “mirage.” The Merriam-Webster dictionary explains the word mirage as “something that is seen and appears to be real but that is not actually there.”
It’s a story that is getting old. On the surface, economic data looks rosy, but when you look closer, you find a picture that is completely distorted. In fact, the fundamentals suggest the U.S. economy is deteriorating.
Not What It Seems
Take auto sales in the U.S. economy as one example. In March, auto sales reached an annual level of 16.4 million units, up from 15.24 million units in January. (Source: Motor Intelligence web site, last accessed April 3, 2014.)
On the surface, the increase in auto sales looks good for the U.S. economy. Automaker stocks are going up. And the politicians can say, “Look, Americans are spending money once again!”
But when we look closer, we discover auto sales in the U.S. economy have reached a new six-year high—with the help of subprime lending. Cars are being sold to those with poor credit ratings.
Remember subprime lending? It was rampant between 2004–2006, when consumers with bad credit received loans to buy houses they simply couldn’t afford. The same thing is happening in the auto market today. And the bubble in auto subprime lending is getting close to bursting.
In the first nine months of 2013, the 31+day delinquency rate was up 23% from the same period in 2013. On average, 7.59% of all subprime loans at the subprime finance companies were 31 or more days delinquent through to September of 2013. (Source: “Subprime Auto Loan Performance: The Best Is Behind Us,” S&P Capital IQ, February 26, 2014.)
In the S&P’s own words, “In our opinion, we’re at a turning point with respect to subprime auto loan performance… The increased competition has led to lengthening loan terms and rising loan-to-value ratios, both of which generally result in higher losses.”
Jobs And Wages
Auto sales are just one of the many examples that make the U.S. economy look rosy on the surface, until you discover what’s underneath, which in this case turns out to be shady loans. There are plenty of other examples. For instance, data suggests there’s jobs creation in the U.S. economy, but the jobs being created are concentrated in low-wage-paying sectors.
For a short time, this mirage that the U.S. economy is improving can continue, but the long-term growth prospects are fading away. I just can’t find enough evidence to believe the U.S. economy will improve in 2014; in fact, I believe it will fall flat on its face.