“Whenever I find myself growing grim about the mouth; whenever it is a damp, drizzly November in my soul; whenever I find myself involuntarily pausing before coffin warehouses… I account it high time to get to sea as soon as I can” – Herman Melville, from Moby-Dick

The most interesting thing about the opening chapter of Herman Melville’s classic masterpiece, Moby-Dick, is that we, as readers, know from the beginning that something is horribly wrong when our narrator is a man who decides to go whaling with a maniac because he would otherwise be a suicidal sociopath who likes funerals and other people’s top hats. We question how reliable he is, just like economic data.

Economic numbers are always such a tiny portion of the greater feast. It would be like judging a meal by tasting the lemon the chef squeezed on one of the dishes at the last moment. We have to keep digging to attain a clearer picture of what is going on.

“Hurrahs!” have been thrown around quite recently. Praises for the economy have been sung, with expectations of FED hikes coming on the heels of the new employment numbers. Yet globally, while the China Shanghai Composite Index (data from Yahoo! Finance) has stabilized somewhat since its crash earlier this summer, there are still looming issues for the FED to consider.


For one thing, as The Economist and others report, South Korean exports “shrank by the largest annual amount in six years, down 14.7% last month from a year earlier to under $40 billion, according to the ministry of trade, industries and energy.” South Korea is a major global exporter, and to have them suffer a slowdown is ill news for the global economy, which, as Business Insider reports, is itself recovering slowly. The Chinese, who account for a large proportion of Korea’s shipping industry, are less inclined to buy from Korea as a result of the recent devaluation of the yuan, which has made Korean goods more expensive. The yuan continues to fall as of the beginning of November. China, which is a large importer of the worlds’ goods, can no longer afford to buy as much as it has in the past due to its economic struggles, and now its currency’s devaluation has made foreign goods more expensive. Mom and Pop are going to be cutting down on the Korean TVs and cellphones this year for Christmas.

Overall, we are looking at a Chinese economy dragging its feet just to get going. But wait! There’s more…

The Bug in Unemployment

Much like Ishmael, many people hobble from job to job trying to make a living. The number of people who are now unemployed after having completed temporary jobs now stands at 3.97 million, according to the BLS. That is 57,000 more than in September. And despite an unchanged labor force participation in October, the trend is still heading downwards as there are 2 million more people out of the work force now than there were in October of 2014, many as a result of economic reasons. Looking at the chart below, one can see the precipitous rise in those who are not in the labor force.


Out to Sea

Let’s take another look at the what’s going on over the ocean blue. The shipping industry has been reporting difficulties for a while, but recent events have taken a turn for the worse. Global freight carrier Maersk Line announced that it would cut 4,000 jobs to cope with the continued drop in demand for container shipping. International Business Times reports that: “The company expects to save around $250 million in administrative costs over two years after the downsizing. Maersk has been in a process of cutting its shipping routes between Asia and Europe amid declining factory outputs and falling container rates.”

This is particularly bad news, considering that oil prices have been relatively low and that should have been a huge plus for a shipping industry. Nevertheless, as Maersk reports themselves: the issue is that the demand is simply not there, and when demand is not present, the supply must constrain itself.

It’s an old law that dates to Adam Smith himself. Smith declared that a producer is limited to the extent of the market. If you’re a shoe sales maker in a town of 10 people, you can expect to sell maybe 10 pairs a year if you’re lucky, but that’s hardly enough to live on, which will send you into the part-time employment category. If, however, the town booms and you have 200 people in the town, your market will be extended and you can stick to shoemaking. Right now, Maersk’s world-wide market has shrunk and thus they have to shrink their own capacity to meet it.

Counting the Days…

It only took 3 days for the Pequod to meet its ultimate destruction at the hands of a giant albino sperm whale. Interestingly enough, the first person to see Moby-Dick and win the resulting prize was Captain Ahab, the man who was sending everyone into oblivion in the first place. That speaks ill for our economy if America is the Pequod.

Q3 GDP growth was 1.5%, less than the 3.9% in Q2, but up from 0.6% in Q1. Most likely, the year will end up trending as it has for the past 6 years, somewhere between 1.5% and 2.5%. Needless to say, the “new normal” is still not a comfortable place for economists. Moreover, the recovery has not been as dynamic as had been previously hoped. Notice the graph below. The blue highlighted sections mark the years when the economy was in a recession, and hence we can see the GDP numbers immediately following recessionary periods. All of the previous recession periods have had more impressive GDP growth than America has seen since the Great Recession. New normals are difficult to accept from an economic and historical perspective: What has changed? Why is the new normal coming now? Is it really a new normal? Or does Ahab see something we don’t?


Spotting the Whale

So what’s the point of all this?

Perhaps we should end with the Federal Reserve, as it’s sail-ho’s have been mere mirages of late. Talk has begun, yet again, about a possible December rate hike of at least 25 basis points. It’s not that simple, however.

The FED on Oct 28 removed the following sentence on international risks from their minutes: “Recent global economic and financial developments may restrain economic activity and are likely to put further downward pressure on inflation in the near term.” It was a sentence that drew a lot of controversy. Why the focus suddenly on international markets? If the FED was unwilling to increase rates after a 3.9% GDP number and a good unemployment number, why would they do so now with 1.5% GDP growth, unemployment unchanged, and the global economy taking several turns for the worse?
It might be interesting to end on this note. “Fed Chair Janet Yellen said an improving economy has set the stage for a December interest-rate increase if economic reports continue to assure policy makers that inflation will accelerate over time,” Bloomberg business reported.

Inflation remains the big question mark here. It is difficult to control inflation and yet the FED is waiting on a 2% inflation number, since the job markets are improving. The international issues still loom large, and while the report seems to exude confidence, there was a moment of… well, you can read it yourself:

In response to a question from Minnesota Republican Tom Emmer, Yellen said she wouldn’t rule out using negative interest rates to help stimulate the economy in the event that another serious downturn occurs before the central bank can lift rates away from zero.

“I don’t at the moment see a need for negative interest rates,” she said. “If circumstances were to change” she added, “potentially anything, including negative interest rates, would be on the table.”

If the economy is on the upturn, and we should be thinking about raising rates, why are we seeing questions and answers about the possibility of a negative interest rate? Or does the captain see something the crew doesn’t see? Perhaps where the ship is headed? Use Google Images and type in “Migaloo” and see what you find…

Your fellow sailor,
Nickolas Urpí
Partner / Research Analyst