It seems a very long way from here, but it was only December 23rd when the economy was taken as “booming.” That was the day that excited economists under direct confirmation, allegedly, that this time was different. The Commerce Department had reported Q3 GDP up to 5%, raising estimates for business investment and consumer spending. The recovery had arrived, at long last:

The U.S. economy is rounding out 2014 in a sweet spot of robust growth, sustained hiring and falling unemployment, stirring optimism that a postrecession breakout has arrived.

 

A fuller picture of the year-end trends emerged Tuesday when the Commerce Department, in separate reports, said the U.S. economy expanded at a 5% seasonally adjusted annual rate in the third quarter, its strongest pace in 11 years, and reported that consumer spending accelerated last month amid rising incomes and falling gasoline prices.

 

“It appears we’ve reached an inflection point,” said John Canally, economist at LPL Financial.

The Wall Street Journal, to its credit unlike so many other outlets, actually tempered some of that enthusiasm by pointing out some troubling indications that lingered through all the euphoria. Among them was a curious lack of inflation and even wages, but also productivity which wasn’t really gaining in direct contradiction to the idea of a “booming” economy. An economy that isn’t producing such gains isn’t really gaining – a perfect tautology of basic economic function.

Now, only five months later that resounding victory in the economic arena sounds so very different.

Early quarterly results from the United States’ biggest companies have reinforced the notion that the U.S. economy, expected to be the engine of global growth in 2015, expanded at a lacklustre pace in the first three months of the year…

 

“This is a continuation of an environment we’ve been seeing for many quarters and years,” said Craig Fehr, investment strategist at Edward Jones. “We haven’t seen that tip-over point to where managers of corporations are really enthusiastic about the economic outlook and looking to deploy cash into new growth avenues.”

How is it possible to go from an end to the malaise to right back into the malaise I just a few months’ time? In one sense, this shouldn’t be surprising as economists and analysts are notorious for extrapolating off even the shortest of trends, but this is something far deeper and speaks to why 5% GDP itself was nothing but an illusion.

Corporations have a few problems of their own, in conjunction with general economic dysfunction. Productivity is itself a setting for capital expenditures, as it indirectly measures the profitability of productive investment. If productivity continues to be very low, then there isn’t much incentive for committing a great deal of resources toward expansion. What we cannot measure directly, only infer, is whether or not that deficient productivity trend is itself a problem or the further results of failing to invest in prior periods.

It isn’t unreasonable to think that deficiency of capital expenditures this entire cycle (or supercycle) is holding back productivity now. Thus it becomes a self-reinforcing process, dating back to bubble policies that clearly favor financial incentives. With so much internal and borrowed resources flowing directly to repurchases, dividends and M&A, a negative feedback loop has formed that not only keeps corporations disfavoring productive activity it keeps the economy substandard enough that further imperils any positive impulses toward longer run growth. The results are the same, the unstable economic trend that has plagued the planet the whole of the supercycle.

The difference this year, so far, has been primarily attributed to the “dollar” as if the “dollar” was an exogenous factor upon economic being. Being more of a financial parameter that might make sense, but you have to keep in mind that the “dollar” acts not purely financially but as a means of expression and thus transmission between financially-driven views and settings and the real economy. In the sense of corporations in the US, there has been a very clear upset to the business dynamic, dollar or not:

With the S&P up only 1.1 per cent this year, investors are concerned that several companies could emulate General Electric and Philip Morris, which each said last week that the dollar reduced their revenues by nearly $1bn in the first quarter. GE said currency swings hit profits by $120m, and Philip Morris reported a $585m hit to “operating companies income”.

Companies themselves are taking great pains to steer away from direct “dollar” figures, instead preferring “constant currency” comparisons. IBM probably inaugurated that as much as anyone, and maybe with good reason if under the intent of softening the blow. No matter how you view it, it is misleading since the company, as analysts, was not making the same “dollar” distinction when it was in reverse, tremendously boosting top and bottom lines. IBM’s latest quarter was another disaster, but appears less alarming when adjusting for the “dollar.”

ABOOK April 2015 IBM Dollar

IBM’s revenue results are as bad as the worst parts of 2009, but the company has rushed to reassure that it isn’t so, either forgetting or ignoring that the same attempt was made in 2009 with far less success. Part of the problem for this is undoubtedly the nature of earnings to begin with, and even revenues, which are to some degree fungible. However, in terms of free cash flow, IBM reported only $1.1 billion in Q1 which is better than last year’s Q1 $600 million but not any different than Q1 2009. If there is a reason for all this combined concern over the “dollar”, pursuant to all these attempts to excuse or assuage it, it is because the “dollar” has very real effects on corporate operations, and thus the economy itself.

FactSet expects first-quarter earnings for the S&P 500 to decline 4 per cent and revenues to drop 3 per cent. But it expects both earnings and revenues to be down 10 per cent for companies that generate less than half their sales in the US.

So again, corporate managers will not be pouring new cash into useful and productive investments in 2015, just as they have studiously avoided doing so for years now. What we don’t yet know is whether these “dollar” effects will be so negative for earnings and cash flow as to curtail even repurchases, if not discount further capex. The “slump” so far this year, “unexpected” as always, already suggests as much.

What a very different world April 2015 compared to December 2014, even though the “dollar” had already risen appreciably by then. That, I think, is itself highly relevant, as the “dollar”, as oil, has progressed enough now that “they” can no longer ignore it or its potential delivery for negative expectations, especially as some of them are starting to be upheld by actual results. It sounds like a self-fulfilling prophecy, but the “dollar” was well ahead of these trends last year, and now has a hand in bringing it about – financial transmission of expectations to reality.