Thursday, December 17, 2009

Miracle on

The November jobs report was much better than expected. The unemployment rate fell to 10% and net payroll jobs declined by only 11,000. These types of numbers were not expected to happen until Q2, 2010. This is good news.

The unemployment rate still could increase in the next few months as discouraged workers begin looking for jobs again. But remember, this is caused by more jobs becoming available and people feeling better about finding work. Improved economic conditions can cause the unemployment rate to increase in the short-term.

Some conservative commentators downplayed the report and tried to diminish the data for political purposes. Yes, the economy is still not good. Yes, the government is not doing the correct actions to help (see last week’s post) and we still have a long way to go. But there is no way to view the November report as anything but good news. You can debate about how good the news is, but that seems rather pointless and childish and it can actually be detrimental to the economic recovery (more on this later). For a very positive (perhaps too optimistic) outlook on the data, see these articles. Article 1 Article 2

But are things really getting better? Back in October I commented on my friends Jeff and Kurt (pseudonyms of Jerry and Kirk), two highly-skilled professionals that had been unemployed for a year. Here is an update on their situations.

Long-term unemployment puts stress on a family and on Thanksgiving Day Jeff’s wife (only in her 40’s) suffered a minor heart attack. She works full-time and is the main source of the family’s income. This is one of the sad personal stories of the recession, similar to what is happening to numerous people throughout the country.

But don’t reach for the tissue box just yet. Because eight days later, after being unemployed for just more than a year, Jeff received a job offer for a great position. Jeff’s wife is going to be alright. Ring some Christmas bells; it’s going to be a great holiday at Jeff’s house.

What about Kurt? Incredibly, Kurt received his first job offer on the very same day as Jeff. That’s right, I’m telling you that the two people I wrote about in October, that had been unemployed for over a year, received their first job offers on the very same day. In December no less, which is the weakest month for hiring. (If you don’t believe me, send an e-mail and I will pass it on to Kurt and Jeff for confirmation).

And it gets even better. Jeff received a second job offer a few days after the first one and Kurt ended up deciding between three offers. This has all the makings of a holiday movie. I’m thinking of writing a script and calling it “Miracle on”.

Good news such as this gives us hope and hope is important for everyone to have right now. There is a psychological/spiritual element to macroeconomics. Recessions usually intensify when people become pessimistic about future economic conditions (In our present case it was more like panic). Recessions end and recovery begins when optimism returns. Economists use the term “animal spirits” to describe the economic changes caused by changes in people’s attitude. The term is often used when economists have no rational explanation why things are getting better or getting worse. This means that trying to discredit good news can actually hinder the economic recovery by keeping people pessimistic.

The economy has gone through much turmoil in the last two years. Many people are going through serious hardships, struggling to make it in what seems to be a cold, dark, world. Some people have given up hope.

But we remember a story of a people also facing hardships in a cold, dark, world. They had received a promise, but that promise remained unfulfilled. Almost everyone had given up hope. It was into this situation that hope was born. It happened suddenly and it came quietly. It would have gone totally unnoticed except for angelic beings proclaiming good news. Good news, indeed.

Merry Christmas

You Can Provide Hope

My friend Duane (a big fan of this blog) is director of the Refuge of Hope mission in downtown Canton, Ohio, a city hit harder than most by the recession. Please consider donating the last $21 of your gift budget to provide Christmas dinner for a table of ten hungry people. You can make a donation on-line (either Pay Pal or credit card) by following this link. Refuge of Hope

Thursday, December 10, 2009

We’re From the Government and We’re Here To Help

“Can 535 politicians, heavily influenced by lobbyists, make better spending decisions than the other 220 million adults in the United States?” – Joseph Y. Calhoun II, Alahambra Investments

Basic economic theory says that individuals in free market economies make better decisions about the allocation of limited resources than do government entities. Government intervention is needed to serve as a “referee” to make sure participants follow the rules (the referees watching the financial crisis “swallowed their whistles” this time.)

The financial crisis has motivated the government to get very involved in the economy and institute several programs intended to help. The major problem is that most of our congressmen are either lawyers or career politicians, or both. Politicians are experts at getting reelected, not solving business problems.

Most of the programs involve giving away “free money” in one form or another. “Game Theory” states that after the government writes the rules for these programs, the participants will act in a way to maximize their own benefit. Or scam the system if possible.

Let’s see how well the government programs are working so far:

Troubled Asset Relief Program (TARP)

The Plan: The government was supposed to purchase or insure up to $700 billion of "troubled" assets to stabilize the financial system and rejuvenate the credit markets.

Free Money: Given to big banks the government likes for the purpose of stabilizing the banks and encouraging them to resume lending.

The Game: The banks take the money and stabilize their balance sheets. Their stock prices go up and ---- yes, big bonuses for everybody. The lending increase to help boost the economy? Not going to happen. And as soon as the government wanted to exert more control over the banks, suddenly the money was no longer free and they sent it back.

The Result: The TARP was greatly needed at the time to stabilize the financial system, but implementation was inefficient and tainted by politics. It failed miserably in attempting to loosen the credit markets.

American Recovery and Reinvestment Act of 2009 (Stimulus 1)

The Plan: I'm not really sure there was a plan. It was an unfocussed, hodge-podge of tactics involving $787 billion. There was some safety net spending and some aid to states for key services support. There was only $100 billion allocated for infrastructure. Jobs were supposed to magically appear keeping the unemployment rate under 8.5%.

Free Money: Much of the free money flowed to politically important states and to politically important workers and basically anyone who could spend it and claim that jobs were saved or created.

The Game: Gimme some of that stimulus money. Such as $31 million for renovating two small Canadian border posts in Montana and $3.5 million for an under road tunnel so turtles and alligators can cross the road safely in Florida. For more examples: See Article

The Result: Money is spent for many wasteful projects and few jobs are created. Unemployment topped 10%. Only 25% of the money had been spent through September but it did help increase GDP in Q3. If this program would have been submitted as a project in a business class, it would have received an “F” grade.

The General Motors and Chrysler Takeover

The Plan: Temporarily take over two bankrupt car companies until they can become profitable on their own

Free Money: Not so free to the car companies since they are under government control. Tons of free money to the United Auto Workers union and retirees.

The Game: Really not much of a challenge. The UAW didn’t give up much and received plenty.

The Result: The government is now trying to run car companies when the government can’t even run the government. This should turn out well.

Cash For Clunkers

The Plan: Give people money for trading in their old gas guzzlers for a new more fuel-efficient, less-polluting, ride. This would stimulate car sales and clean the air.

Free Money: $4,500 for anyone needing or wanting a new car. Politicians were amazed that so many people would take advantage of them handing out free money. So many people took the deal that the program initially ran out of money. This should have been a major red flag that something was wrong and the amount was too large. No, they didn’t get this and allocated even more free money for distribution.

The Game: The biggest users of this deal were Ford F-150 owners who turned in their slightly used F-150s to buy new F-150s. When people who drive pick-up trucks can figure out how to scam the system, the program has some real problems. (Just kidding)

The Result: Auto sales spiked during the program and then fell afterwards. It looks like the program didn’t generate many marginal sales and had negligible effect on air quality. A very expensive program with lackluster results. Also, is it any coincidence that the first industry to get a targeted stimulus is the one the government now owns a piece of? Surprise, surprise, surprise.

First-Time Home Buyer Tax Credit

The Plan: A tax credit for first-time home buyers intended to stabilize house prices and reduce inventory.

Free Money: $8,000 for first time home buyers. Again the free money is very popular.

The Game: Anyone that was considering buying a home in the next 12 months bought it now. This means many sales were pulled forward with no guarantee that sales will continue after the program ends (that is why it was extended). However, the number of eligible buyers for the program is shrinking.

The Result: It has stabilized prices and reduced inventory in the low-priced segment, but has not helped the rest of the housing market. Economists would argue that the program was unnecessary because depressed housing prices combined with historically low mortgage rates already offered a tremendous incentive to buy.

Stimulus – Part 2

As congress considers “Stimulus Part 2”, let’s hope it’s much more job focused than Part 1.

Here are some ideas:

- After the Minneapolis bridge collapse in 2007, the buzz was that all older bridges in the country needed to be replaced. So do it now! It will create jobs and save lives. Win – Win.

- In 10 years it is expected that the highways and railroads won’t be able to handle the increase in traffic and freight. Expand the infrastructure today when there is less traffic and it will create jobs now and lead to economic growth down the road.

- There is also expected to be a strain on the electrical supply and grid sometime in the near future. Upgrade it now. Build some new nuclear plants too.

- And since there is a move to renewable energy, how about building some wind farms and promoting solar panel use and production.

Thursday, December 3, 2009

The Good, The Bad, and The Beautiful - Unusual Economic Indicators

There is still much uncertainty about where the economy is headed in 2010. The GDP forecasts for Q1, 2010 from the latest Wall Street Journal Economic Panel range from -2.0% to +5.0%. The average of all respondents is +2.8% and the average of my personal “Super Seven” economists is +2.6%. Because there is so much uncertainty from the top economists analyzing the traditional economic indicators, it is a good time to look at some unusual ones.

The Strange Indicators:

Men’s Underwear

The theory is that men will delay underwear purchases in tough financial times. Mintel (a consumer research group) is forecasting sales to decrease 2.3% this year and fall another 0.5% next year. Reportedly, sales have increased since the summer.

My Read: This indicator was first proposed by in the 1970’s when men’s underwear choices were very limited. I think it is difficult to use the general data as a predictor today. There might be something useful here, but more in depth data analysis is needed.

Men’s Ties

The theory is that business people wear bright colors when they have confidence in economic conditions and positive attitudes. One economist has claimed that more men are now wearing pink and fuchsia neckties, after wearing much more muted tones earlier in the year.

My read: This one is difficult to measure. Although there could be data available if tie vendors track sales by color. Watch the business news and draw your own conclusions.

Women’s Lipstick

The theory is that during recessions women will compensate for reduced spending on clothes and other fashion items by buying more lipstick, an inexpensive alternative. This theory was first proposed during the previous recession during which lipstick sales spiked. However, it is not holding up this time. Lipstick sales are down about 11% this year. Makeup sales however are up 8.5%.

My read: The lipstick “index” has been proven unreliable so forget it. However the makeup sales could be relevant. Are women making fewer trips to the spa? Are they attempting to cover up the results of stress?

The Hot Waitress Index

The theory is that as layoffs increase, attractive women will have to take jobs as waitresses to make ends meet. I am not making this one up and the linked article makes a good case for the index relating to conditions in New York City. See article.

My read: This theory sounds like it was developed by a group of guys at a bar late at night. There is no baseline and it is difficult to measure. Again, you will have to be the judge on this one.

Unusual, But Logical, Indicators:

The Cardboard Box Index

Many things get shipped in boxes so production of boxes should increase before production of the goods that go into the boxes. Box production jumped in April and the recession probably ended in July. Sales have been relatively flat since however.

My read: Indicator is only good for certain industries and is more short-term in nature. Not showing much of a trend right now, but should grow in 2010.

The Baltic Dry Index

The index measures sea freight rates which typically are very sensitive to changes in demand due to the long lead times of ship construction. This index surged earlier in the year, but that was caused by activity in China. It then fell back, but it has shown strong growth so far in Q4.

My read: Positive movement, but watch China factor.

Scrap Metal Prices

The theory is that increased prices of scrap metal precede increased economic activity. Scrap aluminum and copper prices are up, nickel prices are down. Scrap steel prices are showing modest recovery.

My read: Good indicator, positive trend.

Coal Futures Prices

Coal is a source of energy connected to industrial production. The expected future price of coal should be related to the future demand for coal and thus give indications of economic direction. The index has been less reliable recently due to Chinese demand. Future prices are trending up, but not consistently.

My read: Not as reliable as in the past, but trending positive.

Indicators I See:

Sunday Morning Breakfast Index

I note the number of cars in the parking lot at a family restaurant I pass every Sunday morning. When the economy was strong, the lot was jammed. Early this year, the lot was less than half-full. There was an increase in the summer, but then it flattened out. However, there has been a slow, but steady increase the last two months.

Optional Medical Tests

A source in this industry told me business was very slow in Q1, but has improved every quarter.

The Christmas Lights Index

There are fewer and less extravagant Christmas light displays in my neighborhood this year. Is it because people need to reduce their electric bills or are they feeling less festive?

The Human Relations Job Postings Index

My fellow job seeking friends have reported a recent increase in job postings for HR positions. Speculation is that companies need to bolster their HR departments before hiring other positions.


Considering the 12 indicators as a group: seven are positive, three are negative and two are neutral. Somewhere between 2-3% GDP for Q1 sounds about right.