Monday, June 21, 2010

Potty Economics

The latest unusual economic indicator is located in your bathroom. It’s toilet paper! I’m not making this up. A recent article on MSN Money says toilet paper sales can tell us much about the economic recovery. (article here)

I feel obligated to comment on this new indicator since I have written about other unusual economic indicators. But I assure you that I will treat this subject with the seriousness and professionalism it deserves and will resist the temptation to include any snide puns.

Some economists are flush with excitement at the possibility of a new economic indicator, but I think the argument on this one is a bit too thin to do the job. You know that the situation has hit bottom (or touched bottom) when economists are reading toilet paper instead of tea leaves.

Toilet paper sales plunged in late 2008 and 2009 as the economy swirled downward. You could have knocked me right off my stool with this news. I would have theorized that toilet paper sales would be impervious to economic conditions, but The Great Recession was so nasty sales and production both went down.

Consider that there are no substitutes for this product. Corn cobs or leaves might work in a pinch, but are not viable in the long-term. However, many “downsized” people downsized their toilet tissue purchases. It is speculated that people went from using two-ply to one-ply and from name brand to cheaper off-brands. I knew the recession resulted in tough times, we now know it also created rough times.

There is a possibility that some people did intentionally cut back on toilet paper usage for environmental reasons. Sheryl Crow proposed in 2007 that global warming could be improved if people limited themselves to one sheet per session. Then there was the 2009 campaign from Greenpeace that claimed that our use of plush toilet tissue was destroying the environment. While I think it is important to go green, when green goes up against brown, brown usually wins. And if you wanted to quickly destroy an environment, imagine yourself on a four-hour plane ride with a group of Sheryl Crow disciples. (I wonder if those drop-down masks work at normal cabin pressure).

But what makes this recession different is the amount of people who suffered a reduction of income. The unemployment rate is around ten percent. Add in the part-time workers for economic reasons and the discouraged workers (no longer looking for work) and you are up to 17% of workers. Now add in the people who took a pay cut in 2008-2009 which is basically everyone in the transportation industry as well as many other hard-hit industries. Add to that nearly every commission sales person (including every real-estate agent). You need to include all waitresses and service providers whose income and tips depend on customer volume. Finally, you have many small business owners whose income also is based on volume. People depending on dividend and interest income from investments also took a hit.

Run the grand total and maybe 30% or more of the working population suffered a drop in income. And even with the recession over, incomes are still lower than a few years ago. While most corporate pay cuts have been restored, many people in the other categories are still are trying to recover. In addition, many workers laid off in 2008-2009 have found new jobs that pay less than their previous ones.

However, the economy after being strained is starting to loosen up and interestingly toilet paper production is up 13%. Toilet paper factories are being dumped on with orders and are pushing out product at a rate not seen in months. This is an indication that consumers are wiping away their economic fears and spending money again.

And now the market may be having a movement back to the other end. A new three-ply toilet tissue sold well in 2009 and continues to swell in popularity. The product’s success was probably fueled by people who maintained their income levels and were looking for more comfort. Or it may just be the stress of the economy has inflamed the hemorrhoids of the nation like never before (we need some o-balm-a).

You don’t need to be a bloodhound to know that conditions were smelly and this is one paper that you didn’t have to read to know things had hit the skids. I don’t want to poo-poo the findings too much, but this is a trailing indicator (so lift up your shoe and remove it from the discussion). I don’t believe this indicator means squat unless there is another recession of this magnitude. There are many products that followed the same sales pattern as toilet paper during this recession. It is not unique so I believe that we can eliminate this indicator from the discussion and start back to square one.

Thursday, June 3, 2010

Very Dippy Thoughts

Today’s topic is the “double-dip”. Some double-dips are good. My favorite double-dip is a German Chocolate Cake/Jamoca Almond Fudge combination at Baskin Robbins. Likewise, double-dip roller coasters can be fun. Riding these is very similar to investing in the stock market. The major difference is that you are guaranteed to get off of the roller coaster with the same amount of money you started with, very different with stocks.

Most double-dips have negative connotations. The charlatan who unethically or illegally gains financially from drawing income from two sources, George Constanza double dipping his potato chip, and of course the dreaded double-dip recession.

Some analysts appear obsessed with the possibility that we will have a double-dip recession. Every week there are new articles on the subject, but double-dip recessions are rare. Economists are concerned that global credit problems, a Spanish banking crisis, a new Korean War, a second housing slump, money supply tightening and a disruption in Chinese trade, will plunge the U.S. economy back into recession. It is possible for this economy to fall back into recession, but to dwell on the subject is sort of morose and potentially self-defeating. There will be plenty of time to analyze it after it happens, so shut up already.

The Model T is not predicting a double-dip recession. The current graph of The Model T is shown below. It still says we are in the beginning of a “UL” shaped recovery. Note though that according to the graph, the economy will take an extended time to recover.

GDP Forecasts
My panel of economic experts forecasted a 2.8% growth rate for Q1 and the last revision was 3.0%. The panel is forecasting 3.5% for Q2, 3.1% for Q3 and 3.2% for Q4. So not even close to a double-dip predicted here. Although it should be noted that the panel members did not predict the first recession. (For what it’s worth, I personally think the forecasts for Q3 and Q4 are high).

The Stock Market

June is a key month for the market. The May drop was more pronounced than normal for the start of a bull market. If there is more correction in June, this market has no legs. Almost all the “data driven” models are predicting some type of market correction of 10-40% or even more. Most analysts predicting market increases are basing their forecasts on emotional based factors. They argue that the data models are not valid due to the indicators being unreliable due to the bizarre financial circumstances. This argument is self-defeating. If the economic indicators remain messed up, it is because the economy remains messed up. The unreliability of the indicators is a bad thing, not a good thing.

Yes We Could Double-DipThere is a way that a double dip recession could happen. If the stock market drops 20% or more in a short time period, panic will reenter the economy. Remember that all recessions have some psychological factors and if panic causes consumers and businesses to stop spending, you will get more layoffs and possibly another recession. This would indeed be a strange occurrence. The stock market could drop to where the data models say it should be and this causes the recession. It hurts my head to even think about this one. My suggestion is for everyone to head to Baskin-Robbins and chill out.