This Elephant Wants Cheap Oil!

To determine where the economy is going it is important not to ignore the elephant in the room. (Note: “Ignoring the elephant in the room” is a common business expression that should never be used if there is a rotund woman in your meeting). In our case, the elephant in the room is caused by uncertainty in Japan and Libya. Here is my take on both:

Japan: The Japan nuclear crisis was caused by the tsunami. Sure the 8.9 earthquake caused some damage to three reactors that were built to “only” withstand an 8.0 quake. But the problems would have been contained by the safety systems, if those systems would not have been destroyed by the tsunami. So until there are tsunamis on the Great Lakes, our U.S. nuclear plants are in great shape. We need abundant nuclear power to compete globally in this century.

Libya: Most Americans couldn’t find Libya on a map. Most Americans can’t spell Gha, Kad, okay I can’t either, but you get the idea. The only humanitarian mission we are interested in is the one that provides cheap gas for the humans in the U.S. I’m not saying this is right, I’m not saying this is moral, but you know that it is true. So why pretend it is about anything but the oil? Therefore why not just enter Libya and just take over the oil fields until the conflict ends? Don’t get involved with the war at all, just babysit their oil while they duke it out. We can turn the oil fields back to the winning side when the civil war is over. This is cheaper and less dangerous that what we are doing now (and much easier to explain!).

But don’t worry about the other problems in the Middle East because we have strong, decisive, leadership in the White House. Okay, in less than two years we will have the opportunity to elect strong, decisive… Okay, so maybe Donald Trump is starting to look better every day (except for the lousy hair). You get the idea that if Trump called Libya and shouted into the phone, “YOU’RE FIRED”, that somebody would be catching the next camel out of town.

Now let’s take a look at the major economic indicators:

GDP: Economists are scaling back forecasts due to high gas prices. My expert panel is at 3.2% for Q1 and 3.6% for Q2. January and February were hurt by bad weather conditions in the U.S. March was hurt by bad weather in Japan and the political tsunami in the Middle East. The economy is trying to gain momentum, but grease (and sometimes Greece) keeps getting thrown on the track. It’s going to be tough to hit 3.6% unless the elephant goes away soon.

Housing: The bad numbers keep pouring in. Housing starts and housing prices are in terrible shape. However if the housing market is hitting bottom, you would expect “bottom-feeder” numbers. Those numbers are worse than I expected, even though I still expect a recovery to start in the second half of the year. But some experts are very concerned with the “shadow inventory” – foreclosed homes not on the market yet and houses to be foreclosed in the near future. If the shadow inventory is significant, things could get much worse before they get better.

The housing recovery would have already begun if the government would not have artificially propped up the market last year. The government is like your mother-in-law, it means well but it should have stayed out of the way (and kept its trap shut).

Unemployment: Economists keep trying to use the traditional models to predict job growth. This was not a typical recession and this is far from a typical recovery. Job growth will be stronger than predicted because some companies panicked and cut too many employees during the recession. Now they are hiring more employees back than they would in a normal recovery. However, due to some structural changes in the employment market I believe we will hit a “wall” and it will be difficult to get below 7% unemployment. It is still taking people too long to find new jobs, but it is a much better job market than the pit of mid-2009.

Freight: Freight is still strong. It is fluctuating because businesses are having problems matching inventory with sales as the recovery progresses, but the overall trend is positive.

Retail Sales: People are starting to buy things again, especially wealthy people. Luxury good sales are spiking due to pent-up demand. Let’s hope that this is a preview of things to come in the other retail product segments.

Manufacturing: Industrial production and employment are stronger than anyone expected at this point. Exports have slowed down out a bit however.

The Model T: Indicates the recovery will continue throughout 2011 leading to a very strong 2012. Let’s just hope that the elephant doesn’t take a big dump in the middle of the parade route.