Monday, July 4, 2011

The “Grocery Cart” Recovery

The night was black, the roads were icy
Snow was fallin', drifts were high
And I was weary from my drivin'
And I stopped to rest for a while
I sat down at a truck stop
I was thinking about my past
I've had a long streak of that bad luck
But I'm praying it's gone at last

When you push a shopping cart in the grocery store it rolls very easily on the smooth, level, floor. However when you push the same cart on the store parking lot, it moves much more slowly and any bump, crack, imperfection or even a pebble can impede its progress.

Well, our economy is the shopping cart and after moving fairly well on the smooth surface, it has been struggling to overcome the obstacles in the parking lot in the first half of the year.

What were the obstacles?

1. Bad Weather – Snow storms, ice storms, tornados, floods. And weather statistics are usually useless when determining economic impact. It doesn’t matter if total snowfall for the season is “average”. It depends where it falls, when it falls, how much falls at one time and how icy it makes the roads and runways.

2. Bad Karma – The Middle East has been in political and social turmoil for several months. Do you think that people might get concerned as they watch the possible start of World War 3 on their big screens? And it’s alarming for the U.S. to enter its third war when we are having problems ending the first two.

3. Bad Gas – The Middle East turmoil only generated a “fear impact” until things in Libya heated up. The disruption in crude supply caused gas prices to spike. This sucks huge amounts of money out of our economy and severely limits consumer discretionary spending.

4. Bad Supply Chain – Who knew the impact of the Japanese tsunami would eventually be felt
here? This slowed the growth of several industries, especially the auto industry. The decrease in supply of autos resulted in higher prices for most brands. This of course led to lower industry sales.

After making it through the tough first half of 2011, let’s take a look at some key economic indicators:


I believe the housing market hit bottom in February and has been dragging across the bottom ever since. We have seen this in various industries during the downturn. The reason housing is the last to bottom out is that it had the furthest to drop and the government’s misguided attempt to prop of the sector. If the government had stayed out of the way, housing hits the bottom much earlier and would be recovering right now. Regardless, the housing market should start its recovery soon. It will not be strong enough to significantly help the economy this year; however it will cease to be a drag and that is a very good thing.

Inventory / Freight

Companies currently have a good read on inventory levels and cut stocks as soon as consumer spending slowed. As a result, all trucking freight indexes have gone negative the last couple months. Rail freight has slowed, but not as much. The good news here is inventories are very lean and any increase in consumer sales will immediately result in more production and more freight (which probably happened in June). In addition, activity at the commercial ports shows that import and export activity was not significantly impacted by the slowdown.


The ISM (Purchasing Manager’s) Index says manufacturing activity increased unexpectedly in June. Orders were up, employment was up and production was up. Imports and Exports also increased (conformation of the port data above).


Unemployment remains high, but don’t believe the rule that GDP has to be greater than 3% for the unemployment rate to decrease. This is one of the old rules that don’t apply to conditions right now. Remember, many traditional indicators (and rules) are not relevant right now due to the unusual circumstances. Many companies cut employment too deep during the recession and are starting to “right size”. A profession recruiter told me that his business in March was stronger than it had ever been. Of course the “bad” factors have tempered this some. Job growth should resume increasing very soon.

Auto Sales

Auto sales should jump in the second half of the year. Supply will increase, prices (through incentives) decrease and there is significant pent-up demand in the market. Showroom traffic has already started to increase.

Restaurant Index

The Restaurant Index was down in May as a result of the high gas prices, but the index had shown solid gains prior to that. Almost all the restaurants near my house that closed during the recession have reopened (under new names) and Friday night waiting lines are back to normal levels. The Hotel Occupancy Index was up 2.8% in May, another sign that consumer discretionary spending is starting to roll.

What Happens Now?

It looks like the shopping cart has just reentered the store. But it is still a shopping cart. Not a Lamborghini. Not a Ford. Not even one of those motorized scooters (that blatantly and publically rip off Medicare) that you see advertised on television. This recovery is everything we expected it to be (or not to be) at this point: slow and bumpy.

My panel of experts is forecasting GDP growth of 3.3% in Q3 and 3.2% in Q4. The Model T is more positive so I would add 0.5% on to both estimates. The Model T is still indicating a much stronger 2012.

Good Times?

The weather is improving, the Middle East appears controllable and Japan should be back ramping up production soon. This just leaves gas prices as an obstacle and that brings us to the Libyan situation.

The Chicago thug tactics, lean on the guy until he leaves, are not working. Khadafy is tougher than we thought. But I have an idea. Instead of using bombs, I would use a bombshell. All we need to do is find him asylum in some country, then pay his blonde, voluptuous, nurse (now in Norway) to go there. Next she tells Moammar where she is and that she misses him badly. Game over, gas prices fall.

Once in a while from out of nowhere
When you don't expect it and you're unprepared
Somebody will come and lift you higher
And your burdens will be shared
Yes I do believe, if I hadn't met you
I might still be sinking fast
I've had a long streak of bad luck
But I pray it's gone at last

Gone at last, gone at last
Gone at last, gone at last
I had a long streak of bad luck
But I pray it's gone at last

Gone at Last - Paul Simon

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