Monday, April 23, 2012

Dr. Hope and Joe Economy

The Setting: A few years ago Joe Economy was very sick.  He had ingested toxic assets and suffered a painful bubble burst.  His physician Dr. Bushwack had not done a very good job attending to Joe but now Joe had a new doctor, Dr. Hope, who promised Joe’s family that he would soon return Joe to good health.

Nurse: Doctor, the patient doesn’t look so good.
Dr. Hope:  That’s not a problem.  I am Dr. Hope and I am here to change things!

Nurse:  So you’ve treated many patients like Joe before?
Dr. Hope: Actually Joe is the first patient I’ve ever dealt with, but how difficult can it be? In addition, I did sleep in a big, white, mansion last night.

Joe: Help me, Dr. Hope
Dr. Hope:  The problem is that you are just laying there, Joe.  We need to get you up off the bed and get you stimulated!  Now get over here and grab this shovel and look as if you are about to dig a hole.
Joe: How is this going to help?
Dr. Hope:  If people see you digging holes, then they will start digging holes and then they will load and dump dirt all over the place and you will get better.  That is my aspiration!
Joe: I don’t think you know your aspiration from a hole in the ground, but I will give it a try.

Dr. Hope: See, it’s good being stimulated. Isn’t it?
Joe: I still don’t feel so good. I think I better lie back down. Oh no.

Nurse: The patient has just dumped a load in his britches. What should I do now?
Dr. Hope: Change!

Nurse: Dr. Hope, your patient isn’t getting better.
Dr. Hope: Oh no, he’s not my patient; he is Dr. Bushwack’s patient. And it’s DR. Bushwack’s fault that Joe’s not getting any better.  Dr. Bushwack was a terrible doctor and the failure of any of my actions will be and will ever continue to be, Dr. Bushwack’s fault.

Joe: Help me Dr. Hope.
Dr. Hope:  What you need to do now Joe is to go get your clunker of a car, drive it to the car dealership and trade it in for a brand-new.
Joe:  But my car isn’t a clunker and I don’t have the money for a new one. I don’t think this is going to work.
Dr. Hope: No problem Joe, here’s a stack of cash to help buy the new car. When people see everybody buying cars, this will motivate them to buy more stuff. And when they buy more stuff, you are going to start to feel great.
Joe:  Okay I bought the car and that was fun, but I don’t feel so good now. Oh no.
Nurse: Joe just cashed some clunkers in his shorts.  What should I do?
Dr. Hope: Change!
Nurse: Your patient, I mean Dr. Bushwack’s patient, still looks very weak.  What now doctor?

Dr. Hope: Joe, get up over here and hold this solar panel.
Joe: Why?
Dr. Hope:  It will show people that you are working in a green job.  Green jobs are great because they put people to work and stop global warming.
Joe:  Okay, I’ll hold this thing, but you do realize it’s cloudy today and this thing isn’t going to provide much energy.
Dr. Hope: Nurse, shine some lights on Joe so it looks like it’s sunny.
Joe:  This seems a bit like an artificial stimulus.
Dr. Hope: Just keep smiling and go green Joe.  Here’s another truckload of greenbacks to create even more green jobs.
Joe: I still not feeling so hot. Oh no.
Nurse: Your patient, I mean the patient, has just created some global warming in his pants and it looks like he’s gone green! What now?
Dr. Hope: Change!
After all his actions failed to improve the health of the patient, Dr. Hope stopped trying to stimulate the patient. Joe, now with rest and the proper medication, began to heal naturally.  He started to feel better on his own, his recovery had begun.  He got up from his bed and started to slowly move forward.
Joe:  I’m feeling better now.  It’s time for me go.
Dr. Hope: Look! My patient is healed! My recovery plan worked!
Joe: Whatever. I think I’ll just be moving along now.
Dr. Hope: Let me give my patient a big hug.
Joe: Please keep your *$!% hands off of me!
And at this Joe started moving ahead even faster.
Dr. Hope: Look at him go! I’m an excellent doctor after all!

Tuesday, April 10, 2012

Smells Like 3% To Me

At the beginning of the year many economists said that economic growth would be weaker in Q1, 2012.  Q4, 2011 GDP came in at 3%, but much of the increase was attributed to a build-up of inventory that was not expected to be repeated the next quarter.  Few other reasons were given for the slowdown.

My expert economic panel forecast Q1 GDP to be 1.9% in January and adjusted it up slightly to 2.1 in the March forecast.  I never really bought into a lower number based on inventory changes alone.  The Q4 inventory build-up was a reaction to inventories being much too low in Q3.  They were too low because sales were much better than expected. (A good thing!).  Then businesses added to stocks in Q4 in anticipation of even higher sales (Another good thing!).  In a growing economy, I do not believe inventory increases are a bad thing, I think it is a good thing.

So if the base is 3% growth, what did the economic indicators say in the recently completed Q1? :

The ISM manufacturing index remained in the “growth range” each month and indicated no slowdown in production.

→ The Bloomberg Consumer Comfort Index is currently at its highest since March 2008 (very early in the Great Recession).  The Gallup survey confirms consumer confidence is growing.

→ The Chicago Fed National Activity Index (CFNAI) shows the economy growing at just above a 3% clip.

→ The ECRI Weekly Index (measures leading economic indicators on a weekly basis) is at its highest point since last August.  The government’s index of leading economic indicators also predicts continued growth.

→ Retail sales continued to grow, up 1.1% in February and preliminary March numbers are very positive.

→ Auto sales were described as “robust” by one analyst with sales much higher than last year.

→ Housing probably bottomed out in Q1 (my call).  Regardless, housing is turning from a drag on economic growth to a very small positive. This transition had to help the economy in Q1.

→ The job market keeps growing and the unemployment rate keeps falling.

→ The inventory-to-shipments ratio remained stable through the quarter which means businesses did not over-stock in Q4 and steadier growth has occurred in the last six months.

The Analysis

It is difficult to believe that the economy slowed down at all in Q1.  With all the positive news, you can make a strong argument that it improved over the previous quarter.  However you do have to factor in the negatives of high unemployment, rising gas prices and weak housing data.  Be careful when reading economic commentaries due to the political biases in an election year.  The President’s critics will make things sound worse than they really are and his proponents will spin things the other way.

I’m not an economist, so I am not going to get out my calculator and calculate Q1 inventories.  What I will do is apply what my friend Mark refers to as “Kentucky Windage” and my friend Terry calls “putting his fingers in the air”.  And if I stick my nose in the air, it smells like a Q1 GDP growth rate of 3%.  Which means the economy was somewhat stronger in Q1, with some negative inventory effect.  And while the economy could smell sweeter, it smells much better than the noxious fumes of the last few years.                                                                                      

The Forecast

It did appear that the economy was stronger in January and February than in March.  Last month job growth slowed, the stock market retreated and gas prices rose.  Gas prices will rise more in Q2 due to the switch over to the more expensive summer blends.  If the increase in price follows historical patterns, average gas prices (as reported by the government) will peak around $4.90 a gallon.  I believe this will indeed slow economic grow, but it will not stop it.  Using the same KWM (Kentucky Windage Method), let's shoot for a 2.6% GDP for Q2.

Note: “Kentucky Windage” is a term related to marksmanship, not college basketball.  It is incorrect to say: “Kentucky had much windage at the 2012 NCAA Basketball Tournament.”