Will The Economy Ever Get Back In Sync?

I'm doin' this tonight,
You're probably gonna start a fight.
I know this can't be right.
Hey baby come on,

We start off with a little ‘NSYNC because this economy is so out of sync.

In June several key economic indicators were ‘flashing red” and I wrote that I thought the economy was entering into a new recession. Fortunately, this forecast was wrong.   I still believe the economy may have stopped growing for a few weeks around the end of June, but instead of continuing to drop it bounced back to grow weakly in Q3.

Typically when the economy drops to 0% or negative growth, it continues to fall into a recession.  This is why the ERCI (Economic Research Cycle Institute) model has predicted two recessions in the last year that have not happened.  Their model assumes that once the economy stops growing, it continues to fall. However as the economy bounces softly on the bottom of this cycle, this is not happening under current conditions.  Fortunately there is not enough downward pressure to push the economy through the floor, so we are in a holding pattern.

The usually accurate, predictive, economic indicators continue to malfunction.  This is a result of the economy being “out of sync”.  Usually the housing market is a leading driver of the overall economy. However, the housing market crashed much harder than almost all other industries as a result of the Great Recession.  The rest of the economy has been slowly recovering for over two years, but the housing market recovery is less than 8 months old.  Now just as the housing market is picking up steam, the rest of the economy is losing momentum.  This results in the economy bouncing between 0% and 1.7% GDP (I’ll address the most recent GDP report later).

This is the Ying-Yang economy.  We are floating on the ocean, bobbing up and down.  Never sinking, but not really going anywhere either. If this economy was a country, it would be Malaisia.  Just look at the recent data:

Retail Sales – Dipped earlier in the year, but were up 1.1% in September

Industrial Production – Down 1.4% in August, up 0.4% in September

Index of Leading Economic Indicators – Down 0.4% in August, up 0.6% in September

Chicago Fed National Activity Index – Down in August, up in September

Los Angeles Port Activity – Inbound up 3%, Outbound down 2% (latest monthly data). Traffic has basically flat lined for the last several months.

Bank Lending – Very flat for the last several months

Job Growth – July = 181,000. August = 142,000. September = 114,000. Weak and flat.

Inventories – Have outpaced sales, which means manufacturing and freight markets have pulled back

Many Other Industries and Indicators – Are showing a flat pattern with small bounces up and down

What’s Next?

The first Q3 GDP report had the economy growing at 2.0%.  However increased government spending was responsible for a whopping 0.7% of the 2.0%.  Why the government would spend so much money in the quarter before a presidential election, I’ll never know.  It appears that they may have spent the entire military budget in Q3.  This means the Pentagon won’t have any money to buy even toilet paper the rest of the year. But this is the military, so they know how to get out of sticky situations.

I would also bet the farm on the 2.0% number being revised downward  after the election. My guess is the final Q3 number will be no higher than1.8%, which means after factoring out the government spending boost, the “real” growth may have been around 1.1%.

My panel of economic experts forecasts the following GDP growth rates: Q4 = 1.4%, Q1-2013 = 1.5%, Q2 = 1.9%, Q3 = 2.2%.  The good news is the growth increases every quarter.  Of course the bad news is the increases are so small that you have to work your way up to 2.2% growth.  The panel’s forecasts have been very accurate this year so I think this is consistent with this “bobber” economy.  Unfortunately these GDP rates historically have not resulted in a lower unemployment rate.

My guess is the panel’s forecast assumes no change in economic leadership.  So if you keep doing what you’re doing, you’ll keep getting what you’re getting.  But maybe it won’t turn out that way.  The economy is out of sync, but you will know a change is coming if on the morning of November 7 you hear us getting back ‘NSYNC.  

They want better GDP!

I know that I can't take no more
It ain't no lie,
I wanna see you out that door
Baby, bye, bye, bye...
Bye Bye 

We’re Shakin’ Cause The Economy’s Not Bakin’

Good evening, this is Eugene Roush reporting from the World Economic Speedway.  There is much excitement here because in just a few weeks we will find out if there will be a new driver of the U.S.A. car or if people will decide to stick with the current operator.  I am joined today by renowned NASCAR driver Ricky Bobby of Talladega Nights fame.

Eugene: First we are going to talk to current driver Bearleft Orama.  Bearleft, how do you think you have performed as a driver the last four years?

Bearleft: I have driven the car just great.  I’ve put my foot on the accelerator and kept the car on the right course.  I am an excellent driver and absolutely deserve to continue driving for the next four years.

Ricky Bobby: How fast you driving this thing?

Bearleft: I’m doing around a 1.3 GDP.

Ricky Bobby: 1.3! I can go faster than 1.3 riding naked on a tricycle!

Eugene: Now don’t exaggerate

Ricky Bobby:  No really, I have.  Want to see the photos?

Eugene: No! -- Bearleft, why are you going so slowly?

Bearleft: The previous operator of the car ran it into the ditch and caused considerable damage.  Me and my team had to repair it and now this is all the faster it will go.

Ricky Bobby: That sounds like you are making some wimpy excuses.  Are you sure that’s all the faster it will go?

Bearleft: Look, I’m trying really hard and I care deeply about going faster.  I know I’m not driving as fast as the Chinese car, but just give me more time and I know I will drive much faster.

Ricky Bobby: Trailing the Chinese? That’s disgraceful. – Look dude, if you ain’t first, you’re last!

Bearleft: Let me be clear: I am a great driver.  If you don’t believe me, just ask me or anyone on my team. I’m the best there is, plain and simple.  When I wake up in the morning, I whiz excellence.

Ricky Bobby: Hey, that’s my line! (Actual line from the movie: I p*** excellence.)

Bearleft: Not anymore. I’m the king of this track!

Eugene: Now let’s talk to the man challenging Bearleft for the opportunity to drive the U.S.A car for the next four years, Richie Richney.

Ricky Bobby: Those are interesting drivin’ gloves you got there.

Richie:  Oh these aren’t driving gloves; these are my silk driving mittens. They’re from France!

Eugene: Are you sure the people will accept a driver wearing such expensive “mittens”?

Richie:  Why not?  Underneath the mittens, my hands are human, just like theirs, although with a much better manicure.

Eugene: Do you think you can drive the U.S.A. car faster than 1.3 GDP?

Richie:  Are you serious? My grandmother could go faster than 1.3 GDP. In fact all 12 of my grandmothers could drive faster than that!

Ricky Bobby: You got 12 grandmothers? How is that possible? Your grandfather must have been a real tomcat!

Eugene: Why do you believe you would be a better driver than Bearleft Orama?

Richie: I’ve had lots of experience driving smaller cars on other tracks.  I drove the Bain car and had it zooming really fast.  I drove the Olympic car to victory and I once drove the Massachusetts car on the American circuit.

Eugene: How are you going to get the car to go faster?

Richie:  I plan to put high octane fuel in the tank and to take off all the restructure plates.

Eugene: Can you give us more details?

Richie: Uh, no I can’t.

Eugene: How about you Bearleft, what is your plan?

Bearleft: Plan? I don’t really need a plan.  Remember, I whiz excellence.  Just watch me!

Richie: Oh yeah?  I can whiz excellence too! Only faster!

Eugene: Run Ricky Bobby! It’s turned into a giant whizzing contest!

Ricky Bobby: Shake and Bake! I just wish I would have brought my rain coat!

Eugene: Ricky Bobby, what happens if neither Bearleft Orama or Richie Richney can drive the U.S.A. car any faster?

Ricky Bobby: Then it’s time to pray to that little baby, in that little manger…… 

Shocking News About The Volt

Three years ago “American” cars held a 100% market share of my garage.  We favored domestic automobiles due to our “blue-collar” roots.  My father-in-law was a municipal union worker for many years.  I was raised exclusively on United Autoworker Worker wages.  My father was not an autoworker, but worked in a factory represented by the UAW.  This heritage had always influenced our car buying decisions.

But now things have changed.  American cars now hold a paltry 25% market share of my household.  First, my daughter got a used Kia.  Strangely enough, my father-in law (a Korean War veteran) became a strong admirer of Kia cars before his death.

Next, my other daughter chose a Hyundai Elantra for her college graduation gift.  Her other options were a Mazda and a Nissan.  She refused to test drive a Chevy.  I would have forced her to test drive a Ford, but they are not part of our supplier discount program.  Her Elantra was an award-winning model and my daughter is very pleased with the car.

Then my wife bought a Mazda 3 (another award winner) this year.  My wife was very brand loyal to the Saturn brand.  Three years ago we owned three Saturns, and she certainly would have bought another if General Motors had not discontinued the line.  She loves her new Mazda.  My Saturn Aura, one of the best cars GM has ever made, is the last Yankee standing.

The Last "Yankee" Standing

And just as America cars lost market share in my driveway, they also lost share of the total market.  The value and quality of cars started to decline years ago and foreign competition has continued to improve, especially the Korean companies.

American cars are providing less value because they cost more money to produce.  This is the result of paying generous union wage and benefits even in the face of increased competition and foreign companies opening factories in the U.S.  The American companies are also saddled with large pension benefits and retiree medical expenses.  In addition, I believe the lack of competitive advantage has led to complacency in new product design, quality standards and creativity.

General Motors and Chrysler were already in a swirling downward cesspool when the Great Recession hit and threatened to flush the companies away.  Typically, the companies would have gone through a structured bankruptcy.  The purpose of the process is to restructure the resources and debt of the troubled company so it is able to continue operations in a reduced, profitable, condition.  This is very beneficial since it preserves investor, creditor, and employee value.

But there was no structured bankruptcy this time. There was a government bailout with partial government ownership.  Recently several commentators have referred to the bailout in very positive terms.  This is so wrong! A bailout is a very negative thing. It means you have failed so miserably that there is no way you can climb out of the mess by yourself.  It should be a very shameful, embarrassing, occurrence.  

A big government bailout has winners and losers and the government gets to select who the winners are.  It can be argued that the government did not bail out the car companies, but bailed out the UAW.  It some cases union pensions were preserved over salaried pensions and union wages won out over preferred stock holders.

And while a bankruptcy forces a company to correct its bad practices so that it can regain profitability, a bailout doesn’t have to do this.  The government initiated some peripheral changes, but did not address the big issue: GM union wages and benefits are still significantly higher than the competition.  Because the root cause of GM’s problems were not addressed, I expect the U.S. operations (they are doing well in China) to “fail” again in the future.

In a free market economy the government should never own any part of a company.  This is what communists do.  Unfortunately governments do not understand business, but they sure do understand politics.  A good example of this is the Chevy Volt.  It has been reported that a Volt costs $80,000 to produce.  The asking price was $40,000, but there were few buyers so they had to drop the price to $30,000.

The Volt: Shocking "Profitability"

The manufacturing costs will fall as volume rises, but how long will it take for the Volt to be profitable?  And this is a “high-tech” product which means new technology will make the Volt obsolete in a shorter time.  Producing a product for $80,000 and selling it for $30,000 is a business model only the government, and the Underpants Gnomes from South Park, can buy into.  It does produce many “green jobs” however, you happen to be paying for the bailout with your green.

It is also rumored that the recent increase in Volt sales is not just due to the price cut, but has to do with the government buying many Volts for its own use.  Boosting Volt sales before the November election may be very bad business, but it is very good politics.