Monday, October 29, 2012

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 

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