Another reason I believe the economy will be stronger in 2011 than the experts’ forecasts is the improving employment situation. The unemployment rate dropped 0.4% in December to 9.4%. While some people tried to downplay the good news due to statistical factors, this data caused most economists to lower their unemployment forecasts for this year.
My panel of experts lowered the forecast from 9.2% to 8.9%. This is closer to my 8.7% prediction. I am not ready yet to lower my forecast, but I will say that 8.4% by the end of the year is now within reach. Regardless, the government numbers do have considerable “noise”. So is the employment situation really improving? As Yogi Berra said, “You can observe a lot by just watching.”
- I recently spoke at a job seekers group that I used to attend. There were only 14 people in attendance. A year ago, the group averaged around 35. It was announced that attendance was down because five people had found jobs. I can remember meetings when there were five people joining the group and other times when that room of 35 people did not have five interviews scheduled, let alone five job offers.
In addition, some people I met in these groups that I thought would have much difficultly finding employment due to various factors have found jobs in the past few months.
(I know what you’re thinking. Attendance was down due to the quality of the guest speaker. Well if I can stimulate five people to go out and get jobs just so they don’t have to hear me talk, then I guess I am truly a “motivation” speaker. Even though unemployment never caused me to live in a van down by the river.)
- My previous employer has started hiring office and factory workers after slashing half of its workforce in 2008-2009.
- High end jobs are coming back. Fortune magazine reports that job listings for newly graduating Ivy League MBA’s are up 85% over last year.
- A local flatbed trucking fleet is advertising for drivers on the radio.
- DOT reported that total miles driven in November 2010 were 1.1% higher than last year. These people have to be driving somewhere and many more are driving to work.
- Previously I wrote about two industrial facilities in Canton, Ohio closing about the same time around a year ago. I speculated that most of those former workers would not be able to find new jobs for a long, long, time. I was wrong. A local industrial manufacturer has expanded production and is hiring factory workers. A medical company has opened a new warehouse. And finally, a local chip maker has greatly expanded its workforce.
Now again I know what you are thinking; wow, high-tech jobs in the rust belt! Well, not exactly. They are not producing computer chips, they’re making potato chips. But it is a decent wage with benefits. Most of the previously laid off works from the two facilities do now have job opportunities and I doubt if many of these workers with standard mortgages lost their homes. It is much better than the disaster that was expected a year ago.
Still A Long, Long, Way From Home
Of course things are still tough. It is taking people much longer to find jobs, but most people who keep trying eventually finding work. Several people that were in my job hunting groups who I thought would not find jobs due to difficult personal issues have found work in the past several months.
The salaries of the new jobs found by victims of the recession tend to be lower than previous jobs. The Wall Street Journal reports that 36% percent of previous laid off workers found jobs paying at least 20% less than the one they lost. Much of this is due to workers moving from higher paying jobs with manufacturing firms (both white-collar and blue-collar) to lower paying service industry jobs. But once again, this is better that the conditions of a year ago. People who regularly ate at the steakhouse now may have to eat at Perkins. Yes a step down, but there are 71 million people in the Congo who won’t give you much sympathy on this one.
And there is a limit to how far this jobs recovery will go. The unemployment rate is going down due to the business cycle going up. This means cyclical unemployment is going down. But remember, there was both cyclical unemployment and structural unemployment in this recession.
It is now expected that the unemployment rate will bottom out at 7% (instead of the usual 5%) during this recovery. We may be able to even get to the 7% number by the end of 2012 if things continue to go well.
Many economists are predicting that all the jobs will not return until 2015. However, some of the previous jobs were squeezed out of the economy when the labor markets were “restructured” and permanently changed by the recession. Those jobs are gone forever. It will be interesting to see how the resilient U.S. economy responds to this challenge. Where will the new jobs come from? Or will 7% unemployment become the “new normal”?
A Van Down by the River!
Saturday, January 29, 2011
Monday, January 10, 2011
Time to Change Your Shorts
Another reason I believe the economy will be stronger (than expected) in 2011 is resiliency. The U.S. economy is extremely resilient.
How resilient? It’s like those action movies where the hero gets clubbed in the head with an iron pipe, hit in the face by a brick and repeatedly kicked in the groin and still goes on to win the fight. Now you always know the fight scene is unrealistic because of the groin kicking. No man could take even one kick to the groin and continue fighting. A mere tap to that area is enough to send a guy to his knees. (I know this because it was the object of a game the boys played at my grade school. I remember this because it is the worst game in the world for the tallest kid in the class. Your “target” is high and very accessible and your opponent’s “target” is low and difficult to tap.)
The U.S. economy took some tremendous hits in 2008 and 2009. It hit the ground hard during the Great Recession and it took an extended time to get to its feet. But after many counted it out, it is starting to “rumble” again. This economy is resilient. Remember when the terrorist attack of September 11 was supposed to bury the U.S. economy? This was one of the goals of the attack. And while the nation suffered in many other ways, the economy easily brushed off this cheap shot.
Another economic factor in 2011 is pent-up demand. Pent-up demand is created when something is needed in the present, but the satisfaction of the need is delayed to a future time for one reason or another. It is why sailors returning to port after months at sea often ran to the nearest bordello and why the women working there never won a beauty pageant.
The impact of pent-up demand on the economy can be illustrated by using our favorite economic indicator, men’s underwear sales. Blue-collar Bill saw some of his co-workers get laid off in 2009. Business wasn’t much better in 2010 and some weeks he didn’t work a full shift. In response Bill decided not to buy any new underwear during this time, but to get “extended use” out of his current inventory. But now orders are better. Bill even worked some overtime last week. His underwear may be “a-frayed”, but Bill no longer is. Bill is planning to buy at least two new packs of shorts this weekend. Likewise, Executive Ed had his bonuses reduced in 2009 and 2010. In response, Ed’s wife did not buy him the Italian-made silk boxers that Ed likes. She bought him cotton, that’s right cotton! Cotton may be the “fabric of our lives”, but it chafes Eddie’s thighs. (Remember, everyone has had to suffer in this recession). But now Ed’s business is picking up, it’s time to feel silky smooth again! (Maybe even good enough to hire some new workers)
There is tremendous pent-up demand by both consumers and businesses in this economy. When people and businesses begin to make purchases that they have delayed for the last two years, good things will happen.
We saw some evidence of this with Christmas spending this year. People spent much more this year after two lackluster years. Some analysts believe 2010 had the best holiday sales since 2006. Businesses are reportedly “sitting on “$1.93 trillion in cash (Wall Street Journal). When companies begin to spend more of this money, strong economic growth will follow. There is also pent-up demand in the labor markets. Companies have the need to hire more employees, but have been reluctant to do so. However going into 2011, this is also beginning to change. Look for job listings to jump in Q1.
The release of pent-up demand is linked to confidence. A year ago I wrote about the Iz (employed) and the Uns (employed). The Uns were not spending money because they were Uns, but the Iz were not spending money either because they were afraid they were going to soon become Uns. This of course led to more Iz becoming Uns than necessary. Now with new layoffs becoming few, the Iz (who remember make up over 90% of us) have started feeling confident enough to spend again. Business confidence is improving also which will help them start spending that almost two trillion in cash.
Those “green shoots” that people were looking for in 2009 are only starting now to appear. The problem is that most analysts grew tired of watching for them and now have trouble seeing the positives.
Many analysts claim you can’t have a strong economy recovery without a strong housing market. But it may be time to rethink this. Housing has been over stimulated since the mid-1990s and I believe capital was diverted from better uses during the housing boom in the aughts (00’s). A more productive allocation of capital, with housing getting its correct share, may be better for the economy that a new housing boom. I expect the housing market to bottom out in the middle of this year and then start a recovery. The recovery has already begun in some markets across the country.
Way back in October 2009, the Model T predicted what I termed the “UL” recovery. I described it as a long, slow, uphill climb, from the bottom. That forecast has proved to be very accurate, but it is now time to look at what is going to happen at the end of the “L”. I believe that we could be in what I am calling the “Delayed V”. It is starting now, will continue through 2011 and will accelerate in 2012. We are going to get the strong recovery that we wanted; we just had to lie on the ground an extended time to heal our wounds. You can even call it the “Bowl Recovery” \___/ if you wish.
Yes, this economy is resilient. Or as Sergeant Andy Sipowicz would say on NYPD Blue, “This economy has the stones”. Stones of steel.
How resilient? It’s like those action movies where the hero gets clubbed in the head with an iron pipe, hit in the face by a brick and repeatedly kicked in the groin and still goes on to win the fight. Now you always know the fight scene is unrealistic because of the groin kicking. No man could take even one kick to the groin and continue fighting. A mere tap to that area is enough to send a guy to his knees. (I know this because it was the object of a game the boys played at my grade school. I remember this because it is the worst game in the world for the tallest kid in the class. Your “target” is high and very accessible and your opponent’s “target” is low and difficult to tap.)
The U.S. economy took some tremendous hits in 2008 and 2009. It hit the ground hard during the Great Recession and it took an extended time to get to its feet. But after many counted it out, it is starting to “rumble” again. This economy is resilient. Remember when the terrorist attack of September 11 was supposed to bury the U.S. economy? This was one of the goals of the attack. And while the nation suffered in many other ways, the economy easily brushed off this cheap shot.
Another economic factor in 2011 is pent-up demand. Pent-up demand is created when something is needed in the present, but the satisfaction of the need is delayed to a future time for one reason or another. It is why sailors returning to port after months at sea often ran to the nearest bordello and why the women working there never won a beauty pageant.
The impact of pent-up demand on the economy can be illustrated by using our favorite economic indicator, men’s underwear sales. Blue-collar Bill saw some of his co-workers get laid off in 2009. Business wasn’t much better in 2010 and some weeks he didn’t work a full shift. In response Bill decided not to buy any new underwear during this time, but to get “extended use” out of his current inventory. But now orders are better. Bill even worked some overtime last week. His underwear may be “a-frayed”, but Bill no longer is. Bill is planning to buy at least two new packs of shorts this weekend. Likewise, Executive Ed had his bonuses reduced in 2009 and 2010. In response, Ed’s wife did not buy him the Italian-made silk boxers that Ed likes. She bought him cotton, that’s right cotton! Cotton may be the “fabric of our lives”, but it chafes Eddie’s thighs. (Remember, everyone has had to suffer in this recession). But now Ed’s business is picking up, it’s time to feel silky smooth again! (Maybe even good enough to hire some new workers)
There is tremendous pent-up demand by both consumers and businesses in this economy. When people and businesses begin to make purchases that they have delayed for the last two years, good things will happen.
We saw some evidence of this with Christmas spending this year. People spent much more this year after two lackluster years. Some analysts believe 2010 had the best holiday sales since 2006. Businesses are reportedly “sitting on “$1.93 trillion in cash (Wall Street Journal). When companies begin to spend more of this money, strong economic growth will follow. There is also pent-up demand in the labor markets. Companies have the need to hire more employees, but have been reluctant to do so. However going into 2011, this is also beginning to change. Look for job listings to jump in Q1.
The release of pent-up demand is linked to confidence. A year ago I wrote about the Iz (employed) and the Uns (employed). The Uns were not spending money because they were Uns, but the Iz were not spending money either because they were afraid they were going to soon become Uns. This of course led to more Iz becoming Uns than necessary. Now with new layoffs becoming few, the Iz (who remember make up over 90% of us) have started feeling confident enough to spend again. Business confidence is improving also which will help them start spending that almost two trillion in cash.
Those “green shoots” that people were looking for in 2009 are only starting now to appear. The problem is that most analysts grew tired of watching for them and now have trouble seeing the positives.
Many analysts claim you can’t have a strong economy recovery without a strong housing market. But it may be time to rethink this. Housing has been over stimulated since the mid-1990s and I believe capital was diverted from better uses during the housing boom in the aughts (00’s). A more productive allocation of capital, with housing getting its correct share, may be better for the economy that a new housing boom. I expect the housing market to bottom out in the middle of this year and then start a recovery. The recovery has already begun in some markets across the country.
Way back in October 2009, the Model T predicted what I termed the “UL” recovery. I described it as a long, slow, uphill climb, from the bottom. That forecast has proved to be very accurate, but it is now time to look at what is going to happen at the end of the “L”. I believe that we could be in what I am calling the “Delayed V”. It is starting now, will continue through 2011 and will accelerate in 2012. We are going to get the strong recovery that we wanted; we just had to lie on the ground an extended time to heal our wounds. You can even call it the “Bowl Recovery” \___/ if you wish.
Yes, this economy is resilient. Or as Sergeant Andy Sipowicz would say on NYPD Blue, “This economy has the stones”. Stones of steel.
Monday, December 27, 2010
My Economic “Bowl” Picks
It’s college football bowl season and it’s also time to make economic forecasts for 2011. So I am combining these two things and making my “Economy Bowl” predictions. I will use the average forecast of my top seven economists (published at wsj.com) as the “betting line” with my prediction on which “team” will win in 2011.
The GDP Bowl
Pittsburg Positives vs. Detroit Double Dippers
Line: Positives by 2.8% (GDP growth for year)
The Positives had a comeback year in 2010 after a horrible performance in 2009. The momentum is with the Positives going into 2011. Look for uneven growth next year, but to be overall stronger than expected. My pick: Positives by 3.8%
The CPI Bowl (Consumer Price Index)
Indiana Inflators vs. Denver Deflators
Line: Inflators by 1.7% (CPI for year)
Most experts are picking the Inflators by a narrow margin in 2011which means inflation is held in check for another year. However, many investors are putting their “gold” on a bigger Inflator victory. With commodity and gas prices on the rise, I think the panel is a bit low. That’s why I like the Inflators in this one. (In addition, the Deflator cheerleaders are not very bouncy). My pick: Inflators by 2.2%.
The Unemployment Bowl (sponsored by Monster.com)
Jacksonville Jobs vs. Los Angeles Layoffs
Line: Layoffs by 9.2% (unemployment rate at year end)
The employment environment continues to improve and my sources “on the ground” continue to report very positive progress. It is still taking people too long to find jobs, but layoffs are way down. I’m betting on the “Jobs”. My pick: Jobs by 8.7%
The Housing Starts Bowl
Boston Builders vs. Philadelphia Foreclosures
Line: Foreclosures by 700,000 (housing starts for year)
Look for the housing market to bottom out sometime in mid-year. That means the second half of the year will see more housing starts than expected. My pick: Builders by 820,000 starts.
The Price of Crude Bowl (Sponsored by OPEC)
Houston Oilers vs. San Francisco Solars
Line: $88.70 per barrel (year end)
You’ve got a weak dollar, you have greater U.S. demand as the economy grows and you have strong demand growth in China. I’m taking the Oilers big. My pick: Oilers by $93
The Stock Market Bowl
The Bulls vs. The Bears
Line: No consensus
I am picking the Bulls early and then the Bears and then the Bulls again before the Bears rally late. This will set up a big year for the Bulls in 2012. The Model T is now indicating a 2011 high in the S & P 500 Index of around 1,400.
The Blog Year in Review
We started off the year with that great economist Sting signing of a Brand New Day. From there we looked at underwear sales, toilet paper sales and “bucket washers” to try to understand our economic world. We visited the land of Emplovia and Nectarina (land of the Honey Dippers). We gained insight from Billy Banker, Becky Housing, Sammy Subprime, The Frito Bandito and Pooh Bear. Thanks for reading. If you are checking this out on a LindedIn or Facebook group, e-mail me at donake@neo.rr.com to get put on the mailing list.
A Personal Rollercoaster Ride
2010 was one of the most eventful and challenging years of my life. I felt like I was in one of those “life comes at you fast” commercials except that it wasn’t humorous at all. As the year ends, I feel like I have just exited from the most wild rollercoaster ride of my life. On one hand, I feel exhilarated from the experience. On the other hand, I feel like I could puke at any moment.
Rinnnnnnnnnnnnnng. That was 2011 on the phone. It said the next ride is starting soon. Happy New Year!
Check out this video clip on a Lesson From My Mother
The GDP Bowl
Pittsburg Positives vs. Detroit Double Dippers
Line: Positives by 2.8% (GDP growth for year)
The Positives had a comeback year in 2010 after a horrible performance in 2009. The momentum is with the Positives going into 2011. Look for uneven growth next year, but to be overall stronger than expected. My pick: Positives by 3.8%
The CPI Bowl (Consumer Price Index)
Indiana Inflators vs. Denver Deflators
Line: Inflators by 1.7% (CPI for year)
Most experts are picking the Inflators by a narrow margin in 2011which means inflation is held in check for another year. However, many investors are putting their “gold” on a bigger Inflator victory. With commodity and gas prices on the rise, I think the panel is a bit low. That’s why I like the Inflators in this one. (In addition, the Deflator cheerleaders are not very bouncy). My pick: Inflators by 2.2%.
The Unemployment Bowl (sponsored by Monster.com)
Jacksonville Jobs vs. Los Angeles Layoffs
Line: Layoffs by 9.2% (unemployment rate at year end)
The employment environment continues to improve and my sources “on the ground” continue to report very positive progress. It is still taking people too long to find jobs, but layoffs are way down. I’m betting on the “Jobs”. My pick: Jobs by 8.7%
The Housing Starts Bowl
Boston Builders vs. Philadelphia Foreclosures
Line: Foreclosures by 700,000 (housing starts for year)
Look for the housing market to bottom out sometime in mid-year. That means the second half of the year will see more housing starts than expected. My pick: Builders by 820,000 starts.
The Price of Crude Bowl (Sponsored by OPEC)
Houston Oilers vs. San Francisco Solars
Line: $88.70 per barrel (year end)
You’ve got a weak dollar, you have greater U.S. demand as the economy grows and you have strong demand growth in China. I’m taking the Oilers big. My pick: Oilers by $93
The Stock Market Bowl
The Bulls vs. The Bears
Line: No consensus
I am picking the Bulls early and then the Bears and then the Bulls again before the Bears rally late. This will set up a big year for the Bulls in 2012. The Model T is now indicating a 2011 high in the S & P 500 Index of around 1,400.
The Blog Year in Review
We started off the year with that great economist Sting signing of a Brand New Day. From there we looked at underwear sales, toilet paper sales and “bucket washers” to try to understand our economic world. We visited the land of Emplovia and Nectarina (land of the Honey Dippers). We gained insight from Billy Banker, Becky Housing, Sammy Subprime, The Frito Bandito and Pooh Bear. Thanks for reading. If you are checking this out on a LindedIn or Facebook group, e-mail me at donake@neo.rr.com to get put on the mailing list.
A Personal Rollercoaster Ride
2010 was one of the most eventful and challenging years of my life. I felt like I was in one of those “life comes at you fast” commercials except that it wasn’t humorous at all. As the year ends, I feel like I have just exited from the most wild rollercoaster ride of my life. On one hand, I feel exhilarated from the experience. On the other hand, I feel like I could puke at any moment.
Rinnnnnnnnnnnnnng. That was 2011 on the phone. It said the next ride is starting soon. Happy New Year!
Check out this video clip on a Lesson From My Mother
Sunday, December 12, 2010
We're Addicted To Junk
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Rail Freight Shows a Trend
We can learn some interesting things about the current state of the economy by analyzing the rail freight data published by the American Association of Railroads. If you look at the Carload data that includes minerals, lumber, chemicals, etc. (stuff you use to build things), it shows an economy that is better than 2009, but still considerably weaker than 2008. And there is an even wider gap between 2010 carload freight and the peak years of 2006 and 2007. This data is very consistent with the trends in the general economy.
But if you look at the Intermodal freight numbers you get a very different picture. Intermodal freight is shipped in containers that can be efficiently transported long distances by rail and then easily transferred to trailer chassis and hauled by truck to its final destination. Much of this type of freight is imported consumer goods from China and other countries that arrive by ship to the west coast ports. Intermodal freight surprisingly is back to the same level it was in 2008. If you look at this data, you would conclude that the economy had made nearly a full recovery and unemployment had already fallen to reasonable levels.
Of course intermodal freight growth is fuel by increases in consumer spending. And this increase in spending does help the economy grow --- in China. And it does create many jobs --- for Chinese workers.
Yes, we are doing it again. One of the things that got us into this mess is a vociferous appetite for cheap, imported, consumer goods. The result of this behavior (and trade policies) first resulted in the exporting of production line jobs and now we are also exporting many professional, manufacturing, support jobs.
Happy Campers?
So why are we returning so quickly to the damaging behavior of the past? Didn’t we learn our lesson? What is causing this relapse? Could we be addicted to this junk?
I was pondering this last question a few weeks ago when the annual news stories hit about the people camping out at retail stores three days before “Black Friday” in order to be at the front of the line for the hot sales items. What is your opinion of these people? Do you find them amusing? Do you say to yourself, “I wouldn’t do that, but I understand their desire to save money at Christmastime”?
I believe there has to me more going on here. Economists use the concept of opportunity cost to assign a value to what you give up by taking an alternative action. The opportunity costs of spending three days camping in front of Best Buy are huge. You are basically sacrificing three days of your life that you could be enjoying doing other things. Even if you spent Tuesday and Wednesday working, you may be able to earn more money than you end up saving (which in the spirit of Thanksgiving would please the Puritans). Spending Thanksgiving in a tent instead of sharing a great meal with your family would also be a great opportunity cost for most people.
No, something more is at work here. Researchers report that when day traders make a profitable trade it causes a physiological brain reaction very similar to a heroin high. I believe the people camping out achieve a similar high by “scoring” this big hit when they buy their sale items.
Now consider this: If someone announced that they would be selling discounted crack cocaine in a parking lot Friday at 8 a.m., you would expect crack addicts to begin lining up days in advance. It would not be a surprise, because after all they are crack addicts. You would not find it amusing, because they are crack addicts. You might even think that these people should get help, because they are crack addicts.
The reason we can’t see this with our Black Friday campers is that most of us in this culture literally buy into this mass consumerism. We may not be as bad as the “junkies” (what an appropriate term), but you might as well face it, you’re addicted to junk. And as you look around your house and see all the things you have accumulated that you either didn’t really want or really didn’t need, it isn’t difficult to understand that there is a pleasure in the act of purchasing things that often exceeds the utility provided by the products.
Marketers have figured this out just like pushers in the inner-city. The heroin pipeline begins in Afghanistan and the junk pipeline begins in China. I don’t have an answer for this one. And if you look at my Visa statement surely you would understand (shout out to Leslie Nielsen) that this is an observation and not a judgment.
Once there was a rouge economist that claimed that a person’s life does not consist in the abundance of his possessions. That life is more than food, more than clothes, and yes, more than junk. He said don’t worry about material stuff because there are more important things to focus on (Sounds like he really does understand opportunity costs). But of course this guy doesn’t have any credibility when commenting on how we choose to celebrate Christmas in 2010, does he?
I wish everyone a Very, Merry, Christmas!
Refuge of Hope
My friend (and fan of this blog) Duane manages an outreach shelter for the needy in downtown Canton. You can provide a Christmas dinner for a table of hungry people for a small donation of $25.Click here to donate.
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Rail Freight Shows a Trend
We can learn some interesting things about the current state of the economy by analyzing the rail freight data published by the American Association of Railroads. If you look at the Carload data that includes minerals, lumber, chemicals, etc. (stuff you use to build things), it shows an economy that is better than 2009, but still considerably weaker than 2008. And there is an even wider gap between 2010 carload freight and the peak years of 2006 and 2007. This data is very consistent with the trends in the general economy.
But if you look at the Intermodal freight numbers you get a very different picture. Intermodal freight is shipped in containers that can be efficiently transported long distances by rail and then easily transferred to trailer chassis and hauled by truck to its final destination. Much of this type of freight is imported consumer goods from China and other countries that arrive by ship to the west coast ports. Intermodal freight surprisingly is back to the same level it was in 2008. If you look at this data, you would conclude that the economy had made nearly a full recovery and unemployment had already fallen to reasonable levels.
Of course intermodal freight growth is fuel by increases in consumer spending. And this increase in spending does help the economy grow --- in China. And it does create many jobs --- for Chinese workers.
Yes, we are doing it again. One of the things that got us into this mess is a vociferous appetite for cheap, imported, consumer goods. The result of this behavior (and trade policies) first resulted in the exporting of production line jobs and now we are also exporting many professional, manufacturing, support jobs.
Happy Campers?
So why are we returning so quickly to the damaging behavior of the past? Didn’t we learn our lesson? What is causing this relapse? Could we be addicted to this junk?
I was pondering this last question a few weeks ago when the annual news stories hit about the people camping out at retail stores three days before “Black Friday” in order to be at the front of the line for the hot sales items. What is your opinion of these people? Do you find them amusing? Do you say to yourself, “I wouldn’t do that, but I understand their desire to save money at Christmastime”?
I believe there has to me more going on here. Economists use the concept of opportunity cost to assign a value to what you give up by taking an alternative action. The opportunity costs of spending three days camping in front of Best Buy are huge. You are basically sacrificing three days of your life that you could be enjoying doing other things. Even if you spent Tuesday and Wednesday working, you may be able to earn more money than you end up saving (which in the spirit of Thanksgiving would please the Puritans). Spending Thanksgiving in a tent instead of sharing a great meal with your family would also be a great opportunity cost for most people.
No, something more is at work here. Researchers report that when day traders make a profitable trade it causes a physiological brain reaction very similar to a heroin high. I believe the people camping out achieve a similar high by “scoring” this big hit when they buy their sale items.
Now consider this: If someone announced that they would be selling discounted crack cocaine in a parking lot Friday at 8 a.m., you would expect crack addicts to begin lining up days in advance. It would not be a surprise, because after all they are crack addicts. You would not find it amusing, because they are crack addicts. You might even think that these people should get help, because they are crack addicts.
The reason we can’t see this with our Black Friday campers is that most of us in this culture literally buy into this mass consumerism. We may not be as bad as the “junkies” (what an appropriate term), but you might as well face it, you’re addicted to junk. And as you look around your house and see all the things you have accumulated that you either didn’t really want or really didn’t need, it isn’t difficult to understand that there is a pleasure in the act of purchasing things that often exceeds the utility provided by the products.
Marketers have figured this out just like pushers in the inner-city. The heroin pipeline begins in Afghanistan and the junk pipeline begins in China. I don’t have an answer for this one. And if you look at my Visa statement surely you would understand (shout out to Leslie Nielsen) that this is an observation and not a judgment.
Once there was a rouge economist that claimed that a person’s life does not consist in the abundance of his possessions. That life is more than food, more than clothes, and yes, more than junk. He said don’t worry about material stuff because there are more important things to focus on (Sounds like he really does understand opportunity costs). But of course this guy doesn’t have any credibility when commenting on how we choose to celebrate Christmas in 2010, does he?
I wish everyone a Very, Merry, Christmas!
Refuge of Hope
My friend (and fan of this blog) Duane manages an outreach shelter for the needy in downtown Canton. You can provide a Christmas dinner for a table of hungry people for a small donation of $25.Click here to donate.
Sunday, November 28, 2010
Stoned Slackers
You are driving down the interstate nearing your destination, when suddenly the unmistakable sound of The Stones starts humming through your stereo. If you are a middle-aged guy, this immediately causes you to crank up the volume (way up cause your hearing is fading), stomp down on the accelerator (even if you are driving a Buick) and start doing the Jagger rooster bob. (I personally believe that all speed limits should be suspended if a Stones song is playing on the radio and I also believe explaining to the officer that “there’s fever in the funk house now” should be good enough to get off with just a warning).
It’s after the song ends, when the volume has been lowered and the rooster has been returned to its cage, that you realize you have blown by your exit and gone entirely off course. Unfortunately, you cannot immediately start repairing the damage. You need to wait until the next exit. Even then you may need to stop for a while to make sure you know how to get back on course and to refresh. And for certain when you get turned around, you drive much slower and more cautious than when Mick was blasting through the speakers. (You might even listen to Barry Manilow instead). What your mistake has produced in your trip is slack. In order to get back on track, all the slack must be eliminated.
Today’s topic is slack and how it impacts economic recovery. In a previous post I stated that I now believe the economy will be stronger in 2012 than most experts now forecast. (the government just downgraded its 2012 forecast last week, which actually reinforces my thinking.) One reason I believe the economy could grow at a rate of 5% or more in 2012 is slack.
Recessions create slack in the economy and large recessions create significant slack. This slack must be used up before the economy can really start growing. When all the slack is removed from the economy the impact can be dramatic, but slack is usually very difficult to measure.
To illustrate, consider what happened in the platform trailer market in the previous recession. Before the economy slid, the platform trailer market was booming. Existing trucking fleets were buying many new trailers and new fleets were entering the market to handle a seemingly continuous increasing demand for freight. Trailer dealers had huge inventories to service this demand. Trailer manufactures were running multiple shifts and struggling to keep up with orders. Even after the first signs of economic weakness were apparent, trailer manufacturers considered it “just a blip” and continued at full production rates in order to keep manufacturing costs lower.
When the real recession hit, freight demand quickly dropped. Fleets had too many trailers so they parked or tried to sell their excess units. When older trailers broke down, they were repaired instead of replaced. Many fleets went out of business and their trailers went into the huge used trailer inventory. Thousands of new trailers sat in dealer lots ready for customers that no longer existed and thousands more sat at the manufactures a result of the irrational exuberance that characterized the time period. There was a tremendous amount of slack in the platform trailer market.
After the economic recovery began, it took an extended time before this slack was used up. For a long time, people in the industry wondered why the demand for new trailers was not stronger. During the time though; freight was growing, fleets were putting units back into service, profits were increasing so there was money to buy new equipment and used inventory was being depleted. When all the slack had been eaten up, something almost magical happened. Demand for new platform trailers exploded, catching the industry by surprise.
Slack impacts economic recoveries like this. Imagine that you have a very tangled rope with a ball attached at the very end. Then you tie the other end to a pick-up truck. The pick-up truck starts to move forward. You can’t see the truck or most of the rope, so you watch the ball and use that as an indicator to determine how fast the truck is moving. The truck starts at a slow speed and the ball moves a little. As the truck accelerates the slack in the rope is being tightened up, but the ball still doesn’t progress much. Now the truck is moving at a high rate of speed, at some point the rope becomes taut and the ball now accelerates at a speed equal of the truck.
This is what I expect to eventually happen with this economy. People are hoping for a fast recovery, but you don’t always get what you want with this economy, but with the economic forces at work, you get what you need. This has been a very long economic slide. We’ve been holding out so long and we miss you (economic good times). The unemployed try, yes they try, but they can’t get no satisfaction in this labor market. It’s enough to make a grown man cry.
But at some point this misery will end. It will be a memory, a memory of a slump that used to mean so much to me (and you). And once you start it up, this economy will never stop (until the next downturn of course).
People think I’m crazy, others think I’m hazy, but that’s my roll of these tumblin’ dice on when the economy will climb out from under the thumb of economic hardship and finally say goodbye to those rueful Tuesdays.
So to review: It’s all right now, except for some slack. Then it’s a gas, gas, gas.
Mailing List
If you are reading this on a Linked In group or are being sent the blog link from a friend, please e-mail me at donake@neo.rr.com and I will add you to the mailing list so you can be notified of new posts.
It’s after the song ends, when the volume has been lowered and the rooster has been returned to its cage, that you realize you have blown by your exit and gone entirely off course. Unfortunately, you cannot immediately start repairing the damage. You need to wait until the next exit. Even then you may need to stop for a while to make sure you know how to get back on course and to refresh. And for certain when you get turned around, you drive much slower and more cautious than when Mick was blasting through the speakers. (You might even listen to Barry Manilow instead). What your mistake has produced in your trip is slack. In order to get back on track, all the slack must be eliminated.
Today’s topic is slack and how it impacts economic recovery. In a previous post I stated that I now believe the economy will be stronger in 2012 than most experts now forecast. (the government just downgraded its 2012 forecast last week, which actually reinforces my thinking.) One reason I believe the economy could grow at a rate of 5% or more in 2012 is slack.
Recessions create slack in the economy and large recessions create significant slack. This slack must be used up before the economy can really start growing. When all the slack is removed from the economy the impact can be dramatic, but slack is usually very difficult to measure.
To illustrate, consider what happened in the platform trailer market in the previous recession. Before the economy slid, the platform trailer market was booming. Existing trucking fleets were buying many new trailers and new fleets were entering the market to handle a seemingly continuous increasing demand for freight. Trailer dealers had huge inventories to service this demand. Trailer manufactures were running multiple shifts and struggling to keep up with orders. Even after the first signs of economic weakness were apparent, trailer manufacturers considered it “just a blip” and continued at full production rates in order to keep manufacturing costs lower.
When the real recession hit, freight demand quickly dropped. Fleets had too many trailers so they parked or tried to sell their excess units. When older trailers broke down, they were repaired instead of replaced. Many fleets went out of business and their trailers went into the huge used trailer inventory. Thousands of new trailers sat in dealer lots ready for customers that no longer existed and thousands more sat at the manufactures a result of the irrational exuberance that characterized the time period. There was a tremendous amount of slack in the platform trailer market.
After the economic recovery began, it took an extended time before this slack was used up. For a long time, people in the industry wondered why the demand for new trailers was not stronger. During the time though; freight was growing, fleets were putting units back into service, profits were increasing so there was money to buy new equipment and used inventory was being depleted. When all the slack had been eaten up, something almost magical happened. Demand for new platform trailers exploded, catching the industry by surprise.
Slack impacts economic recoveries like this. Imagine that you have a very tangled rope with a ball attached at the very end. Then you tie the other end to a pick-up truck. The pick-up truck starts to move forward. You can’t see the truck or most of the rope, so you watch the ball and use that as an indicator to determine how fast the truck is moving. The truck starts at a slow speed and the ball moves a little. As the truck accelerates the slack in the rope is being tightened up, but the ball still doesn’t progress much. Now the truck is moving at a high rate of speed, at some point the rope becomes taut and the ball now accelerates at a speed equal of the truck.
This is what I expect to eventually happen with this economy. People are hoping for a fast recovery, but you don’t always get what you want with this economy, but with the economic forces at work, you get what you need. This has been a very long economic slide. We’ve been holding out so long and we miss you (economic good times). The unemployed try, yes they try, but they can’t get no satisfaction in this labor market. It’s enough to make a grown man cry.
But at some point this misery will end. It will be a memory, a memory of a slump that used to mean so much to me (and you). And once you start it up, this economy will never stop (until the next downturn of course).
People think I’m crazy, others think I’m hazy, but that’s my roll of these tumblin’ dice on when the economy will climb out from under the thumb of economic hardship and finally say goodbye to those rueful Tuesdays.
So to review: It’s all right now, except for some slack. Then it’s a gas, gas, gas.
Mailing List
If you are reading this on a Linked In group or are being sent the blog link from a friend, please e-mail me at donake@neo.rr.com and I will add you to the mailing list so you can be notified of new posts.
Thursday, November 11, 2010
Real Time Election Results
The true election results are what happens in the time following the election, not what happens on election night. After the votes are tallied, it’s not important who won, but what that person actually does in office.
While this blog is about economics and not politics, let’s look at some issues that will impact the economy after the mid-terms….
Do You Hear Me Now?
The Voters Wrote the Following Message on President Obama’s Facebook Wall: “FOR THE LOVE OF GOD, PLEASE JUST STOP IT!!!!! PLEASE JUST *#$!*!* STOP IT RIGHT NOW.
President Obama replies: Hey, you don’t need to shout. I don’t understand what I’ve done to cause this type of reaction.
The Voters reply: Uhhh … we already knew that.
Repossession Order
The main problem with the healthcare bill is there is no money available for the states to be able to pay for it. That’s why governors are so opposed to it and after the election this opposition will increase.
The healthcare plan is similar to buying a new Rolls-Royce on credit. It is wonderful to drive. Your friends and neighbors just ooh and aah about it and of course the chicks dig it. Absolutely everything about the car is a positive experience until the first bill comes. Of course you can’t pay it, so you don’t. Then Matt and Sonia from Operation Repo show up with a camera crew and rip the car right out from under you at a most inappropriate time.
So now the Republicans want to change most of the healthcare bill while the Democrats do not. This is similar to two doctors operating on the same patient at the same time, but not agreeing on what needs to be done. This is not going to end well.
California Screaming
Both my California (business) girls (Whitman and Fiorina) lost. No sour grapes, but the financial problems in the state are huge and I just can’t see them improving much now. Expecting political veteran Jerry Brown to sharpen his pencil (literally) and solve the problems is like asking your grandfather to fix you iPod. “This is pretty small for a transistor radio. How do you get a 9-volt in this dadgum thing?”
The California ballot initiative on legalizing marijuana also went down to defeat. Supporters of the initiative reportedly were very bummed about the outcome. If only there was some way for them to relieve their sadness.
Seems to me if you were going to return to the hippie era and elect Jerry Brown, you would want to go the whole way and legalize pot. California could really use the tax revenue and with Brown in charge of handling their financial crisis, they are going to need more than just medical marijuana to deal with this pain.
WWF Defeated
Voters also rejected former World Wrestling Federation CEO Linda Mc Mahon in Connecticut. But don’t worry; with this divided government I predict that the upcoming political fighting will make the WWF look like the World Series of Hopscotch.
Get ready for a smack down. Pelosi better put on her game face (or at least pump up her present one). Boehner better hope his tan goes deeper than the first layer because he’s going to lose lots of skin in this game.
And that’s too bad. Many people believe that the government that governs best governs least (Quote often attributed to Ronald Reagan, but he was quoting Thomas Paine). Gridlock results in less “governing” and that worked great in the 1990’s. However, I agree with several commentators that have warned that we have serious problems right now that need to be addressed.
The First Cut is the Deepest
Many people are now alarmed that people who won elections are actually going to --- gasp and gasp again --- cut spending. Oh the horror! If you are spending too much, you either have to get more money, i.e. raise taxes or yes, cut spending. Is this concept too difficult to understand? When people lose their jobs and have less money, they have to cut their expenditures. What makes government so special that it would not have to do the same thing?
Yes, We Have No Bananas (Republic)
It’s probably too late for the election to change this…..
When third-world countries recklessly inject mass quantities of capital into their economies, we laugh at them and refer to them as “banana republics”. When we do it, it is wise monetary strategy. We’re not “printing money” it’s “Quantitative Easing”. The name sounds so pleasant and gentle. You might also say that quantitative easing is what your Uncle Ned does right after finishing his huge Thanksgiving dinner. That doesn’t turn out to be so pleasant and gentle either.
This quantitative easing in this case is like pouring water on a chemical fire. It appears like you are doing something but you are achieving very little. Banks say they have the money to lend but there is little demand from customers. It’s like a restaurant with bad food that tries to stimulate demand by offering all-you-can eat specials. If people aren’t hungry for what you are serving, lowering the price doesn’t help.
Please checkout this video clip from a recent presentation I gave to a job seekers group: Click Here
While this blog is about economics and not politics, let’s look at some issues that will impact the economy after the mid-terms….
Do You Hear Me Now?
The Voters Wrote the Following Message on President Obama’s Facebook Wall: “FOR THE LOVE OF GOD, PLEASE JUST STOP IT!!!!! PLEASE JUST *#$!*!* STOP IT RIGHT NOW.
President Obama replies: Hey, you don’t need to shout. I don’t understand what I’ve done to cause this type of reaction.
The Voters reply: Uhhh … we already knew that.
Repossession Order
The main problem with the healthcare bill is there is no money available for the states to be able to pay for it. That’s why governors are so opposed to it and after the election this opposition will increase.
The healthcare plan is similar to buying a new Rolls-Royce on credit. It is wonderful to drive. Your friends and neighbors just ooh and aah about it and of course the chicks dig it. Absolutely everything about the car is a positive experience until the first bill comes. Of course you can’t pay it, so you don’t. Then Matt and Sonia from Operation Repo show up with a camera crew and rip the car right out from under you at a most inappropriate time.
So now the Republicans want to change most of the healthcare bill while the Democrats do not. This is similar to two doctors operating on the same patient at the same time, but not agreeing on what needs to be done. This is not going to end well.
California Screaming
Both my California (business) girls (Whitman and Fiorina) lost. No sour grapes, but the financial problems in the state are huge and I just can’t see them improving much now. Expecting political veteran Jerry Brown to sharpen his pencil (literally) and solve the problems is like asking your grandfather to fix you iPod. “This is pretty small for a transistor radio. How do you get a 9-volt in this dadgum thing?”
The California ballot initiative on legalizing marijuana also went down to defeat. Supporters of the initiative reportedly were very bummed about the outcome. If only there was some way for them to relieve their sadness.
Seems to me if you were going to return to the hippie era and elect Jerry Brown, you would want to go the whole way and legalize pot. California could really use the tax revenue and with Brown in charge of handling their financial crisis, they are going to need more than just medical marijuana to deal with this pain.
WWF Defeated
Voters also rejected former World Wrestling Federation CEO Linda Mc Mahon in Connecticut. But don’t worry; with this divided government I predict that the upcoming political fighting will make the WWF look like the World Series of Hopscotch.
Get ready for a smack down. Pelosi better put on her game face (or at least pump up her present one). Boehner better hope his tan goes deeper than the first layer because he’s going to lose lots of skin in this game.
And that’s too bad. Many people believe that the government that governs best governs least (Quote often attributed to Ronald Reagan, but he was quoting Thomas Paine). Gridlock results in less “governing” and that worked great in the 1990’s. However, I agree with several commentators that have warned that we have serious problems right now that need to be addressed.
The First Cut is the Deepest
Many people are now alarmed that people who won elections are actually going to --- gasp and gasp again --- cut spending. Oh the horror! If you are spending too much, you either have to get more money, i.e. raise taxes or yes, cut spending. Is this concept too difficult to understand? When people lose their jobs and have less money, they have to cut their expenditures. What makes government so special that it would not have to do the same thing?
Yes, We Have No Bananas (Republic)
It’s probably too late for the election to change this…..
When third-world countries recklessly inject mass quantities of capital into their economies, we laugh at them and refer to them as “banana republics”. When we do it, it is wise monetary strategy. We’re not “printing money” it’s “Quantitative Easing”. The name sounds so pleasant and gentle. You might also say that quantitative easing is what your Uncle Ned does right after finishing his huge Thanksgiving dinner. That doesn’t turn out to be so pleasant and gentle either.
This quantitative easing in this case is like pouring water on a chemical fire. It appears like you are doing something but you are achieving very little. Banks say they have the money to lend but there is little demand from customers. It’s like a restaurant with bad food that tries to stimulate demand by offering all-you-can eat specials. If people aren’t hungry for what you are serving, lowering the price doesn’t help.
Please checkout this video clip from a recent presentation I gave to a job seekers group: Click Here
Monday, November 1, 2010
Hard Questions, Difficult Answers
Hey Don, if the recession ended in June of 2009, why does it feel like we are still in one 17 months later?
Because even though the recession officially ended the economy remains recessed. Calculatedriskblog.com reports that the economy is currently 0.8% below pre-recession peak and industrial production is still 7.5% below peak.
Think of a recession as an event and a recessed economy as a condition. If you suffer a wound that results in significant bleeding, stopping the bleeding is a good thing. However, it will take time for your blood count to return to normal.
So as soon as we get back to where we were in November 2007, things are going to be great. Right?
Unfortunately, no. Recessions are actually good for the economy because they squeeze inefficiencies out of businesses and reallocate capital that has not being optimized. But recessions are similar to fevers. Mild ones often accomplish the task and the recovery time is fast and the event relatively painless. Severe ones are very painful and recovery takes an extended time before the patient is healthy.
This economy was very sick. Now the fever is gone, but other problems still persist. Unfortunately just getting back to “even” will not significantly reduce unemployment. Millions of workers lost their jobs during the recession. This is part of the efficiency improvement. Companies are now functioning with less employees and this helps profits and makes them stronger. Under normal conditions the displaced workers would find jobs with newly expanding companies benefiting from the more productive reallocation of capital. That is not happening now. The credit markets are still dysfunctional so capital is not being reallocated and we are still “exporting” jobs to China. Therefore, once we get back to “even”, unemployment will remain elevated.
When will the economy be strong enough to really make a difference?
The Model T shows the economy growing slowly in 2011. The economy will reach 2007 peak levels sometime in the first half of the year and slowly keep moving ahead in the second half. Unemployment will decrease, but not substantially.
But the Model T does predict strong economic growth in 2012. GDP could grow in excess of 5%. This is higher than most economists are predicting. But when the economy is weak, people tend to believe things will continue to stay the same indefinitely. It is the same when the economy is very strong. Some of the 2007 quotes by Ben Bernanke, Henry Paulsen (then Treasury Secretary), and some top economists predicting an on-going strong economy and a continued great housing market are now laughable.
In 2012 things will start to hum. Consumer confidence should improve leading to more consumer spending. Business confidence will then improve leading to more investment. The credit markets will be healthy enough to support the increased need for capital. These conditions will finally start to create jobs and drive down unemployment. More workers getting paychecks helps fuel a recovery, just as it is supposed to. In addition, it is a big election year. There is nothing like an important election to get Republicans and Democrats to work together to boost the economy and improve everyone’s reelection chances. And if the economy is booming, don’t count out a second term just yet.
What will happen with the stock market?
I am officially abandoning the Model T’s prediction of an S & P low of 580 at this time. I still believe the model would have worked, but the extreme government intervention created a “false bottom” for the stock market and the economy. The government stopped the market from crashing. The trade off is in taking these actions it kept things pushed down for an extended period of time and has delayed an economic recovery. Only time will tell if these actions were brilliant or boneheaded. The fact that it could be either proves how difficult it was to make decisions during the midst of the financial meltdown.
Several analysts now predict that the next correction will take the S & P down close to 800. That makes sense. It would be logical for the market to drop sometime in 2011 as investors lose patience with the economy. If the S & P approaches 800 or below, it is time to jump back in. Even if the market continues to fall below 700, it should not take long to get back to 800. And you definitely want to be in the market before the boom year of 2012.
Because even though the recession officially ended the economy remains recessed. Calculatedriskblog.com reports that the economy is currently 0.8% below pre-recession peak and industrial production is still 7.5% below peak.
Think of a recession as an event and a recessed economy as a condition. If you suffer a wound that results in significant bleeding, stopping the bleeding is a good thing. However, it will take time for your blood count to return to normal.
So as soon as we get back to where we were in November 2007, things are going to be great. Right?
Unfortunately, no. Recessions are actually good for the economy because they squeeze inefficiencies out of businesses and reallocate capital that has not being optimized. But recessions are similar to fevers. Mild ones often accomplish the task and the recovery time is fast and the event relatively painless. Severe ones are very painful and recovery takes an extended time before the patient is healthy.
This economy was very sick. Now the fever is gone, but other problems still persist. Unfortunately just getting back to “even” will not significantly reduce unemployment. Millions of workers lost their jobs during the recession. This is part of the efficiency improvement. Companies are now functioning with less employees and this helps profits and makes them stronger. Under normal conditions the displaced workers would find jobs with newly expanding companies benefiting from the more productive reallocation of capital. That is not happening now. The credit markets are still dysfunctional so capital is not being reallocated and we are still “exporting” jobs to China. Therefore, once we get back to “even”, unemployment will remain elevated.
When will the economy be strong enough to really make a difference?
The Model T shows the economy growing slowly in 2011. The economy will reach 2007 peak levels sometime in the first half of the year and slowly keep moving ahead in the second half. Unemployment will decrease, but not substantially.
But the Model T does predict strong economic growth in 2012. GDP could grow in excess of 5%. This is higher than most economists are predicting. But when the economy is weak, people tend to believe things will continue to stay the same indefinitely. It is the same when the economy is very strong. Some of the 2007 quotes by Ben Bernanke, Henry Paulsen (then Treasury Secretary), and some top economists predicting an on-going strong economy and a continued great housing market are now laughable.
In 2012 things will start to hum. Consumer confidence should improve leading to more consumer spending. Business confidence will then improve leading to more investment. The credit markets will be healthy enough to support the increased need for capital. These conditions will finally start to create jobs and drive down unemployment. More workers getting paychecks helps fuel a recovery, just as it is supposed to. In addition, it is a big election year. There is nothing like an important election to get Republicans and Democrats to work together to boost the economy and improve everyone’s reelection chances. And if the economy is booming, don’t count out a second term just yet.
What will happen with the stock market?
I am officially abandoning the Model T’s prediction of an S & P low of 580 at this time. I still believe the model would have worked, but the extreme government intervention created a “false bottom” for the stock market and the economy. The government stopped the market from crashing. The trade off is in taking these actions it kept things pushed down for an extended period of time and has delayed an economic recovery. Only time will tell if these actions were brilliant or boneheaded. The fact that it could be either proves how difficult it was to make decisions during the midst of the financial meltdown.
Several analysts now predict that the next correction will take the S & P down close to 800. That makes sense. It would be logical for the market to drop sometime in 2011 as investors lose patience with the economy. If the S & P approaches 800 or below, it is time to jump back in. Even if the market continues to fall below 700, it should not take long to get back to 800. And you definitely want to be in the market before the boom year of 2012.
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