It’s time to check the current state of some major economic indicators:
GDP
GDP for Q4, 2009 is expected to be 4.5% (this is per the “Ake” index which averages the forecasts of my favorite seven economists. They do the math so I don’t have to!)
The forecast for Q1 is 2.8% and 2.7% for Q2.
What it means: The economy did not really grow at 4.5% in Q4. According to the experts, the number is inflated due to inventory replenishments. The 2010 first half forecasts are predicting a moderate recovery.
What I think: The GDP estimate is less accurate when economic conditions are abnormal and this is about as abnormal as it gets. The economy did grow in Q4, but not significantly (Goldman Sachs says that growth is about 2% when you eliminate the “noise” from the data). Future forecasts are becoming more consistent and accurate as the economy heals.
Housing
Housing Starts: Rate of 557,000 per year. Down 4.0% from November. Up 0.2% y/y.
Existing Home sales: Rate of 5.45 million per year (SA). Down 16.7% from November. Up 15% y/y.
Existing Home Prices: Up 1.5% y/y – first increase since August 2007
Home Builder Confidence Index (HAHB) – Fell to 15
What it means: Housing starts remain weak due to the large inventory of upscale existing homes on the market. Existing home sales (and also new home sales) fell because many sales were pulled forward due to the expiration of the tax credit. The increase in prices was unexpected, but next month’s data will be important in determining if this is a blip or a trend. Home builders remain pessimistic about 2010.
What I think: Because housing got us into this mess, people expect housing to lead us out. This has been true of many economic recoveries. There will be no big snap back in housing this time. Housing will take an extended time to recover and so should the economy.
Existing home sales will jump back up in January due to the tax credits being extended and expanded. Sales should plunge again in May due to the credits expiring in April. Therefore, June becomes a critical month. It will be in the peak of home buying season, but the tax credit is gone, mortgage rates will be higher, and there could be even more foreclosed homes on the market.
The Consumer
Retail Sales: Down -0.2% from November (SA), up 5.4% y/y (excludes auto sales)
Light Vehicle Sales: Yearly rate of 11.25 million (SA), third straight monthly increase
Consumer Confidence: The Conference Board Index is low and trending up, the ABC News index is low and trending lower.
What it means: People with jobs are spending more money than they were a year ago. People who need automobiles are buying them. Much of the fear and panic are gone and consumers are starting to behave more rationally. One of the two consumer confidence indexes is wrong. Watch for the University of Michigan Index (a third survey) released tomorrow, to break the tie.
What I Think: Retail sales are doing better, but it is not a steady increase. The low consumer confidence scores tell you the reason why. It does appear that the auto industry is recovering stronger than experts predicted.
Don’t look for consumer spending to take off just yet. As long as unemployment stays high, consumer confidence will remain weak and there will also be less disposable income available. Usually the employment rate is a lagging indicator (improves after the economy does). This time employment could be a coincident indicator (improves as the economy does). As people find jobs, they spend more money and the people that already have jobs feel more confident and spend more money also. This would be consistent with the theory that employment could improve faster than expected due to how and why the layoffs happened in 2008-2009.
Businesses
Moody’s Survey of Business Confidence - Very positive increase, at highest level since late 2007
PricewaterhouseCoopers World CEO Survey- Significant increase in confidence for 2010
National Federation of Independent Business Optimism Index – Low and staying low
What it means: Large businesses are recovering but small businesses continue to struggle.
What I think: Small businesses are still having extreme difficulty obtaining credit. This should have been the government’s number one priority starting in October 2008 when credit started to dry up. The problem still remains and it is vitally important because of the number of new jobs that can be created by small businesses. There was a plan presented in the State of the Union address to provide $30 billion for small business loans. We will wait and see how fast Congress jumps into action this time.
The Predictive Indicators
The Conference Board Leading Economic Index – Up for the ninth straight month. It predicts steady growth in Q1 and increased growth in Q2.
Economic Cycle Research Institute Weekly Leading Index – Q1, 2010 growth will be slower than Q4, 2009. There will be a slight decrease in growth in Q2, 2010.
What it means: It is good news that both indexes predict the economy will continue to grow for the next six months. This is consistent with the GDP forecasts listed above. One of the two indexes, which strongly compete with each other, is wrong about Q2.
What I think: All of the indicators point to a slow, steady recovery. This is consistent with the GDP forecasts and the Model “T’s” prediction of a long, slowly ascending, curve (or the “UL” recovery).
Thursday, January 28, 2010
Thursday, January 21, 2010
Welcome to the Kingdom of Employvia
The Iz and the Uns
Once upon a time there was a kingdom called Employvia. Two classes of people lived in the kingdom, the Iz and the Un. The Iz were the preferred and more respected class. They had much greater access to the many riches of the kingdom and thus could consume more goods and services.
Almost every Un wanted to become an Iz. Under normal conditions 95% of the people were Iz and 5% were Uns. People moved from one class to the other due to personal or situational factors in the everyday life of Employvia. In good times it wasn’t difficult for an Un to become an Iz. An Un still had do exert some effort to become an Iz, but the transition period was relatively short. Under these conditions the great majority of the people were happy and the kingdom thrived.
Then one day it was discovered that some greedy men had been manipulating the kingdom’s resources for their own gain. This caused a great panic among the people. This panic resulted in terrible conditions in Employvia. Many people involuntarily went from being an Iz to an Un. Worse yet, no matter how hard the new Uns tried to turn back into Iz, the great majority remained Uns. And so the number of Uns continued to grow.
This situation alarmed the people so much that they demanded action by the king to increase the number of Iz. So the great King "O" (not much of a stretch) waved the royal stimulus wand that was supposed to magically transform the Uns into Iz (even less of a stretch). But alas, this did not work. Iz continued to become Uns.
The fear and panic had caused another problem. Many Iz were afraid they might become Uns. They knew of many family, friends and neighboring cubicle dwellers who once were very successful Iz who had suddenly been turned into Uns. Because of this fear, they started behaving more like Uns than Iz. They started to consume less goods and services. Ironically this change in behavior resulted in even more people becoming Uns.
Now the king and his royal advisors must restore confidence in Employvia so that the Iz return to acting like Iz. This will result in more Uns becoming Iz and as the number of Iz grows, it will provide even more opportunities for Uns to become Iz.
Recovery or Healing
While we all talk about an economic "recovery", it will resemble more of a healing. It is similar to an athlete who suffers a serious hamstring injury. The injury is a traumatic event with much pain and suffering. Immediately after the injury it is difficult and painful to even walk. You can take medication to reduce the pain, but there is little you can do to accelerate the healing process, it just takes time. At some point you can walk again without pain. But athletes need to run, not just walk.
There is a psychological barrier that needs to be overcome in the transition from walking to running. The leg feels different than before and the pain from the injury is still very fresh in your memory. But you jog, and then you trot, and one day you run again. And that is a great day. Our economy has been injured. It will take time to heal, but someday we will run again.
Once upon a time there was a kingdom called Employvia. Two classes of people lived in the kingdom, the Iz and the Un. The Iz were the preferred and more respected class. They had much greater access to the many riches of the kingdom and thus could consume more goods and services.
Almost every Un wanted to become an Iz. Under normal conditions 95% of the people were Iz and 5% were Uns. People moved from one class to the other due to personal or situational factors in the everyday life of Employvia. In good times it wasn’t difficult for an Un to become an Iz. An Un still had do exert some effort to become an Iz, but the transition period was relatively short. Under these conditions the great majority of the people were happy and the kingdom thrived.
Then one day it was discovered that some greedy men had been manipulating the kingdom’s resources for their own gain. This caused a great panic among the people. This panic resulted in terrible conditions in Employvia. Many people involuntarily went from being an Iz to an Un. Worse yet, no matter how hard the new Uns tried to turn back into Iz, the great majority remained Uns. And so the number of Uns continued to grow.
This situation alarmed the people so much that they demanded action by the king to increase the number of Iz. So the great King "O" (not much of a stretch) waved the royal stimulus wand that was supposed to magically transform the Uns into Iz (even less of a stretch). But alas, this did not work. Iz continued to become Uns.
The fear and panic had caused another problem. Many Iz were afraid they might become Uns. They knew of many family, friends and neighboring cubicle dwellers who once were very successful Iz who had suddenly been turned into Uns. Because of this fear, they started behaving more like Uns than Iz. They started to consume less goods and services. Ironically this change in behavior resulted in even more people becoming Uns.
Now the king and his royal advisors must restore confidence in Employvia so that the Iz return to acting like Iz. This will result in more Uns becoming Iz and as the number of Iz grows, it will provide even more opportunities for Uns to become Iz.
Recovery or Healing
While we all talk about an economic "recovery", it will resemble more of a healing. It is similar to an athlete who suffers a serious hamstring injury. The injury is a traumatic event with much pain and suffering. Immediately after the injury it is difficult and painful to even walk. You can take medication to reduce the pain, but there is little you can do to accelerate the healing process, it just takes time. At some point you can walk again without pain. But athletes need to run, not just walk.
There is a psychological barrier that needs to be overcome in the transition from walking to running. The leg feels different than before and the pain from the injury is still very fresh in your memory. But you jog, and then you trot, and one day you run again. And that is a great day. Our economy has been injured. It will take time to heal, but someday we will run again.
Thursday, January 14, 2010
A Story, an Attitude Check, and a Warning
A Model “T” Allegory
Once there was a car that was travelling down the road very fast. Its maintenance staff kept it running with high-octane, but poor quality, fuel. As the quality of the fuel deteriorated, the engine started to sputter and smoke. The car began to shake so violently that it left the road and went down a large hill before coming to rest.
Two expert mechanics were called to repair the car and get it back running again. We will call the mechanics Ben and Timothy. They changed the fuel, made repairs to engine and then restarted the car. The engine ran, but it was apparent the car did not have enough power to make it up the hill and back on to the road. Let’s call the road “Recovery”.
So Ben and Tim decided to push the car up the hill with the engine running. They told the owner of the car, Barry, to get in the driver seat and steer the car back on to Recovery while they pushed.
Ben and Tim pushed the car harder than it had been pushed in a long time. The car started up the hill, but moved slower than expected due to several obstacles. Barry attributed some of the problems to the car’s previous owner, George, who he said did not maintain the car properly.
Because Ben and Tim were pushing so hard it was difficult to determine how much of the car’s power was being generated by the improving engine performance. Barry bragged about the gain in horsepower to onlookers, but could still be heard shouting, “Push Tim, Push Ben”.
But the car is not yet back on the road and Ben and Tim are getting tired. Soon they will no longer be able to push the car very hard. At that point the car will be reliant on the engine alone to make it the rest of the way.
There are three possible endings to the story:
1. The car keeps traveling at a good speed up the hill, gets back on to the road and then accelerates. Call it the Mazda ending, Zoom, Zoom, Zoom.
2. The car continues to climb the hill, but at a slower pace than when it was being pushed. It eventually gets back on to the road, but takes a long time to get there. Once back on the road, it may even take some more time to accelerate due to the energy exerted climbing the hill. Call it the grandma drives a Buick ending.
3. The car’s engine sputters, it loses power and starts to roll backward down the hill. It will not reach the previous low point due to Barry pushing the brake pedal through the floor and Ben and Tim throwing themselves under the car (if they fail to do this, they will end up thrown under the bus). Call it the clunker (hey somebody got cash for that!) ending.
Hope for number one, plan for number two and recognize that number three is possible.
Psychological Factor Update
Because psychology plays a significant role when entering and exiting a recession, it’s wise to keep track of the key consumer and business confidence surveys.
The University of Michigan Index of Consumer Sentiment
- Up 7.6% in December to 72.5. First increase after two months of decline, but still very low.
The Conference Board Consumer Confidence Index
- Up 2.3 points in December to 52.9. The second consecutive increase, but still very low.
ABC News Customer Comfort Index (weekly index)
- Down six points (big drop for this index) last week to -47 after significant gains the last few weeks.
Chief Executive Magazine CEO Confidence Index
- Surged 9.2 points in December, after two consecutive declines
What it means –
All three consumer indexes were reported to be influenced by the latest jobs data. The two monthly indexes by the positive November employment numbers and the ABC survey by last week’s disappointing December report.
It appears that consumer confidence is very fluid and dependant on the latest job news. This can be unsettling since unemployment is a lagging indicator and should increase some even as the economy improves. People were expecting a better employment report in December after November’s pleasant surprise. However, the economic recovery is not going to be a smooth one. Expect data on unemployment, retail sales, etc. to fluctuate in the short-term. The increase in CEO confidence is still a good sign.
Follow Up From Last Week’s Post
The Model “T” has written something on Don Ake’s Facebook Wall:
“Oh, so you think my forecast of a 48% drop in the stock market is too low? The current edition of the Economist says stocks are overvalued by 50%. I pity the fool who takes too much risk.”
Sounds more like Mr. Model “T” to me.
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Once there was a car that was travelling down the road very fast. Its maintenance staff kept it running with high-octane, but poor quality, fuel. As the quality of the fuel deteriorated, the engine started to sputter and smoke. The car began to shake so violently that it left the road and went down a large hill before coming to rest.
Two expert mechanics were called to repair the car and get it back running again. We will call the mechanics Ben and Timothy. They changed the fuel, made repairs to engine and then restarted the car. The engine ran, but it was apparent the car did not have enough power to make it up the hill and back on to the road. Let’s call the road “Recovery”.
So Ben and Tim decided to push the car up the hill with the engine running. They told the owner of the car, Barry, to get in the driver seat and steer the car back on to Recovery while they pushed.
Ben and Tim pushed the car harder than it had been pushed in a long time. The car started up the hill, but moved slower than expected due to several obstacles. Barry attributed some of the problems to the car’s previous owner, George, who he said did not maintain the car properly.
Because Ben and Tim were pushing so hard it was difficult to determine how much of the car’s power was being generated by the improving engine performance. Barry bragged about the gain in horsepower to onlookers, but could still be heard shouting, “Push Tim, Push Ben”.
But the car is not yet back on the road and Ben and Tim are getting tired. Soon they will no longer be able to push the car very hard. At that point the car will be reliant on the engine alone to make it the rest of the way.
There are three possible endings to the story:
1. The car keeps traveling at a good speed up the hill, gets back on to the road and then accelerates. Call it the Mazda ending, Zoom, Zoom, Zoom.
2. The car continues to climb the hill, but at a slower pace than when it was being pushed. It eventually gets back on to the road, but takes a long time to get there. Once back on the road, it may even take some more time to accelerate due to the energy exerted climbing the hill. Call it the grandma drives a Buick ending.
3. The car’s engine sputters, it loses power and starts to roll backward down the hill. It will not reach the previous low point due to Barry pushing the brake pedal through the floor and Ben and Tim throwing themselves under the car (if they fail to do this, they will end up thrown under the bus). Call it the clunker (hey somebody got cash for that!) ending.
Hope for number one, plan for number two and recognize that number three is possible.
Psychological Factor Update
Because psychology plays a significant role when entering and exiting a recession, it’s wise to keep track of the key consumer and business confidence surveys.
The University of Michigan Index of Consumer Sentiment
- Up 7.6% in December to 72.5. First increase after two months of decline, but still very low.
The Conference Board Consumer Confidence Index
- Up 2.3 points in December to 52.9. The second consecutive increase, but still very low.
ABC News Customer Comfort Index (weekly index)
- Down six points (big drop for this index) last week to -47 after significant gains the last few weeks.
Chief Executive Magazine CEO Confidence Index
- Surged 9.2 points in December, after two consecutive declines
What it means –
All three consumer indexes were reported to be influenced by the latest jobs data. The two monthly indexes by the positive November employment numbers and the ABC survey by last week’s disappointing December report.
It appears that consumer confidence is very fluid and dependant on the latest job news. This can be unsettling since unemployment is a lagging indicator and should increase some even as the economy improves. People were expecting a better employment report in December after November’s pleasant surprise. However, the economic recovery is not going to be a smooth one. Expect data on unemployment, retail sales, etc. to fluctuate in the short-term. The increase in CEO confidence is still a good sign.
Follow Up From Last Week’s Post
The Model “T” has written something on Don Ake’s Facebook Wall:
“Oh, so you think my forecast of a 48% drop in the stock market is too low? The current edition of the Economist says stocks are overvalued by 50%. I pity the fool who takes too much risk.”
Sounds more like Mr. Model “T” to me.
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Thursday, January 7, 2010
It’s a Brand New Day
Let’s start off with some advice from that great economist Sting:
Turn the clock to zero, honey
I’ll sell the stock, we’ll spend all the money
We’re starting up a brand new day (or year, or decade, for that matter)
Actually not bad advice if you expect the stock market to tank and inflation to rise.
What will happen to the stock market in 2010? Seldom has there been such a wide divergence of opinion as we begin a new year. You can be certain the market will go up, unless of course it goes down, or maybe it will just “move sideways” (I love that expression). Let’s look at some predictions:
The Stock Market Will Go Up
The market is up over 60% from its low last March. It has momentum and will continue to rise as the economy continues to grow. There are many respected analysts predicting stocks will increase 10-20% in 2010. One of the most optimistic is the team of Brian Wesbury and Bob Stein (Forbes.com). They are predicting a 24% increase in stocks this year and were very accurate in forecasting the 2009 jump.
The Stock Market Will Go Down
The stock market is very “over-bought” and prices are much too high. The fundamentals are bad. Sales volumes have been too low. The economy will slump once the fiscal and monetary boost provided by Treasury and the Fed fades, taking the stock market down with it. There are many respected analysts predicting a drop of more than 15% in 2010. One of the most pessimistic is David Tice (Federated Investors) who predicts a 40% decrease in 2010.
The Stock Market Will Go Down ----- Then Back Up
Stock market prices are too high after the 2009 rally. The market will dip (10-15%) in the first half of the year. Later, continued economic growth will boost the stock market and it will finish the year with a gain of 10-15%. This scenario is favored by Shaeffers Research and Dennis Keade.
What the Model “T” Says
The Model “T” is still forecasting an S&P bottom of 580. This would be a 48% drop from 2009 year-end and significantly lower than most of the pessimistic forecasts. It is apparent now that the commercial transportation industry (which is very connected to the housing industry) declined much more than most industries during this recession. Because the Model “T” is based on the transportation market, it is probably reading too low at this point.
There is also a timing factor to the Model “T”. Current graphs of stock price trends would indicate a long-term rally has begun. So is this a real recovery or just an artificial upward bending of the curve causing by the extraordinary actions taken by the Treasury and the FED to stabilize and prop up the economy? At this point, no one knows.
The Model “T” however indicates the recovery is premature. It says the real recovery should begin in Q4, 2010. This would mean a significant drop in the market for the first nine months of the year, with a recovery beginning in Q4.
What I Think
Using the most optimistic and pessimistic predictions from the experts, I can confidently forecast the S&P 500 index will end the year between 670 and 1390. Amusing, no doubt, but I did this to make a point. With this much uncertainty, now is not the time to make any bold moves. It is probably wise at this point to reduce your risk since it is likely that there will be some pull back on stocks in the first half of the year.
Because the recent rally was largely fueled by optimism, it will be interesting to see what happens if the optimism fades. If this were a movie, it would be fun to watch. Unfortunately it is more like reality television and everyone with stock investments is a participant in this show.
Turn the clock to zero, boss
The river’s wide, we’ll swim across
Starting up a brand new day
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Turn the clock to zero, honey
I’ll sell the stock, we’ll spend all the money
We’re starting up a brand new day (or year, or decade, for that matter)
Actually not bad advice if you expect the stock market to tank and inflation to rise.
What will happen to the stock market in 2010? Seldom has there been such a wide divergence of opinion as we begin a new year. You can be certain the market will go up, unless of course it goes down, or maybe it will just “move sideways” (I love that expression). Let’s look at some predictions:
The Stock Market Will Go Up
The market is up over 60% from its low last March. It has momentum and will continue to rise as the economy continues to grow. There are many respected analysts predicting stocks will increase 10-20% in 2010. One of the most optimistic is the team of Brian Wesbury and Bob Stein (Forbes.com). They are predicting a 24% increase in stocks this year and were very accurate in forecasting the 2009 jump.
The Stock Market Will Go Down
The stock market is very “over-bought” and prices are much too high. The fundamentals are bad. Sales volumes have been too low. The economy will slump once the fiscal and monetary boost provided by Treasury and the Fed fades, taking the stock market down with it. There are many respected analysts predicting a drop of more than 15% in 2010. One of the most pessimistic is David Tice (Federated Investors) who predicts a 40% decrease in 2010.
The Stock Market Will Go Down ----- Then Back Up
Stock market prices are too high after the 2009 rally. The market will dip (10-15%) in the first half of the year. Later, continued economic growth will boost the stock market and it will finish the year with a gain of 10-15%. This scenario is favored by Shaeffers Research and Dennis Keade.
What the Model “T” Says
The Model “T” is still forecasting an S&P bottom of 580. This would be a 48% drop from 2009 year-end and significantly lower than most of the pessimistic forecasts. It is apparent now that the commercial transportation industry (which is very connected to the housing industry) declined much more than most industries during this recession. Because the Model “T” is based on the transportation market, it is probably reading too low at this point.
There is also a timing factor to the Model “T”. Current graphs of stock price trends would indicate a long-term rally has begun. So is this a real recovery or just an artificial upward bending of the curve causing by the extraordinary actions taken by the Treasury and the FED to stabilize and prop up the economy? At this point, no one knows.
The Model “T” however indicates the recovery is premature. It says the real recovery should begin in Q4, 2010. This would mean a significant drop in the market for the first nine months of the year, with a recovery beginning in Q4.
What I Think
Using the most optimistic and pessimistic predictions from the experts, I can confidently forecast the S&P 500 index will end the year between 670 and 1390. Amusing, no doubt, but I did this to make a point. With this much uncertainty, now is not the time to make any bold moves. It is probably wise at this point to reduce your risk since it is likely that there will be some pull back on stocks in the first half of the year.
Because the recent rally was largely fueled by optimism, it will be interesting to see what happens if the optimism fades. If this were a movie, it would be fun to watch. Unfortunately it is more like reality television and everyone with stock investments is a participant in this show.
Turn the clock to zero, boss
The river’s wide, we’ll swim across
Starting up a brand new day
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Thursday, December 17, 2009
Miracle on Monster.com
The November jobs report was much better than expected. The unemployment rate fell to 10% and net payroll jobs declined by only 11,000. These types of numbers were not expected to happen until Q2, 2010. This is good news.
The unemployment rate still could increase in the next few months as discouraged workers begin looking for jobs again. But remember, this is caused by more jobs becoming available and people feeling better about finding work. Improved economic conditions can cause the unemployment rate to increase in the short-term.
Some conservative commentators downplayed the report and tried to diminish the data for political purposes. Yes, the economy is still not good. Yes, the government is not doing the correct actions to help (see last week’s post) and we still have a long way to go. But there is no way to view the November report as anything but good news. You can debate about how good the news is, but that seems rather pointless and childish and it can actually be detrimental to the economic recovery (more on this later). For a very positive (perhaps too optimistic) outlook on the data, see these articles. Article 1 Article 2
But are things really getting better? Back in October I commented on my friends Jeff and Kurt (pseudonyms of Jerry and Kirk), two highly-skilled professionals that had been unemployed for a year. Here is an update on their situations.
Long-term unemployment puts stress on a family and on Thanksgiving Day Jeff’s wife (only in her 40’s) suffered a minor heart attack. She works full-time and is the main source of the family’s income. This is one of the sad personal stories of the recession, similar to what is happening to numerous people throughout the country.
But don’t reach for the tissue box just yet. Because eight days later, after being unemployed for just more than a year, Jeff received a job offer for a great position. Jeff’s wife is going to be alright. Ring some Christmas bells; it’s going to be a great holiday at Jeff’s house.
What about Kurt? Incredibly, Kurt received his first job offer on the very same day as Jeff. That’s right, I’m telling you that the two people I wrote about in October, that had been unemployed for over a year, received their first job offers on the very same day. In December no less, which is the weakest month for hiring. (If you don’t believe me, send an e-mail and I will pass it on to Kurt and Jeff for confirmation).
And it gets even better. Jeff received a second job offer a few days after the first one and Kurt ended up deciding between three offers. This has all the makings of a holiday movie. I’m thinking of writing a script and calling it “Miracle on Monster.com”.
Good news such as this gives us hope and hope is important for everyone to have right now. There is a psychological/spiritual element to macroeconomics. Recessions usually intensify when people become pessimistic about future economic conditions (In our present case it was more like panic). Recessions end and recovery begins when optimism returns. Economists use the term “animal spirits” to describe the economic changes caused by changes in people’s attitude. The term is often used when economists have no rational explanation why things are getting better or getting worse. This means that trying to discredit good news can actually hinder the economic recovery by keeping people pessimistic.
The economy has gone through much turmoil in the last two years. Many people are going through serious hardships, struggling to make it in what seems to be a cold, dark, world. Some people have given up hope.
But we remember a story of a people also facing hardships in a cold, dark, world. They had received a promise, but that promise remained unfulfilled. Almost everyone had given up hope. It was into this situation that hope was born. It happened suddenly and it came quietly. It would have gone totally unnoticed except for angelic beings proclaiming good news. Good news, indeed.
Merry Christmas
You Can Provide Hope
My friend Duane (a big fan of this blog) is director of the Refuge of Hope mission in downtown Canton, Ohio, a city hit harder than most by the recession. Please consider donating the last $21 of your gift budget to provide Christmas dinner for a table of ten hungry people. You can make a donation on-line (either Pay Pal or credit card) by following this link. Refuge of Hope
The unemployment rate still could increase in the next few months as discouraged workers begin looking for jobs again. But remember, this is caused by more jobs becoming available and people feeling better about finding work. Improved economic conditions can cause the unemployment rate to increase in the short-term.
Some conservative commentators downplayed the report and tried to diminish the data for political purposes. Yes, the economy is still not good. Yes, the government is not doing the correct actions to help (see last week’s post) and we still have a long way to go. But there is no way to view the November report as anything but good news. You can debate about how good the news is, but that seems rather pointless and childish and it can actually be detrimental to the economic recovery (more on this later). For a very positive (perhaps too optimistic) outlook on the data, see these articles. Article 1 Article 2
But are things really getting better? Back in October I commented on my friends Jeff and Kurt (pseudonyms of Jerry and Kirk), two highly-skilled professionals that had been unemployed for a year. Here is an update on their situations.
Long-term unemployment puts stress on a family and on Thanksgiving Day Jeff’s wife (only in her 40’s) suffered a minor heart attack. She works full-time and is the main source of the family’s income. This is one of the sad personal stories of the recession, similar to what is happening to numerous people throughout the country.
But don’t reach for the tissue box just yet. Because eight days later, after being unemployed for just more than a year, Jeff received a job offer for a great position. Jeff’s wife is going to be alright. Ring some Christmas bells; it’s going to be a great holiday at Jeff’s house.
What about Kurt? Incredibly, Kurt received his first job offer on the very same day as Jeff. That’s right, I’m telling you that the two people I wrote about in October, that had been unemployed for over a year, received their first job offers on the very same day. In December no less, which is the weakest month for hiring. (If you don’t believe me, send an e-mail and I will pass it on to Kurt and Jeff for confirmation).
And it gets even better. Jeff received a second job offer a few days after the first one and Kurt ended up deciding between three offers. This has all the makings of a holiday movie. I’m thinking of writing a script and calling it “Miracle on Monster.com”.
Good news such as this gives us hope and hope is important for everyone to have right now. There is a psychological/spiritual element to macroeconomics. Recessions usually intensify when people become pessimistic about future economic conditions (In our present case it was more like panic). Recessions end and recovery begins when optimism returns. Economists use the term “animal spirits” to describe the economic changes caused by changes in people’s attitude. The term is often used when economists have no rational explanation why things are getting better or getting worse. This means that trying to discredit good news can actually hinder the economic recovery by keeping people pessimistic.
The economy has gone through much turmoil in the last two years. Many people are going through serious hardships, struggling to make it in what seems to be a cold, dark, world. Some people have given up hope.
But we remember a story of a people also facing hardships in a cold, dark, world. They had received a promise, but that promise remained unfulfilled. Almost everyone had given up hope. It was into this situation that hope was born. It happened suddenly and it came quietly. It would have gone totally unnoticed except for angelic beings proclaiming good news. Good news, indeed.
Merry Christmas
You Can Provide Hope
My friend Duane (a big fan of this blog) is director of the Refuge of Hope mission in downtown Canton, Ohio, a city hit harder than most by the recession. Please consider donating the last $21 of your gift budget to provide Christmas dinner for a table of ten hungry people. You can make a donation on-line (either Pay Pal or credit card) by following this link. Refuge of Hope
Thursday, December 10, 2009
We’re From the Government and We’re Here To Help
“Can 535 politicians, heavily influenced by lobbyists, make better spending decisions than the other 220 million adults in the United States?” – Joseph Y. Calhoun II, Alahambra Investments
Basic economic theory says that individuals in free market economies make better decisions about the allocation of limited resources than do government entities. Government intervention is needed to serve as a “referee” to make sure participants follow the rules (the referees watching the financial crisis “swallowed their whistles” this time.)
The financial crisis has motivated the government to get very involved in the economy and institute several programs intended to help. The major problem is that most of our congressmen are either lawyers or career politicians, or both. Politicians are experts at getting reelected, not solving business problems.
Most of the programs involve giving away “free money” in one form or another. “Game Theory” states that after the government writes the rules for these programs, the participants will act in a way to maximize their own benefit. Or scam the system if possible.
Let’s see how well the government programs are working so far:
Troubled Asset Relief Program (TARP)
The Plan: The government was supposed to purchase or insure up to $700 billion of "troubled" assets to stabilize the financial system and rejuvenate the credit markets.
Free Money: Given to big banks the government likes for the purpose of stabilizing the banks and encouraging them to resume lending.
The Game: The banks take the money and stabilize their balance sheets. Their stock prices go up and ---- yes, big bonuses for everybody. The lending increase to help boost the economy? Not going to happen. And as soon as the government wanted to exert more control over the banks, suddenly the money was no longer free and they sent it back.
The Result: The TARP was greatly needed at the time to stabilize the financial system, but implementation was inefficient and tainted by politics. It failed miserably in attempting to loosen the credit markets.
American Recovery and Reinvestment Act of 2009 (Stimulus 1)
The Plan: I'm not really sure there was a plan. It was an unfocussed, hodge-podge of tactics involving $787 billion. There was some safety net spending and some aid to states for key services support. There was only $100 billion allocated for infrastructure. Jobs were supposed to magically appear keeping the unemployment rate under 8.5%.
Free Money: Much of the free money flowed to politically important states and to politically important workers and basically anyone who could spend it and claim that jobs were saved or created.
The Game: Gimme some of that stimulus money. Such as $31 million for renovating two small Canadian border posts in Montana and $3.5 million for an under road tunnel so turtles and alligators can cross the road safely in Florida. For more examples: See Article
The Result: Money is spent for many wasteful projects and few jobs are created. Unemployment topped 10%. Only 25% of the money had been spent through September but it did help increase GDP in Q3. If this program would have been submitted as a project in a business class, it would have received an “F” grade.
The General Motors and Chrysler Takeover
The Plan: Temporarily take over two bankrupt car companies until they can become profitable on their own
Free Money: Not so free to the car companies since they are under government control. Tons of free money to the United Auto Workers union and retirees.
The Game: Really not much of a challenge. The UAW didn’t give up much and received plenty.
The Result: The government is now trying to run car companies when the government can’t even run the government. This should turn out well.
Cash For Clunkers
The Plan: Give people money for trading in their old gas guzzlers for a new more fuel-efficient, less-polluting, ride. This would stimulate car sales and clean the air.
Free Money: $4,500 for anyone needing or wanting a new car. Politicians were amazed that so many people would take advantage of them handing out free money. So many people took the deal that the program initially ran out of money. This should have been a major red flag that something was wrong and the amount was too large. No, they didn’t get this and allocated even more free money for distribution.
The Game: The biggest users of this deal were Ford F-150 owners who turned in their slightly used F-150s to buy new F-150s. When people who drive pick-up trucks can figure out how to scam the system, the program has some real problems. (Just kidding)
The Result: Auto sales spiked during the program and then fell afterwards. It looks like the program didn’t generate many marginal sales and had negligible effect on air quality. A very expensive program with lackluster results. Also, is it any coincidence that the first industry to get a targeted stimulus is the one the government now owns a piece of? Surprise, surprise, surprise.
First-Time Home Buyer Tax Credit
The Plan: A tax credit for first-time home buyers intended to stabilize house prices and reduce inventory.
Free Money: $8,000 for first time home buyers. Again the free money is very popular.
The Game: Anyone that was considering buying a home in the next 12 months bought it now. This means many sales were pulled forward with no guarantee that sales will continue after the program ends (that is why it was extended). However, the number of eligible buyers for the program is shrinking.
The Result: It has stabilized prices and reduced inventory in the low-priced segment, but has not helped the rest of the housing market. Economists would argue that the program was unnecessary because depressed housing prices combined with historically low mortgage rates already offered a tremendous incentive to buy.
Stimulus – Part 2
As congress considers “Stimulus Part 2”, let’s hope it’s much more job focused than Part 1.
Here are some ideas:
- After the Minneapolis bridge collapse in 2007, the buzz was that all older bridges in the country needed to be replaced. So do it now! It will create jobs and save lives. Win – Win.
- In 10 years it is expected that the highways and railroads won’t be able to handle the increase in traffic and freight. Expand the infrastructure today when there is less traffic and it will create jobs now and lead to economic growth down the road.
- There is also expected to be a strain on the electrical supply and grid sometime in the near future. Upgrade it now. Build some new nuclear plants too.
- And since there is a move to renewable energy, how about building some wind farms and promoting solar panel use and production.
Basic economic theory says that individuals in free market economies make better decisions about the allocation of limited resources than do government entities. Government intervention is needed to serve as a “referee” to make sure participants follow the rules (the referees watching the financial crisis “swallowed their whistles” this time.)
The financial crisis has motivated the government to get very involved in the economy and institute several programs intended to help. The major problem is that most of our congressmen are either lawyers or career politicians, or both. Politicians are experts at getting reelected, not solving business problems.
Most of the programs involve giving away “free money” in one form or another. “Game Theory” states that after the government writes the rules for these programs, the participants will act in a way to maximize their own benefit. Or scam the system if possible.
Let’s see how well the government programs are working so far:
Troubled Asset Relief Program (TARP)
The Plan: The government was supposed to purchase or insure up to $700 billion of "troubled" assets to stabilize the financial system and rejuvenate the credit markets.
Free Money: Given to big banks the government likes for the purpose of stabilizing the banks and encouraging them to resume lending.
The Game: The banks take the money and stabilize their balance sheets. Their stock prices go up and ---- yes, big bonuses for everybody. The lending increase to help boost the economy? Not going to happen. And as soon as the government wanted to exert more control over the banks, suddenly the money was no longer free and they sent it back.
The Result: The TARP was greatly needed at the time to stabilize the financial system, but implementation was inefficient and tainted by politics. It failed miserably in attempting to loosen the credit markets.
American Recovery and Reinvestment Act of 2009 (Stimulus 1)
The Plan: I'm not really sure there was a plan. It was an unfocussed, hodge-podge of tactics involving $787 billion. There was some safety net spending and some aid to states for key services support. There was only $100 billion allocated for infrastructure. Jobs were supposed to magically appear keeping the unemployment rate under 8.5%.
Free Money: Much of the free money flowed to politically important states and to politically important workers and basically anyone who could spend it and claim that jobs were saved or created.
The Game: Gimme some of that stimulus money. Such as $31 million for renovating two small Canadian border posts in Montana and $3.5 million for an under road tunnel so turtles and alligators can cross the road safely in Florida. For more examples: See Article
The Result: Money is spent for many wasteful projects and few jobs are created. Unemployment topped 10%. Only 25% of the money had been spent through September but it did help increase GDP in Q3. If this program would have been submitted as a project in a business class, it would have received an “F” grade.
The General Motors and Chrysler Takeover
The Plan: Temporarily take over two bankrupt car companies until they can become profitable on their own
Free Money: Not so free to the car companies since they are under government control. Tons of free money to the United Auto Workers union and retirees.
The Game: Really not much of a challenge. The UAW didn’t give up much and received plenty.
The Result: The government is now trying to run car companies when the government can’t even run the government. This should turn out well.
Cash For Clunkers
The Plan: Give people money for trading in their old gas guzzlers for a new more fuel-efficient, less-polluting, ride. This would stimulate car sales and clean the air.
Free Money: $4,500 for anyone needing or wanting a new car. Politicians were amazed that so many people would take advantage of them handing out free money. So many people took the deal that the program initially ran out of money. This should have been a major red flag that something was wrong and the amount was too large. No, they didn’t get this and allocated even more free money for distribution.
The Game: The biggest users of this deal were Ford F-150 owners who turned in their slightly used F-150s to buy new F-150s. When people who drive pick-up trucks can figure out how to scam the system, the program has some real problems. (Just kidding)
The Result: Auto sales spiked during the program and then fell afterwards. It looks like the program didn’t generate many marginal sales and had negligible effect on air quality. A very expensive program with lackluster results. Also, is it any coincidence that the first industry to get a targeted stimulus is the one the government now owns a piece of? Surprise, surprise, surprise.
First-Time Home Buyer Tax Credit
The Plan: A tax credit for first-time home buyers intended to stabilize house prices and reduce inventory.
Free Money: $8,000 for first time home buyers. Again the free money is very popular.
The Game: Anyone that was considering buying a home in the next 12 months bought it now. This means many sales were pulled forward with no guarantee that sales will continue after the program ends (that is why it was extended). However, the number of eligible buyers for the program is shrinking.
The Result: It has stabilized prices and reduced inventory in the low-priced segment, but has not helped the rest of the housing market. Economists would argue that the program was unnecessary because depressed housing prices combined with historically low mortgage rates already offered a tremendous incentive to buy.
Stimulus – Part 2
As congress considers “Stimulus Part 2”, let’s hope it’s much more job focused than Part 1.
Here are some ideas:
- After the Minneapolis bridge collapse in 2007, the buzz was that all older bridges in the country needed to be replaced. So do it now! It will create jobs and save lives. Win – Win.
- In 10 years it is expected that the highways and railroads won’t be able to handle the increase in traffic and freight. Expand the infrastructure today when there is less traffic and it will create jobs now and lead to economic growth down the road.
- There is also expected to be a strain on the electrical supply and grid sometime in the near future. Upgrade it now. Build some new nuclear plants too.
- And since there is a move to renewable energy, how about building some wind farms and promoting solar panel use and production.
Thursday, December 3, 2009
The Good, The Bad, and The Beautiful - Unusual Economic Indicators
There is still much uncertainty about where the economy is headed in 2010. The GDP forecasts for Q1, 2010 from the latest Wall Street Journal Economic Panel range from -2.0% to +5.0%. The average of all respondents is +2.8% and the average of my personal “Super Seven” economists is +2.6%. Because there is so much uncertainty from the top economists analyzing the traditional economic indicators, it is a good time to look at some unusual ones.
The Strange Indicators:
Men’s Underwear
The theory is that men will delay underwear purchases in tough financial times. Mintel (a consumer research group) is forecasting sales to decrease 2.3% this year and fall another 0.5% next year. Reportedly, sales have increased since the summer.
My Read: This indicator was first proposed by in the 1970’s when men’s underwear choices were very limited. I think it is difficult to use the general data as a predictor today. There might be something useful here, but more in depth data analysis is needed.
Men’s Ties
The theory is that business people wear bright colors when they have confidence in economic conditions and positive attitudes. One economist has claimed that more men are now wearing pink and fuchsia neckties, after wearing much more muted tones earlier in the year.
My read: This one is difficult to measure. Although there could be data available if tie vendors track sales by color. Watch the business news and draw your own conclusions.
Women’s Lipstick
The theory is that during recessions women will compensate for reduced spending on clothes and other fashion items by buying more lipstick, an inexpensive alternative. This theory was first proposed during the previous recession during which lipstick sales spiked. However, it is not holding up this time. Lipstick sales are down about 11% this year. Makeup sales however are up 8.5%.
My read: The lipstick “index” has been proven unreliable so forget it. However the makeup sales could be relevant. Are women making fewer trips to the spa? Are they attempting to cover up the results of stress?
The Hot Waitress Index
The theory is that as layoffs increase, attractive women will have to take jobs as waitresses to make ends meet. I am not making this one up and the linked article makes a good case for the index relating to conditions in New York City. See article.
My read: This theory sounds like it was developed by a group of guys at a bar late at night. There is no baseline and it is difficult to measure. Again, you will have to be the judge on this one.
Unusual, But Logical, Indicators:
The Cardboard Box Index
Many things get shipped in boxes so production of boxes should increase before production of the goods that go into the boxes. Box production jumped in April and the recession probably ended in July. Sales have been relatively flat since however.
My read: Indicator is only good for certain industries and is more short-term in nature. Not showing much of a trend right now, but should grow in 2010.
The Baltic Dry Index
The index measures sea freight rates which typically are very sensitive to changes in demand due to the long lead times of ship construction. This index surged earlier in the year, but that was caused by activity in China. It then fell back, but it has shown strong growth so far in Q4.
My read: Positive movement, but watch China factor.
Scrap Metal Prices
The theory is that increased prices of scrap metal precede increased economic activity. Scrap aluminum and copper prices are up, nickel prices are down. Scrap steel prices are showing modest recovery.
My read: Good indicator, positive trend.
Coal Futures Prices
Coal is a source of energy connected to industrial production. The expected future price of coal should be related to the future demand for coal and thus give indications of economic direction. The index has been less reliable recently due to Chinese demand. Future prices are trending up, but not consistently.
My read: Not as reliable as in the past, but trending positive.
Indicators I See:
Sunday Morning Breakfast Index
I note the number of cars in the parking lot at a family restaurant I pass every Sunday morning. When the economy was strong, the lot was jammed. Early this year, the lot was less than half-full. There was an increase in the summer, but then it flattened out. However, there has been a slow, but steady increase the last two months.
Optional Medical Tests
A source in this industry told me business was very slow in Q1, but has improved every quarter.
The Christmas Lights Index
There are fewer and less extravagant Christmas light displays in my neighborhood this year. Is it because people need to reduce their electric bills or are they feeling less festive?
The Human Relations Job Postings Index
My fellow job seeking friends have reported a recent increase in job postings for HR positions. Speculation is that companies need to bolster their HR departments before hiring other positions.
Conclusion
Considering the 12 indicators as a group: seven are positive, three are negative and two are neutral. Somewhere between 2-3% GDP for Q1 sounds about right.
The Strange Indicators:
Men’s Underwear
The theory is that men will delay underwear purchases in tough financial times. Mintel (a consumer research group) is forecasting sales to decrease 2.3% this year and fall another 0.5% next year. Reportedly, sales have increased since the summer.
My Read: This indicator was first proposed by in the 1970’s when men’s underwear choices were very limited. I think it is difficult to use the general data as a predictor today. There might be something useful here, but more in depth data analysis is needed.
Men’s Ties
The theory is that business people wear bright colors when they have confidence in economic conditions and positive attitudes. One economist has claimed that more men are now wearing pink and fuchsia neckties, after wearing much more muted tones earlier in the year.
My read: This one is difficult to measure. Although there could be data available if tie vendors track sales by color. Watch the business news and draw your own conclusions.
Women’s Lipstick
The theory is that during recessions women will compensate for reduced spending on clothes and other fashion items by buying more lipstick, an inexpensive alternative. This theory was first proposed during the previous recession during which lipstick sales spiked. However, it is not holding up this time. Lipstick sales are down about 11% this year. Makeup sales however are up 8.5%.
My read: The lipstick “index” has been proven unreliable so forget it. However the makeup sales could be relevant. Are women making fewer trips to the spa? Are they attempting to cover up the results of stress?
The Hot Waitress Index
The theory is that as layoffs increase, attractive women will have to take jobs as waitresses to make ends meet. I am not making this one up and the linked article makes a good case for the index relating to conditions in New York City. See article.
My read: This theory sounds like it was developed by a group of guys at a bar late at night. There is no baseline and it is difficult to measure. Again, you will have to be the judge on this one.
Unusual, But Logical, Indicators:
The Cardboard Box Index
Many things get shipped in boxes so production of boxes should increase before production of the goods that go into the boxes. Box production jumped in April and the recession probably ended in July. Sales have been relatively flat since however.
My read: Indicator is only good for certain industries and is more short-term in nature. Not showing much of a trend right now, but should grow in 2010.
The Baltic Dry Index
The index measures sea freight rates which typically are very sensitive to changes in demand due to the long lead times of ship construction. This index surged earlier in the year, but that was caused by activity in China. It then fell back, but it has shown strong growth so far in Q4.
My read: Positive movement, but watch China factor.
Scrap Metal Prices
The theory is that increased prices of scrap metal precede increased economic activity. Scrap aluminum and copper prices are up, nickel prices are down. Scrap steel prices are showing modest recovery.
My read: Good indicator, positive trend.
Coal Futures Prices
Coal is a source of energy connected to industrial production. The expected future price of coal should be related to the future demand for coal and thus give indications of economic direction. The index has been less reliable recently due to Chinese demand. Future prices are trending up, but not consistently.
My read: Not as reliable as in the past, but trending positive.
Indicators I See:
Sunday Morning Breakfast Index
I note the number of cars in the parking lot at a family restaurant I pass every Sunday morning. When the economy was strong, the lot was jammed. Early this year, the lot was less than half-full. There was an increase in the summer, but then it flattened out. However, there has been a slow, but steady increase the last two months.
Optional Medical Tests
A source in this industry told me business was very slow in Q1, but has improved every quarter.
The Christmas Lights Index
There are fewer and less extravagant Christmas light displays in my neighborhood this year. Is it because people need to reduce their electric bills or are they feeling less festive?
The Human Relations Job Postings Index
My fellow job seeking friends have reported a recent increase in job postings for HR positions. Speculation is that companies need to bolster their HR departments before hiring other positions.
Conclusion
Considering the 12 indicators as a group: seven are positive, three are negative and two are neutral. Somewhere between 2-3% GDP for Q1 sounds about right.
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