Posted by Michael A. Kamperman on August 1, 2009
The happy talk President and media have declared that the second quarter GDP report contained “good news” and the contraction in the economy was less than expected. They are both signaling an expectation that slow growth will soon resume in the second half of the year. But are they reading the right tea leaves? Yes, the preliminary GDP report showed the overall economy contracted at minus 1%, which was a much better performance that the previous couple of quarters. However, they ignored the fact that there were downward revisions going back to the fourth quarter of 2007 that added an additional decline of 2% to GDP. Hence, the 1% decline was off of a smaller than expected base. But that is all looking back in time. What is the second quarter GDP report telling us about where we are now and where we are going? The real picture not in the headlines is not pretty.
For starters, the headline number is based on a statistical quirk in the way GDP is calculated that needs to be revised. According to the second quarter GDP report, “net exports” rose and added a positive contribution to overall GDP of 1.38%. In reality actual exports fell 7% and actual imports fell by a larger 15%. Now who really believes an economy that exported less in the second quarter achieved significant export driven growth? Economists should revise the GDP net export calculation and base it on whether or not combined imports and exports were growing or shrinking. Based on a combined calculation imports and exports would have subtracted 1.5% from growth and not added to it. This would have made the reported GDP figure minus 4% rather than minus 1%. Next, federal government spending rose 11% overall. But this figure was juiced by a 13% increase in defense spending as President Obama expands the war in Afghanistan. Fighting in Afghanistan is not going to revive the domestic economy now or in the future.
The real problem in the GDP report is consumer spending, which accounts for 70% of GDP, shrank at a rate of 1.2%. Even in the 6.4% revised first quarter downturn consumer spending was positive. The consumer has finally thrown in the towel and is hunkering down. If this behavior continues we will only see further economic erosion and not positive growth. What economists are missing in their models is that credit is so tight to qualify for a mortgage or an auto-loan that consumers are being forced to forego spending. With a rising unemployment rate it is hard to see where the predictions of renewed consumer spending vigor are coming from. The other thing most economists are missing, because of a false faith in their econometric models that are based on a post World War II inflationary cyclical economy, is that inventory reductions are due to semi-permanent decreased demand. These economists expect a re-stocking of inventories to drive positive GDP growth going forward. But, if the consumer spends even less in the third quarter than in the second quarter, then why would companies add to their inventories? What we need President Obama is an economic prescription that does not include the currently preferred method of watchful waiting to get us out of the depression.
Posted by Michael A. Kamperman on July 15, 2009
The global economic depression is not over, not close. Bank of America/Merrill Lynch replaced their market strategist and the new one has called an end to the recession. After the markets closed yesterday, there was jubilation over a much better than expected report from Intel. One talking head on the show Fast Money gleefully declared that Intel is indicating the recession is over. Funny, I must not have studied hard enough in my economics classes. I didn’t know that a near monopoly company that reports a greater than 15% year over year drop in revenues indicates anything good for the economy. Now I do know that some stocks are overvalued and some stocks are undervalued every day in the stock market. Having declining revenues that are still better than expected can be positive for the price of a stock. But declining revenues from the world’s premier microchip company with few competitors is not indicative that the depression is over. To think so because of the happy talk is to be tricked by an economic optical illusion.
Merrill’s old analyst David Rosenberg is not calling for an end to the economic malaise. To me he is one of the few economists out there that seems to really get it. He said “what I see is a forecasting community that continues to make predictions based upon linear data that have been completely interrupted by the secular change in the credit cycle. And I think because this is all so far beyond our own collective experience, the tendency has been to underestimate the role that asset deflation and debt repayment plays in the economy….The average FICO score today now is down to 690 after the borrowing spree of the past seven years. Yet to obtain a plain-vanilla 30-year fixed rate mortgage, the minimum score is 760. For a 15-year HELOC, it is 740. And, for a three-year auto loan, the minimum FICO is 720.”
Two corporate reports yesterday were much more telling about what is really going on in the economy. Martin Marietta said they saw a significant drop in orders for crushed stone to build and repair roads. The stimulus money is not showing up in shovel ready infrastructure projects and the states are cutting back. Yum brands lowered their outlook because of the weakness they see amongst the consumers in their two biggest markets, the U.S. and China. That’s right, in spite of the Chinese government’s stimulus money actually building shovel ready roads and bridges, the Chinese consumer is slowing down. As the consumer goes, so goes the economy. The consumers will continue to sit on their wallet as long as unemployment keeps rising and the ability to borrow money to buy a home or a car remains excessively tight.
Posted by Michael A. Kamperman on June 27, 2009
We are not in a recession. We are in a depression. If Washington doesn’t recognize this soon and take dramatic action, then we will fall into a new great depression. The reality is there is no leadership in Washington prepared to place the responsibility for the economy’s outcome on their shoulders. The Republicans are in disarray and are looking for an issue to get back in the electorates good graces. So far they have not found something positive and proactive to rally the country to their side. Therefore they are playing defense and waiting for the Democrats to stumble to be in a position to benefit from the fallout. The Republicans should come up with a comprehensive plan to restore the economy and they should hammer President Obama every day that he doesn’t enact their solutions. Unfortunately I have not heard a single Republican pound the table with alarm that too little is being done. Too often the refrain is too much is being done.
This leaves the Democrats who control both chambers of Congress and the Presidency to offer new solutions to restore the economy. However, the Democrats are intent on taking advantage of their large majorities in Congress and reshaping the agenda in America. Hence, the focus is on fighting global warming and re-engineering healthcare. The problem is both of these initiatives require large amounts of new federal spending at a time when the budget is already in way out of balance. If the Democrats acknowledged the number one issue confronting the nation is an economic crisis that could turn into a new great depression, then their large spending initiatives would wither and die on the vine. Additionally, like the Republicans, I have not heard a single Democrat pound the table with alarm that too little is being done.
What will it take to wake Washington up? I believe unemployment will run right past 10% and will reach 11% by this fall. Perhaps then someone in a leadership position in Washington will become alarmed enough to start pounding the table. Statesmanship requires one to do what is in the best interests of the country rather that what is politically expedient. Are there no statesmen, or stateswoman left in Washington? It would be nice if Ben Bernanke and the Federal Reserve were willing to push for more, but they too have been cowered by recent criticisms and have fallen into a wait and watch mode. If we do not acknowledge the economy is facing a serious crisis that will not heal itself with time, then we cannot take the bold and courageous actions as Americans to solve the crisis. As Warren Buffet said, “we are facing an economic Pearl Harbor.” Winning the war was the country’s sole focus in the 1940’s. People were willing to do whatever it took to win. If we are not willing to do whatever it takes to fix the economic crisis today, then we will lose the economic war we are facing.
