Posted by Michael A. Kamperman on May 2, 2010
I am a very optimistic person. It pains me to be such a pessimist on the economy. I look forward to the moment when I can switch from pessimism to optimism. Now is not that time. The preliminary GDP report showed growth of 3.2%. This represents a significant slowdown from the 5.6% growth rate reported in the fourth quarter of 2009. This is the roaring recovery we keep hearing about. The so-called jobless recovery. But the key to remember is this is the best we could do despite the $787 billion stimulus plan, the quantitative easing from the Fed, the home-buyers tax credit, and the stimulus spending from many foreign nations. It looks like rough sledding ahead. The Fed stopped adding cash to the economy at the end of the first quarter. The homebuyers tax credits expired at the end of April. Considering that almost 45% of all home-buyers in March were first time home-buyers, triple the normal rate, it is reasonable to assume another slowdown in home sales started yesterday. Jarringly state and local government spending dropped at an annualized rate of 3.8% in the first quarter. Most of the money from the stimulus plan was aimed at providing cash aid to state and local governments. What will happen to state and local government spending when the stimulus money stops coming at the end of 2010 since their budgets are already plummeting now? Export growth slowed in the first quarter. Not surprisingly the dollar has continued to strengthen all year hindering relative export competitiveness. And of course we are all watching the Greek Tragi/Comedy unfold day by day. Greece has forced all of Europe and many other debtor nations to tighten their belts in the last few weeks. It is impossible to see how exports can lead a U.S. recovery going forward no matter what the rhetoric is from the Whitehouse.
I was at a party last night and I mentioned that Gallup reported the March unemployment/underemployment rate was 20.3% and that in Spain the official unemployment rate is now 20%. A man I met who works in the aerospace industry said unemployment in his industry is 30%. He said he has so many friends living off of their IRA’s and 401(k)’s and that for some the money is starting to run out. A woman I met told me about her daughter in her 30′s having to move back home. The economic pain is spreading and it is not letting up.
The economy definitely needs another major stimulus plan. That looks politically impossible in 2010. The Tea Party movement believes our problems are the result of too much government spending. Their libertarian leanings are pulling the Republican party to the right. The progressive liberal wing of the Democratic party is all that will be left after the 2010 elections. Those politicians who believe in the possible, which means they believe in the art of compromise, are an endangered species. We could well be in a period in 2011 and 2012 when nothing significant is accomplished because compromise by either side will be viewed as surrender by the radicals that increasing are gaining power on both sides of the aisle. The old saying that there is not a dimes worth of difference between the Republicans and the Democrats may well no longer be true. Polarized politics will not solve America’s problems. We need the President and both aisles of Congress to focus on creating jobs for others rather than focusing on saving their own jobs for themselves.
Posted by Michael A. Kamperman on October 29, 2009
The third quarter GDP rose by 3.5%. Media outlets and economic pundits have hailed the report as irrefutable evidence the recession is over. It is not over. Consider that 1% of the gain came from a decline in the decline of inventories. The country shrank inventories at an annualized rate of $130 billion in the third quarter. But because that was an improvement over the second quarter the alchemists consider this negative a positive. A careful reading of the GDP report shows that 1.66% of the gain came from an increase in auto production. This is attributable to a combination of the cash for clunkers program and of GM and Chrysler restarting production that was totally shut down for parts of the second quarter as they went through government controlled bankruptcy proceedings. In September auto sales fell back to depression levels once the cash for clunkers program ran its course. Residential fixed investments increased 23.4% in the third quarter after decreasing 23.3% in the second quarter. But in September sales of new homes fell 3.6%, while sales of existing homes rose 9.4%. This is due to the first time home buyers tax credit. The discrepancy between existing homes sales and new home sales is because in order to qualify for the credit a buyer must close on the home by November 30 and new home cannot be built in less than 90 days. This indicates that just like the cash for clunkers program as soon as federal government stimulus is removed from the marketplace depression level final demand resumes. There is a real possibility a new home buyers tax credit will be extended in some form. However, it will probably not juice sales as much as the last tax credit since everyone who was waiting to buy a home ran out and bought one to take advantage of the tax credit. In other words in both situations demand was pulled forward. The collapse in consumer confidence in October and the persistently high rates of weekly jobless claims indicate the underlying fundamentals of the economy have not materially improved. The banks are still tightening lending and as long as that continues the depression will continue.
The GDP report revealed some stark weaknesses in the economy that will eventually drag the whole economy down again. First and foremost state and local government expenditures shrank by 1.1%. The decrease in tax revenues means local government spending will remain weak for an extended period of time. Also, non-residential spending decreased by 2.5%. The commercial real estate market is flat on its back and will only continue to contract going forward. Finally, disposable personal income decreased by $20.4 billion in the third quarter. This means the 3.4% increase in consumer spending is not sustainable, especially if the consumer remains unable to borrow their way to prosperity.
The real tragedy about the 3rd quarter positive GDP report is the high fives at the Whitehouse and Federal Reserve will prevent much needed economic assistance from Washington making its way to Main Street. The real measure of economic growth is jobs. Unless the federal government statisticians again drop hundreds of thousands of people out of the workforce the unemployment rate will rise to 10%, or higher in next Friday’s report. If not for the federal government dropping 1.5 million people out of the labor force in the last few months the official unemployment report would already be close to 11%. The Obama administration can only hide their heads in the sand like Ostriches for so long. If the new Hoover administration doesn’t get their act together by creating millions of jobs soon they will be looking at a Republican controlled Congress in 2010.
Posted by Michael A. Kamperman on October 1, 2009
The debate between most economists is whether we are in a V-shaped recovery or whether we will have a double dip W-shaped recovery. What recovery are they talking about? Yes, based on the flawed GDP calculation we probably have a positive reading in the third quarter. The final GDP report for the second quarter showed the economy only contracted at -.7% annualized rate. In the second quarter real U.S. exports to willing buyers fell by 4.1%. But because our imports fell 14% the GDP calculation claims that “net exports” added a positive 1.65% contribution to overall second quarter GDP. If the calculation simply used actual exports, then 2Q GDP would have contracted at -2.8%. The flaw in the GDP calculation has economists overstating the strength of the real economy. This morning weekly jobless claims rose to 551,000. This is higher than the highest week of jobless claims in either the 2001 or 1991 recessions. It has been over a year since we have had a weekly jobless claim number below the 2001 peak of 517,000. Can any sane person accept that we are in the middle of an economic recovery when the official unemployment report will soon reach 10%, possibly as soon as tomorrow?
Auto sales plummeted in September just as soon as the cash for clunkers program ended. The annual sales rate is once again well below 10 million units per year. Consider that September of 2008 was the worst month for auto sales since 1993. Yet the supposed recovery we are in saw Ford sales fall 6% from September of 2008, Toyota sales fall 13%, and GM sales drop by 45%. Does that look like a recovery to you? I look for home sales to follow auto sales into the ditch in October now that sales from the first time home buyers tax credit are behind us. Remember you have to close by November 30 and it is taking an average of 60 days to process a mortgage application.
Sales of autos and homes are big ticket items. Most buyers need both a job and access to credit to acquire either. With unemployment still rising and credit still tightening, it is unrealistic to believe the economy is in a full blown recovery. We need someone in Washington to show some leadership and come forward with a small business and consumer credit program. The Treasury and the Federal Reserve are too content to sit back and wait for the Zombie banks to heal. These banks are undercapitalized and they will not heal on their own. They are going to need more federal support. The housing market is going to need more federal support. The auto market is going to need more federal support. And the job market needs a lot more federal support.
Posted by Michael A. Kamperman on August 7, 2009
Was I surprised the reported unemployment rate fell from 9.5% to 9.4%? Yes I was. I expected the unemployment rate to rise. Especially since the Labor Department reported the U.S. lost another 247,000 jobs in the month of July. But I was also surprised last month that the unemployment rate rose by only .1% from 9.4% in May to 9.5% in June. In June, the Labor Department reduced the number of people wanting jobs from 155,081,000 to 154,926,000. Based on estimates for population growth we need to add about 125,000 jobs every month for the job market to absorb new entrants seeking work. By decreasing the active participation in the labor force by 280,000 in June, the reported rate of unemployment rose to only 9.5% instead of 9.7%. For the month of July, the Labor Department once again reduced the number of people wanting a job in America. This time the number dropped from 154,926,000 to 154,504,000. If the Labor Department kept the numbers of those seeking work in May constant with July and added the normal 250,000 new entrants into the ranks of those seeking employment, then the unemployment rate reported this morning would have been 10% and not 9.4%. In the last two months the Labor Department has added almost 1 million people to the ranks of those not in the Labor Force. This is the reason the official unemployment rate is the same in July as it was in May and not 10%. Just as with the GDP report, signs of economic weakness are being reported as signs of economic strength. In the U.S. 577,000 fewer people are earning a paycheck than were just two months ago, and we had more young people enter the workforce than older people retire, and yet our official unemployment rate is unchanged and the pundits declare the economic recovery is on.
Intuitively and intellectually it doesn’t make much economic sense that more people are leaving the workforce than entering it. If you are a stay at home parent and your spouse loses their job, then that means in many cases two people are looking for employment in your home rather than one. If you are a stay at home spouse and your working spouse lost a good paying job and has had to accept a job at much lower wages, then that means in many cases two people are looking for employment from your home rather than one. If you are a young adult going to school and Mom and Dad have to pull your financial support, then that means in many cases you are looking for work. It only makes sense that we have more people seeking employment when many households have declining, rather than rising, incomes.
While we may be entering a sustained period of economic growth, the data and the reaction by the White House and the Media means the economy will have to recover on its own without any further near term significant assistance from Washington. This is not a comfort to me when the “improvement” comes from a combination of claiming a 20% decline in exports over the last three quarters actually added to economic growth, and the way we are improving our unemployment rate is by no longer counting fellow citizens desperate for work. Perhaps the strategy of talking ourselves into recovery will work. However, woe is us if the recovery spin is wrong and we wasted an opportunity to head economic calamity off at the pass at Thermopylae.
Posted by Michael A. Kamperman on August 5, 2009
We are not in an economic recovery, not by a long shot. If estimates are correct the unemployment numbers for July will show somewhere between 300,000 to 450,000 job losses. That would not be a sign of slack hiring but of continued firings. Hiring is a lagging indicator once a recovery takes hold. Continued firing is a clear sign there is no recovery. Confusion about the concept of “net exports” in the GDP data is leading many to misinterpret the state of the economy as being more positive than it really is. U.S. imports and exports peaked in the third quarter of 2008, with exports reaching $1.913 trillion. In the fourth quarter of 2008 total dollar exports fell to $1.706 trillion, followed by a drop to $1.509 trillion in the first quarter of 2009 and a drop to $1.483 trillion in the second quarter of 2009. Yes, the rate of decline is slowing. But the GDP data claims “net exports” added .45% to GDP in the fourth quarter of 2008, added 2.64% positive growth in the first quarter of 2009, and finally added 1.38% to positive GDP growth in the second quarter of 2009. Our actual exports have fallen by over 20% in the last three quarters and yet our GDP calculation claims “net exports” have added 4.5% to our economic growth. The firing data offers a clearer picture of the true state of the economy. Firing is not a lagging or leading indicator, it is a current indicator. If the July unemployment report estimates are accurate, then the economy was still falling and not in a state of recovery in the month of July. Yet July is part of the third quarter when the average forecast of economists is calling for positive GDP growth.
Many look to China as a source of economic strength and positioned to lead a global economic recovery. The latest data out of South Korea says otherwise. According to Bloomberg news, “exports to China, South Korea’s biggest overseas market, fell 15.7 percent from a year earlier in the first 20 days of July. Exports to the U.S. slid 26.5 percent in the period while shipments to Japan fell 32.6 percent, today’s report showed.” China claims a 7.9% second quarter growth rate and yet, just like the U.S. and Japan whose economies are in an acknowledged deep slump, China is importing much less than it did last year.
The economic strategy being employed by the White House is being driven more by the political advisers than the economic advisers. Today the President and his Administration began making a concerted effort to convince Americans the economy is doing better than expected, and the stimulus plan is working as intended. Considering the stimulus plan was supposed to keep unemployment around 8% in 2009 and it will soon reach 10%, just what is the objective of this plan of denial and obfuscation? The objective is to paint the picture the President has a solid plan for the economy. No, he doesn’t. What the President needs to do is say the economy is in much worse shape than expected and that is unacceptable. He should say the stimulus plan, while helpful, is proving to be not nearly effective enough in stopping the economy from declining. He should say he is willing to stake his Presidency on restoring jobs in America and will do whatever it takes to make that happen. President Obama, I will tell you what your political advisers should have already told you, your Presidency is already staked to the unemployment rate.
