.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Friday, May 07, 2010

Switching My US Forecast To Sustained Recovery

Although the employment report this morning is very good, it has nothing to do with my change. You can ignore the unemployment rate increase - that is a measure of an improving economy.

The reasons for my change are two: Number 1, I expect oil prices to be restrained by the abrupt emergence of European reality, and Number 2, the combined freight/small startups indicators have gone sharply positive. The combination of these two factors indicates a slow but healthy build in incomes which we have not seen for years.

Based on diesel consumption, I would have switched over about three weeks ago except for very deep worries about the impact of state and local fiscal emergencies and poor April FUT proceeds. So I wanted to see April tax receipts and make sure that they weren't weak enough to undercut the private sector activity.

The interesting thing is that the small startups appear to be almost wholly self-financed, so I don't see credit as being an impairing factor at all. Further, they are concentrated not in services but in goods/construction/remodeling. High-skilled labor is very cheap right now, especially your own when you don't have a job. But a significant number of the people who don't have a job do have high skills and some money of their own, and they are beginning to find their way.

There is still going to be a huge swing in total employment - it will jack up very significantly over the next few months and then probably start falling as the Census employment fades and the state and local cuts continue to dribble along. Nonetheless, there are business (mostly small business) opportunities out there and exploitation of those opportunities is on the upswing as people adapt.

Truthfully, the European crisis is not good for the US economy. And this is now a test of my theory that the 2008 crash was not a product of credit, but of energy and cost inflations inflicting an abrupt drop of global incomes. If I am wrong about that, my forecast here is wrong.

I now turn to Europe; about next Tuesday/Wednesday is an important inflection point there. By the end of next week I should have more on that. There are some counter-balancing trends in Europe. For example, the decline of the Euro will actually improve the performance of some foreign-currency loans.

The major risk involved in my forecast (which could certainly be wrong) is that US government action will crimp the turn, curb the income gains and knock us back into a cycle of stagnation, although in GDP it will show up as a seesaw. However I did include some tests as to energy consumption costs, and the growth survived.

A caveat: What I do is basically forecast incomes and disposable incomes. Now theoretically GDP is supposed to be a measure of national income, although it isn't. So while I do forecast something highly related to GDP, it will not correlate to GDP at any quarter, and it is more related to GDP a year to two years in the future.

The US economy is highly dynamic, which usually saves us. However if there is another sharp inflation in energy costs or a very severe Asian crisis, we could see another cycle of contraction next year. I hope India can hold out, because I think China has entered into the last phase of a bubble, in which bubble spending chews out the guts of the economy in the bubble.

Edit: See the latest rail weekly report, and note the increasing trajectory of YoY increases on (now) all types of traffic. Trucking is increasing too.

Comments:
"(startups) are concentrated not in services but in goods/construction/remodeling"..any sense for what *kind* of construction? Surely not a whole lot of residential, with the housing overhang.

Also, I assume "goods" here means manufacturing..again, any data as to what sort of goods?

thx
 
David - I'm running numbers like a nutcase, or maybe HAL on speed, so I don't have a lot of time.

These is based on talking to bankers, small businessmen, contractors, freight, cost estimates, consumption trends, etc.

The environment for a lot of manufacturing in many states right now is pretty good.

Heck, insulation and woodstoves would make a lot of money in many places. There is a ripping market for firewood in many areas. Consumer spending is shifting toward lowering carrying costs while remaining in place.

This is part of a fundamental restructuring of the US economy.
 
MOM,

"And this is now a test of my theory that the 2008 crash was not a product of credit, but of energy and cost inflations inflicting an abrupt drop of global incomes."

I turned bearish in 2004 based solely on credit concerns. Oil was an afterthought that grew into something much more than that (as seen in my name).

I think your theory will certainly be tested. That said, I do hope you are right.

How much do you factor in the sustainability of our budget deficit? My bearishness is based on the distant future. There was plenty of recovery after I turned bearish in 2004, but it eventually evaporated.
 
MoM,I am also seeing signs of improvement.Good local contractors are very busy (core crews only,they are not expending),several people I know have found decent positions and several smaller businesses in town are doing better,partly survival bias,but still.The big problem in Cali is government,it has failed at all levels.The local paper FINALLY had an article about pension obligations being unpayable (40% of the budget by 2017!).We do have redistricting coming up,but it is likely too late,Without representative government and accountability, WASS.
 
Mark - the shift into a slow positive economic feedback cycle doesn't change the ugly reality that we have to change our governmental course.

The states and locals will be forced to adjust by the marketplace now. What's happening in Europe is no joke and is forcing a paradigm change.

The federal government now must adapt to reality. If it doesn't, of course the US economy will be dumped into a vicious cycle.

However, look at it this way: we have a chance. Lord knows, reality itself is writing the message in flaming letters across every indicator and market possible. Change or bust! No matter where you look, that is the message.

It is up to us whether we listen or not. I think it will take quite a bit to change the culture in DC.
 
Given that the peak decline in GDP was only about $400B and the stimulus package was nearly $800B, not including the Fed's backdoor stimulus, don't you think a lot of what we are seeing now is nothing more than short-term follow through from the stimulus? I guess I am surprised at how many economists have changed to "sustainable recovery" when the stimulus is responsible for at least $80B a quarter. The consumer debt burden is not going away and the stimulus effects worldwide are going to be declining dramatically by the fourth quarter.
 
And this is now a test of my theory that the 2008 crash was not a product of credit, but of energy and cost inflations inflicting an abrupt drop of global incomes.

So are you saying there wasn't a bank solvency issue?
 
To me this is a race MoM. The question is can the economy heal itself sufficiently quickly to enable Governments to pull back from their overindebted states without hampering the recovery.
Greece was first call that there isn't too much time left to pull the above trick off. All eyes are on Government debt and deficit levels and the sustainability, or otherwise, thereof.
Obviously the Chinese situation compounds worries stemming from Europe.
India is a peculiar case: Inflation on the street is far higher than government estimates. Second, its economic weight isn't sufficient to offset simultaneous troubles in Europe and China both of which are substantially larger economies.
That said, the biggest impediment to a quick resolution of the situation is the utter lack of transparency regarding asset values held on the balance sheets of banks and Feds globally. I doubt markets can clear and adopt a clear economic direction without a reasonable estimate of these values.
My worry is that mark-to-model will eventually be responsible for us to lose the aforementioned race.
I'd dearly love to be proved wrong however.
 
I guess I am surprised at how many economists have changed to "sustainable recovery" when the stimulus is responsible for at least $80B a quarter.

This is exactly my position. We have juiced numbers (or juked stats, in the language of The Wire). What happens when the steroids are taken away? Can we come up with stimulus-independent stats?
 
Also, as MoM pointed out to me in a thread a few weeks ago, there was a $600 tax credit (I may be using the incorrect term here). How much of any consumer spending recovery is fueled by this?
 
'Im wondering what the total net income will be with
the "new hiring ". If the new jobs are paying a good bit less than the jobs they replaced then we are still in the
hole, although not as deep. How many are directly related to stimulus and will vanish over the next 6 months ? A strong dollar equals low oil. A strong dollar also equals fewer exports and tough competition with imports.
Sporkfed
 
We saw a decided increase in business around April 15, presumably the result of refunds or lower-than-expected liabilities. I doubt such stimulus is self-sustaining in a "pump-priming" sort of way. I don't know how much that bump is affecting the current stats.

If there is a sustainable recovery underway (however slow), I agree with M_O_M that it has something to do with people just deciding they have to get back to work. The end of unemployment benefits might have something to do with that--folks just had to lower their expectations and get back to work at a lower level of income than before. People are just muddling through.

I'm concerned about the small-business-killing provisions of the health care bill (the new requirement to send 1099s to our vendors is going to cost us thousands of dollars per year, starting in 2012, to pick one example). I do think we're going to have a rough time of it over the next 10 years. But I'm still optimistic in the medium-term.

We are Americans, after all. If the world caves in on us, that just means we'll have to work harder.
 
MOM,

However, look at it this way: we have a chance. Lord knows, reality itself is writing the message in flaming letters across every indicator and market possible. Change or bust! No matter where you look, that is the message.

For what it is worth, I'd much rather be investing in the US than China or Europe right now. That's something. My nest egg continues to sit in US dollar denominated government debt. I'm not completely without hope.
 
I think it's wishful thinking, the sustainability of what we have here in the USA. What we have has been based on unearned income for too long on every level. No doubt, the indicators are showing improvement. No doubt, numbers will rise again after a fall. The operative word here is "sustain". I don't see that in the structure of our country anymore. People want more than they can have and are willing to pay their futures for it. It's already been done, we've already paid our future. We've paying it for quite some time now. There is turmoil and suffering in the cards as a result. This is something I am preparing for. I have children and my hope is that I can also prepare them. I'm not all gloom and doom. I do beleive that the morning will come after the night; but the night, I beleive, has just begun.
Ed G.
 
MOM

I have a question about your comment regarding the environment for manufacturing in many states being pretty good right now.

The example you gave in connection to your statement, about insulation and woodstoves and firewood, threw me a bit.

I live near several national forests where folks have always made a little extra money gathering and selling firewood but it never has been something that could enable them to make a decent living, certainly not an income that one would expect to spur the local or national economy in any significant way. I have done this, myself, so I am talking from experience.

And firewood around here is not cheap. We use it only as luxury item in the winter now. Natural gas is much cheaper when it comes to heating a home. It's cheaper to burn and cheaper when you consider the labor involved in maintaining a wood burning fire.

Woodstoves are either a luxury item or a necessity if you live out far enough away from civilization.

Your comment about insulation I can see, especially when you consider government incentives for the consumer. But woodstoves and a ripping market for firewood? Can you explain? Maybe things are different where you live.

Ed G.
 
MOM,

Truthfully, the European crisis is not good for the US economy.

I hope India can hold out, because I think China has entered into the last phase of a bubble, in which bubble spending chews out the guts of the economy in the bubble.

These are the things that concern me most. I ran with this today and here are some charts to think about.

USA vs. Europe & Asia

In my opinion, if global stock markets struggle then we're very unlikely to be immune.
 
I suspect that a lot of the small business recovery is related to the new home buyer credit. The deals must be signed by the end of April and occupied by June. There's a lot of construction going on right now to hit that June deadline.
 
Sustained Recovery

I don't understand this - only for very specific definitions of "sustained", as in: until we can't borrow for 0% anymore. In the mid to long term, absolutely everything falls apart. When the deficit spending stops, or the debt service doubles, everything goes boom.

This is all smoke and mirrors until the deficit stimulus is stopped. Then it's just tragedy.
 
M_O_M:

What's your reaction to this?
 
Post a Comment

Links to this post:

Create a Link



<< Home

This page is powered by Blogger. Isn't yours?