What’s in the News – GDP and labor #’s better, the
recession is essentially (statistically) over
The second look at 2nd quarter GDP this morning (8/27)
contained a bit of a surprise to some economists, but no
surprise here. The market had been expecting this revision
by the Bureau of Economic Analysis (BEA) to show GDP
declined at -1.5% rate for the quarter. (The BEA preliminary
estimate last month showed a -1.0% decline in 2nd quarter
GDP.) This BEA revision showed the 2nd quarter GDP
contracted at only a -1.0% rate in the 2nd quarter;
appreciably better than the -1.5% estimate. (The BEA will do
a final revision of GDP next month.) The better than
expected GDP number suggests that the economy may be getting
better at a faster rate than previously thought. In addition
to the BEA’s GDP revision reported today (8/27) the
Department of Labor released jobless claims for the week
ending August 22nd. Initial Jobless Claims were down -10,000
from the previous week to 570,000. The news was even more
encouraging for the continuing claims (people who are
currently unemployed, receiving benefits and filed for
unemployment at least 2 weeks ago). Continuing Claims were
down -119,000 to 6,133,000—the 3rd straight week of decline.
If the labor sector has finally turned around, then the
stage is being set for a recovery and jobless claims along
with the unemployment rate should start to see improvement.
Economic Update – The recession ends…feel any better?
For all intents and purposes, the recession is
over…statistically that is. Between the “Cash for Clunkers”,
first time home buying incentives and various other stimulus
give-aways, whether it is this quarter or next, GDP is
likely to show at least some sort of gain. Remember, all of
these programs positively affect GDP.
The real key will be when “Capacity Utilization”
makes a comeback. Capacity utilization is a concept in
economics that refers to the extent to which an enterprise
or a nation actually uses its installed productive capacity.
Thus, it refers to the relationship between actual output
that is produced with the installed equipment and the
potential output that could be produced with it, if capacity
was fully used.
At the moment, capacity utilization in the US is at an
all-time low, around 68%. That means that with the equipment
we already have in place we could produce almost 50% more
goods than we are now producing. However, most analysts
think that 80% capacity utilization is a very good number.
On the bright side, there was a small uptick in last month's
data. Whether or not this is the "bottom" remains to be
seen. But if it is not the bottom, it is close. You can only
shut down so much production before inventories fall to
levels that require restocking. And we are getting close to
that level in many industries.
With most analysts feeling that a capacity utilization of
80% or more is pretty indicative of solid growth, we have a
long road back. To get back to that level, we would have to
see an almost 20% rise in manufacturing. That is unlikely to
happen all that fast, for several reasons. First, consumers
are retrenching and saving. We just simply are not going to
need or want as much stuff. Second, unemployment is crimping
the ability of consumers to spend. The recovery we are
likely to see is going to be sluggish and not produce new
jobs for quite some time. Again, that stifles demand. The
country (and the world) is adjusting to the New Normal. It
is some level of overall economic activity that is different
than what we have enjoyed during the reigning paradigm of
the last 30 years.
What few understand is that we are in a massive generational
cycle that only comes around every 40 years (a generation)
and a compounded generational cycle that happens every 2
generations, or 80 years. Is it any wonder that consumer
spending is the lowest since 1967, yes about 40 years ago
and through a massive deleveraging process that happened two
generations ago, yes 80 years ago in 1929? That’s because
people reach their peak spending in their late forties (48
on average) and slow down spending and start saving, hard!
It’s just a natural demographic cycle. (I discuss this in
depth in my Economic Tsunami special report. Readers can
request a free copy).
What’s going to happen is that manufacturers are going to
ramp up more slowly than in the past, especially as many
companies have the ability to tailor their production to
consumer demand much faster now, due to automation. As I
have repeatedly said, the world is awash in excess capacity.
We simply built too much productive capacity to be utilized
in the New Normal. Too many malls, too many shoe stores too
many Harley Davidson’s. One way of dealing with too much
capacity is to simply close the plants. That is what is
happening in the paper and memory-chip industries. Other
industries are engaging in mergers to reduce or
"rationalize" capacity. While that process is a good thing,
it does mean that unemployment rises or stays higher longer.
The building of inventories counts as a rise in GDP.
Conversely, reducing inventories gets counted as a lack of
growth. We have just about reduced inventories all we can.
As companies begin to rebuild inventories, that will
translate into a statistical increase in GDP. But if
capacity utilization rises even to the low 70’s, it still
shows a weak economy with not many new jobs and reduced
corporate profits, compared to a few years ago. It will be a
rather long time before the jobs that have been lost this
cycle will come back. Will the statistical comparison of
data from a year ago look positive? Are things improving?
The answer will be yes. But it will not feel like it for
those who are looking for new jobs or higher income or more
sales.
Stock Market Update - The little engine that could
I think I can, I think I can….The market continues its
mantra and keeps advancing against public sentiment and
climbing a “wall of worry”. Well, that’s what is does. It
goes up when most people are bearish and down when most are
bullish. It never makes the majority right. In other words,
“if it’s obvious, it’s obviously wrong!” People in
general still don’t believe this market. Astoundingly, the
AAII bullish sentiment dropped last week from 51% to 43%
after rising for most of the last 5 months. (Barron’s
publishes these figures each week) This is really
surprising. It means that investors are getting nervous. I
was looking for a 53-55% bullish # to make me become
bearish. This decline, along with the relative strength the
market has been holding up makes me believe the market’s
going higher. Maybe not for long, but I do not see the need
to put on a sell just yet. The many cycles converging in
September along with the way the market has rallied in an
upward trajectory vs. a more healthy stair step fashion,
keeps me convinced that this is a bear market rally and we
need to stay on high alert. My mantra continues to be “pray
for peace but prepare for war”.
For the longer term, bull and bear cycles should be seen in
terms of valuation instead of price. Markets go from high
valuations to low valuations and back to high. It is an
age-old story. PE (price to earnings) valuations typically
drop to 7-9 in a bear market. We have done about half the
work we need to do to get back to low valuations. These
cycles are of 17-25 years. We are less than ten years into
this one. I believe we are going to lower valuations in
terms of price-to-earnings ratios. This can be done by the
market going sideways and earnings rising, or the market
dropping, or some combination. Given the serious
demographic and deleveraging challenges ahead,
considerably lower prices seem difficult to avoid.
Investment Strategy – The little engine keeps chugging
Having a true strategy is now critical, one that also
includes an exit strategy. The single most important
question for investors to get right over the next few years
is whether we face inflation, deflation, stagflation or
what. The answer is YES. We are likely to be facing all of
these things and each probably more than once. The problem
is that each will require a completely different portfolio.
Stocks will do well in inflation but get killed with
deflation. Bonds will do well with deflation but get crushed
with inflation. And of course, there will be a time in the
near future when cash will be king. So investors have to be
nimble, alert and tactical. Old fashioned “asset allocation”
and “buy-and-hold” approaches do not work. Our trademarked
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*Real Estate Tidbit
The housing news has been less bad of late. Home-builder
sentiment is marginally higher. Today we learn that sales
are up month-over-month, and actually year-over-year, on a
seasonally adjusted basis, which is some of the best news on
the housing front we have had in two years. Sales of
existing homes were the highest since August of 2007. Have
we seen the bottom? Well although actual homebuilding
activity is still down, the annual comparisons are getting
easier and activity seems to be leveling out. That too will
be a positive for GDP. For two years, the continual drop in
home building reduced the GDP numbers every quarter. We may
even be seeing a false bottom. What we are seeing is the
result of a government program that offers first-time home
buyers $8,000 if they buy a home by November 30; and that
program is working, especially at the lower end of home
prices (as you would expect, and as it should.) 31% of home
sales in July were involved with this program. But like Cash
for Clunkers in automobiles, this is pushing demand for
homes from next year into this year.
If homebuilding activity simply stops falling, as it appears
to be, then housing will stop being a negative as far as GDP
is concerned. There continue to be millions of homes being
brought onto the market through foreclosures -- two million
vacant homes for sale, plus, builders are still building.
Will we get back to the levels of 2005? Not for many decades
and with a much larger population. Not until the echo
boomers begin buying their first-timer homes in 2012-2015
will any rebound likely occur.
Cheers –Keith
916-925-8900
P.S. Be sure I am in your address book so my weekly email
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Keith Springer is President of Capital Financial
Advisory Services, a registered investment advisor,
providing Wealth Management and Mortgage Consulting
Services. For more information on how to build and
maintain a solid retirement plan, please contact Keith
at
916-925-8900 or
Keith@KeithSpringer.com |
