Thinking Through an Economy Without Stimulus

Since 2006, we have been in the midst of greatest global and American economic turmoil since the 1930’s.  At every step along the way, we have been showered by contrary and opposing economic opinion by economists, taking heads and pundits.

Some maintain we have spent too little to quell this crisis, while others maintain we are here because we spent too much.  I maintain we are here because we were overleveraged when the economy shifted gears due to the aging baby boomers – an aging populace spends less. 

For several years now I have believed America was facing an asset deflation cycle combined with deleveraging of debt – commonly referred to in the press as the Japanese L.  I would be happy to be wrong as deleveraging cycles have no proven cures other than time.   Unfortunately, leverage was not the only issue which caused the Great Recession – it was a perfect storm combining demographics, a classic business cycle, and 50 years of government policies favoring money flows over goods production.

This week the advance estimate of 3Q2010 GDP release showed the economy grew at 2%.   Growth of 2% or under is not growth.  2% growth does not create jobs.  Some have pointed out that change in inventories were literally 2/3rds of GDP growth.   As a note to those who do not understand the wacky world of GDP methodology – goods are counted in GDP when produced, and not when sold.  When the goods are sold, it becomes a balance sheet transaction – inventories debited and sales credited. 

First, if you accept that GDP is THE measure of the economy, you take the release as a whole.  The most important message is the trends which have not changed.  A single release is a snapshot in time with idiosyncrasies.  If you want to draw any conclusion, my concern is that inventories rise when an economy is slowing.  They rise for Christmas too, but since all of the analysts are looking for the proverbial double dip – my worry would be the economy is slowing. 

One day before the GDP report, Econintersect released its November 2010 economic forecast (EEI).  Because of the economic pulse points used, Econintersect’s EEI generally (but not exactly) correlates with GDP.  The EEI is designed to anticipate near term economic change on Main Street.  Because pulse points used, the portion of the stimulus which did not make its way to Main Street was not picked up by the EEI. 

Economic growth as measuered by the EEI has decelerated through 3Q2010 – but on average overall growth is approximately the same as 2Q2010.    If we graphically overlay the EEI (zeroing on December 2009) onto GDP, the EEI would have anticipated 3Q2010 GDP growth at approximately 1.5%.  Econintersect believes the final 3Q2010 GDP will likely be lowered to around this number.

The takeaway from this graph is concern that the trendline is negative.  Both October and November EEI forecasts were for a slowing Main Street economy – but still with positive growth none-the-less.  The good news is that the rate of deceleration slowed in November, and hopefully positioning the economy for a sustainable growth cycle without artificial stimulants.

One positive piece of news this week was the initial unemployment claims which continued to decline.  In this week’s release, the four week moving average approached 450,000 – and about at the lowest level for 2010.  Hopefully we are approaching real jobs growth as historically claims under 450,000 correlate to positive jobs numbers.

Job creation would solve many ills facing the economy.  Americans need to be open to jobs which are not green.  It should be obvious that for strategic reasons complete sectors cannot be exported just because they are dirty and nasty smoke stack polluters.  They will just be dirty and nasty polluters in other countries anyway – this is not the way to save the planet, and is an ostrich approach to environmental solutions.

The effects of the stimulus are winding down.  We are now beginning to see our economy for what it is.  There is a better chance now to isolate the specific issues which are preventing jobs growth,  and take corrective action. 

The Weekly Leading Index from ECRI continued to be negative although rising from -6.9 to -6.5 implying conditions six months from today will be worse.  Lakshman Achuthan wrote this week:

The good news is that the much-feared double-dip recession is not going to happen.  That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn’t lead to recession.

This week, Econintersect’s review of the indicators and other events of concern:

Weekly Economic Release Scorecard:
Item Headline Analysis
GDP 2% growth Trends remain unbroken
Is this a Double Dip or One Long Recession?    Certain consumers are bearing the brunt of this economic situation
Business Cycle Drivers   What bad options exist to trigger a real recovery
Recession Watch   Growth trends remain negative
ATA tonnage Up slightly Likely flat
New Home Sales Up 6.6% Down 
Durable Goods Rose 3.3% Up or down depending on seasonal adjustment methodology
Consumer Demand   Now exceeds the Great Recession
Case-Shiller Home Prices Down slightly  
Mortgage Foreclosures   B of A now subject of a class action suit
Existing Home Sales Rose slightly Down 
Chicago Fed National Activity Index Down slightly Backward revisions essentially made the index unchanged

Bankruptcies this Week: AmericanWest Bancorporation

Failed Banks this Week: None

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