Headwinds in 2011

Econintersect: David Rosenberg, Chief Economist at Gluskin Sheff has identifed the structural defects which will be faced in 2011:

1. Stubbornly high unemployment rate (at 9.8%, not far of the recession high of 10.1%). Oh yes, as for that ballyhooed slide in initial jobless claims, the high seasonal factor divisor contributed to a 388k headline despite anincrease of 25k in raw unadjusted terms. Also note that first time claimants on State’s rolls increased by 118k. So, while initial claims are the lowest since July 2008, this masks just how soft the overall jobless situation really is. Continuing claims today, at 4.1 million, compares with 3.1 million back in 2008; extended benefits today are at 819,000, versus  zero back then; and emergency claims at 3.7 million today versus 127,400 back then (thanks to Rich Yamarone for that little ditty). Then let’s compare initial claims on a non-seasonally adjusted of 522k for this past week … and this compares with:

• Dec 26, 2009: NSA: 557k (SA: 454k)
• Dec 27, 2008: NSA: 717k (SA: 514k)
• Dec 29, 2007: NSA: 508k (SA: 352k)
• Dec 30, 2006: NSA: 500k (SA: 339k)

2. Deflating home prices ― in fact, not only did Case-Shiller home prices decline 1.3% MoM in October, but all 20 cities showed a sequential decline, and this last happened in February 2009 (when investors were actually paying attention to what was happening in the housing market). Eight cities are now down or perilously close to new cycle lows, including some big markets like Miami, Cleveland, and L.A. As an aside, there was a niftyop-ed piece by Peter Schiff on page A19 of the December 30 WSJ that laid out the reason why (hint: Bob Farrell’s first rule) U.S. home prices may have another 28% downside from here (and to think we thought the Dallas Fed research team was bearish at down 23%). In “wealth effect” terms, would be equivalent to a 75% slide in the stock market!

The last time we enjoyed a Santa rally (or in Bernacase, a rally of Maccabeus proportions) was in 1991

3. Huge state/local government budget gaps ($65 billion this year) will be closed with tax hikes, user fees and service cutbacks. The biggest myth being promulgated today is that the economy must be doing better because state/local government revenues are on the rise. Dude! That’s not the economy! It’s called tax increases. In fact, 23 states have boostedtaxes in the past year. Eight have raised income taxes ― you may want to see the December 26 NYT editorial titled The Looming Crisis in the State.  It was edifying.  Ditto for the December 27 front page WSJ article titled Strapped Cities Hit Nonprofits with Fees.  And yesterday’s NYT ran with a front page article titled Cuomo Plans 1-Year Freeze On State Pay. This is a major macro theme for 2011 ― the fiscal squeeze at the lower level of government. And, it’s not a given that we are going to see all the stimulus at the federal level come to the fore either ― the new Congress will see to  that (the front page of the NYT also went with GOP Newcomers Set Out toUndo Obama Victories as well as Congress Targets Spending on the front page of yesterday’s WSJ). May we also suggest a read of page A3 of yesterday’s WSJ – Forget Pep Talks: Governors Warn of Tough Times.  To wit: “With sagging economies, soaring budget deficits and the loss of federal stimulus money, incoming governors face the deepest fiscal crisis in decades and expectations that they will remain true to campaign pledgesto slash spending and taxes.” It remains to be seen how this 12% share ofGDP and 15% share of employment end up wreaking havoc on newly minted near-4% economic forecasts for 2011.

4. Surging energy prices ― oil prices have broken above $90/bbl and we seem to recall that when this happened in 2007, an unexpected recession followed four months later. Yesterday’s USA Today ran with an article quoting some energy experts predicting that gasoline prices, already north of $3 a gallon, may yet test $4 a gallon before long. Now that would pretwell take care of that payroll tax cut … and then some. Looking at the nearecord net speculative long positions on the New York Mercantile Exchangas far as light sweet crude is concerned, it is abundantly clear that this runup in oil prices is not merely related to physical demand. Remember that it was this investment-related action in 2008 that ultimately caused the price to head into reverse as the physical demand growth went into reverse (as an aside, speculative longs in copper have also reached five year highs).

5. Slowing global growth, as flagged by the decline in the Chinese stock market. The dramatic fiscal squeeze in Europe is also going to effect 25% of U.S. exports and the policy tightening in inflation-bound emerging Asia will negatively influence another 25% of the pie. So forget about any 2011 improvement from the foreign trade front.

6. The looming showdown in Congress over the stopgap bill that keeps the government running until March. And stimulus freaks may have to conwith a GOP-led House that is pushing for spending to return to 2008 levels. Have a look at GOP Sets Up a Huge Target for Budget Ax on the front pageof today’s NYT — the new Congress is not the old Congress and is seeking $100 billion of cuts in government spending this year. We wonder how many economists, giddy over the recent tax stimulus, have entertained thenotion how dramatic spending restraint in their forecast as far as the widespread consensus 2011 macro forecast is concerned. We also recommend a read of the article on page 2 of today’s FT — Republicans Ready for Battle on Debt Ceiling. Make no mistake, steep expenditure cutswill very likely be part and parcel to any deal resolving the looming debt ceiling issue.  which comes to a head by April.

Source: gluskinsheff.com