Archive for the ‘Recovery’ Category

Polar Vortex or Recession Redux?

Friday, May 30th, 2014

The recovery that wasn’t a recovery may have come to an end, as the Bureau of Economic Analysis reported that gross domestic product dropped by 1% during the first quarter of 2014.

Even with the drop in GDP, lower housing sales and continued high unemployment, no one is saying the economic is in a recession.  Perhaps when a recovery is as insignificant as the one we’ve experienced for nearly five years, the distinction between recession and recovery is insignificant.

The economy was in sad shape five years ago and it’s in sad shape today, in spite of record stimulus spending, bond buying, and warm and fuzzy messages from the President, Congress and the Fed.

Quarter-to-Quarter-Changes-in-Real-GDP-Percent-Change_chartbuilder-1But fear not.  The bar is so low now, even a baby step over it will look like a high jump.  At least that’s the opinion of PNC Chief Economist Stuart Hoffman who wrote, “I believe this real GDP decline, mostly due to the polar vortex, coiled the ‘economic spring’ even tighter for a sharp snap-back (boing!) this quarter, where I have an above-consensus forecast for a 4.0% annualized rise in real GDP.”

In other words, bad news for the first quarter is good news for the second quarter.  Stop me if you’ve heard that story before.

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Household Income Shows Troubling Outcome

Friday, May 23rd, 2014

Hold off on the victory dance.

The 2014 “Economic Report of the President” and many media reports indicate that the U.S. economy has finally recovered.  But has it?

One measure of economic health is household income.

Historically, America has prospered, as each generation typically has earned more inflation-adjusted income than the generation that preceded it.  The American Dream is not just to succeed yourself, but to provide your children with a better life.

A better life means more than money, of course, but money enables the next generation to do more, live more comfortably and worry less about making the mortgage payments.  Materialistic though it may be, it’s part of the American Dream.

So it’s alarming to see the drop in income that has taken place since 2007, when the financial crisis began.  Median household income has dropped from $56,000 to $51,017, which is a dip of nearly 10%.

We’ve had dips before, as the chart below shows, particularly during the “stagflation” years of the late ’70s and early ’80s.  But this has been the most dramatic drop in income in recent history.

Household Income

Household Income

When household income shrinks, some in the middle class risk sinking down to the lower class and those on the cusp of becoming middle class no longer are able to achieve that status.  As the lower class grows, government expenditures grow, resulting in higher taxes and even further erosion of discretionary income for those in the middle class.

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Wishful Thinking Does Not Create Economic Recovery

Wednesday, April 30th, 2014

This was going to be the year.  Remember the predictions of 3% economic growth?

More recently, the consensus was 1.2% growth for the most recent quarter.

It turns out, though, that the economy has flat-lined, growing at a puny 0.1%, quarter over quarter.  Even the 2% growth we’ve experienced throughout the 58 months of economic recovery we’ve had (see last week’s post) looks good in comparison to what we’re experiencing.GDP

Keynesians, undaunted by being wrong 100% of the time, have been predicting for years that prosperity is just around the corner.  The only thing around the corner, though, has been another corner, then another.  It’s time to realize that we’ve been going in circles.

Growth of 0.1% is, of course, just a whisker’s width away from recession.  Maybe that’s what’s around the corner.

Two areas of weakness were trade, which subtracted 80 basis points from GDP growth, and inventories, which subtracted 60 basis points.  You may recall that in Q4 of 2013, when economists were talking about strengthening growth, it was because inventories were increasing.

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The Economic Recovery That No One Noticed

Friday, April 25th, 2014

The average recovery since the end of World War II has been 58 months.  The current “recovery” has just reached that milestone.

So maybe we should be celebrating.  But what’s to celebrate?econ_expansion25_405

If you were to define “recovery” as a period when gross domestic project (GDP) increases from one quarter to the next, yes, we’ve been in a recovery.  But a recovery is typically reflected by a period that also includes, among other things, low unemployment, strong consumer spending, increasing income, higher inflation and strong manufacturing.

Most of those signs of recovery have been either barely visible or missing, and GDP has been growing about as fast as a bonsai tree.

This has been, and will likely continue to be, the recovery that no one noticed.  It’s a recovery in name only, as for most Americans it doesn’t feel much different than a recession.  Consider what’s been happening:

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Paper Taper

Friday, December 20th, 2013

So the taper begins in January.  Big deal.

That was the market’s initial reaction anyway.  In fact, the market viewed this week’s announcement as a positive, setting yet another record.  Conversely, when Fed Chairman Ben Bernanke first brought up the possibility of a taper in May, he sent the market reeling.  So talking about buying bonds has a greater impact than actually buying bonds.  Who knew?

Some believe the stock market rallied because The Fed made it clear that it will remain accommodative and that interest rates will remain near zero until the apocalypse.  That being the case, though, why did bond yields soar?  Go figure.Taper Impact

The taper announcement is not a big deal, though, because everyone knew it was coming – everyone except for the economists whose job it is to tell us when tapering is coming.  First they guessed wrong that it was coming in October, then they guessed wrong that it wasn’t coming in December.  Keep that in mind when you hear them tell you the economic benefits of more bond buying and more government spending.

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Getting Your Bond Portfolio in Shape for 2014

Friday, December 13th, 2013

It’s time to start thinking about New Year’s resolutions.  It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.

But who are we kidding?  Such resolutions are made to be broken.  So this year, why not make a resolution and keep it?  This year, resolve to pay attention to bonds.

That’s right.  Boring old bonds.  They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives.  Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.Cost of zero interest rate

Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.

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The Off-On-Off Economy

Friday, August 9th, 2013

The economy recently has been full of stops and starts, ups and downs, good news and bad news.

Optimists will say that progress is being made, as we’ve moved beyond the all-bad-news days of 2007 and 2008.  Those of us who are less than optimistic would instead ask why it’s taken five years to get to the current dismal economic state.

Recovery always seems to be just around the next corner.  But the world is round and there is no next corner.

Zerohedge recently ran a series of 13 charts showing that any economic exuberance is irrational.  The charts compare the current “recovery” with four previous recoveries.  The trend lines in most cases are almost identical – except that the lines representing the current Keynesian-inspired recovery are well below the lines representing the previous four recoveries.  They show that:

  • Growth in gross domestic product is pitifully low.  If it were a patient, GDP would be signing up for hospice care.
  • The ISM Manufacturing Index has fallen significantly from two years ago.
  • Business inventories have risen significantly, signaling that new orders will likely drop.
  • Productivity is down, consumer spending is lackluster and housing starts, though improving, are nowhere near what they should be if the housing market were really recovering.

But cheer up … vehicle sales are up!  The recovery must be just around the next corner, wherever that is.

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The Second Housing Bubble

Thursday, May 30th, 2013

“Demand is artificially high … and supply is artificially low.”
                                                                         Fitch Ratings

We’ve written frequently about the disconnect between the real world and the stock and bond markets. Now the housing market has drifted into its own false reality.

While Gluskin Scheff’s David Rosenberg has referred to the stock market’s recent climb as a “Potemkin rally,” what’s happening in housing is Potemkin in reverse.

Russian minister Grigory Potemkin created a fake village to impress Empress Catherine II during her visit to Crimea, giving us the term “Potemkin” to mean an illusion, reality propped up to look bigger and better than it really is.

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Fingers Crossed In Economic Promise

Friday, April 19th, 2013

Like most promises made before an election, the promise of an economic recovery is beginning to look like a false promise.

Last fall, the housing market was showing signs of recovery and the unemployment rate was dropping.  The stock market since then has been propelled upward by the artificial stimulus of quantitative easing.

Now, though, economic indicators are less promising.  The Conference Board reported today that, after three months of gains, its index of leading indicators dipped 0.1% to 94.7 in March.

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The Yin-Yang Economy

Friday, March 8th, 2013

Last week, with sequestration pending, President Obama and others warned of airplanes falling from the sky, tainted meat being served and schools being closed because of teacher layoffs.  The budget cut news was so bleak, tours of the White House were canceled.

This week, the stock market hit a record high.

It may be a coincidence.  The Washington Post gave sequestration no credit for the record and said the market was boosted by China’s announcement that it would put more money into the economy.  There is, it seems, a Keynesian explanation for everything.

But, as The Wall Street Journal noted, “One thing for sure, the stock market doesn’t mind the federal budget sequester.”

S&P 500 YTD

The only mention of sequestration in the Post story was to note that “some” are warning that it could dampen economic growth.  Of course, economic growth has been so slow, if it’s “dampened,” it’s possible that no one will notice.

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