GDP is technically in an expansion phase – finally exceeding December 2007 levels, although recovery is only half completed when the metric is GDP normalized to population growth. What is different “this time” are the economic dynamics driving the economy.
Previous economic recoveries were driven by the consumer and construction. Many punters still try to paint pictures of consumers flocking back – but consumer footsteps are weak at best even though they may be gradually improving.
Until recently, the majority of the economic drive came from an increase in government spending. Although government spending is still increasing, the primary driving dynamic is shifting to business. Business is creating jobs (although slowly so far), and jobs will lift the ability of the consumer to consume.
The quantification of job creation over the past 12 months is displayed in the following graph (click to enlarge):
The above graph contains the revised BLS employment data released Friday morning. I am including the graph created before the new data and data revisions that were released Friday morning to add emphasis to the amount of change that was actually made (click to enlarge).
Until the last two months of ADP data arrived, there was a serious question about whether jobs growth was actually keeping up with population growth. The BLS data said it was and ADP said it wasn’t. The December and January data from ADP are now showing jobs growth is keeping up with population growth – and now the BLS is saying payrolls are starting to grow less rapidly than population. The question remains – is jobs growth actually keeping up with population growth?
There are 9 million or more jobs that are needed to (1) replace the total of those lost in The Great Recession plus (2) enough more to compensate for the shortfall of job creation below population growth in 2008 and 2009. Whether or not we currently have adequate jobs growth, the growth is inadequate to repair the damage done in The Great Recession.
The economy desperately needs job growth to get on a sound footing.
Literally 1/2 of the of the Great Recession recovery was provided by the government. If all the cost cutting talk at both the state and federal level is put into practice, the $750 billion of spending rise by the government since the beginning of the 2007 recession is likely to disappear. And even if spending cuts are hot air, few would argue this government sector will be expanding going forward.
This past week, Fed Chairman Ben Bernanke has publicly told the USA Administration and Congress to cut the deficit to zero – or else. He has implied it should be through cutting spending and raising taxes.
The government will soon be sidelined in contribution to GDP expansion. Business must pick up this slack. The danger now going forward to the USA economic expansion cycle now centers on the headwinds to business, and keeping business expanding faster than the government contracts.
Many elements of the economy are operating well below potential and will be adding to the headwinds. The housing market based on research by Econintersect is not coming back anytime soon – and likely will continue contracting.
Meredith Whitney this past week unleashed her Perpetual Cycle Of Weakness (click to enlarge):
Based on the latest US Census report, there may be over 10 million excess homes in the USA (out of the 18 million unoccupied). From my perspective, the extent of this crisis varies zip code to zip code. Many of these homes now are already useless either through deterioration or a shift in employment regions.
Meredith Whitney’s cycle (which actually represents a downward spiral) will present in the states (zip codes) with the highest home vacancies (like holiday areas and smoke stack states) – and be totally absent in others. On balance, it is difficult to claim home prices will not weigh on the economy.
The economic headwinds are reduced government spending, employment, personal income, housing, and a construction industry which has not bottomed. To any logical calculation – these are strong headwinds.
If you add up all the economic headwinds, the sum is hardly ever reached. People are dynamic and adjust to counter the changing conditions, or will mitigate and capitalize on the headwinds.
With the growing strength in business, the economy gaining a stronger footing then one that was based on government expansion. If the economy contracts because of lower government spending, it is possible it will only be a technical contraction and not felt at consumer level.
Any gain for Joe Sixpack is not evident. The caretakers of the economy must continue to focus on jobs. As the majority of jobs come from business – de facto this implies ensuring regulatory and tax conditions are favorable to creating jobs on USA soil – not just profits.
Economic News this Week:
Econintersect released its economic forecast for February 2010 pointing again to a slightly improving economy with all segments of its non-monetary index positive. However, it did warn that the Middle East crisis could cause oil prices to escalate which historically has caused a recession in a weak economy.
This week the Weekly Leading Index (WLI) from ECRI improved from 3.5 to 3.7. Although the overall level implies the business conditions six months from now are as good or better then today – this was a break in the upward momentum of this index (click to enlarge).
Initial unemployment claims in this past week’s release dropped significantly after last week’s large increase. Econintersect believes the weather is playing havoc with unemployment claims. One week is not a trend, and it remains important to follow the four week moving average for analysis of unemployment to smooth out the reporting idiosyncrasies (click to enlarge).
The data released this past week was generally consistent with Econintersect’s January forecast of slightly improving economic conditions overall.
Weekly Economic Release Scorecard:
|January BLS Jobs Report ||Unemployment down to 9.0% ||Data well under expectation, and relatively weak throughout |
|4Q2010 Productivity ||Up 2.6% ||Outsourcing is masquerading as productivity improvement |
|January ISM Non-Manufacturing || |
Up 1.7 percentage Point
Matches other data
|December Manufacturing ||Up 0.2% ||Likely Up 1.1% – very strong |
|Wallison vs Black ||Debating the merits of one of the minority reports of the Financial Crisis Inquiry Commission|
|Population & Economic Indicators ||The graphic differences when data is analyzed per capita |
|January ADP Employment ||Up 187,000 ||Large growth in small and medium size business |
|January ISM Manufacturing ||Highest Level since May 2004 ||Index is only 50% accurate at turning points |
|December Construction Spending ||Down 1.3% ||Construction spending still has not bottomed. |
|February Economic Forecast ||Slightly positive growth – worries about economic effects of Middle East unrest |
|4Q2010 Personal Income & PCE ||Income up 0.4% / PCE up 0.7% ||Per capita compensation is falling indicating growth is from the richer population segment. |
|Economy Is Now In Expansion ||When GDP moves to historic highs – recovery is finished and expansion begins – but looking per capita, economy is still in recovery. |
|Normalized GDP ||Redefining definition of economic cycles using a per capita approach |
|4Q2010 GDP ||Arguing economy is contracting from a consumer metrics view. |
|Opinion: Sovereign Debt Yields too Low ||Bill Gross argues bondholders should be buying quality emerging market debt. |
|Opinion: China’s Non-performing Loans ||The last banking crisis caused a contraction in consumption. |
|Opinion: Investigating the Financial Crisis ||William Black argues that the Republican members of the Financial Crisis Inquiry Commission were architects of the crisis.|
|Opinion: FDIC was setup to Fail ||Yves Smith argues the Financial Crisis Inquiry Commission started with conclusions and did not investigate. |
|Opinion: What is Currency ||Derryl argues currency can not be a both an efficient medium of exchange and a storehouse of value. |
Bankruptcy this Week: Angiotech Pharmaceuticals