Seeking Alpha
Macro, contrarian, bonds
Profile| Send Message|
( followers)  

Has the economic and employment situation improved? It might depend upon who is talking and the point of reference. Here is my take. The employment situation has improved when looking at the total nonfarm private payroll employment from ADP. The chart below shows a steady increase in employment since 2010.

(click to enlarge)

A recent Bloomberg article has suggested that candidate Romney would like governors to tone down the improvement in jobs, and by extension the economy. Candidate Romney could be pointing to the improved employment since the Republicans regained control of the House of Representative and Republican Governors took office. That is running on a record of results. Rather than reinforcing the gloomy mood of business and consumers. Imagine the potential economic growth with reduced regulation and uncertainty. It might help investors regain some trust in the marketplace.

If a factory were on fire would a businessperson immediately call for assistance or decide the issue needed study and delay calling until the report was completed? Congress by kicking the can down the road on major fiscal issues is basically saying the issue needs more study. How many reports do they need? Maybe they should cancel or forfeit the August vacation to write the report. What private firm provides its employees with nearly a month of consecutive vacation after less than a year on the job? The US Congress enjoys that perk, doesn't it? Elected in November, take office in January, month long vacation in August.

Why has the federal debt increased? Estimates for GDP were overly optimistic in the fiscal year 2007 budget compared with actual results contained in the fiscal year 2013 budget.

The total GDP shortfall for the fiscal years 2006 thru 2011 totals $5 trillion. Clearly the sub par economic performance has created issues with the federal budget and debt levels. A return of economic growth could go a long way to solving the fiscal issues.

Source data:

To see the 2013 budget for actual GDP figures click here.

To sell the 2007 budget for estimated GDP figures click here.

There is good news, federal revenue has been increasing. See chart.

(click to enlarge)

Might the fall in natural gas and crude oil prices be a result of the drill, baby drill campaign? Or is it a result of weakening economic growth in part due to government inaction leading to concerns by business over payments and contracts? If a defense contractor might see a project delayed or cancelled then it might have an effect on its budget, profit and employment. Imagine working for a defense contractor wanting to purchase a home, but not knowing if the project will be delayed or cancelled, in which case income would be lost. What rational individual would want to take that risk given the events of the past few years?

What this means for the economy, interest rates and the stock market.

The constant focus upon the negative can take its toll on business and consumer confidence. Falling confidence does not help business or profits. The model may suggest that falling prices might increase the bottom-line but that may assume revenue is constant. If revenue falls faster than cost savings, then margins might be squeezed, just look at highly indebted firms.

From a contrarian point of view the argument could be made that the worst damage has been done. And the smallest of gestures from Congress about working together to solve the major issues could go a long way in rebuilding trust in the system. This could mean the stock market offers tremendous value and that US Treasury interest rates might have seen its lows. Time will tell what happens, but for the economy to improve the confidence of business and consumers needs to stop falling. In my opinion the reason the real estate market has been slow to recover is fear of job and or income loss, combined with the ever-increasing property taxes. The saving from lower interest rates might be handed over to local governments.

The Federal Reserve is pushing on string, if one looks at the velocity of money.

It is unclear how much lower the velocity of MZM money supply can fall. Maybe if the Federal Reserve reduced the interest paid on excess reserves then the velocity of money might stabilize or start to increase.

Being an optimist I am bullish on American industry and the stock market. Sooner or later business conditions and confidence will improve. My hope is that the November election will be a fight over who deserves credit for the surprising economic turn-a-round. Economic growth will help address and solve many of the budget issues. If a teachers union could come to the aid of New York in the 1970's, might business come to the aid of the American economy in 2012?

An economic rebound might benefit firms like Alcoa (NYSE:AA), Caterpillar (NYSE:CAT), Peabody Energy (NYSE:BTU), Fastenal (NASDAQ:FAST), CSX (NYSE:CSX), Paychex (NASDAQ:PAYX) and a host of other issues. Should the Fed's operation twist result in higher short term interest rates and lower mortgage interest rates then the mortgage REITs such a Annaly (NYSE:NLY) might experience some margin pressure resulting in reduced payouts.

Source: Is The Economy And Job Picture Actually Improving?