TraderRob's  Instablog

Doom and gloom seems all too faux pas to the casual investor keeping up with "the Journal", FT and perhaps the Economist, as Bloomberg runs articles documenting the recovery just over the horizon. One report by independent analysts cites a jobs report for the month of August at merely 250,000 additional jobs to be tallied on the total unemployment rate. These times are precarious to say the least as a lackluster "back to school" environment was outweighed by the grand finale of "cash for clunkers" to spit out consumer numbers for July and August that beat estimates.

So where to now? Cash for clunkers is over and may have added a 0.5% boost to Q3 GDP according to Mike DiGiovanni, sales analyst with GM (General Motors), yet how much change really comes from ramping up the industrial sector for one quarter and adding some temp workers to muddle the employment picture? How much will stick? This type of stimulus is very similar to the Chinese strategy which effectively allowed consumers to buy specific durable products at extreme discounts.

The final Press release of the C.A.R.S (Car Allowance Rebate System) on August 26th announced a total of $2.88 billion in rebates applied for and 690,000 clunker transactions by the deadline. Trusting these figures, the average consumer received an approximated $4170 rebate which translates into a rough 15% discount, given an average price of a new car at $28,400 according to the Federal Trade Commission. The result of the program is a temporary stimulus to the durable goods pipeline and the draining of disposable income from many consumers pockets, as any person who was in the market for a vehicle in the past and/or future year most likely jumped at the window of opportunity and made a purchase. All of these consumers have essentially sidestepped the first year of depreciation, but is the economy any better off? Don't we want Joe the Plumber putting that $20,000 into a down payment on a new home rather than a Corolla, Civic or Camry (the three top selling vehicles under C.A.R.S.)?

The thousand dollar question remains, "will the inventory rally transfer into sustainable growth on the consumer front, void of government stimulus?" The United States has an incredibly large deficit which has been publicly approximated at 9 trillion dollars ten years from now by the Obama administration, and $1.6 trillion deficit in 2009 alone. The $700 billion stimulus has only appropriated $300 billion in funds so far and interest from previous deficits must also be financed by debt issuance over the course of 2009 and 2010. The savings rate has risen dramatically from 1.8% of disposable income in 2007 Q2 to 5% in 2009 Q2, alarming economists that individuals may be retreating from previous consumption habits in an economy where the consumer supports 70% of GDP.

The employment numbers for July will shed some light on the strength of the consumer, but the report should be carefully dissected and jobs related to manufacturing and durable goods should be understood as potential outliers over a long term trend. The picture is coming into focus, yet there are so many issues which have simply been blacked out that will come to pass whether we are looking at them or not. Asset values on banks balance sheets which have been artificially inflated will be checked once they are liquidated and consumers will decide the fate of the production pipeline moving forward.