US Economy - Keep It Simple

We want economics to be friendly, easy on the temperament, not intimidating. We’re all capable of fetching what we need, gathering a little grounding, past the noise and bullets. Only those employed in the business want us to think it’s difficult. Naturally. We don’t need them. Let’s take a look.

Where are we now? We repeat from our sketch of Oct/2, because it remains accurate. Overall, we have an economy that is in a stage of self-correction, although one of a restrained variety. Free enterprise spawns creative destruction and then off we go. This time the threat of a tidal wave of interference rightfully dampens incentive to invest or hire.

There’s been modest improvement. The Fed’s act of flooding the markets with money is responsible for the hog’s share of it (and whether this flooding can be reversed in time is a subject we will visit later). In the meantime, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. "If she ain’t critical, shut her down," is the motto nowadays. That’s good for profits and apparently good for stocks, but, you need more if you own a small business, say a nursery, where demand is discretionarily oriented and as a result one finds one’s business on its rump. You need more spendable income in the hands of your (past) customers. But scared employers are making changes that will permanently eliminate job demand, thus spendable income.

We have the current administration to thank for this.

Let’s break, and look at some recent measures of the economy’s mph.

First, retail sales surprised on the up side in Oct., much of this strength due to rebounding vehicle sales. Retail activity isn’t booming naturally; Oct activity was still only a tad above Q3 averages but in fact, consumers are looking to spend a bit, and would spend faster if not for still rising unemployment, stagnant income growth and tight credit.

Next, industrial activity rose in October for the fourth consecutive month. This is impressive. The level is still depressed, sure, with a lot of excess capacity remaining, but a modest recovery is underway in this key sector (mostly due to exports).

Finally, but not so encouraging - housing starts tumbled in Oct. Home construction is still struggling at very low levels. Also of note, mortgage delinquencies rose again in Q3.

So this "recovery" very slowly ratchets ahead, very slowly. In the past, the more severe the recession, the more robust the recovery. This pattern has never failed. Not, that is, until this time. We all know why. The individual culprits preventing a full recovery are in full view. These we detailed in recent past reports.

We know also that there is a general fear in the real sector that the free-market principles of the last half century are being abandoned. One can make the argument that Obama is right, that we need less 1) free enterprise and more 2) government overlay, but if so, one must accept the flip side - a permanently crippled US economic engine which will impact his or her own personal lifestyle.
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Robert Craven

UPDATE

Today’s key jobs report for Oct is in keeping with the economic scenario we have come to expect - a recovery which has assigned the jobs sector to drag (while herding beef in the old days, the unfortunate cowboy assigned to "drag" gathered all the dust). Let’s take a look.

We lost another 190M jobs in October, bringing the number lost this year to 3.8MM. Unemployment is now 10.2% Yet just last week we were to understand that the economy grew at 3.5%! What gives here folks?

From Lee Ohanian, an econ prof at my old alma mater (UCLA), "It's not even a jobless recovery; it's a recovery with more job losses," said UCLA economist Lee Ohanian. "The idea of having essentially no net job creation after a remarkably severe recession is a real pathology for the U.S. economy."

And why? As we have highlighted in past blogs, all other recoveries carried employment right along with them. Why not this time? Answer - Extremists creations from an extremist administration.

Employers are spooked. They’d rather grow more efficient (at significant initial cost) and hope to never have to hire again. This is why so-called Non-farm productivity rose by 9.5% Q3 vs expectations of 6.5%! Productivity is now 4.3% above its year ago level.

No one in his right mind will hire now facing Obamacare and cap & trade, all the rest.

There are answers. One championed by several observers is a proposed tax credit for employers. At a cost of $12,000 per employee, a heck of lot cheaper than the $112,000 reported for the stimulus plan. Or, what we have favored all along - a cut in payroll taxes. Presto - employment. There are others, all sorts of solutions, yet all of them a threat to the far left.

For those of the chattering class who may lament, may complain that business remains poor, look no further than your own party.

Robert Craven