A September Snapshot

September 2009 looks much better than September 2008.
We've certainly heard everyone and her mother say we're climbing out of recession. Shall we take a look and see whether everyone is actually right?
For the purposes of comparison, we'll compare the data available thus far in 2009 with the full year of 2008.
I. Manufacturing
Industrial output has averaged 97.4 over the first seven months of this year, with July actually showing upward movement for the first time this year, probably due in large part to the "cash for clunkers" program. 2008 industrial output averaged 109.6, however, so we're still down over 11% year-over-year.
The percentage of manufacturing capacity we are using has averaged 69.4% this year through July. (Full capacity is generally thought to be 84%.) Last year's was 78.3%, so here again we're down over 11%. The good news, however, is that capacity utilization has been climbing upward for five straight months.
II. Gross Domestic Product
It is generally thought that an economy our size can grow at 2.8% per year at full employment without causing inflation. In 2007, the US economy grew at 2.5%. In 2008, our economy contracted by 1.8%. In the first two quarters of 2009, GDP was -6.4% and -1%, respectively. Most economists predict flat to 2% growth in the third quarter of this year.
III. Unemployment
Last July, we looked at historic unemployment data http://womensfinancialplanning.blogspot.com/2009/07/unemployment.html and saw that unemployment generally begins to improve about one year after a recession ends. 2008 unemployment levels averaged 5.76% and this year, 8.77%. We can conclude, based on these data, that unemployment will begin to improve in the third quarter of 2010.
2010, however, is a mid-term election year, and this issue has already begun to be politicized. For that reason, the current Congress may approve an additional stimulus package aimed at improving the unemployment outlook, and, in doing so, their re-election prospects. From a strictly economic perspective, this seemingly unnecessary expenditure, and additional deficit to be added to the burgeoning national debt, would seem to be a mistake.
But, I never underestimate the lengths to which our esteemed members of Congress will go to be re-elected, so I consider an additional stimulus to be a needless, but likely event.
IV. Consumer Confidence
As you have undoubtedly heard, 2/3 of US GDP is consumer spending. As you have undoubtedly experienced, consumers are somewhat less confident than they were before this recession. To validate your feelings, consumer confidence was 103.49 in 2007, 56.76 in 2008 and, thus far in 2009, is 39.89.
Before we assume that all is lost for any potential growth in GDP owing to our cautious consumers, please take a look at the often ignored export situation, discussed recently http://womensfinancialplanning.blogspot.com/2009/07/wuvl-shape-of-our-upcoming-recovery.html
Should the hypothesis that newly enriched emerging markets will spend their dough on our exports, we may have a growth engine that could replace our previous non-stop, debt-riddled spending spree with something more sustainable.
V. Inflation
From 1973 to 1995, inflation averaged 2.8%. Most economists believe that 2.5% inflation allows sustainable economic growth and full employment. In 2007, inflation averaged 2.87%. In 2007, inflation rose to 3.85%. This year, with falling energy prices due to lessening demand, as well as consumer entrenchment in nearly all categories, inflation is .33%.
This is undeniably good news, which, of course, I will turn into something scary. At no time in history has the government printed money to the extent it has now and NOT caused inflation. History tells us it is coming, but it's not here yet.
VI. Business Inventories
When businesses are humming along, inventories used to build up in anticipation of happy consumers. Those days are over, for two reasons. The first, and most obvious, is that consumers are scared. So scared, in fact, that they're SAVING money. Weird.
Second, businesses have gotten smart. They operate as close to a build on demand model as possible, i.e., they don't build your thingamabob until you order it.
That said, however, inventories have fallen by over 6% - after building up for six straight years. They are low, and falling. When demand does return, which I believe it will through exports, then inventory buildup will help boost economic growth.
VII. Conclusion
All these indicators are pointing positive. It's been so long since we've had good economic news, we hardly recognize it when it shows up, but there it is.
The worst is over. Let's hope we keep our heads on straight and stay the course without succumbing to political pressure that will cause us to make poor economic decisions.

Stagflation and Its Potential to Derail Economic Recovery

Unemployment

We've previously discussed the fact that the current unemployment rate, while high, is not at the level it was in some previous recessions. We've also discussed that unemployment tends to last longer than recession, and is therefore called a "lagging" indicator.

But that's not the whole story. Further research shows that unemployment may actually be behaving differently than it has in past economic recoveries.

In the statistical measurement called "standard deviation," the US is deviating from the standard behavior of unemployment as measured by Arthur Okun, a prominent economist in the 1960s. The relationship he discovered was that between the degree to which the economy contracted and the concurrent rise in unemployment. This relationship, called Okun's Law, had been reasonably reliable - until now. At the current rate of decline in our economy, his calculations show that we should have a current unemployment rate of 8% - not 9.5%. We have lost almost 5% of all jobs - far surpassing the 3% we lost in the 1980s recession when unemployment last reached over 10%.

We previously discussed the fact that, during a recession, employers tend to keep employees at a level that will accommodate the return of growth after the recession ends. It is that "buffer" that results in a delay in hiring, as these employees increase their productivity during the growth phase, eliminating the necessity to add workers until the economic growth trajectory is well under way.

In this recession, however, further examination of employment patterns show that this "buffer" has not been kept. Does this mean that employers, jarred by inability to obtain credit by the frozen financial system, panicked and cut employment more than usual? Perhaps.

But, that does not explain the additional fact that, since 2001, overall hiring has been contracting. During the 1990s, employment expansion was at a rate of 8 workers for every 100 on staff. That expansion dropped to 7 workers per 100 during the 2001 recession. Hiring, however, stayed at that level after the recession was over, and has now fallen to 6/100.

Perhaps a part of this failure to hire can be attributed to

• A permanent loss of manufacturing and other jobs "outsourced" to countries who can produce goods at a lower cost than the US


• Less innovation = fewer new businesses. During war time, technology tends to be focused on the war effort as opposed to innovations in the private sector.


• As aging baby boomers leaving the work force, the total number of workers lessens and unemployment rates appear larger. As an example, with a total work force of 100, if 5 people are unemployed, the unemployment rate is 5%. With a total work force of 90, if 5 people are unemployed, the unemployment rate is 5.5%

Whatever the explanation, there is a big difference between a sustained decrease in hiring, as there has been since the 2001 recession and thereafter, and job losses due to a recession. Jobs lost in economic downturns have historically returned, but only when confidence that economic recovery was well in force.

Stimulus

Some argue that the unemployment problem is partially addressed by the stimulus program. This is only partially true, because government programs aimed at repairing the infrastructure, e.g., roads, bridges, etc., are temporary in nature.

Confidence

Jobs lost in economic downturns have historically returned only when economic confidence returned to the private sector. Certainly, no employer wants to add workers unless she feels that a sustained recovery is under way.

Sustainable Jobs

The Obama administration has opined that new job growth be in technological advances in green energy, which will address the national security issues of oil imports, the international need to reduce greenhouse gases, and provide a cost effective alternative to depleting international sources of fossil fuels. With the current lack of emphasis in math and science in the educational system, this goal will be difficult to achieve in the short run. Regardless of the source of so-called sustainable jobs, however, it is crucial that job growth be achieved - and soon.

Falling Wages

One need only look at the economic problems in the State of California and publishers like the Boston Globe to see that we are experiencing a period of falling wages. Wages, expected to be flat during periods of recession, are in danger of falling as businesses and municipalities cut expenditures to the bone.

Additional Stimulus

Should unemployment rates continue to fall precipitously, and wages fall as businesses try to survive, the government may be tempted to provide additional stimulus. That, in my opinion, would result in the disastrous recipe for stagflation. Stagflation = Stagnant (or falling) Wages + Inflation.

But, inflation is very low, you may argue. True, but the national debt, approaching $10 trillion dollars, must be repaid. And, as debt is piled on, higher and higher rates must be paid to borrowers who lend us money. Higher rates mean higher cost of borrowing in the public and private sector, which result in higher costs. Higher costs plus stagnant wages = Stagflation.

What Now

The goal of sustainable job growth is an absolutely critical part of the answer. That means that we will need

• An immediate retooling of our workforce in skills necessary for sustainable jobs


• Education emphasis on math and science


• Accommodative policies to encourage investment in sustainable business


• Immediate policies enacted to reduce deficits


• Bi-partisan support for such policies to encourage confidence.

The last issue is critical. Without confidence, business will stay stagnant. It's a tall order, and there's an immense economic outcome at stake. Failure to achieve sustainable job growth will result in a more serious long term economic problem than has faced our country to date. It is up to every one of us to voice our opinion to our representatives and demand that action be taken immediately, or accept a generation of economic decline.

Unemployment - A Commentary

The previous article is one that provides data with respect to the current unemployment situation as compared with previous economic cycles and in previous Presidential administrations from Truman to date. This is my personal opinion about that data, and a response to criticisms regarding the adequacy of the stimulus program signed on February 17, 2009 to address the unemployment problem.

As stated previously, 10% of the stimulus money has been spent. Asking whether the program is successful at this point is analogous to asking whether your outfit is appropriate after having put on your panties. There is not sufficient information available to answer the question. If the administration is correct in its allegation that, by early August, 500,000 jobs will have been created or saved by the $75 billion spent thus far, job losses will be 2 million instead of 2.5 million. 10% of the stimulus will have improved job losses by 20%.

Some allege that the fact that the unemployment rate is at 9.5% shows that the stimulus program is a failure. Data show that to be false, based solely on the fact that unemployment rates are well within historical parameters of previous recessions. Further, in the recession ended November, 1982, unemployment averaged 9.8% for a full year after the recession ended. It is, as has been said by countless pundits, a lagging indicator.

Others say that stimulus money could have been put to better use by lowering business taxes. It is true that the US has on of the highest business tax in the world, second only to Japan. Those who hold this opinion feel that lowering business taxes would result in immediate hiring. History shows that opinion to be false.

In reviewing hiring behavior in prior recessions, data show that businesses rely upon increasing productivity of existing staff as the business cycle improves, delaying the necessity to add new staff until the cycle is well past recessionary levels. Consequently, it would be more likely that businesses would use tax savings for other purposes.

While the success of the stimulus package is certainly not a given at this point, those who suggest that there is sufficient data to opine that it is a failure are relying upon 10% of its expenditures and five months in order to draw this conclusion. Further, those who believe that the funds would better serve the unemployment situation with lowering business taxes are at odds with historic recessionary hiring trends.

Unemployment

The latest "doom and gloom" prediction is centered around the unemployment rate.

Misery Index

The Misery Index consists of adding the unemployment rate to the rate of inflation, or the percentage of those out of work plus the percetage by which prices are rising.

Historically, the misery index has been

• Truman Administration (1948 - 1952) Average 7.88 (High 13.63, Low 3.45)


• Eisenhower Administration (1953 - 1960) Average 6.26 (High 10.98, Low 2.97)


• Kennedy Administration (1961 - 1962) Average 7.14 (High 8.38, Low 6.40)


• Johnson Administration (1963 -1968) Average 6.77 (High 8.19, Low 5.70)


• Nixon Administration (1969 - 1973) Average 10.57 (High 13.61, Low 7.80)


• Ford Administration (1974 - 1976) Average 14.93 (High 19.90, Low 12.66)


• Carter Administration (1977 - 1980) Average 20.27 (High 21.98, Low 12.60)


• Reagan Administration (1981 - 1988) Average 11.19 (High 19.33, Low 7.70)


• Bush I Administration (1989 - 1992) Average 9.68 (High 12.47, Low 9.64)


• Clinton Administration (1993 - 2000) Average 8.80 (High 10.56, Low 5.74)


• Bush II Administration (2001 - 2008) Average 8.10 (High 11.47, Low 5.71)

The time weighted average Misery Index since 1948 is 9.64. The current Misery Index is 9.8: Unemployment is 9.5, and Inflation is .3. To put this into perspective, we are now 1.6% higher than the average since 1948.

Unemployment Rate

Some economic theorists have used the unemployment rate to justify their opinion that

• The stimulus package isn't working
• There should be another stimulus package, i.e., the stimulus package wasn't sufficient

Let's take a look at that hypothesis.

Of the $787 billion dollar stimulus package, approximately $75 billion, or about 10%, has been paid out. The Obama administration estimates that the stimulus package will have helped create (or save) 500,000 jobs in the two hundred day period from signing the bill February 17 to early August. 10% of the stimulus package will therefore have improved the number jobs lost by 20%. In other words, without the stimulus package, the jobs lost in the two hundred days since the stimulus package was in effect would have been 2.5 million instead of 2 million.

The Obama administration believes the government will ultimately meet its spending targets, increasing spending toward the end of the year as states fund their projects. Ultimately, the measurement of success is whether the economy improves, and, as shown below, it may be too early to make that judgment.

To use consistent time measurements, since 1948 there have been eleven recessions. Let's look at each, and the accompanying rate of unemployment.

Nov. 1948 - October, 1949 (11 months) - Average unemployment rate 10.69%

July 1953 - May, 1954 (10 months) - Average unemployment rate 4.43%

Aug., 1957 - April, 1958 (8 months) - Average unemployment rate 5.69%

April, 1960 - Feb., 1961 (10 months) - Average unemployment rate 5.94%

Dec. 1969 - Nov.,1970 (11 months) - Average unemployment rate 4.88%

Nov. 1973 - Mar. 1975 (16 months) - Average unemployment rate 6.09%

Jan. 1980 - July 1980 (6 months) - Average unemployment rate 7.07%

Jul.,1981 - Nov. 1982 (16 months) - Average unemployment rate 9.09%

Jul, 1990 - Mar. 1991 (8 months) - Average unemployment rate 6.225%

Mar. 2001 - Nov. 2001 (8 months) - Average unemployment rate 4.813%

Dec. 2007 - Jun. 2009 (18 months) Average unemployment rate 6.76%

(Note: Data are not available for July. Most economists opine that the the third quarter 2009 will be flat, and fourth quarter will show a slight increase in GDP)

For comparison purposes, the two most severe recessions in the period under review were Nov. 1973 - Mar. 1975 and the current one. The last five months of those recessions averaged an unemployment rate of 7.72 and 8.88, respectively. The last five months of this recession was 15% worse than the 1973 - 1975 recession.

Further, the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over.

Our current numbers are well within historical precedents, and to assert that the stimulus program is ineffective at this point is not supported by data, obtained from the U.S. Bureau of Labor Statistics.

In our next discussion, we'll talk about the deficit to see whether the alarm expressed by some over its size is warranted.