Posts tagged ‘recession’
Cockroach Consumer Cannot be Exterminated
We’re told that cockroaches would inherit the earth if a nuclear war were to occur, due to the pests’ impressive resiliency. Like a cockroach, the American consumer has managed to survive its own version of a financial nuclear war, as a result of the global debt binge and bursting of the real estate bubble. Although associating a consumer to a disease-carrying cockroach is not the most flattering comparison, I suppose it is okay since I too am a consumer (cockroach).
Confidence Cuisine
Cockroaches enjoy feasting on food, but they have been known to live close to a month without food, two weeks without water, and a half hour without air while submerged in water. On the other hand, consumers can’t live that long without food, water, and oxygen, but what really feeds buyer purchasing patterns is confidence. The April Consumer Confidence number from the Confidence Board showed the April reading reaching the highest level since September 2008. On a shorter term basis, the April figure measured in at 57.9, up from 52.3 in the previous month.
Where is all this buying appetite coming from? What we’re witnessing is merely a reversal of what we experienced in the previous years. In 2008 and 2009 more than 8 million jobs were shed and the fear-induced spiraling of confidence pushed consumers’ buying habits into a cave. With +290,000 new jobs added in April, the fourth consecutive month of additions, the tide has turned and consumers are coming out to see the sun and smell the roses. Recently the Bureau of Economic Analysis (BEA) revealed real personal consumption expenditures grew +3.6% in the first quarter – the largest quarterly increase in consumer spending since the first quarter of 2007.
Sure, there still are the “double-dippers” predicting an impending recession once the sugar-high stimulus wears off and tax increases kick-in. From my perch, it’s difficult for me to gauge the timing of any future slowing, other than to say I have not been surprised by the timing or magnitude of the rebound (I was writing about the steepening yield curve and the end of the recession last June and July, respectively). Sometimes, the farther you fall, the higher you will bounce. Rather than try to time or predict the direction of the market (see market timing article), I look, rather, to exploit the opportunities that present themselves in volatile times (e.g., your garden variety Dow Jones -1,000 point hourly plunge).
Will the Trend End?
Can this generational rise in consumer spending continue unabated? Probably not. To some extent we are victims of our own success. As about 25% of global GDP and only 5% of the world’s population, changing directions of the U.S.A. supertanker is becoming increasingly more difficult.
Source: The New York Times (Economix)
However, more nimble, resource-rich developing countries have fewer demographic and entitlement-driven debt issues like many developed countries. In order to build on an envious standard of living, our country needs to build on our foundation of entrepreneurial capitalism by driving innovation to create higher paying jobs. With those higher paying jobs will come higher spending. Of course, if uncompetitive industries cannot compete in the global marketplace, and a mirage of spending is re-created through drug-like credit cards and excess leveraged corporate lending, then heaven help us. Even the impressively resilient cockroach will not be able to survive that scenario.
Read full New York Times article here
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Tortuous Path to Productivity
There is a silver lining to the deep, tortuous job cuts in this severe recession and it is called “productivity.” Those fortunate enough to retain their jobs are forced to become more productive. In layman’s terms, productivity simply is output divided by hours worked.
Unemployment dropped to 9.4% in July, thanks in part to a decline in the job losses to -247,000 from a peak in January of -741,000 job losses. During this period of job-loss cratering, we managed to sustain a decline of a mere -1% in Q2 Gross Domestic Product (GDP). How could we lose more than 6 million jobs since the beginning of 2008 and still be on a path to recovery? A large contributor is our friend, productivity, which came in at a whopping +6.4% in Q2 – the highest in six years.
Productivity increased in part because of a slashing of work-hours by employers. Employees that have maintained employment are therefore forced to produce more output (goods and services) per unit hour of employment. In this severe recession that we are pulling out of, the American worker is being stretched like a rubber band. At some point, the “Law of Diminishing Returns” kicks in and employers are forced to hire new employees to meet demand levels, or the rubber band will snap.
The prime ways of increasing productivity are raising the amount of capital per worker (capital intensity) and also elevating the workers’ average level of skill, education, and training (labor quality).
Not only are the surviving U.S. workers toiling harder, they are not getting pay increases large enough to offset inflation. For example, Q2 hourly compensation increased +0.2%, but after accounting for inflation, real hourly compensation was actually down -1.1%.
As the MarketWatch article points out:
The early stages of recovery are typically the best for productivity: Output is rising, but cost-cutting plans are still being implemented… Productivity gains are the key to higher living standards, higher wages, increased profits and low inflation… Productivity averaged about 2.7% annually from 1948 to 1970, then slowed to 1.6% from 1971 to 1995. Since then, productivity has grown about 2.5% annually. In 2008, productivity increased 1.8%.
Productivity allows the U.S. to produce more goods and services with fewer workers. For instance, the MarketWatch article also highlights the U.S. is producing 20% more output relative to a decade ago, yet employment has not changed at all over that time period.
We are certainly not out of the woods when it comes to the recession, and for those lucky enough to maintain employment, they are being asked (forced) to work more for less pay. These productivity improvements feel like torture to the survivors, however this pain will eventually lead to economic gain.
Wade W. Slome, CFA, CFP
Plan. Invest. Prosper.
Is the Recession Over?
Dennis Kneale, bullish commentator on CNBC presented his case on why he thinks the recession is over:
Positive Technical Indicators: Kneale points out that in recent history when the 50-day moving price average cuts upward through the 200-day moving average there is a positive directional bias for the market in the ensuing months.
Personal Income: +1.4% in May for 2 consecutive months.
Personal Spending: Consumer spending was up again in May, and up more than in April.
University of Michigan Consumer Sentiment: The survey rose again to a reading of 70.8 in the recent measurement period.
VIX Volatity Index: The so called “Fear Index” is down -43% in about 3 months – stabilizing to a more normalized level. He argues this should bring in some cash on the sidelines into the stock market.
Eric Schmidt Positive: CEO of search giant, Google, says the worst is behind for the U.S. economy.
Most of the guests rang a more cautious tone, not the least of which, Peter Schiff sees Armageddon ahead for the U.S. economy. Mr. Schiff goes on to compare CNBC to the Gardening channel with all the talk about “green shoots.” Not to mention, he sees the trillions of stimulus dollars only providing a temporary, artificial boost that will eventually cause a horrible economic hangover. Lucky for Peter, he has perfectly timed the international rebound in 2009…cough, cough.
Investing Caffeine 
