Thursday, July 23, 2009

“Big Slice Version”

Employment as a Lagging Indicator: You are either a CNBC anchor or the President himself if you’ve found yourself lingering around the “improvement right around the corner, unemployment is a lagging indicator” store. Or you’re high on Ether, maybe smelling salts. No, I don’t believe for one second that one of you good folks thinks that things are OK. There will be no V-shaped, or rapid economic recovery, this time around. There are simply too many headwinds to long-term growth. Highly questionable economic policies coupled with the ball and chain, the elephant in the room, Atlas’s burden, the all powerful, all mighty, horrible word, DEBT, shall prevent the American economy from doing what we are accustomed to…bouncing back. No, the computer was a tremendous growth engine, changed everything for the better, so many brilliant people, thank you, keep working, but there will be no imminent virtuous cycle of economic growth that fuels its own engine, save a new paradigm created, good luck on that, although I’m sure we do have some of our best men and women on it as we speak!. One of the great claims by the bulls in the recent showing of market strength through early June was that the unemployment data is a lagging indicator, that the economy will be long on its way to recovery before the results trickle down to the jobs data. It was this belief that kept propelling the Dow Jones Industrial Average up 100 and 200 points despite continued readings of massive job loss. The President himself has publically clung to this “statement of fact” in many recent addresses on the state of the nation’s economic health. I may not have the President’s official credentials but I can tell you that, unfortunately, this time it is different. Yes, yes, I know those are dangerous words, words that, over time, can cause one to over-think simple relationships. Nevertheless, it is different this time. Typically the model goes something like this—slowing growth causes the Fed to slash interest rates, which boosts credit, which translates into consumer demand, which improves business balance sheets and production, and ultimately necessitates that business expand to accommodate such growth. Jobs are then created, and long after the stock market and leading economic data have improved, the unemployment data finally kicks in and stamps an official end to the recession. That’s how it’s supposed to work. But we have a problem. The Fed has already taken the Fed Funds Rate to 0%, but with consumer debt so high relative to income plus massive losses still unrealized on bank’s balance sheets, credit has continued to contract. It seems as though consumers are as reluctant to take on credit as the banks are to accommodate them. This, my friends, is a headwind, and a strong one. When I think about it, it almost seems as if jobs, this time around, will be a pre-requisite for truly coming out of the recession. At least maybe, we’ll meet in the middle or something. But we have to get back to more traditional relationships between income and credit, income and housing prices, income and consumption. Yes, I think it is quite safe to say that credit can be expected to contract as long as people continue losing jobs or settling for less employment than desired. This reality should serve to delay any strong recovery, or new virtuous cycle arising from the ashes. Please flush, if you will, the traditional model of moving out of a recession down the proverbial toilet.

Yes Sweetheart, I would like some fresh Basil on my pasta tonight.

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