Ashford Radio Broadcasts
rduvall 
Due to the very positive response to Morris Segall’s interview on Ashford Radio on January 18th, he has agreed to a series of three more interviews with Ashford Radio on February 7th, February 21st and March 6th. The interviews will run 30 minutes each and all will begin at 2 P.M. EST. Please mark the dates and times on your calendar.
As in the January 18th interview, you may listen to the broadcasts and ask questions by signing onto www.ashfordradio.com, select Studio A and look for the interview with Morris Segall. The interviews will also be accessible by telephone at 760-542-4100. These broadcasts will enable us to deliver to our clients and subscribers our current analyses and thoughts on contemporary events, national and international economies, U.S. politics, geopolitics and international capital markets in a recurring and timely manner. We hope you can participate and would appreciate your comments.
New Interview Available: SPG In The News!
rduvall If you happened to miss the interview, you may now listen online!
Mr. Segall provides significant insight on economic and capital markets. Be sure to check out his interview with Ashford Radio.
Tune In
rduvall As we announced last month, Morris Segall will be interviewed on Ashford Talk Radio on January 18, 2012 at 2 P.M. EST. Mr. Segall will cover and answer questions on current events and outlooks spanning national and international economics, geopolitics, U.S. politics and international capital markets. You may listen to the interview and ask questions by signing on to www.ashfordradio.com, select Studio A and look for the interview with Morris Segall. The interview is also accessible by telephone, at 760-542-4100. This is an opportunity to hear our current thoughts on events impacting the economy and capital markets.
Geopolitics: Why its so important
Morris Segall Capital Markets, Emerging markets economic growth, European debt crisis, Global financial and banking systems, International economic growth, U.S economic growth, Worldwide recessionSince the spring of 2010 events outside the U.S. have been dominating our financial news and influencing our economy and capital markets. That spring the European debt difficulties moved to crisis stage with the imminent debt default of Greece. The financial crisis that began that spring has continued virtually unabated with a series of financial “band aids” that have staved off world financial disaster but done nothing to provide a permanent solution to Europe’s financial distress. In the meantime, the ratings agencies have downgraded both sovereign and bank credit through much of Europe and the ill advised austerity programs (See our website articles of March 15, 2011 and December 17, 2010), adopted by the members of the European Union have “choked off” economic growth in much of the continent, threatening the region with existing and imminent recession. During this period, world financial markets have been in turmoil and capital markets have been depressed.
Without a firm solution to the spreading sovereign debt woes, panic spread to the continent’s banking system that forced world central banks to add liquidity to the European banking system. This new calamity necessitated a summit of European leaders to fashion a long awaited permanent solution to Europe’s debt crisis. The summit was held last week and as we expected, failed to produce a bona fide solution to the debt crisis. Once again, a summit of European political and financial leaders was long on rhetoric and short on tangible solutions. After a reflex rally in the world capital markets last Friday on the news of increased unity and collaboration of EU members, the absence of substance in the summit became evident on examination over last weekend and the capital markets reacted accordingly on Monday.
We have been pessimistic about the future of the European union since its financial woes became unmanageable in 2010 and the sequence of events since then have only borne out our concerns. The fact is there is no machinery within the European Union framework that will accomplish what is needed to alleviate Europe’s financial distress and satisfy world financial markets that Europe is creditworthy. The principal entity that should be able to provide a conduit for Europe’s sovereign debt financing and shore up its banking system, the European Central Bank, is not empowered nor does it have the resources to do both. Therefore, the members of the EU face totally revamping their union with new treaties, subordinating their sovereignty to the European Commission, or creating some ersatz organ to provide the financial resources to do so. Again, there is not enough consensus among EU members to do what is necessary and not enough resources within the European Community to fully engineer a financial solution to both the sovereign debt and under-capitalized banking system. So the angst over Europe’s financial future continues as does the continuing threat of credit downgrades by the credit rating agencies, exacerbating an already tense situation. At this point, the austerity programs have created a negative economic situation for Europe, both Western and Eastern, that is threatening world economic growth for 2012-13. Europe represents approximately 20% of world trade and is a major market for U.S. and emerging market exports. Its economic stagnation has negative implications for GDP growth here and abroad. If Europe’s financial woes degenerate into a world financial crisis threatening the banking systems globally, it could precipitate a worldwide recession. This is the principal reason why forecasting world economic growth for the next 2-3 years has become so difficult.
That difficulty has been compounded by the current significant economic growth slowdown in the emerging market leaders in Asia and Latin America, notably China, India and Brazil. Emerging markets have been the locomotive of world economic growth before the recession and have led the world economic recovery since the recession ended. Economic deceleration in this key segment of the world economy coupled with economic stagnation in Europe cannot help but depress prospects for economic growth in the U.S. The impact of overseas events on our economy, our financial system and capital markets has never been greater and is unprecedented in the post war era. Unfortunately it is part of a secular change in the world economic order where global interdependence has replaced economic independence and where global economic growth leadership has passed to the newly industrialized economies of Asia and Latin America.
Morris R. Segall
The November Employment Report: Not So Fast
Morris Segall absence of high paying job creation, consumer spending, employment report, job creation, long term unemployment, low paying job creation, seasonal service sector jobsThe November employment report showed an increase of 120,000 new jobs, 140,000 in the private sector and a loss of 20,000 in the government sector. The latter continues the negative trend begun in the second half of 2008. Of import was the sharp drop in the unemployment rate from 9.0% (which has been the level over the past 12 months) to 8.6%, the lowest level since March, 2009. Additionally, prior months job gains in September and October were revised upward by a total of 72,000, moving the average monthly gain in job creation over the past three months up to 143,000 versus an average of 76,000 over the prior four months.
As impressive as the headline numbers appear, one needs to analyze the details behind the numbers. Upon further examination we find the following:
1. The large drop in the unemployment rate reflects a large drop in the labor force of over 300,000
persons in the month of November. This is indicative of a continuing flow of discouraged workers
leaving the workforce which now numbers over 2.5 million and causing the labor force participation
rate to fall to a multi-year low of 64%.
2. The number of unemployed over a 5-26 week period actually increased by over 30,000 persons in
November from September levels.
3. Virtually all of the job gains since September have come from the service sector sector, notably retail
trade, professional and business services, most of which were temp jobs, healthcare services and
leisure and hospitality jobs. Most of the retail and leisure and hospitality jobs are seasonal and are
considered temporary. All of these service sector jobs are generally lower paying jobs relative to
manufacturing, construction and goods producing jobs which are not showing increases over the
past three months.
4. Average hourly earnings are little changed over the September-November period despite the large
increase in monthly job creation. This further validates our thesis that the bulk of the jobs being
added are low paying.
5. The average duration of unemployment in weeks amounted to nearly 41% in November, near the post
recession highs of 40%-45%, despite the increase in job creation since September and the recent
decline in first time unemployment claims during this same period and a decline in the number of
unemployed of 5 weeks or less.
So, while the increase in job creation since September is welcome and helpful to income creation and consumer spending in the near term, we must look at these numbers with circumspect as they may not last and appear to do little to improve the longer term unemployment distress in higher paying jobs and among the long term unemployed.
Morris R. Segall
The Super Committee fails: Now What?
Morris Segall Bush tax cuts, consumer spending, democrats, Economic Growth, economic outlook, employment, eroding middle class, future trends, mandatory federal spending cutbacks, military spending, public education impairment, republicans, U.S. credit rating downgrade, U.S. economic and military superiorityYesterday’s announcement that the Bipartisan Congressional Committee, charged with formulating a long term deficit reduction plan, could not come to an agreement on such a plan was anti-climatic. It had been rumored for weeks that the members of the committee were far apart on critical issues and by this past weekend, it was apparent no agreement was going to be reached. We had long been skeptical this committee was going to succeed (See our blog video of October 7) but we felt there was a chance statesmanship would triumph over politics at the eleventh hour. We were wrong. We have commented since last summer’s near disastrous debt limit negotiations that the ideological divide between Republicans and Democrats is so wide that the parties are incapable of bridging the gap, even when the well being of the nation is at stake. It will reside in America’s voters in next year’s election to decide this country’s long term public and fiscal policy by electing a President and Congress of one political party or the other. A split vote that results in continued divided government in Washington will be a formula for economic and social disaster.
In the meantime, Congress must fund the government past next month and decide if it will extend last year’s tax breaks via a reduced payroll tax on wage earners and extended benefits to this nation’s chronic number of long term unemployed. In the present partisan atmosphere in Washington, none of these important issues can be counted as certain of passage. Failure to pass any of these items will certainly diminish the economic outlook for next year at the least, and potentially plunge this country into economic chaos at the worst, if the government is shutdown for lack of funding.
Beyond the immediate issues affecting the economy for next year are the prospects of mandatory federal budget cutbacks and the expiration of the Bush tax cuts in 2013 as a result of the failure of the “Super Committee” to fashion a long term deficit reduction package. The combination of increased taxes and federal government spending cuts will result in higher taxes, particularly on the already stressed middle class, and significant reductions in federal assistance in vital areas such as education, again disproportionately affecting middle and lower income sectors of our economy. At the same time, mandatory federal spending reductions will fall heavily on the Defense Department causing drastic cuts vital to our national defense while our strategic enemies are increasing their defense spending and closing the gap on our technological superiority. It is this technological superiority, through necessary research and development, that allows us to field a world class military with fewer numbers than our adversaries. Oh and by the way, defense spending cutbacks of approximately $500 billion over the next ten years are estimated to cost approximately 1 million defense related jobs according to estimates by the Defense Department.
The sum of such fiscal developments, we believe, will be a low level of economic growth on an extended basis from suppressed consumer income and spending and continued high levels of unemployment. Erosion of our public education system to the detriment of a future generation of students and impairing our ability to compete in the world economy. This combination may well result in the creation of a burgeoning number of low income earners replacing what has historically been a growing and thriving American middle class. The disparity between the “haves” and “have nots” will reach historic proportions threatening the future social, economic and military superiority of the U.S. Lastly, there is no guarantee that such mandatory spending reductions will stave off a further lowering of our credit rating. Indeed, we expect the rating agencies will be taking an unfavorable opinion of our economic prospects in the near term. Lower spending matched by lower tax receipts may not result in the improved federal fiscal situation necessary to maintain our AAA credit rating. In short, absent a robust economic recovery, hallmarked by substantial job and income growth, the future social and economic outlooks for this country are not encouraging.
Morris R. Segall
Analysis – Changes in the banking industry
Morris R. Segall, President of SPG/Trend Advisors, discusses how the banking landscape is changing and what that means for the industry and the consumer.
Analysis – Consumer Income and Spending Report
Morris R. Segall, President of SPG/Trend Advisors, discusses the Consumer Income and Spending Report that was released October 28, 2011.
Analysis: European Union debt deal
The agreement between the EU and the International Banking Association regarding the Greek bailout will result in a substantial reduction in the value of private debt holdings. The parties also agreed to beef up the emergency European bailout facility and recapitalize the European banks for the hits they are going to take on sovereign debt. Still, questions remain: Who will buy the bonds to be issued? How much can EU members really contribute? And how will Italy be dealt with? There has to be a real cash infusion into the European banking system to bring capital ratios up and make them whole for the write down they will experience. As a result, this agreement will be severely tested over the next six months.
Morris R. Segall, President of SPG/Trend Advisors, discusses the debt deal reached by members of the European Union on October 27, 2011 to bail out Greece.
Analysis: Market reacts to EU debt deal, Q3 growth
A better-than-expected growth rate in the U.S. economy during the third quarter and a bridge solution introduced by the European Union to address the Greek debt crisis should help the Stock Market to remain on the upside, at least in the short-term. Continuation of that trend through the end of the year will depend on further developments out of Europe and additional good news for the U.S. economy through the fourth quarter.
Morris R. Segall, President of SPG/Trend Advisors, talks about the positive market reaction to news of a European Union deal to address the Greek debt crisis and a better-than-expected growth rate in the U.S. economy during the third quarter.
Egypt’s importance to U.S. economy
Egypt is experiencing a marked increase in anti-Israeli sentiment, both within the government and on the street. The country is allowing an increasing number of weapons to be smuggled into Gaza, which inevitably will be used against Israel. We are also seeing sectarian violence between Christians and Muslims. In short, we are witnessing a rapidly deteriorating situation. Because Egypt was a key U.S. ally, who can we now count on in the Mideast and what will we do if Egypt is taken over by fundamentalists? Unfortunately, we seem not to have any ready solutions.
Will Europe bail out Greece?
Greece continues to be the boiling point in Europe. And while it appears Greece will receive another traunch of money to keep it from defaulting, the bailout undoubtedly will mean more pain and suffering among the European banks and private debt holders. The question that remains is whether the EU will add enough capital to the European banking sector to enable it to take that so-called “haircut” on a Greek renogeotiated debt deal.
Can Obama’s jobs bill be salvaged?
With the mood in Congress not favoring compromise, it appears that the President’s jobs bill is in jeopardy. Only payroll tax cuts and an extension of unemployment benefits seem likely to survive. This is in large part because there is a rebellion within the President’s own party. Democrats are no longer listening to the President. In addition, his initiatives seem to be falling on deaf ears, making him look irrelevant. This is primarily because he has talked a lot but delivered very little. As a result, he seems to be falling out of the public debate.
We predicted the “Occupy” protests and expect them to grow
At the heart of the recent Occupy protests is a real belief that the American dream has been stolen away and that the playing field is no longer level. An SPG web article (“I Am Mad as Hell”) published on March 23, 2009 predicted as much. Economic and financial drivers are getting people out into the street as frustration and anger grows at the lack of progress being made in creating new jobs and growing income. But the political system is also being called into question as many contend that both the Democrats and Republicans are putting special interests and their own interests ahead of the public interest. That feeling will result in increasingly volatile elections in which no incumbents are safe.
Optimism for Europe?
Recent rallies in capital markets reflect optimism that the Europeans are finally going to come to grips and do something meaningful with regard to sovereign debt issues. If expectations are fulfilled, we will have dodged a bullet with respect to Greek default and will probably be able to salvage some strength in the European banking systems. Failing that, we could see a complete reversal in the euphoria we have seen. Morris Segall comments on optimism in Europe on the Baltimore Sun’s website.
Why the Middle East matters to the U.S. economy
While we have been focused on the American economy, tensions between Israel and Turkey have put the U.S. in a difficult position with historical allies. With a distinct shift in anti-Israel sentiment in Egypt and the Palestinians’ demands to have a state certified by the U.N., we must not take our eyes off international events because they impact commodity prices and affect us geopolitically. Morris Segall comments on the recent rise in Mideast tensions on the Baltimore Sun’s website.
August Employment: There is None
Morris Segall Capital Markets, consumer sentiment, Economic stagnation, economy, employment, employment report, future trends, government, government stimulus, manufacturing, private sector investment, recession, slowdown, unemploymentToday’s employment report for August continued a worsening trend in the job market we have noted in our blog and website articles since June. Rather than another month of paltry job growth seen since May, job creation in August was zero. The last time the monthly employment report recorded an absence of job creation was last September. In addition, job creation for the months of June and July were revised downward a combined 58,000 jobs. Thus, over the last three months, job creation has averaged 35,000 jobs versus an average of 153,000 over the first five months of this year. Even the private sector, which has been creating a moderate level of jobs so far this year, dropped to nearly zero in job creation in August. More distressing is the event we have feared since the economy and employment faded through the second quarter. That is the shift by employers from reduced job hiring to job layoffs. In the August report, a number of industries recorded job losses including: manufacturing; construction; retail trade; transportation and information technology. The latter includes striking Verizon employees but that does not account for all of the job loss in this sector. The government sector also shed another 17,000 jobs in August. Year to date, the government sector has reduced employment by over 260,000 jobs.
As bad as these numbers are, other data in the employment report for August are even more negative. The already weak average workweek declined to 34.2 hours from 34.3 hours in June and July and is at the low level of last August. Average hourly earnings declined from July levels and are less that 2% above year ago levels, well below nominal inflation. The number of involuntary part time workers increased by approximately 400,000 to over 8.8 million workers from July and is at the highest level since last August. As we reported in prior employment report articles, the number of unemployed 5-14 weeks had been expanding in recent months. Now those people are unemployed over 15 weeks and that category has expanded to almost 59% of the number of unemployed persons.
Combined with the very weak manufacturing data reported yesterday showing major declines in orders, shipments, backlogs and employment and the plummeting levels of consumer confidence in recent surveys, and we have an economy that is “stalled out” and on the verge of sliding back into recession. We have previously cautioned about such a prospect in previous blog articles if economic data over the summer did not improve materially and fast. It hasn’t.
The private sector is doing what we expected in a weakening economic environment-cutting back. The President is expected to announce new economic stimulus measures next week to help create jobs. They will not turn the economy around. The Fed will inaugurate a QE3 program to add more liquidity if recession is imminent. The impact will be similar to that of QE2- a temporary respite but damaging to the bond market and the value of the U.S. Dollar. Without the full participation of the private sector to invest heavily into the economy and hire workers, the current economic trends and pessimistic outlook will not change. This also does not augur well for U.S. and overseas capital markets.
Morris R. Segall
Behavioral Shifts Threaten U.S. Growth
We are witnessing a profound change in the behavioral patterns of American businesses and consumers. On the consumer side, a reluctance to use credit and fear spurred by high unemployment and the declining Stock Market have resulted in an increasingly uneven spending pattern. Businesses, meanwhile, have been reluctant to make long-term capital investments and to hire new employees. These shifts in behavior have led to an increasing number of Americans becoming pessimistic, ultimately threatening long-term U.S. growth. Morris Segall discusses these behavioral shifts on The Baltimore Sun’s website at http://bsun.md/nYz3HK
Wall Street Volatility Raises Concerns About Recession
Morris Segall Dell, double-dip recession, economic volatility, European markets, HP, manufacturing, recession, technology, Wall StreetVolatility returned to Wall Street Thursday (8/18) on the heels of weakness in overseas markets and growing concern about slipping into recession. The reaction to a European slowdown in 2Q was exacerbated by the decidedly poor Mid-Atlantic manufacturing data and the diminishing near-term and intermediate outlook for technology companies like Dell and HP.
Could We Be in for a Double-Dip Recession?
Given the recent turmoil on Wall Street, the question on everyone’s mind is whether or not the nation will slip into a double-dip recession. And with cuts in federal spending looming, will the Washington-Baltimore region be pulled into the abyss too? In a recent Washington Post article, economist Morris Segall notes
that to date, businesses have deferred hiring. If the economy worsens, they may retrench even further and begin layoffs. With employment and consumer spending remaining weak, a double-dip recession remains a real possibility, according to Segall, unless economic data improves quickly. Read the entire Washington Post article at: http://www.washingtonpost.com/business/capitalbusiness/5-indicators-to-watch-in-the-regions-economy/2011/08/11/gIQA9SXWFJ_story.html
July Employment: Not Good Enough
Morris Segall business retrenchment, Capital Markets, Economic Growth, economic recovery, employment report, GDP, job creation, recession, unemploymentJuly’s employment report was hailed with a sigh of relief. Total new job creation was over 100,000 with private sector job creation in excess of 150,000. This was the highest level of private sector job creation since 241,000 jobs were created in April. In addition, May and June employment was revised upward by a total of 56,000 jobs. Revised job creation for the two months amounted to 99,000 rather than the 43,000 previously reported. These numbers were interpreted to allay fears the economy was about to recede into recession.
While the July employment gain and previous months revisions were encouraging, in our opinion, the gains were not much more than statistical and change little in our view of the weak current employment environment. In virtually all of the key measures of the job market, the July data continued the picture of a diminishing and discouraged work force, working stagnant hours and suffering from diminished employment.
According to the Household Survey, the civilian labor force contracted by almost 200,000 in the month of July and is 400,000 persons lower than year earlier levels. The employment/population ratio has fallen to 58.1% from 58.4% in July, 2010 and is at a 28 year low. The number of people not in the labor force has risen to 86.4 million, an increase of 374,000 from June and 2.1 million higher than year earlier levels. The unemployment rate for July was 9.1%, virtually unchanged from the May-June levels and only fractionally lower than the 9.5% of July, 2010. In addition, 2.5 million people could find only part time work in July, an increase of 116,000 from June and over 200,000 higher than year earlier levels. The average workweek continued to be an anemic 34.3 hours, virtually unchanged for a year. The average duration of unemployment in July rose to 40.4 weeks, up from 33.0 weeks in July, 2010. The total number of unemployed plus all persons marginally attached to the labor force and those working part time involuntarily, remained over 16%, virtually unchanged since April of this year and only fractionally lower than the 16.5% of July 2010.
On a more positive note, the important Professional and Business Services segment continued to show important progress with further gains in Computer systems design, Management and technical consulting services and Administrative jobs while temp jobs actually declined from May levels.
In summary, private sector job growth accelerated in July from weak levels of May and June. The job creation in the private sector continued to be offset by large job losses in the government sector, averaging 39,000 over the last three months. In fact, even with the increased job growth in July, net employment growth over the last three months averaged 111,000, down from an average of nearly 180,000 over the first four months of this year. This just isn’t good enough to foster increased economic growth or business expansion. While we do not believe we are currently in recession, an absence of improvement in recent economic data, including employment, will in our opinion, lead to further business retrenchment. This business retrenchment will be intensified by the recent downgrade of the U.S. sovereign debt rating and the resulting deterioration in worldwide capital markets. This has raised the possibility of a recession later this year and next.
Morris R. Segall
In addition
Credit Downgrade Could Have Devastating Impact on MD Economy
With the U.S. credit downgrade, Wall Street is already in a tailspin and cuts in federal spending appear to be on the horizon. This potentially could have a devastating impact on Maryland’s economy, which has always been closely tied to the federal government. In interviews with WJZ-TV 13 and WBAL-TV 11, Morris Segall, President of SPG Trend Advisors, says it could be tough for Maryland to continue to hold the line and continue to maintain its AAA bond rating. View the interviews at: http://baltimore.cbslocal.com/2011/08/08/md-governor-reacts-to-debt-crisis/ and http://www.wbaltv.com/video/28809506/detail.html
With debt ceiling deadline looming, U.S. beginning to see credit ratings downgraded. What does this mean for the average consumer?
With the debt ceiling deadline quickly approaching, and the U.S. credit rating already slipping, both business and consumers are wondering how this will play out – and more importantly – how this is going to impact their wallets. Economist Morris Segall discusses the debt ceiling deadline – and what it means for consumers – on WBAL TV: http://www.wbaltv.com/video/28685902/detail.html
Are the Property Cuts Proposed by Baltimore’s Mayoral Candidates Economically Feasible?
Morris Segall Baltimore City, Baltimore City Mayoral Candidates, Baltimore Mayor, Home Tax, homeowners, Property TaxBaltimore City’s Mayoral candidates are proposing cuts in property taxes that run the gamut, from slow and steady to huge, immediate reductions. Can the city, which is already cash strapped, afford major cuts in an effort to attract new homeowners and investment? Can it afford not to? Economist Morris Segall discusses the kind of approach he belives is most economically sensible in a recent WBAL-TV interview: http://www.wbaltv.com/video/28619023/detail.html
The EU gets serious about its sovereign debt crisis
Morris Segall European banking systems, European debt restructuring, European Financial Stability Facility, European sovereign debt, European Union, Greek debt crisisEuropean leaders today agreed to a plan brokered by French President Sarkozy and German Chancellor Merkel to provide a second and more comprehensive “bailout” of Greece and avoid that country’s imminent debt default. The new agreement is noteworthy in that for the first time, it calls on private debt holders to be part of the solution.
In addition, the EU is not just giving Greece a new tranche of money from its European Financial Stability Facility (EFSF), it is restructuring the Greek debt by extending maturities and lowering interest rates and expanding the scope of the Facility to provide for financing stabilization for other EU countries in distress. In effect, the EFSF will fulfill the role the Federal Reserve System played in stabilizing the U.S. banking system in 2008 by becoming the lender of last resort.
We have long argued (See our blog article of July 1 and our website article of March 15), that this approach was long overdue by the European Union leadership if a continuum of sovereign debt defaults by its weaker members was to be avoided. The concession to Germany to include private debt holders in debt restructuring is a major and necessary development. These moves will avoid an imminent Greek default on its debt (although the debt restructuring will likely create a technical default of its credit terms) and will also alleviate the increasing pressure on Italian and Spanish finances for the time being.
Notwithstanding these new and bold moves by the EU, today’s agreement will need further expansion. First, the EFSF must recapitalize the various EU banking systems for the losses incurred in the debt restructuring to keep them financially strong. Second. the private creditors of Greek debt must all agree to the principal loss involved in the restructuring. Third, the EFSF must be greatly expanded if it is to effectively “backstop” Irish, Portuguese, Italian and Spanish debt. Third, private creditors must be convinced to go along with similar restructuring of the debt of those countries if a comprehensive solution is to be achieved. Fourth and most important, the voters of the other EU countries, whose credit is underwriting the EFSF facility, must continue to go along with this scheme. This has been the most difficult hurdle to overcome in the ongoing European debt crisis.
Until all of these factors are accomplished, we are of the opinion that substantive steps have been taken to avoid the crisis du jour in Europe for the time being. Until further and more expansive steps are taken to truly restructure more of Europe’s sovereign debt, we remain skeptical the EU has fully solved it sovereign debt issues. We will watch further developments unfold to see if the current crisis has been deferred once again or if long term solutions are truly being implemented.
Morris R. Segall
Second Quarter backsliding
Morris Segall consumer sentiment, consumer spending, Economic Growth, employment report, GDP, industrial production, inflation, retail sales, unemploymentLast week saw a number of important economic reports for the month of June, including wholesale and retail inflation, consumer sentiment from the University of Michigan/Reuters survey. There were no surprises to us in these reports. We expected inflation to recede from the elevated levels of the first five months of this year as energy prices declined in the month of June. We also expected consumer sentiment numbers to decline reflecting the weak stock market in May and most of June and the very weak employment situation in both months (See our blog article of July 8 on June unemployment). For us however, the two economic reports of most importance were retail sales and industrial production. If there were going to be signs of improvement from the very weak data reported in May, it would be seen in these two reports.
Unfortunately, while retail sales, excluding grocery store and gasoline station sales, increased .3% in June from depressed May levels, June retail sales were essentially flat with the level of April and lower than the peak level of sales in March. So it would appear consumer discretionary spending is down at the end of the second quarter from the peak levels at the end of the first.
We were anxious to see the Fed’s June report on industrial production and capacity utilization to see again if our expectations of a June rebound in industrial activity would be fulfilled. Here too we were disappointed with the results. Similar to the retail sales report, June industrial production did improve from weak May data but only by a slim .2% and all of the increase came in mining and primarily from utilities. The latter benefitting from increased usuage of power for cooling in the extended and massive heat waves last month. Given the continuation of hot weather in July, utility consumption is expected to be high again this month. More importantly, industrial production in manufacturing showed no increase in June from May and prior months industrial production in April and May were revised downward to negative readings. Indeed the revised numbers indicate overall industrial production in the second quarter showed no improvement from the first quarter. In addition, total industry capacity utilization declined in June from March levels. Manufacturing capacity utilization is also down in June from March levels and has not increased above the 74.4% level since April. As a point of comparison, this level of capacity utilization is well below the 79% long term average utilization rate of 1972-2010 .
Concurrent with the weak employment numbers already reported and the increase in the trade deficit reported for May, the weak retail sales and manufacturing data for June point to GDP growth in the second quarter lower than the 2% growth recorded in the first quarter. We raised concerns about this in our July 8th blog article. It now appears second quarter GDP growth will be in the 1.5%-2% range. Furthermore, we are increasingly pessimistic about a catlyst in the private sector that would rejuvenate the economy in the second half. Given the pessimism amongst consumers, and the retrenchment we have seen in the business sector, we are hard pressed to see what will “jump start” this economy in the absence of another Federal stimulus program which is not expected.
Morris R. Segall
The June Employment Report: Now we are getting pessimistic
Morris Segall business spending, Capital Markets, consumer sentiment, consumer spending, debt default, deficit reduction, democrats, Economic Growth, economic recovery, future trends, inflation, job creation, June employment, obama, recession, Republican PartyToday’s employment report for the month of June is unequivocally a blow to expectations that May’s weak report was an aberration. Instead of rebounding from May results, the June report deteriorated in virtually all key aspects of employment. Nonfarm payrolls increased by a neglible 18,000 jobs, the weakest level of job growth in nine months. To make matters worse, the Labor Department revised downward its previous readings on job creation in April and May by a combined 41,000 jobs, including a 29,000 job reduction in May to 25,000 from an already weak level of 54,000 jobs. The June report and the April-May revisions reveal a virtual absence of job creation since April. Of the 18,000 jobs created in June, 57,000 were created in the private sector, offset by a reduction of 39,000 jobs in federal, state and local governments. Of the 57,000 private sector jobs the vast bulk of these, (34,000), were in the Leisure and Hospitality sector- low paying, seasonal and tenuous given its sensitivity to the economy. According to the Household survey, the unemployment rate reached a year to date high of 9.2% in June despite a contraction in the labor force of over 270,000 from May levels. In addition, the June Household survey showed an increase of 173,000 in the number of unemployed workers and an increase of nearly 450,000 persons not in the labor force. Other statistics from the June monthly report include: a recessionary employment/population ratio of 58.2%; a $.01 decrease in average hourly earnings resulting in no increase in average hourly earnings since April; a decrease in the average workweek and factory overtime; an increase of 100,000 in the number of discouraged workers from May to nearly 1 million persons; an overall increase of 474,000 in those categorized as marginally attached to the labor force from May to a level of 2.7 million people; and an increase of over 400,000 from May in the number of unemployed less than 5 weeks to over 3 million persons. In June, the percentage of workers unemployed, those marginally attached to the labor force and those working part time because they can’t find full time work amounted to over 16%, the highest level this year. Two years after the recession ended, these numbers are unprecedented in post-war economic recoveries.
In our June 7th website article on May unemployment data, we concluded that the May data had been suppressed by the severe storms in the south and mid-west in April and May and the supply dislocations in Japan. We saw reassuring data in the May report that encouraged us to believe we were not on the verge of a double dip recession. Unfortunately, the June report contained none of those positives and should be relatively unimpeded by exogenous events. We believe the June data confirms our fears that the business sector has retrenched in its spending since March, insecure in the outlook for consumer and customer end demand given the high levels of inflation and pressure on incomes and profit margins and deteriorating economic conditions in major markets overseas. This is confirmed in the underlying weakness in the June ISM manufacturing survey ( See our website article on the June Manufacturing Survey), and the weakness in the June ISM non-manufacturing survey, both released earlier this week. This retrenchment now appears to include a reduction in hiring.
This business spending retrenchment will have enormous implications for economic growth for the remainder of this year and into next if not reversed. An economy that does not provide job growth cannot grow. We have long focused on business and consumer spending as the drivers of economic recovery in the absence of contributions from housing and the government sector. Business retrenchment in spending and hiring will remove both of those drivers from the economy. The absence of private sector job creation will soon be reflected in reduced consumer sentiment and spending. Reduced consumer spending will slow business sales and pressure corporate profits causing businesses to retrench further. The net result is an economy that does not grow and one that could easily fall back into recession. We commented in our last website article how important the June employment report would be for the future direction of our economy. With the June numbers showing such employment weakness, we are now pessimistic the second half of this year will show renewed economic growth and the outlook for 2012 has become decidedly less sanguine. We expect to revise downward our expectations for GDP growth for this year to the bottom of our 2%-3% range and we may have to reduce our projections further if current economic trends persist.
We expect the weak June employment data to complicate if not preclude an agreement on raising the nation’s debt ceiling. The weakness of the June report will, in our opinion, harden the resolve of Republicans to reject revenue raising measures advocated by the President. The same employment weakness will, in our opinion, also strengthen the resolve of Democrats to avoid stringent federal spending cuts, particularly in entitlement programs. The current weakness in the economy will widen the ideological chasm between the political parties. Thus, we are not optimistic a far reaching deficit reduction program will be reached in the next two weeks. Rather we now believe a stopgap measure to avoid government default, possibly through the end of the current fiscal year, will be the only agreement that can be fashioned.
Clearly these events and the current economic environment are not conducive to stock market appreciation. In view of the recent rally in stock prices at the end of June and the first week in July, we believe the equity markets have increased downside risk and less upside potential. We would advise a more defensive and risk averse capital market strategy in light of present circumstances.
Morris R. Segall
Austerity Squeezes Greece Too Hard
The Greek paliament’s approval of a $113 billion austerity package — demanded by the EU and IMF as a condition for receiving a $17 billion installment of the $160 billion bailout package negotiated last year — will allow the country to avoid defaulting on debt obligations due in July and August. But does the Greek experience call into question the soundness of the EU austerity policy? While the objective of the measures was to reduce government deficits below 3% of GDP, they have left more than 800,000 Greeks jobless while the Greek economy has continued to contract. The EU needs to consider adopting a longer time period for debt reduction. Greece also needs to crack down on tax evasion and collect more revenues. Squeezing the Greek population and economy further could well lead to a political backlash which, in turn, could threaten the existence of not only the current Greek government but the EU. Read more in Morris Segall’s op-ed, published July 1 in The Baltimore Sun: http://www.baltimoresun.com/news/opinion/oped/bs-ed-greece-20110630,0,6665125.story
Prices Thwarting Housing Market Recovery
How many times recently have you heard homeowners complain that they are in the market for new homes, but wouldn’t even consider moving because they know they can’t get what their current houses are worth? That, in short, is the problem with today’s U.S. housing market. The demand is there. Unfortunately, pricing is not. As a result, prices are thwarting a recovery in the housing market. Morris Segall, President of SPG Trend Advisors, predicts the housing market won’t return to pre-recession levels until prices on existing homes firm and start moving up. That could be 2013, at the earliest. See Segall’s comments in a recent article in the Baltimore Business Journal: http://www.bizjournals.com/baltimore/print-edition/2011/06/17/is-latest-baltimore-area-housing-data.html?page=all
Will U2′s Economic Impact Pave the Way for More Big Events in Baltimore?
Irish rock group U2’s recent concert in Baltimore provided a huge economic bump for the city and surrounding areas as hotels, bars, and restaurants were filled with more than 75,000 concert-goers. Are more major concerts like this in store for the area as tourism officials, promoters, and retailers recognize the financial shot-in-the arm they potentially can provide? And would major concert attractions help to offset the $40 million hit the region would take if the NFL were to cancel the upcoming season?
Morris Segall, President of SPG Trend Advisors, discusses the economic impact of U2 and the potential for similar concerts in the future with area media:
http://baltimore.cbslocal.com/2011/06/21/final-preparations-underway-for-u2-concert-in-baltimore/
Is There a Silver Lining in May’s Unemployment Numbers?
The May unemployment numbers were nothing short of disappointing. But do they mark the beginning of a double-dip recession, as many economists have predicted? Morris Segall, President of SPG Trend Advisors, suggests things might not be quite as bad as they seem, with weather the primary culprit for the sharp drop in production and distribution. Segall also cites an uptick in professional and business services employment and a shift from temporary to permanent hiring as encouraging. See Segall’s oped in the Baltimore Business Journal at http://www.bizjournals.com/baltimore/print-edition/2011/06/17/bleak-economic-numbers-dont-disclose.html
May Manufacturing: Pause or Peak
Morris Segall consumer spending, Economic Growth, economic recovery, economy, manufacturing, slowdown, stock market, trendsThe ISM national manufacturing survey for May fell precipitously from April levels, confirming the trend seen in regional manufacturing surveys released over the past two weeks. For a number of reasons, the economy, including manufacturing, is slowing as we proceed into the second quarter. This looks very much like the pattern in economic activity we experienced last year as economic growth peaked last March-April and receded over the summer before reviving in the fall and winter. The reasons for the slowdown this year are primarily related to the surge in inflation since last summer, led by huge jumps in food and energy prices. This has been a restraining factor on consumer discretionary spending and has put pressure on corporate profit margins. It appears the rising level of prices is causing businesses to reduce spending to a greater extent than consumers as the experience of the recent recession has taught businesses to move quickly to cut spending to protect profitability.
Another factor hurting manufacturing currently is the dislocation of orders and shipments from and to Japan as a result of the earthquake and tsunami that has devastated that nation and created havoc with its industrial production and shipments.
In addition, the contraction in economic growth in Europe and ongoing sovereign debt issues are suppressing exports to the weaker economies in the Euro zone.
The unrest in the Middle East and North Africa has dislocated business orders and shipments from that region.
Lastly, the huge decline in shipments reported in the regional and national manufacturing surveys in May, reinforce our belief that a significant factor in May’s manufacturing weakness is due to the severe storms experienced in April and May in the Eastern U.S. and particularly the Midwest. In all of the manufacturing surveys production measures experience some of the biggest declines in the month of May.
It is noteworthy that the category of “No Change” increased significantly in many of the regional and national surveys in May. The increase in this category in May raised the absolute readings in this category to levels that far overshadowed the levels of weakening responses in the surveys. We interpret this that more of the weakness in these manufacturing diffusion indices is due to a “flattening” in the key metrics rather than massive deterioration. In addition, employment in virtually all of the manufacturing surveys remained positive. We acknowledge that employment is a lagging indicator and further weakening in orders, shipments and backlogs will result in weakening trends in employment going forward. Surprisingly, in many of the manufacturing surveys, including the national, respondents were generally positive regarding the future and expected key trends in orders and shipments to improve from May levels. If we are correct in our assessment of the impact of weather on the May surveys, we would concur. Finally, it should be noted that in the national survey, 14 of 18 industries reported growth in May with only 3 industries reporting contraction and those three industries were not major capital goods sectors.
It remains to be seen if the manufacturing growth trends rebound in June and beyond. If so, the capital investment cycle that has led the economic recovery will remain intact. If not, and the May surveys are signaling a weakening trend, then we will have to face the possibility this cycle may have peaked.
We are not optimistic that if such is the case, the federal government will resuscitate it with further stimulus as it did last year. The absence of further strong growth in manufacturing will lead to reduced overall economic growth this year and into next. Because of the flagging growth in manufacturing and net exports so far this quarter, we will be re-evaluating our economic growth projections for the second quarter and the rest of this year. We will evaluate the May employment report before we make our revisions.
The weakness in the May manufacturing report along with a forecast of weak employment growth by the independent payroll processing firm, ADP, caused a major sell-off in the U.S. equity markets on Wednesday that is being replicated by Asian markets Thursday morning and likely will spread to Europe. The world capital markets are nervous about the outlook for world economic growth and financial stability and have become very volatile. Those outlooks will dim further if the U.S. economic recovery stalls out. This is why we have emphasized private equity and the investment themes of merger and acquisition, infrastructure investment and business growth financing in our capital market strategy for the intermediate and longer term (See our website article of January 6, 2011 and our website Economic and Capital Market Presentation of February 2, 2011). Recent events overseas and the fragility of our own economic recovery plus our long term financial difficulties, reinforce this strategy.
Morris R. Segall
Economic Update
Morris Segall April job growth, consumer credit, consumer spending, corporate profits, Economic Growth, future trends, GDP, inflation, manufacturing orders and shipments, non-manufacturing orders and production, personal income, unemploymentThere has been a large amount of important economic data and news over the past week that is shaping the outlook for the U.S. economy as we proceed through the second quarter.
First, preliminary GDP growth for the first quarter was reported in line with our expectations (See our blog article of April 24, “First Quarter GDP will be a Slowdown”) of just below 2% higlighted by reduced consumer spending, reduced business capital investment, negative net exports and a surprising cutback in Federal government spending in defense. Our expectations of a beginning reorder cycle in inventory accumulation is also apparent in the report. We expect the second and third revisions to the GDP report will be upward based on stronger consumer spending numbers in the Personal Income and Spending report for March and strong capital goods orders for February and March.
Consumer income and spending data released after the preliminary GDP report reveals significantly stronger growth in both in the first quarter, particularly in February and March, aggregating a total increase of 1.5% for the two months. Spending was widespread among durable and nondurable goods and services over the two month period. Savings helped fuel the spending as the savings rate dropped to 5.5% from nearly 6% in January.
Orders, shipments and backlogs of manufactured goods increased at accelerated rates in February and March with orders and shipments in March growing at an outsized rate of growth approximating 3%. Order and shipments strength continued the recovery pattern of growth in both durable and nondurable industries. Manufacturing backlogs, on a non seasonally adjusted basis, are up over 13% year over year in March.
Purchasing managers indices for manufacturing and non-manufacturing receded in April from record levels in February causing concern about an economic slowdown but examination of the subsets of the indices reveal continued strong levels from respondents regarding orders, shipments, backlogs and employment. However, respondents in both surveys noted a continuation of price increases from suppliers.
Employment growth continued in April by a stronger than expected 244,000 jobs with private sector hiring accelerating to 268,000 from upwardly revised levels of 261,000 and 231,000 in January and February, respectively. However, the unemployment rate increased to 9% in the Household survey due to a calculation of fewer jobs created versus the Business establishment survey. The increase in job creation was broad and included manufacturing, retail trade, professional and business services, healthcare and leisure and hospitality sectors. Within professional and business services, the recent improvement in management and technical consulting services and computer systems services continued and provided much of this important sector’s monthly growth. This confirms anecdotal evidence we have been gleaning for much of the February-March period. Unfortunately, the labor force participation rate has not improved from a mediocre 64.2% and the number of people working part time for economic reasons and marginally attached to the labor force increased further. In addition, wages have not increased during the first quarter and have increased less than 2%, year over year, in April, less than the rate of inflation.
Consumer credit expanded again in March for the third consecutive month in both revolving and nonrevolving credit. Most of the increase in consumer credit continues to be led by nonrevolving credit such as auto and student loans. The small increase in revolving credit in March does not bring it back to fourth quarter 2010 levels.
Finally, commodity prices declined substantially led by a collapse in silver prices. We had felt commodity prices were building a bubble similar to the price action in the summer of 2008 and we expected a similar result when they broke down in the fall of that year.
Our conclusions from all of this data is that the first quarter ended on a stronger note than expected given the rapid rise in inflation during the quarter. Demand from consumers and businesses were remarkably resilient. With the recent decline in commodity prices, even temporarily, some pressure on consumer incomes and business profitability will be relieved. This augurs well for consumer and business spending in the second and third quarters and fortifies our optimism for heightened GDP growth for these periods. Another very positive development in the first quarter was the stronger than expected level of corporate profits reported for the period. Our optimism must be tempered by adverse events overseas, the current debate regarding the federal budget, which will impact the level of federal spending going forward, and the expiration of the Fed’s QE2 program which has supported low interest rates and ample liquidity for the economy and the stock market. We will be publishing our power point, comprehensive economic update and outlook on our website shortly.
Morris R. Segall
Osama Bin Laden is Killed and Risk Tolerance Rises For the Moment
Morris Segall Al Queda, Capital Markets, consumer spending, debt ceiling deliberations, economic realities, Fed's QE 2 program, geopolitical changes, inflation, kudos to U.S. intelligence and military, obama, Osama Bin Laden, President's reelection, risk aversion, stock marketLast night’s news that U.S. military forces killed Osam Bin Laden is another unexpected geopolitical development in a year that is already seeing huge changes in the world’s political landscape. The news of Bin Laden’s death is causing an immediate reaction of relief and exultation which is seeing large gains in U.S. equity futures which will translate into large gains in U.S. stocks at today’s open. The very short term reaction in U.S. stocks will see a reversal in recent surges in safe haven investments led by gold and oil which are already trading down in Asian and futures markets. This reversal of risk avoidance will last in the very short term but economic and geopolitical realities will reassert themselves in fairly short order.
First, the U.S. markets will still have to deal with U.S. budget contentions that threaten to stall a rise in the U,S. debt ceiling that must be done to avoid a potential U.S. debt default. We continue to believe an eleventh hour agreement on raising the debt ceiling will occur but the cost in the form of higher taxes and decreased federal spending will be significant.
Second, the rise in inflation through the first quarter and extending into the current quarter threatens the growth of personal consumption and business profitability. Already more companies are announcing price increases necessary to pass along higher commodity, manufacturing and distribution costs. Unless, commodity prices collapse on an extended basis through the second half of this year, inflation will continue to be an economic headwind, not just for the U.S. but more importantly, for most economies overseas.
Third, the Fed’s QE 2 program will end at the end of June. What will the effect on the U.S. Treasury market be once the Fed stops absorbing the continuing large issuance of Treasury debt to finance this year’s large deficit.
Fourth, while the killing of Osama Bin Laden is a huge psychological victory over Al Queda, the reality is Al Queda has been operating independently of Osam Bin Laden for some time as witnessed by the vibrancy of the Al Queda operations in Yemen and Africa. The killing of Osama Bin Laden will not change that fact or the threats from local Al Queda chapters. In fact, these factions may intensify their threats in order to offset the psychological loss of Bin Laden.
So after a near term robust rally in U.S. and overseas equity markets, we expect euphoria to be tempered with economic realities. The impact of Bin Laden’s loss may have more mileage in the Arab world where people may feel a sense of relief and increased security that will empower them to further their fight for economic and political change in North Africa and the Middle East. In the dizzying pace of international events, it is difficult to forecast with clarity how political and economic developments will be shaped but major changes in both are underway and the status quo around the world is being altered.
Finally, we have been critical of President Obama in his handling of foreign policy including our recent website article on the Middle East. Despite critical diplomatic setbacks, we must congratulate the President and the counterintelligence agencies and the military for what appears to be first rate work in intelligence and military operations and decisive action on the part of the President to secure the prize. This will undoubtedly be a huge boost to the President’s reelection chances and deservedly so.
First Quarter GDP will be a slowdown
Morris Segall consumer spending, corporate profit margins, Economic Growth, economic recovery, first quarter GDP growth, flattening corporate profit growth, housing weakness, inflation, inventory reorder cycle, Japanese catasrophes, overseas political unrest, rising commodity prices, sovereign debt woes, weak housing pricesWe have been expecting first quarter GDP, which will be preliminarily reported this Thursday, April 28, to be slower than the growth reported for the fourth quarter of 2010 (+3.1%) because we did not expect consumer spending to be sustained at the elevated level (approximately 7% annualized rate of growth in domestic sales) achieved in last year’s fourth quarter. Therefore, we had expected first quarter GDP growth to be in the vicinity of 2.5% with reduced consumer spending being offset by strong manufacturing shipments, including exports, and a beginning of an inventory reorder cycle to replenish the strong movement of goods in the fourth quarter of last year.
However, we have been telling our clients and audiences since early April, that first quarter GDP growth could be weaker than our initial 2.5% estimate due to the rising cost of food and fuel that was stifling consumer spending more that we expected and also causing a pause in the level of discretionary business spending as businesses evaluated the impact of higher fuel and commodity prices on near term profitability. In our February 2nd economic and capital market presentation to our clients, we highlighted the flattening slope of corporate profit growth being seen in the second half of 2010 and expected to continue in 2011. We pointed out to our audience that the easy and geometric gains in corporate profits coming out of the recession were going to have be replaced by greater unit volume growth and profit margin maintenance as the economic recovery progressed. The escalation in energy, commodity and service costs is definitely pressuring corporate profits in the first quarter of this year.
In addition, to weaker than expected consumer and business spending, housing weakened dramatically in the first quarter from bad winter weather and most importantly, excess housing inventory from high levels of foreclosures, which in turn caused a further weakening in housing prices. We have been forecasting the latter since last summer but the level of housing sales in the first quarter was extraordinarily weak. This will be a further depressant to the first quarter GDP.
Given the additional negative impacts on world economic growth from continued sovereign debt woes in Europe, the earthquake and nuclear catasrophes in Japan and spreading political unrest in North Africa and the Middle East, a slowdown in first quarter GDP in likely to be incrementally weaker. At this juncture, we have been using a revised estimate of approximately 2%, plus or minus for the quarter. The weakness in the first quarter could be made up over the remainder of the year if inflation pressures recede, geopolitical events stabilize and further gains in manufacturing and employment continue. At this point we are not reducing our full year estimate of 2011 GDP growth from approximately 3% but current trends are troubling. We will have further to say after this week’s preliminary GDP announcement and the upcoming publication of our updated economic outlook presentation on our website.
Morris R. Segall
S & P Joins the U.S. Budget Debate
Morris Segall austerity programs, bailout, business confidence, business landscape, Capital Markets, consumer sentiment, consumer spending, Economic Growth, economic recovery, federal deficits, future trends, GDP, national debt, politics, recession, tight creditThis morning, Standard and Poor’s downgraded the U.S. credit rating outlook from stable to negative. The rating agency cited the high level of public debt as a percentage of GDP and the uncertainty that adequate actions to significantly reduce the U.S. debt level and maintain it at manageable levels would be undertaken in the forseeable future. The negative outlook and the reasoning behind it portend a “one in three likelihood of a lower long-term credit rating on the U.S. within two years” according to the text of the S & P release. Standard and Poor’s states the leverage on the U.S. balance sheet and accumulating annual deficits are higher than other countries with sovereign debt ratings of AAA.
We are not surprised by the S & P action. Indeed, in our website article of September 8, 2008, “Stocks, Recession and the Bail Out” we cautioned that the massive federal bailout of the housing and banking industries would add billions to annual deficits and the national debt. We further stated “The cumulative effect of ballooning annual federal deficits, the secular pressure on the federal budget from increasing entitlement spending and the continuing balance of trade deficit may lead to a downgrade in the U.S. government credit rating and a further aversion to U.S. dollar denominated assets longer term”. The extended decline in the U.S. dollar versus other currencies has reached historical proportions in the first four months of this year, even against the financially questionable euro.
While we are not surprised by the S & P action, we are surprised at the timing of the ratings outlook. Why now in the heat of the budget debate between Congress and the President? Why didn’t Standard and Poor’s wait until mid May after some decision on the federal budget and increase in the debt limit would have been forthcoming? It is our opinion that by releasing this downgraded credit outlook now, it would have a significant impact on the budget deliberations and possibly tilt the argument in favor of more draconian spending cuts as advocated by the Republicans in Congress. It is not unreasonable to believe that outside credit analysts, rating agencies and economists have come to the conclusion that the U.S. must adopt an austerity spending program similar to those adopted by the European Union as a solution to its excessive debt burden. By using a time frame of three years (similar to that employed in the European austerity programs) to measure progress, S & P makes the same mistake such a short time period has created on the countries in Europe. It is simply too short a period of time to deleverage sovereign balance sheets without stifling critically needed economic growth to provide the means to paydown debt (See out website articles of December 17, 2010 and March 15, 2011).
Today’s ratings outlook release by Standard & Poor’s misses important differences between the U.S. economic situation and those of Ireland, Greece, Portugal and Spain. The U.S. economy is in recovery led by manufacturing, exports and more recently consumer spending. Employment gains have accelerated since last November. While the recent surge in inflation has slowed U.S. economic growth coming out of the first quarter of this year, the recovery trend is not aborted. It will be if the Federal government is forced to make drastic spending cuts which will reverse its role as an economic stimulant to an economic depressant at this sensitive point in the U.S. economic recovery. We argued in our economic articles on Europe and once again, that longer periods of time are required to deleverage these balance sheets. A longer period of time will allow the national economy to grow at a rate to raise tax receipts and pay down debt. We have long been advocates for greater fiscal discipline by the U.S. government that includes large spending cuts and higher taxes. However, a nation in recession cannot reduce its debt to GDP ratio.
By releasing its downgraded U.S. ratings outlook today, Standard and Poor’s has entered the political debate and abandoned its role as a neutral and impartial arbiter of credit conditions. Furthermore, the surprising timing of this release has caused capital markets here and around the world to decline significantly, further eroding asset values and wealth and business and consumer confidence already battered by overseas events in Japan, the Middle East and Europe. Declining capital markets and consumer and business confidence will lead to tighter credit conditions at a time when credit was just beginning to “loosen up”. This in turn will lead to investment and spending retrenchment, threatening the nascent economic recovery here in the U.S. The worries of a deteriorating U.S. financial condition in 2012 and beyond could be self fulfilling as a result of what we believe is an ill timed alarm. We will have to see in the coming days if the S & P action is transitory or longer lasting in its impact.
Morris R. Segall
The Budget Wars: Now beginning
Morris Segall bailout, budget deficits, democrats, financial Armageddon, fiscal wars, national debt, national economic philosophy, new fiscal discipline, obama, politics, republicans, U.S. government default, U.S. government shutdownLast week’s melodrama leading up to the eleventh hour avoidance of a Federal government shutdown is just the beginning of the new fiscal wars over the U.S. budget for this fiscal year and beyond. The discussion of U.S. fiscal policy has now turned from stimulus, bailouts and economic recovery to debt reduction and redefining the role of the Federal government in the economy. Starting with the release of the Republican led House Budget Committee’s aggressive plan for deficit reduction, followed by steadfast demands for major reductions in federal spending to avoid the government shutdown, the Republican party has now shaped and defined the fiscal discussion and taken the lead from the President and the Democrats in Washington. The President, on the defensive, will reveal tomorrow evening his plan for reducing projected federal deficits going forward and lowering the level of the national debt as a percentage of our GDP.
In arriving at their compromise last week on nearly $39 billion in spending cuts for this fiscal year, the President was fortunate in being able to utilize a number of “one time” program reductions, cost cuts already approved by Congress and unused funds from previously adopted appropriations. This “low hanging fruit” may be as much as $20 billion of the $38.5 billion compromise. The President and the Democrats in Congress will not be so fortunate going forward. The President knows he must propose a credible deficit reduction program in an attempt to get Republican cooperation in raising the federal debt ceiling by early May. Such a plan will likely include tax increases as well as significant spending reductions. The President and his party will try to salvage as much of their fiscal and social agenda as possible.
Given the strong philosophical differences between the parties, we believe the President’s submission tomorrow evening will be rejected as insufficient and inclusive of unwelcome taxes by Republican hard liners in the House of Representatives. Another period of gamesmanship between the Republicans in the House and the President and the Democratically controlled Senate will ensue between now and early May, when the government will run out of money, to attempt a budget compromise and avoid a federal government default. The parties will use this period to blame each other for taking the country to financial Armageddon. We are optimistic neither party want to be held responsible for that and last minute concessions will avert disaster.
We have long warned of deteriorating federal finances, long before the recent recession, and been critical of the burgeoning federal debt, unsuccessful fiscal “ bailout” and excess liquidity programs to the extent we have been steadfastly pessimistic in regards to the long term U.S. financial and capital markets outlooks. We are in the process of examining the federal financial situation and the proposed solutions in an upcoming website article. However, the current chain of events and resulting dialogue represents a sea change in our national economic thinking and philosophy. The potential economic changes resulting from a new fiscal discipline in Washington will have profound impacts on all of us, our children and grandchildren.
Morris R. Segall
March Employment: Still Encouraging But…
Morris Segall "hard core" unemployed, business profits, Economic Growth, employment report, hourly earnings, inflation, job creation, jobs for college graduates, labor market "slack", labor market growth, unemploymentThe March employment report continues to show the improving trends we have been recounting in our previous employment blog articles (March 6 and February 5, 2011). The March report showed a second straight month of more than 200,000 new jobs created in the private sector. This is the highest consecutive level of private sector monthly job creation since well before the recession. According to the Household survey, nearly 1 million more workers have been employed since March, 2010.
The March report showed a continuation of the positive trends of: fewer unemployed from the loss of part time work; a further increase in manufacturing jobs; another decline in the level of unemployed from 5-26 weeks, particularly in the important 15-26 weeks category; and further improvement in management and professional jobs in the important Business and Professional Services segment.
However, all is still not well in the job market despite the recent improvement. Temp jobs still comprise the “lion’s share” of Professional and Business Services employment. The labor market is not growing. The number of persons not in the labor force or marginally attached continues to grow and the employment/population ratio still stands at a recessionary level of 58.5%. The increasing “hard core” unemployed of 27 weeks and longer comprised almost 46% of the total number of recorded unemployed in March versus just under 44% in March of 2010. This is becoming a major socio-economic dilemma for this country. Many of the jobs created in March were lower wage service jobs in healthcare, wholesale and retail trade and in the leisure and hospitality industries. Compounding this issue is weak wage growth overall. Average hourly earnings reflected in the March employment report showed annual growth of 1.7%, far less than the nearly 4% annualized growth in nominal consumer prices for the six month period ending in February. Our March 7th website article on inflation highlighted the increasing problem of rising prices for consumers and businesses. Continued price escalation which pressures consumer discretionary spending and business profits could hurt further permanent hiring gains.
So while the recent trends in employment, as reflected in the monthly jobs report and weekly first time unemployment claims, are showing concrete improvement, the gains are not uniform and still leave a large amount of “slack” in the U.S. labor force. In addition, there are far too many instances where mature, experienced workers and recent college graduates cannot find meaningful and permanent jobs with good salaries. This will hurt economic growth, longer term, if it is not corrected. However, in the near term, we remain optimistic the recent gains and improved outlook for job creation can be maintained for this year and into next.
Morris R. Segall
The Japanese Disaster and the Capital Markets
Morris Segall Capital Markets, deflation, Economic Growth, Japanese reconstruction, nuclear meltdown, reflation, stock market, stock market correction, stock market volatilityWhat was already a cataclysmic catastrophe in last week’s earthquake and tsunami in Japan has become a calamity of potentially worldwide proportions. On the heels of the tsunami has been a series of hazardous nuclear system failures at the nuclear power complex at Fukushima Daiichi. These failures have been caused by the destruction of water cooling systems that are essential to maintaining the safety of nuclear power plants. The loss of this water cooling apparatus has resulted in dreaded nuclear fuel overheating and potential meltdowns that would release deadly radioactive gas into the atmosphere. What appeared to be a containable situation last Friday has become a seemingly out of control nuclear nightmare, rivaling the nuclear tragedies of Chernobyl and Three Mile Island.
This ongoing nuclear misfortune has exacerbated the Japanese disaster into one of world consequences. World capital and commodity markets have declined substantially since the proportions of the nuclear threat increased. The declines have been severe and precipitous as concerns that the impact of the Japanese national destruction would curtail world economic growth and cause another international financial crisis. After concerning ourselves with the rising tide of inflation in our March 7th website article, the Japanese crisis threatens to unleash deflationary forces, temporarily, from diminished demand from the world’s third largest economy. In addition, the spread of nuclear radiation to Asia and the Pacific Basin would impair economic activity in the important emerging industrialized countries in that region, further reducing worldwide growth.
In the long term, the rebuilding of the Japanese economy will stimulate demand for industrial commodities, raw materials and capital goods resulting in reflationary trends and accelerated worldwide economic growth. This should be reflected in rising capital and commodity markets after the near term corrections in these markets. However, the recent severe declines in equity prices threaten to derail the stock market recoveries began last September if they continue. As we publish this post, Asian markets are stabilizing from Tuesday’s sharp declines and we expect this will spread to European and U.S. markets on Wednesday.
If equity market recoveries are to continue, the Japanese nuclear threat must be removed so reconstruction can proceed. The disposition of Japan’s nuclear problems will determine the direction of capital and commodity markets in the short term. Those problems have become unpredictable and the uncertainty of that situation is causing public and investor consternation. At this time, we are maintaining our economic and capital market outlooks and allocations (See our website article of January 6th, “Great Expectations”), but we are watching the Japanese situation closely to see if reevaluation is necessary. The recent public market declines and volatility from adverse overseas developments fortifies our capital market strategy emphasis on private equity investment in transaction and hard asset themes and cyclical recovery emphasis on the U.S.
Morris R. Segall, CFA, CIC
What if Moammar Gadhafi Turns into Saddam Hussein?
Morris Segall inflation, Iran, Libyan air force, Libyan civil war, Middle East unrest, oil infrastructure, reduced economic growth, rising oil prices, Saddam Hussein, weak foreign policyIn the fluid sequence of events in the Libyan civil war, it appears the forces of Moammar Gadhafi are solidifying and mounting a more cohesive counter-offensive to the rebellion that has challenged the Libyan dictator. First, pro-government ground forces are conducting more concerted and organized offensive attacks on targets that have been selected for their strategic and pyschological importance. Second, the government is utilizing its air force more cohesively and effectively in supporting the ground offensives and inflicting significant damage to rebel positions and material. Today, the Gadhafi government bombed key oil installations in rebel controlled territory for the first time.
This raises the question-suppose Moammar Gadhafi is prepared to destroy his oil infrastructure, as did Saddam Hussein, to challenge the West in exerting further pressure on him and getting involved in the civil war, knowing they are reluctant to do so. In doing so, Gadhafi is challenging the West to stop him and their failure so far to do so is empowering him to use more force that could overwhelm the rebel forces. The increased use of air power is the deciding factor in government forces defeating the rebels. By bombing oil installations, Gadhafi is also punishing the West by continuing to scare the oil markets and potentially drive up oil prices further. Furthermore, destruction of oil pumping and distribution facilities would lead to protracted elevation in oil prices which would harm worldwide economic growth and lead to increased inflation. We do not think this strategy is far fetched given the erratic behavior of Moammar Gadhafi, his obsession with staying in power and his anger at the West for trying to force him out.
The failure of the West to “ground” Libyan air power is turning the tide of the civil war from what two weeks ago looked like a successful rebellion leading to the ouster of Mr. Gadhafi. If the rebellion in Libya is crushed, it will have long lasting and far reaching negative implications for the U.S. and its NATO allies. First, it will have demonstrated again to the world how impotent U.S. and Western foreign policy is in the post Iraq/Afghanistan war period. We have commented in several geo-political posts, on the blog and website, the danger to U.S. and Western security and economic interests weak and failed foreign policy initiatives present. Second, the failure to tangibly support the Libyan rebels, to the point of their success, will reverberate throughout the Arab world as another failure of the U.S. and its allies to support democratic movements in that part of the world. Third, in their anger and frustration, the unrest we have seen so far in North Africa and the Middle East could spread and become more violent, threatening friendly governments in Jordan and Saudi Arabia and those of the Gulf Emirates. Our failure to support democratic movements will strengthen the reactionary and antagonistic actions of Iran and its allies in Syria, Iraq, Lebanon and Gaza. The failure of the U.S. and its NATO allies to commit military assets to protect their national interests send a signal to our more strategic adversaries in Moscow and Beijing that we are not prepared to confront them in military and economic expansionism.
The price of this foreign policy failure will be higher prices for oil for an extended period of time, suppressed economic growth in the oil consuming, industrialized economies and increased worldwide political tensions. None of these are good for worldwide public capital markets. In view of the new developments in Libya, we must now be more vigilant to economic impacts here and abroad and the reaction of the capital markets.
Morris R. Segall
February Employment Report: More “Green Shoots”
Morris Segall Employment "green shoots", employment report, February employment report, positive employment trends, turning the corner on unemployment, unemploymentThe monthly employment report for February showed more “green shoots” of positive employment signs that we mentioned in our February 5th blog article on the “ January Employment Report”, and along with other recent empirical and anecdotal data, are leading us to believe we may be turning the corner on unemployment. We note the following positive data in the February report that builds on the encouraging trends we have noted since November:
1. The number of persons working part time for economic reasons declined again by 67,000 from January and has declined by 760,000 since October, 2010. This includes persons who are working part time due to business conditions and persons who could only find work part time.
2. The number of persons unemployed for more than 15 weeks declined in February by over 300,000 from January, including a decline of over 200,000 in those unemployed 27 weeks and longer. Since November, the numbers of such unemployed have declined by over 670,000 and 330,000, respectively.
3. Total private sector payrolls increased in February by over 220,000, well above the monthly average of approximately 100,000 gains of the past year, and included widespread and significant gains in most goods producing and service industries. Manufacturing employment has grown for four months and construction employment has shown a gain after more than a year of decline. In the important Professional and Business Services segment, employment is picking up in key sectors aside from temporary workers which have fueled virtually all of the gains in this sector. Management and Technical Consulting employment has increased by 25,000 since October and Administrative and Support Services has grown by over 150,000 jobs since October. In addition, architecural services as measured by the Architectural Billings Index has moved from retrenchment to expansion with readings of 50 and above since November, 2010. This is the most encouraging growth in these sectors since the recession.
4. As we forecast in our previous blog article of January 9th and our website article of December 6, 2010, previous months employment have been revised upward, including November and December, 2010 by 22,000 and 49,000, respectively, and January, 2011 by 27,000.
5. There are other positive indications such as an increase in the average workweek and manufacturing overtime and increases in job recruitment in financial and accounting, IT and new business development positions and an increase in marketing and advertising spending by businesses. In addition, an increasing number of industries, 68%, were hiring in February versus 60% in January and 58.6% in December, 2010. Lastly, the number of first time unemployment claims for the week ended February 26 fell to 368,000, the lowest level since May, 2008 and importantly, below the key 400,000 for the first time since the recession. This is a very bullish employment development.
These positive trends and developments are lending credence to the improved 9% employment rate attained since November and augur well for further employment gains as the economy continues to improve as we expect (See our website article, “Great Expectations-2011″, January 6, 2011).
Morris R. Segall, CFA, CIC
The Spreading Mideast Upheaval: Is it Containable?
Morris Segall Geopolitical threats, rising commodity prices and inflation, risk aversion and weak stock markets, uprisings in the Middle EastIn a local TV interview on the unrest in Egypt in early February (See WBAL TV interview, February 3, 2009, SPG in The News, www.spgtrend.com), I warned about the spread of the Egyptian turmoil from Cairo to the Suez Canal and other countries in the Middle East and the negative implications that would have for world commodity prices and foreign policy in the region for the U.S. and its Western European allies. Since that interview, the uprising in Egypt has led to the fall of the Egyptian government and its long time leader, Hosni Mubarak. Similar popular revolts that began in Tunisia have spread to Jordan, Yemen, Bahrain, Morocco and now Libya, threatening to overthrow governments in those countries similar to the results in Tunisia and Egypt. The massive upheavals in the region are becoming apocryphal. The long standing authoritarian regimes of North Africa and the Middle East are being threatened and toppled by a spreading populist revolt against the very authoritarianism that has led to high levels of poverty, unemployment and poor standards of living with bleak futures. No one could have predicted the massive spread of populism that has engulfed a region that has never experienced popular democracy.
While the initial reaction to these populist uprisings is one of exhilaration at the movement of these autocratic countries towards democracy, the reality is the removal of the autocrats is leaving a void filled with chaos and increased economic deprivation for the populations of these countries. During the demonstrations, the economies in these countries have ground to a halt. Banks, businesses, schools, government offices are closed. Vital necessities such as food and fuel, which had already risen dramatically in price, are even more expensive as supplies dwindle due to the breakdown of distribution networks.
Now, the populist revolutions have hit Libya over this past weekend with stunning impact. In less than a week, the unthinkable is happening. Muammar Gaddafi, one of the most durable of Middle Eastern dictators is on the verge of being outsted from power. Libya’s military and government officials are deserting the government and Benghazi, the nation’s second largest city is in the hands of the revolutionaries. Unfortunately the spreading of popular revolt to Libya is having a new, negative impact on world commodity and capital markets. Libya is one of the world’s top ten oil exporters and has the largest oil reserves in Africa. The chaos in Libya has shutdown a substantial portion of the country’s oil production and as a result, oil prices over the last 24 hours have jumped to over $100 per barrel in Europe and approaching that level in oil futures in the U.S. As a result, stock markets in Europe declined today and Asian markets are declining this evening. Stock futures on the major U.S. indices are already down significantly, signaling a lower Wall St. opening tomorrow, after the President’s day holiday. Escalation of oil prices from these levels will not only depress world stock markets but start to affect worldwide economies that are still fragile in their recoveries from the 2007-2009 recessions. Worldwide inflation, which has already escalated to dangerous levels overseas, will become worse and negatively affect economic growth in the emerging markets which have paced the economic recovery since 2009. Rising inflation in the U.S. threatens to slow the recent acceleration in economic growth seen in the closing days of 2010 with continued promise in 2011. The removal of Libya’s leader and his exile from the country may quell the current violence and restore enough calm to restart oil production and shipments. That may allow oil prices to recede.
In the meantime, risk aversion will reappear with money flowing into safe havens, i.e. U.S. Treasuries, the U.S. Dollar, gold and oil.
However, the current upheaval in the Middle East and North Africa must soom be contained before it threatens the entire world economy with rising commodity prices, inflation and reduced economic growth. A spread of the current populist uprisings to other oil producing states in the United Arab Emirates or worse, to Saudi Arabia, will be catastrophic not just economically but also geopolitically. The events in the region have already placed the U.S. and Western Europe in positions of impotence to shape the course of events and the ultimate outcomes in the change in governments. Already, Iran is attempting to capitalize on the vacuum of power and enlarge its footprint in the region. A replacement of the Western allied autocrats with anti-Western regimes would be disastrous to the balance of power in the Middle East and increase tensions to the point of war. The U.S. could lose valuable strategic military assets to fight terrorism and Israel would find itself in a potentially untenable position.
The current events of the last two months will take years to garner solutions. Countries with no democratic institutions or political parties or active Parliaments will need to develop them. In the meantime, the economies and economic hopes of the disenfranchised populations that rose up in rebellion will have to be refurbished. Failure in these areas will lead to continued unrest and dissatisfaction with the goals of establishing popular democratic governments and may result in the loss of these countries as democracies.
Morris R. Segall
Charge!
Morris Segall consumer credit, consumer sentiment, consumer spending, consumer spending sea change, credit card debt, Economic Growth, future trends, GDPThis past Monday afternoon, February 7th, the Federal Reserve released its report on consumer credit for the month of December, 2010. Since peaking in the third quarter of 2008 consumer debt has steadily declined over the past two years by over $150 billion. Most of that reduction has been in revolving debt, largely credit card debt. This has reflected a combination of consumer debt repayment and the write-off of consumer loans in default by lending institutions and credit card issuers. After a further decline in November of last year, consumer revolving debt increased by nearly $2 billion on a seasonally adjusted basis or a 3.5% annual rate in December. This was the first increase since August of 2008 and most of that increase came in consumer credit card debt. Non seasonally adjusted data is more impressive, showing a better than $9 billion increase in revolving credit led by credit card gains at commercial banks. This change in credit card debt balances could be a signal the consumer de-leveraging is about over and consumer evaluations about their finances are sufficiently improved to allow them to begin increasing credit card purchases. If the December increase is not an aberration and continues in 2011, it will signify a dramatic change in the consumer spending dynamic.
Up until last year’s fourth quarter, consumer spending had been anemic due to high unemployment and lagging consumer income growth, in addition to the de-leveraging of consumer balance sheets. That changed in the fourth quarter as consumer spending surged to pre-recession levels. The Federal Reserve data would indicate expansion of consumer spending in December was supported by the use of credit cards. This would explain the large increase in consumer spending (.7%) in the month of December, well above the .4% increase in consumer income growth in that month. If the December data portends a return to credit card financing by consumers, the prospect of continued high levels of consumer spending in 2011 is heightened. The willingness of consumers to increase credit card debt will counteract the suppressing forces of moderate consumer income growth and a continued high level of unemployment. This will promote a greater consumer spending contribution to the economy than one would have expected and augments the outlook for improved GDP growth this year, importantly led by the consumer.
It remains to be seen if the December data is the beginning of a trend and we will be looking at future data to confirm or deny this important development. However, a note of caution. If consumers abandon the financial discipline of the past two years and return to spending in excess of income growth, a consumer spending renaissance will be short lived and a financially weak consumer sector will re-emerge, constricting long term economic growth.
Morris R. Segall, CFA, CIC
January Employment Report: Weak but Contains “Green Shoots”
Morris Segall "green shoots" in employment, 2009 economy, 2010 employment data, employment report, future trends, strenthening 2011 economy, unemployment, winter recovery in jobsThe January monthly employment report reported on Friday showed a dispappointing creation of 36,000 jobs versus the 150,000+ again expected by economists and analysts. 2010 job market data for both the Household and Business Surveys have been revised to reflect new Census numbers and new seasonal adjustment and other measurement changes. Since October’s 171,000 revised level of new jobs, November, December and now January’s job growth have not been close to the 150,000 level expected since October. Yes, the revisions to November and December job growth numbers have been positive, as we expected, amounting to a cumulative 40,000 additional jobs from previously reported data. Nonetheless, the average number of new jobs created in November and December of last year amount to a weak level of slightly over 100,000. We have no doubt the very low level of job creation in January was negatively affected by harsh winter weather and expect an upward revision when February monthly job data is reported because of the absolutely low level of job creation reported. We also believe the weather in January interrupted timely and more complete survey reporting. However, December winter weather was harsh also and still allowed for over 120,000 new jobs being created. In addition, the weather so far in February continues to be severe, so it might be a March thaw before job creation, per the monthly surveys, show a more normalized pattern. In addition, major benchmark revisions to 2010 data will be forthcoming in February which will reflect new readings on the 2010 labor market. Finally, the unemployment rate surprisingly dropped for the second month to 9%. However, the drop in the unemployment rate since November primarily reflects a decline in the labor force of over 750,000 workers, a sign of continued discouragement among American workers.
Despite the low level of new jobs reported, the January employment report shows some continued improvement in labor market trends that we mentioned in our January 9th blog article. Namely, further improvement (+ 49,000) in manufacturing employment making it three consecutive months and a cumulative increase of 78,000 jobs in this important sector. It supports the strengthening in the manufacturing sector in the fourth quarter of last year which is leading to increased hiring. In addition, jobs were created in wholesale and retail trade, in furtherance of the fourth quarter hiring in these sectors. This reflects the strong retail sales trends in the fourth quarter of last year and the positive indications for retail sales in January as recently reported by major retailers. Lastly, the January data show a drop in temporary help hiring, the first such decline in a year, and significant increases in IT and administrative jobs indicating a broadening of permanent hiring in the important Professional and Business Services category. Continuing a positive trend first seen in December, job losses due to the ending of temporary assignments dropped again by nearly 500,000 and the number of unemployed 5-14 weeks in duration dropped by 168,000 and are down over 400,000 since October. Thus, while the overall employment situation is still weak, we see “green shoots” in the monthly data and improvement in the weekly unemployment claims data. Other positive data on consumer and business spending and manufacturing orders and production augur well for further improvement in job creation going forward.
Morris R. Segall, CFA, CIC
Fourth Quarter 2010 GDP: First Cut in Line with Expectations
Morris Segall consumer spending outlook in 2011, Fourth quarter and full year 2010 GDP, highest level of consumer spending, inventory restocking cycle, negative impact on GDP from low inventory accumulationThis past Friday, the Commerce Department released its first reading on the fourth quarter and full year 2010 report of U.S. GDP. As we stated in our website article, “Great Expectations-2011″, January 6, 2011, we projected fourth quarter GDP to be stronger than that of the third quarter led by consumer spending. Fourth quarter GDP increased at a 3.2% annualized rate, within the 3%-4% range we had projected in our January 6th article. It was the largest increase in GDP since before the recession, matching the 3.2% of the second quarter of 2007. In the preliminary numbers released on Friday, Personal consumption expenditures led the advance, growing at a 4.4% annualized rate, the largest increase since the 4.5% annualized growth in the first quarter of 2006. Personal consumption expenditures comprised over 3% of the total growth in fourth quarter GDP, once again the largest increase since the 3.1% contribution to total GDP in the first quarter of 2006. Personal consumption surged (up nearly 22% annualized) in durable goods and increased strongly (up 5% annualized) in nondurable goods. Both levels of growth were at pre-recession levels. However, unlike previous reports on GDP growth since the recovery from the recession, Private domestic investment recorded negative growth (-22.5% annualized), due to a large decline (over $100 billion) in inventory investment in the fourth quarter from third quarter levels. Indeed, the decline in private inventory investment reduced fourth quarter GDP by nearly 4%. The decline in private business investment in the fourth quarter was the first since the 18.5% decline in the second quarter of 2009, just as the recession was ending. Bolstering GDP in the fourth quarter was an increase (+8.5% annualized) in net exports as imports fell and exports strengthened. Government spending was negative in the quarter with a reduction in federal defense spending and a continuation of reductions in state and local spending.
The first reading on GDP growth for all of 2010 was an increase of 2.9%, consistent with our forecast of 3%. Clearly the fourth quarter surge in consumer spending pushed full year GDP growth to the 3% level which was not visible at the end of last summer as the economy sagged during the late spring and summer months. However, as we noted in our January 6th website article, we do not believe the rate of increase in fourth quarter consumer spending can be sustained into the first half of 2011 as the level of spending is far outstripping the gain in consumer income. We believe the consumer will restrain his spending in the first quarter to restore liquidity he drew on to finance his purchases in the fourth quarter. Our economic analysis just published on the Presentations page of our website (www.spgtrend.com) reveals no increase in consumer credit card debt through November of last year. We thus believe consumer spending was done with cash and debit cards. In addition, discretionary consumer spending in the first quarter will be suppressed by the harsh winter weather curtailing shopping at the malls and the large increase in food and fuel prices which will “pinch” consumer incomes. A rebound in consumer spending may occur in the spring and summer of this year as the weather thaws and pent-up consumer demand reappears. However, the degree of consumer re-emergence will depend on the level of job creation in the first half of this year. While we have noted in our previous blog (January 9th) article on December unemployment, an improving trend in unemployment, conclusive evidence of a change in the chronic unemployment environment remains to be seen.
Two further observations. Friday’s GDP report is the first of three. It is subject to material revisions as more complete data is collected over the months of February and March. Because the level of inventory accumulation recorded in this initial report is so low, we would not be surprised to see it revised higher and thus increase the readings on the fourth quarter and full year GDP for 2010. Second, the large increase in consumer spending in the fourth quarter depleted retailer’s shelves. There will be an inventory replacement cycle in the first half of this year which will partially fill the void of reduced consumer spending and keep the U.S. economy growing at a heightened rate.
Morris R. Segall, CFA, CIC
December Unemployment: Still a mixed Story
Friday’s unemployment report for the month of December continued to show the mixed data we have been seeing since late last summer. While the unemployment rate for the month dropped steeply to 9.4% from 9.8% in November ( due primarily to a contraction in the labor force), the job creation in the month was a disappointing 103,000 jobs. Estimates of new job creation for December had ranged from 150,000 to 300,000. Consistent with our comments in our December 6, 2010 website article on November unemployment, we believe erroneous seasonal adjustment factors and incomplete business survey results are again understating new job creation in the initial monthly report. As we stated in that article, we believed the very low job creation data reported initially for the month of November, 2010 would be revised upward. Indeed, in Friday’s December monthly report, November job creation was substantially revised upward from 39,000 to 71,000 and October’s job creation data was also substantially revised upward from 151,000 to 210,000. In fact since July, revised monthly job data has shown a cumulative increase of 280,000 additional jobs being created versus initial estimates. We had stated in our December 6 website article that we noted the trend of upward revisions to the initial job creation data and the revisions in the December report confirms this trend. We expect a similar upward revision to the December data when the January monthly data is reported and when the semiannual revisions to 2010 data are made in February. We base this on the large reduction (over 500,000) in December in the number of people who have lost their jobs due the completion of temporary jobs. This is the largest positive change in this category in a year. In addition, we also note a major positive shift in the number of unemployed by the duration of unemployment. The December report showed a reduction of over 500,000 people who have been unemployed from less than 5 weeks to 26 weeks. This also is the most dramatic improvement in this series since the end of the recession.
These positive trends do not change the fact that while employment is improving (we also believe there is a marked improvement in initial unemployment claims below the 450,000 level which had been a sticking point for so long), it is still well below levels necessary for accelerated economic growth. The fact remains that over 15 million Americans are unemployed and under-employed and over 6 million of these have been unemployed for over 27 weeks. The latter continues to grow and represents an increasing problem of long term unemployed. Labor remains a surplus commodity and wage growth in 2010 was less than 2%. The new fiscal stimulus of extended and new tax cuts enacted by the “lame duck” Congress aids the environment for increased job creation and offers the best hope since the end of the recession of improving employment. It remains to be seen if the promise will be fulfilled but the data is moving in the right direction and our optimisim for improvement has increased.
Morris R. Segall, CFA, CIC
The 12th Congress: And We’re Off
Morris Segall federal debt ceiling, government funding, new Congress, political gridlock, reduce federal government and national debt, Tea Party conservativesTomorrow the 112th Congress will be sworn in and members of the new Republican majority in the House have already declared their first order of business will be the repeal of President Obama’s healthcare legislation enacted last year. It would appear the bipartisan cooperation of the lame duck Congress last month is over and the ideological divide resulting from the November elections will be prevalent particularly in the House. Of the 242 new Republicans in the House, nearly 90 will be conservatives ideologically aligned with the Tea Party. They will represent a large, dogmatic contingent committed to reversing the legislative and fiscal spending programs of not only the Obama administration but those of the Bush administration as well. They feel empowered by the mid term elections to move forward with a concerted effort to cut federal spending, reduce the size and power of the federal government and reduce the national debt. Their efforts will cause friction within the Republican party whose mainstream leadership is committed to producing legislative results that will produce jobs and help the economy. Nonetheless, the House Republican leadership has announced its intention to cut $100 billion from the Federal budget this year as a concession to the “Tea Party” agenda. Details of where the cuts will come from are missing. Keeping the hard line conservatives “in line” will prove a challenge to the Republican leadership.
While providing a challenge to the Republican party leadership, the new, hard line conservatives will represent an attack force to the Democratic Party whose slim majority in the Senate will have to hold back efforts to undue their legislative programs of the past two years and their legislative legacy of the past seventy years. The partisanship that has intensified since the Clinton administration promises to become more vehement given the rhetoric and promised zeal of the newly elected conservatives. One thing is certain. The federal largess doled out over the last two years to “jump start” the U.S. economy is over. The level of federal stimulus promises to be reversed by the new fiscal conservatives and that will force the private sector to fill the void and carry the burden of economic recovery going forward. It remains to be seen if the private sector can successfully accomplish that task.
In the meantime, the first battles between the parties and the President will be the funding of the federal government and the raising of the debt ceiling. The current continuing resolution funding the federal government expires in March and the current debt ceiling of approximately $14 trillion is expected to be reached in the spring. At this time, the rhetoric from the Republican conservatives indicates opposition to raising the debt ceiling and refusal to fund the government without substantial fiscal and regulatory reductions. We expect a game of “chicken” for the next two months as we near the deadlines for both. We expect the President to be conciliatory as he continues to move towards the political center, avoid devastating gridlock and attempt to paint his Republican opposition as irresponsible and unable to effectively serve the body politic. The President wants to get re-elected in 2012 and he stands to win politically if the Republicans grind the government to a halt.
Stimulus is in place for aiding the economy and the stock market in 2011. The new Congress will decide the future trends in both thereafter.
Morris R. Segall
Europe’s Debt Crisis: “Off With Their Heads” ?
This evening in London, angry student protesters attacked the Prince of Wales and his wife in their car as they were enroute to a theatre event. As the protesters pounded the Prince’s car several were reported to have shouted “off with their heads”. Off with their heads? Europe’s debt crisis and the resulting austerity programs are now spawning intensifying public outrage. Thank goodness this was 21st century London and not 18th century France. We have witnessed a series of public demonstrations, including riots and strikes from Greece to France and the U.K. However, the attack on Prince Charles and his wife signals a new, uglier and more dangerous public reaction to the draconian austerity measures adopted by Eurozone governments in their attempts to deleverage their national balance sheets.
Fortunately, Prince Charles and his wife were unhurt and were able to escape serious injury from the mob. The fact that this attack was in London on the heir to the British throne is historically unprecedented. The fact that the protesters were primarily students is also noteworthy. The students were protesting the huge increase in college tuition enacted by the British government as part of its harsh deficit reduction program. The increase in college tuition will put a college education out of reach for many students and thus doom their economic future. In addition to alienating a typically activist segment of the population, the result of denying advanced education to the next generation will condemn Britain and other countries adopting the same measure, to a future of economic decline. In our blog article of May 10, 2010, “From Panic to Relief”, we stated that “spending reduction programs will not be popular domestically and social unrest should be expected.” We also commented in that article of the political costs of such social unrest. We will comment on these developments in more detail in a soon to be published article on the European debt crisis and its consequences on our website, www.spgtrend.com. However, tonight’s attack on the Prince of Wales raises the extent of the public backlash to a new, disquieting level and could be the beginning of an ugly winter of discontent in Europe that could result in serious political upheaval in the Eurozone with negative repercussions for the European Union.
Morris R. Segall
And now it’s Ireland
Morris Segall another European debt crisis, failure of EU austerity measures, Irish debt crisis, Irish loan bailout, more debt crises in Spain and Portugal, political upheaval and shift to left in Europe, social unreast in EuropeIn our blog articles published in May (May 6, 10 and 31, 2010) we commented repeatedly that the European debt crisis and the responses by central banks and the European Union’s austerity programs were not going to “go away” and would continue to resurface as the solutions offered were untenable and the loan facility made available were not more than “band aids” to keep the countries in the European Union from defaulting on their sovereign debt. We never doubted the European Union, IMF and the European Central Bank would be able to forestall those disastrous occurrences. We were far more suspect of the ability of the European populations to support the austerity measures and the success of those austerity measures to meet the debt reduction goals outlined. Furthermore, we were skeptical the capital markets would continue to be accommodative to the more distressed European economies in providing financing at affordable interest rates. Finally, given the ongoing pressure from high unemployment, weak real estate markets and continued high loan losses, we believed it only a matter of time before the inevitable pressures would create another round of loan losses within European banks. Since we published those articles, Greece has been “bailed out” by the European Union’s-IMF sovereign debt facility which has also helped Spain and Portugal avoid similar fates. However, popular discontent with the austerity programs announced by most of Europe has resulted in demonstrations, riots and strikes from the Aegean Sea to the U.K. including France, Spain and Portugal.
Now it is Ireland’s turn. After hearing all summer and into the fall of Ireland’s financial soundness despite its chronic debt issues, it seems Ireland is not so financially sound at all. Indeed, despite the statements by the Irish government of its “control of the situation” over the last several weeks, the Irish government is about to accept a loan of approximately $100 billion from the European Union-IMF loan facility to stem the weakness in Irish sovereign debt caused by the deteriorating situation in Irish banks. Increased loan losses in the Irish banking system, which is fully backed by the Irish government, have caused Irish debt to increase to almost one-third of Irish GDP. Financing costs have escalated and there has been a virtual “run” on Irish banks. Capital markets were increasingly becoming closed to Irish government and Irish banking financing and capital markets around the world were getting “ hit” on another resurfacing of the European debt crisis. So with another sovereign government bailout, another “band aid” has been applied to salve market fears of a government default. However, the ruling Irish government has become so unpopular as a result of the weak economy and draconian austerity measures due to go into effect next year, that it will likely be replaced in elections due to be held next year by a center-left government even if it is one of a coalition of parties. This is the prevailing shift in politics within Europe as a result of the debt crisis and the tax increases, worker layoffs, pension cuts and other austerity measures enacted by European governments as they attempt to reduce debt levels. We warned of social unrest leading to political upheaval in Europe in our May blog articles and we are getting it.
So if Ireland accepts the EU-IMF bailout we expect a brief period of relief but the unfortunate truth is the European debt crisis is not going away. This month it is Ireland. Over the next several months it will be Portugal and Spain and if European economic growth slows down next year, it could be Italy as well that need EU-IMF support. The question becomes, how much money will the EU-IMF have available if those other countries need loans to avert financial disaster. We have steadfastly been of the opinion that the EU solutions to the debt crises in their member countries are ill advised and doomed to failure. We will be publishing a major article on our website, www.spgtrend.com after the Thanksgiving holiday outlining in detail the problems in Europe and why we believe the Union will fail.
Morris R. Segall
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SPG Trend Advisors In Brief
SPG Trend Advisors is a boutique consultancy that provides global economic research for business and other decision makers. With fifty years combined experience between the principals, and through its website, SPG Trend Advisors provides insightful analysis and forecasting to prepare senior executives for tomorrows trends. Visit SPGTrend.com for more information.Recent Posts
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