Random Thoughts at the End of the Second Quarter
Friday, July 1st, 2011
The economic outlook has become so disappointing, even Ben Bernanke lowered his GDP forecast. Last week, 1Q-2011 GDP was raised from +1.8% to +1.9%. Many forecasters have been lowering their GDP estimates for the year to be more in the 2% range. The White House, however, is stuck with the forecast it made with its budget submission: 2.7% for 2011 4% in 2012, 4.5% in 2013, and 4.2% in 2014. Most every White House economics team overestimates the economy. There is little reason to believe that these will be realized. +1.7% might be a better forecast than 2011 than 2.7%. We’re still in the +2% to +2.5% range for this and many years forward.
If anyone is pining for the days of Alan Greenspan, his forecasts in Congressional testimony were accurate 1 in 12 times, on average, as noted in Econospinning, a book by Barron’s economist Gene Epstein. No one can forecast these trends well, and the statistical estimation process used to calculate GDP are subject to revision for years. At the end of July, the Bureau of Economic Analysis will be revising data from five years ago. It is likely that the recent recession will be shown to be a little deeper than originally reported, based on revisions to other data series that have been made in the last few months. Most businesspeople don’t realize how wide the range of corrections can be in historical economic data.
Personal income data for May were released the other day, and they were extremely disappointing. For the first five months of 2011, real personal income, which is adjusted for inflation, is up only +0.4%, and real disposable personal income, adjusted for inflation and taxes, is +0%. This means that real personal income is up on an annualized basis or just under +1.0%, and that after taxes, the rise in income results in no greater spendable income.
The Fed is intent on preventing deflation of assets, and keeps working counterproductively to the overall economy. Even though “quantitative easing” is over, they will still be replacing maturing securities as they mature, keeping their Frankenstein-like balance sheet intact for quite a while. Their efforts are to try to make asset prices rise so that bad mortgages don’t get worse. Instead, all they are doing is trying to support the prices of goods that were made long ago, and not doing anything that will support the production of new goods. Production of new goods and services is what will make incomes rise, and rising incomes will make asset prices rise.
The actions of the Fed have been rather insidious when it comes to savings. If a retired person had a modest savings of $100,000, and was getting $2000 per month from Social Security. If that savings was yielding 6%, that would have been $500. The total income would be $2500. At today’s rates, that $100,000 earns practically zero. At a very generous 3%, that’s now $250 per month, so monthly income is down from $2500 to $2250, or 10%. The Fed rates penalize old savings, and discourage old savings, and they have no chance of keeping up with inflation.
Unemployment data are usually released the first Friday of every month, but that won’t happen in July. When months start with a Friday, the data are generally released the week after. So we won’t be getting the latest unemployment rate until Friday, July 8. We will be getting lots of data in the few days beforehand. The only data of interest on July 1 will be the Institute for Supply Management’s manufacturing index. The data start flowing on Tuesday, July 5 with factory orders, the ISM non-manufacturing index on Wednesday along with the ADP employment report, and initial jobless claims on Thursday.
What will the rest of 2011 hold? The global economic worries about Greece, Italy, Spain, Portugal, and Ireland will dominate the credit markets. Some sudden events are likely, and there may be some pushback from the healthier Eurozone economies, businesses, and taxpayers, against anything that looks like an ongoing bailout no end in sight. The upcoming retail holiday season will be of primary focus starting after Labor Day with great concerns about how it reflects on the health of consumers. Commodity prices are likely to ease back somewhat over the next few months; they’ll still be high. Any collapse in commodity prices would be a stark reminder of 2008; the risks of such a collapse are higher than most analysts currently state. Stay wary.