3rd Quarter GDP Lower than Previous Estimate
Today we learned that the 3rd quarter estimate for GDP was lower than originally estimated, 2.8% versus a previous estimate of 3.5%. Driving the revision downward was the consumer. Consumer spending was lower than previously estimated. If you look at the consumer spending component, durable goods spending was the driving force, and this was due to cash for clunkers.
So, we continue to see that the consumer is not going to drive the recovery. Given that the consumer makes up 70% of the economy, this is further evidence of a U shape recovery. You will be hearing less and less from the V shapers.
Economic Outlook 2010
The One Weekly column included our economic outlook for 2010. The link below takes you to our regional outlook for 2010. Overall, we will see lower unemployment rates (but likely above 8%), slow growth, and the emergence of the new consumer. Housing will also rebound.
http://www.1si.org/news_econupdate_outlook2010.asp
Economic Outlook this Friday and Employment
We will be doing our annual Economic Outlook Breakfast this Friday morning. We are expecting another large crowd. I’ll post my regional outlook after the program.
It has been a slow week regarding economic data. Last week, the Bureau of Labor Statistics released the monthly jobs report, and it was not good. Another 190,000 jobs were lost, and the nation’s unemployment rate increased to 10.2%. When you factor in discouraged workers and workers who can only work part-time (but desire to work full-time), then the real rate of unemployment jumps to over 17%.
As the economy exits from the recession, and growth (slow) resumes, the greatest threat to a sustained recovery is unemployment.
If you recall, this recession began in housing, and then spilled over to the broader economy (even though Chairman Bernanke suggested that there was little chance of that happening). Sustained elevated rates of unemployment now represent the greatest threat to any housing recovery, and an economic recovery in general.
High unemployment will impact debt repayments such as mortgages and consumer loans. We have to keep in mind that the so-called housing recession began when unemployment rates were in the 6 to 7% range, or in some locales, even lower.
Sustained rates of unemployment will also discourage those with employment to spend less. This lower spending by the employed will also place a drag on the economy.
Will talk more about this in future posts.
Manufacturing Continues Recovery
Louisville Metro saw a significant number of job losses in manufacturing due to disruptions in home construction and the automotive sector. Yesterday, the ISM Mfg. Index showed that manufacturing is now expanding. The Index came in over 55, a number that beat the consensus forecast. Any number above 50 means expansion in manufacturing, and any number below 50 means contraction.
Back in April, we suggested that manufacturing was about to enter a trough. We now know that Louisville manufacturing appears to have hit a trough during the month of May. Since May, year over year job losses have continued to decelerate.
My One Weekly column below talks about the relationship between local manufacturing and inventory levels nation-wide. The key factor in today’s manufacturing recovery is the restocking of inventory. But that can only last so long. The consumer will then have to step up to the plate. But their plate is still full.
http://www.1si.org/news_trough_manuf.asp
Ford Sales Up, Profits Up
Today, Ford announced an increase in profits due to higher sales. Ford also saw an increase in market share.
On June 1 of this year, we posted this on a different blog.
EIO (Economic Indicators by Observation)
Did not see the Talladega race today, but just caught the highlights on ESPN. Amazing to see so many empty seats. First time I’ve seen so many empty seats at a Talladega race.
Going to a NASCAR is not a durable good, but it is discretionary spending. Discretionary spending is really getting discretionary!
I’ll share other EIOs in future posts. I like EIOs because one can really learn much about the economy by simply listening and observing. It is real time data!
The Reality of a U Shape Recovery
The markets are now beginning to accept the reality of a U shape recovery. The reaction of that acceptance was demonstrated this past Friday when the Dow dropped 250 points. The possibility of a V recovery was thrown out the window with that 250 drop.
Basically, the economy has hit a trough, and a recovery is underway. However, the climb up is not going to be that swift, thus the U shape recovery.
What is the primary reason for the U shape recovery? You, the consumer. Consumers have cut back big time. After households reduce their debt levels, they will not return to the profligate ways of debt-financed consumption. The supply of credit will return, but the demand or tolerance for debt will not be there.
What can shorten the width of the U? The width of the U may be shortened (i.e. a more rapid recovery) if households see an increase in home values (that will take a long time) and a significant appreciation in the stock market. In other words, if consumers feel wealthy again, they will likely return to spending. I don’t see that happening anytime soon.
The Looming Commercial Real Estate Crisis
If you’ve had a chance to follow some of my colums in the One Weekly, quotes in the Tribune and Evening News, or recalled one of our conclusions from last year’s Economic Outlook breakfast, we have been talking about the spillover to commercial real estate. Below are a few links where I mentioned this over the past year.
http://www.news-tribune.net/local/local_story_245204509.html
http://www.1si.org/news_build_permits_down.asp
http://www.entrepreneur.com/tradejournals/article/192638368.html
In today’s WSJ, Wilbur Ross was quoted from an interview on Bloomberg yesterday.
Comments from billionaire investor Wilbur Ross on Bloomberg Radio Friday, saying a “huge crash in commercial real estate” is beginning, were cited as helping escalate concerns about the financial sector.
In future posts, we’ll talk about the linkage between current economic trends and commercial real estate conditions, and why we suggested spillover to commerical real estate one year ago.
Dow Drops 250 Points
By now, you are probably aware of the big sell off in the market today. Declining consumer sentiment and a growing awareness of consumer retrenchment once we move past government life support of the economy were cited as reasons for the decline. Structural retrenchment of the consumer was one of our summary conclusions during last year’s Economic Outlook Breakfast.
Man on the Street Economic Indicators
I just talked with my uncle, a crab fisherman from South Louisiana. He was telling me that demand from the East Coast has dried up. What most people may not realize is that a good percentage of crabs consumed on the East Coast is actually shipped up from South Louisiana. So the next time you are eating a Maryland crab cake, there is a good chance it originated from the Gulf Coast, or South Louisiana.
He was telling me that the buyers are simply not buying. Why? Check out the price for a crab cake at your Ruth Chris’s of the world.
As consumers go through this structural retrencment, they may trade down from crab cakes to catfish!
