bizzXceleration: Performance, Value and Profit

Economy: Big Picture

A Feeble Recovery: The fundamental economic weaknesses of the 2001-07 expansion  Evidence is mounting that the U.S. economy is in a recession. If this is the case, a complete business cycle from 2001 through the end of 2007 (or perhaps the start of 2008) is now on the books, and the economic performance of the current decade can be held up in comparison to that of past business cycles. By almost all measures, the most recent expansion was the worst since WWII. A variety of recent economic data now show a pattern consistent with the start of a recession. Since 1951, three consecutive months of job declines have always been signals of a recession; the U.S. employment rate declined for the first three months of 2008. Furthermore, the unemployment rate rose from 4.4% in March 2007 to 5.1% in March 2008. Economic output also began decelerating in the fourth quarter of 2007 to a 0.6% annual rate, an anemic pace that continued into the first quarter of 2008. Several of the internal indicators in the recent gross domestic product report—including consumption of goods and business investment—saw outright declines. Other monthly indicators—including industrial production and payroll employment—peaked in either the fourth quarter of last year or the first quarter of this year. Real income (less transfers) has been flat since last September. While it will be many months before an "official" recession is declared, evidence shows that the economic expansion that began in 2001 has almost surely ended.¹ Furthermore, if these trends continue, the start of a new recession will likely be dated either at the end of the last quarter of 2007, or at some point during the first quarter of 2008.² Finally, financial market turmoil, housing price declines, and higher energy costs are all likely to place continued downward pressure on the macro economy, thus leading to a longer period of diminished economic activity. Safely assuming that the expansion ended near the start of 2008, we can compare this cycle's performance to those of the past. The bottom line of such a comparison is that the economic performance from 2001 to 2007 was anemic by most measures, especially in regards to the labor market. For the vast majority of American households—that is, those who depend on earnings derived from the labor market for the bulk of their income—the economy has been seriously mismanaged. Rankings Table Graphic By most widely-accepted and honest measures, the most recent economic expansion should receive a failing grade. Measures of total output, investment, consumption, employment, wage and income growth, all rank at or near the bottom when compared with past business cycles.Worse, these anemic results have been accompanied by rising inequality as well, meaning that the bulk of the (historically weak) gains have accrued to a small sliver of the population. This makes the fruits of the current recovery even smaller for the typical working family. For most American families, this has been a fundamentally weak U.S. economy for some time, and it seems poised to get much worse. Now is the time for a new direction in economic policy. Family Income Trends

• Employment Outlook: Where Have All the Jobs Gone ? Fewer jobs were created because companies were more fearful and therefore careful about hiring and capex. There were more fearful because of growing worldwide competition and the impact on profits of inlfation. This represents a fundamental change in the job strenght of the economy. Which leads to the 2nd sub-chart which shows the consequences of the Red Queen Effect - you know running faster and faster to keep up ? Well the population grows about 1.5%/year so any new jobs below that level means a drop in per capita hiring. When you factor in productivity growth the rough rule of thumb is that the economy must create 150K job per month (450K/Qtr) to keep the Queen in place or she falls behind. We've been falling behind. Net new jobs (New Jobs-450K) dropped abruptly and sharply this last quarter, which is scary and dangerous. Over time (here since 1980) you can look at aggregate new job creation, that is the running total of Net new jobs, and see where we stand for the strategic health of the economy and what consumer demand might look like.

Economy: Realities

This Recession, It's Just Beginning So much for that second-half rebound. Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal. It ain't gonna happen. Not this summer. Not this fall. Not even next winter. This thing's going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We're caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of. Only this will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations. In explaining why that second-half rebound never occurred, the Fed and the Treasury and the Wall Street machers will say that nobody could have foreseen $140 a barrel oil. As excuses go, blaming it on an oil shock is a hardy perennial. That's what Jimmy Carter and Fed Chairman Arthur Burns did in the late '70s, and what George H.W. Bush and Alan Greenspan did in the early '90s. Don't believe it. Truth is, there are always price or supply shocks of one sort or another. The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes. The last hope for a second-half rebound began to fade earlier this month when Lehman Brothers reported that it wasn't as immune to the credit-market downturn as it had led everyone to believe. Lehman scrambled to restore confidence by firing two top executives and raising billions in additional capital, but even that wasn't enough to quiet speculation that it could be the next Bear Stearns.

• The Muddled Economic Outlook
• Consumer Confidence Tumbles to 16-Year Low

Professor Duy: "This Is Not Good" Tim Duy has another great post on the Fed being caught between inflation and recession: This Is Not Good. Here is his conclusion: This is a no win situation...which way will the Fed turn? The Fed will hold the current policy in place until policymakers becomes sufficiently distressed by the impact of energy price inflation ... Note that market participants are increasingly aware that the Fed’s default policy for the time being is higher inflation, as evidenced by the rise in 10 year TIPS breakeven levels to 254bp today. In theory, the best outcome is to find is a sweet spot that allows global growth outside of the US to decelerate while avoiding a free fall in the Dollar. In the absence of such equilibrium, the US economy can hobble along only as long as the following three conditions hold:

Oil, Housing,... 

Envisioning a world of $200-a-barrel oil. As forecasters take that possibility more seriously, they describe fundamental shifts in the way we work, where we live and how we spend our free time. Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil. With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to "significant bankruptcies and store closings,"… The fee increases on the ferry would be nothing compared with the added cost of transoceanic shipping if oil goes to $200. Some experts say high energy costs are altering global trade and slowing the pace of globalization. "To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."

Housing Abyss: The Worst Is Ahead The housing crisis is entering a new and frightening stage. On June 24, Standard & Poor's announced that the S&P/Case-Shiller 20-City Home Price Index had fallen more than 15% in April from a year earlier. Adjusted for inflation, the decline is the biggest since 1940-42, according to data collected by Yale University economist Robert Shiller. The risk for the financial system and the economy is that the price drop, already horrifying, will start feeding on itself. When home values fall low enough, hard-pressed homeowners become less able or less willing to keep paying their mortgages. That forces lenders to repossess homes and then dump them back on the market at fire-sale prices, which depresses prices further and leads to even more foreclosures. That process has already started in parts of Arizona, California, Florida, and Nevada.

• New Home Sales: Worst Selling Season Ever There was no Spring this year. This year saw the smallest increase in sales from the Winter doldrums, to the Spring selling season, since the Census Bureau started tracking new home sales in 1963. Usually sales increase in the spring - but not this year. The previous worst spring on record was 1982 - in the midst of a severe recession, with 30 year fixed mortgage rates at 17%, and close to double digit unemployment. In 1982, sales picked up late in the year as interest rates declined sharply (30 year fixed rates fell from 17% to about 13% at the end of the year).

• Has Housing Bottomed? Whether there are opportunities right now in the housing market, with Patrick Newport, Global Insight and Matt Garrison, Coldwell Banker [this vidclip is largely for commodity relief especially when one of the talking heads says he’s expecting New Home Sales go up !]
• Home Prices Fall Record 15.3 Percent: S&P/Case-Shiller, Update: Ratio Median House Price to Median Income (2008 Report), Holy Snikes! New Home Sales Fall 40.3%
• Existing Home Sales: Not Seasonally Adjusted
• Sortable Chart: Case-Shiller Prices in 20 Metro Areas

Americans are REALLY stressed out Never in the last 40 years have your fellow citizens been so worried about their financial condition.  In layman's terms, they are freaked out. The Consumer Confidence index measures two primary questions.  How are you today, and what are your expectations for the future. This chart shows the second question; "What are you expecting?" Lining up your neighbor's expectations to what actually occurred later, has always been the most accurate prediction of what's down the pike for the economy. Since July of last year, this index has plummeted. Americans have gotten more and more worried about how they will pay for gas, how they will deal with falling home prices, how they will pay for food, whose price is rising faster than they've seen in a generation.  All this adds up to changing consumer behavior which has already wreaked the housing sector, is in the process of destroying domestic auto production and is cutting deeply into retailers, recreation providers and airlines.  In the next 12 months at least a million Americans will lose their jobs, and 2-3 million over the next 24 months. How the policy makers at the Fed can take this news in stride is astonishing.  Here's Chairman Ben Bernanke on June 9.  "Indeed, although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. " On June 9th, he knew the above chart was at 47, just barely above the previous all time low of 45 in 1973.  And he knew that unemployment had jumped 1/2 percent higher. Today of course the index drops even lower to 40.9.  To suppose the result won't be a recession on the scale of 1973 or 1980 stretches the imagination. 

State, city layoffs: 45,000 and counting A squeeze on tax revenues could force local leaders to cut tens of thousands of more jobs. That could add to the nation's economic woes. The latest hit to the economy could come from state houses and city halls as state and local governments across the nation find themselves in their worst budget crisis in years due to the economic slowdown. With revenue from sales and income taxes falling and property tax declines looming on the horizon, states, cities and towns have already laid off tens of thousands of government employees and many expect more job cuts ahead. The American Federation of State, County and Municipal Employees, a public employees union, says about 45,000 government layoffs have been announced this year and far more are likely in the months ahead as public officials struggle with trying to balance their budgets. All but four states are set to begin their new fiscal years on July 1, which means that tough decisions will have to be made soon. Economists say that cutbacks in jobs and spending by local governments could be a major drag on the overall economy in the last half of this year. There are 29 states, including California, Florida and Ohio, facing a combined budget shortfall of at least $48 billion in the fiscal year that starts July 1, according to the Center on Budget and Policy Priorities (CBPP), a liberal think tank. The National Association of State Budget Officers estimates that spending by all 50 states will be up 1% in fiscal 2009. But that would be the third lowest increase in the past three decades. There are nearly 20 million state and local government employees in the country. So a 1% decline in employment at cities, towns, schools and states would result in a job loss of almost 200,000 people, a much larger amount than we've seen from battered sectors such as automakers or home builders in the past two years. Even in states, towns and cities not yet laying off people, hiring freezes and early retirement packages are now common, said Robin Prunty, senior director in the public finance department of credit rating agency Standard & Poor's.

Dow Chemical Raises Prices for Second Time in a Month The Dow Chemical Company said Tuesday that it was raising prices for the second time in a month to offset a “relentless rise” in energy costs, a sign that companies may increasingly have to pass on price increases to their customers. The increase of as much as 25 percent — the largest in the company’s history — comes after a 20 percent rise last month that the company said did not go far enough given the continuing surge in energy prices. Dow, which makes products ranging from pesticides to plastic wraps, also said it would impose freight surcharges of $300 for each truck shipment and $600 for each rail shipment beginning Aug. 1 in the United States. In addition, it will scale back production in plants across North America and Europe.

• Dow Chemical Raises Prices Dow Chemical will raise prices by as much as 25% and will implement freight surcharges, with Andrew Liveris, Dow Chemical CEO

Housing: Multiple Reactions

Over the horizon, a housing recovery The current housing market is bleak: home prices and sales are plummeting, foreclosure proceedings are skyrocketing and mortgage rates are on the rise. When will things be better? A new study from the Joint Center for Housing Studies of Harvard University, "The State of the Nation's Housing 2008," finds the country poised to see an increase in housing demand over the next decade. "The good news is that we still have a growing population," said Nicolas Retsinas, director of the Joint Center for Housing Studies and one of the study's authors. "As long as you have more households, more people are going to need places to live." Social trends - people getting married later and divorced more often - are making single-person households the fastest growing household type, the study finds. In addition, a long-term net increase in potential home buyers will be driven by demographic factors: the aging of "echo boomers" into adulthood, an increased life expectancy for baby boomers and projected annual immigration of 1.2 million. From 2010 to 2020, the number of households in the United States will grow by an average of more than 1.4 million per year, the study finds.

Shaky job market threatens housing recovery Slump, worst in generations, still hasn't run course, report says. And if job losses accelerate in coming months, it could take even longer for local markets to regain their footing, said Nicolas P. Retsinas, director of the university's Joint Center for Housing Studies. Job losses could be "the last shoe to drop, but a pretty heavy shoe," he said in a telephone interview. The center releases its "State of the Nation's Housing" report each year, and not surprisingly, the 2008 edition gave a grim prognosis for housing markets throughout the country.In short, local markets are dealing with drops in housing starts, new home sales and existing home sales -- corrections that are rivaling the deepest slowdowns since the World War II era, the center reported. On top of that, the fall in home prices and the rise in mortgage defaults are the worst on record since the 1960s and 1970s. See the Joint Center for Housing Studies Web site. All this adds up to a downturn that is "the most severe that we have seen," Retsinas said.

Housing Study Says Worst Isn't Over (WSJ) Harvard's annual housing report gave a grim prognosis for housing markets throughout the country. It predicts the housing slump, already shaping up to be the worst in a generation, still hasn't run its full course. Report: US housing slump a prelude to recession

Revisiting the Underlevered American Household But I also found his column instructive in that it forced me to more carefully articulate some ideas I had been kicking around for a while. One year later, that process still resonates with me. Here's my takeaway from our debate last year: 1) Always pay attention to statistical anomalies: They are invariably informative. If for no other reason, they make you think about how we gather and use data. In the "under-levered case," I had to consider different time frames, chew over context. I thought it was important that the savings rate went negative for the first time in three quarters of a century. That oddity got my attention -- and for good reason. Since then, the economy has likely slipped into a recession, and the Dow has fallen 12%. …5) Real, inflation-adjusted income matters: Despite real income being negative, as a nation, we took a long time to adjust our consumption habits. Consuming more than earnings has significant repercussions.  Instead of seeing wage gains being used to raise living standards, we consumed Household equity as if it were actual income. There is an enormous difference between borrow and spend, versus earn and spend. Which is precisely what the negative savings rate was warning those how were paying closer attention . . .

More on Oil

'Oil shock' stems from fears of future shortfall: consultant A "shortage psychology" in oil markets is overshadowing news of fresh discoveries and falling demand to drive oil prices to record levels, the head of influential energy consultancy Cambridge Energy Research Associates said Wednesday. "A lot of what's going on in financial markets is not just looking at Nigeria but looking at the shortfall in supply three, five years down the road," said Daniel Yergin at a Senate Joint Economic Committee hearing in Washington, which was Webcast. Investors are viewing future oil supplies through the prism of expected high-demand growth in China and India, which "tends to be the end of all discussions," he added.These concerns -- that global oil supplies won't be able to keep up with the rapid industrialization and consumer-spending growth of emerging markets -- are overshadowing other fundamental factors that would typically dampen oil prices.These include discoveries of potentially large oil fields in Brazil and a drop in some developed countries' demand for oil, which tend to be "discounted" by the market, according to Yergin. Instead, the market is wrestling with a much thinner gap between supply and demand that had been customary for decades in the past. Curbing expectations for future supplies, the cost of developing new oil and gas fields has more than doubled over the past four years due to a shortage of oil-field professionals and raw materials, he noted. The sum total of global supply disruptions, including frequent oil-pipeline attacks in Nigeria, has amounted to a loss of between 2 million to 3 million barrels a day, Yergin said.