Archive for the ‘Economics’ Category

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GDP First Look – Robbing Peter to Pay Paul?

Thursday, October 29th, 2009

The 3rd quarter showed a 3.5% increase over the 2nd quarter GDP (Gross Domestic Product). According to the preliminary look at 3rd quarter GDP report the primary contributors where (as quoted by the report):

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

Let’s take a better look at the above quote from this widely viewed report.

The first primary contributor according to the report was Personal Consumption Expenditures. The report specifically cited that auto sales accounted for a large part of this upturn. Cash for clunkers is actually quoted by the report as a major contributor to these sales.

Exports are the second contributor named in this report as a large contributor. When the Dollar is cheap so are good that are priced in the Dollar. The news is filled with headlines on how the US Dollar is under significant pressure.

Private Inventory Investment is the next contributor on the list. Over the past year retailers have been shedding inventory to attempt to match supply with current demand. The shelves are empty and they need to be restocked if retailers want to sell products to consumers.

Residential Fixed Investment is named as another large contributor. First time home buyers have been scrambling to purchase homes to take advantage of the $8000 tax credit. In September alone nearly 50% of existing home sales where to first time home buyers. Nearly 70% of existing homes sales in September where under $250,000.

So last on the list is Federal Government Spending. It should be no surprise that Federal Government spending contributed a large portion of 3rd quarter GDP. Looking at what the report cited as the primary contributors to real GDP, I would argue that almost all of the GDP growth was from the government intervention.

The report also sighted the following:

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

From the above statement I would gather that consumers made less but spent more. Interestingly this current outcome is what the Federal Government wants to happen, spend our way out. With tight credit and rising unemployment, where does the money come from? Credit is what caused this problem, is it really the cure as well. Drug addicts don’t take more drugs to get off drugs do they.

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Federal Reserve Statement

Wednesday, May 20th, 2009

Judge for yourself, but it looks like according to the US Federal Reserve the outlook has not improved. The economy has continued to “contract” and their hope is resting on the stimulus and the Federal Reserve’s steps it has already taken. They cite household spending has seen signs of stabilizing, “but” with continued job loss, declining housing wealth and tight credit, it still is “constrained. There has never been a time in history where fighting a credit crisis with credit has ever won. Maybe it isn’t a lack of credit, but too much credit in the system.

Here is a copy of their statement released today at 2:00 PM EST:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.

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Over Shooting Expectations

Friday, May 1st, 2009

In the first week of March 2009, the sentiment on Wall Street was very negative. Analysts started adjusting their earnings expectations down to match sentiment. By the end of the week the sellers were overtaken by buyers and now the stock market has moved over 20% in record time.

The general expectation was that the stock market would retrace some in April due to earnings season. So far nearly two thirds of earnings released have beaten expectations. Since expectations have been better than expected, the stock market has held up.


Sales and earnings for most of the companies who released are way off over last year. Companies who beat typically had their earnings expectations adjusted lower at one point during the first quarter.

When the market was heading into the abyss of 6500 on the Dow Industrial average, Wall Street lowered their expectations of the future. Expectations now are being raised since the market has made a record jump to speedy recovery.

Wall Street seems to always over shoot their expectations. When they are bearish, the worst is expected. When Wall Street is bullish, the best case is expected. Expectations are just that, what someone expects to happen.

The markets generally move on expectations. If expectations are high then the bear is advantaged. If expectations are low, then the bulls have the leg up. Can the lofty expectations being set now be achieved? Some of Wall Street is starting to forecast the conclusion to this financial crisis by summer’s end, what if it does not happen?

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Consumer Confidence – Propaganda or Main Street Gauge?

Wednesday, April 29th, 2009

Every month the Conference Board releases the results of a poll conducted by TNS of 5000 US Households. This poll is meant to capture the mood of the average US household during the month in question and apply a number to it. If the mood of US households is improving then supposedly this is a sign of improved consumer spending and better conditions on Main Street.

The questions asked during this poll focus on both present conditions and future outlook. This sampling of US households is asked to give their current individual condition and forecast the US economy as it relates to them.


The most recent poll released on April 28, 2009 showed an increase in US Consumer Confidence from 26.0 to 39.2. In this most recent poll the Present Situation Index increased slightly from 21.9 to 23.7. The Expectations Index rose dramatically from 30.2 to 49.5. From this poll it clearly shows currently that expectations outweigh existing conditions. This sampling of US Households has increased its optimism for the future.

Over the past two months Washington and Wall Street have increased their confidence dramatically as well. Washington has made comments hinting that we have possibly seen the worst and Wall Street has rallied to lofty levels in record time.

Both Washington and Wall Street have made extra efforts to remain optimistic. Washington now takes great care in releasing information in not to disrupt the Markets too much. Wall Street seems to have teamed up to shift their majority view from bearish to bullish. In my opinion it also appears that the financial press seems to praise the bulls and shun the bears.

Propaganda is the dissemination of information that is meant to influence the opinions or behaviors of people. Wall Street and Washing are focusing on the glimmers of light at the end of the tunnel. The light could be real or it could be a train coming, but we are still for the most part in the dark.

Wall Street and Washington have something to gain by keeping the US household positive. Wall Street wants US Households to invest their hard earned money into the market so they can make money. Washington wants US households to feel they are succeeding in solving to problems so they can keep “political will” on their side and succeed in their political agenda.

Is Consumer Confidence a gauge of Main Street finances or a measure of success in political and corporate propaganda?

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Who Leads the Economy?

Tuesday, April 28th, 2009

The US economy is made up of two fundamental events which are expanding and contracting credit. While an economy is expanding credit typically it is a time of prosperity. When an economy is contracting usually it is a labeled a recession. The economic cycle of expansion and contraction describes an economy as a whole.

To best visualize this cycle you should imagine a wave. As you go up the wave credit is expanding which typically means more spending; when you go down the wave credit is contracting which leads to less spending. Since US consumer makes up about 70% of GDP, it is logical to imagine the consumer is the water that makes up the wave. As the old saying goes, “Life is full of ups and downs”. People are typically either going up or down the wave.


The world is made up of cycles. The sun comes up and then is goes down and seasons change. Peoples clothing and surroundings may change but history usually repeats itself.
Individuals have short and long cycles. Groups of people also share cycles. These groups could include 2 individuals to millions or even the entire world’s population.

Gustav Le Bon in his book “The Crowd” cited that individuals are smarter than the crowd. With this assumption one could argue that the larger the group included in a cycle the slower the cycles is to repeat itself since it will take the crowd longer to move to the next part of the cycle than an individual.

Individual’s private finances most of the time go through periods of expansion and contraction just like the economy as a whole. Actually if you believe that individuals are smarter than the crowd, then you should also believe that individual’s finances lead the broader economy, since they are more efficient at moving to the next part of the cycle.

With the current economic crisis the price of real estate skyrocketed to a point where more and more individuals no longer saw value and stopped buying. With less buyer and more sellers, real estate prices started to plummet. Once the first domino falls, the rest eventually do. Since the housing bubble was so widespread and included so many people, both in the USA and abroad, the cycle should take that much longer to progress.

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What Happens if the Economy Gets the Flu?

Monday, April 27th, 2009

Every couple of years the term “Flu Pandemic” makes headlines. The term refers to a global medical disaster where a large part of the world population gets the fast spreading flu. Every year the flu kills thousands; during a flu pandemic it could kill millions. A side effect of this type of crisis is felt in the world economies. Fear of illness keeps people in their homes and out of the malls. Sick people miss work that leads to less productivity.

Several agencies have done research for the USA into the potential economic impact of a flu pandemic. Their research has estimated that the US GDP could contract from 4% to 6% in a severe flu pandemic. They also estimated that if there is a mild flu pandemic it could shrink GDP by 1%. The report also noted that the effect in other countries could be much worse. The real impact is the loss of life the side effect is the contraction of economic growth. The report does indicate that economies should snap back after the crisis from pent up consumer demand.


A global flu pandemic would make a time of prosperity difficult let alone its effect during a time of crisis, as we are in right now. The economy is at such a fragile point that even a pandemic scare could have a measureable effect.

With Wall Street and Washington citing glimmers of hope, a flu pandemic, or even a scare, could sidetrack their hopes for the near future. At this point, the health of the people who make up the world economies should be the concern then worry about the economic side effects.

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Banks Profitable – That was Easy

Thursday, April 16th, 2009

Okay so here we are again, it is earning season and to the market’s surprise banks are showing some profits. When I make the above statement I can’t help to picture a older man in a suit riding a bike with training wheels saying “Mom look, I can ride a bike”.


All it took was nearly a trillion dollars to suppress mortgage rates; billions of dollars of direct aid, small change to Market to Market accounting and a commitment from the US government indicating they will not them fail.

Meanwhile earnings of companies who do not have the favor of the government are falling rapidly. Housing starts again appear to be retrenching (remember this was a pillar which Wall Street put such angst on citing recovery). A large commercial real estate firm (holds over 200 malls across America) filed for bankruptcy protection today with a disclosed $29.6 billion in assets and $27 billion in liabilities. What banks are on the hook for that?

The US economy cycles through expansion and contraction of credit. This process has occurred for centuries. Since the Federal Reserve started to maintain control of the overnight bank rate the cycles have become somewhat more predictable. This predictability occurs because as the Federal Reserve identifies where the US economy is in a cycle it responds with a rather predictable action. This action has a somewhat predictable response.

When the economy approaches over expansion of credit the Federal Reserve raises the overnight bank rate to raise the cost of lending, which theoretically should slow growth. When the economy starts to contract credit, the Federal Reserve lowers the overnight bank rate to lower the cost of lending, which theoretically should spur growth.

The actions to save banks over the past year are meant to contribute to the above mentioned goal. The US Government and Federal Reserve are attempting to reduce the cost of lending to spur growth. The dilemma that is facing the United States is that currently its citizens are contracting out of fear. The average US citizens’ mindset has changed from over consumption to conservation. Since US consumers makes up about 70% of GDP, growth cannot occur without them.

To stabilize the US consumer you most likely need to improve unemployment to reduce this fear. This week showed an improvement in claims (attributed to the holiday week) but continued claims are still rising (over 6 million). This indicates that finding a job is still a challenge. For job growth to resume, someone needs to start hiring. The US government is attempting to take this role artificially with their behemoth stimulus they passed.

It appears the US government is attempting to put training wheels on its economy by trying to shoulder the weight on their own. These banks that have already had the training wheels attached are profitable off the actions of the US government, at the expense of the US taxpayer. I was under the impression that companies went out of business because not enough business to support them. What happens when (if?) the US government takes off the training wheels? Will the economy ride on its own or break a leg?

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A Real Economic Indicator

Wednesday, April 15th, 2009

Yesterday consumer spending started back down the path of contraction. Remember one of the major sparks for the March rally was the improved retail sales numbers. It is funny how a once very pessimistic market can turn overly optimistic in such a short period of time.


Wall Street and the US government rely heavily this economic data for their analysis of the economy and its current state. Interesting how this data did not reveal the current state of the economy sooner. A year ago very few could have predicted the current crisis and its depth. It would seem that this method of data collection is too slow in reporting present conditions (especially with the recent dramatic revisions of past reports).

The US Federal Reserve went to a tightening status to combat inflation in April 2008 based off of this type of data (which was extremely late to the relatively obvious state of increased inflation). With an already low overnight bank rate, the Federal Reserve was forced to use up its most effective tool to stimulate the economy by taking it to 0% to .25% target. The Federal Reserve has also started to rapidly expand its balance sheet using “innovative” methods to promote lending. When considering debt and leverage, there really are limits to “innovation”; debt still needs to be repaid.

What happens if the home sales numbers start to show weakness again? What happens if (when) commercial real estate write offs start to replace the consumer debt write-offs on banks balance sheets. Do we have any other weapons to throw at the problem?

Unemployment is on the rise and Americans are more interested in saving money than spending right now. The US Government is trying to cure the problem by expanding lending while the US Citizen feels the solution to their problem is to reduce their debt. Interesting how the government and its people can be on such different pages.

Consumer spending makes up 70% of the United States GDP (I would argue that without the consumer we would not have the other 30%). The US Government and Wall Street have declared the worst is over. The average consumer does not feel the worst is over as seen in the retrenchment of retail sales, continued high savings rate and decreased consumer debt. What economic indicator should we believe?

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Stop Fighting the Dollar

Tuesday, April 7th, 2009

The US Government in one breathe attempts to sink the Dollar in the next speaks of a commitment to a strong Dollar. Even with all of their “innovative” methods of sinking the Dollar, it just keeps getting back up. The Dollar of recent has the resilience of a “Rocky” opponent.

So what keeps the Dollar moving up even in the face of such dramatic attempts to keep it down? Probably the most obvious is that the rest of the world is in worse shape than the USA. The old saying goes “if the USA gets a cold, typically the rest of the world gets pneumonia”.


With the US Government printing money at a feverish pace, other countries that are dependent on exports to the USA must do the same to keep their currency in pace. This process seems to extend the financial pain and fuel social unrest.

The Dollar is the Ocean eroding the cost of goods and services in the US, the solutions so far are looking like poor conceived Jetties, which typically cause more harm than good.

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Is Deflation the Problem or the Solution?

Saturday, April 4th, 2009

Over the past year the US government has taken large steps to ward off the destructive forces of deflation. Deflation takes much of the blame for the financial crisis during the depression of the 1930’s.

Instead of following in the monetary footsteps of the Federal Reserve during the depression, the current US Federal Reserve is attempting to monetize their way out of the problem by flooding the system with money.

One thing is for sure, the Federal Reserve of the 1930’s was successful in the long run. The United States emerged as the power house economy of the world. During the 1930’s prices came down and leverage was reduced through the process of deflation.

The current policy of the United States is to attempt to re inflate the US economy at all costs. This policy reflects a belief that deflation is worse than inflation. The Federal Reserve believes that they can control inflation through the control of the overnight bank rate.

If they can control inflation, than why has debt grown significantly (historically) faster than income over the last 30 years? Stable growth, in my opinion, should be complimented by salary growth and not expanded credit. Unfortunately complex financial instruments have fooled our Federal Reserve into believing we have had very tame inflation over the past 30 years. How do you bring debt back into balance with income? Deflation?

Couple relevant quotes:

“I place economy among the first and most important of republican virtues, and debt as the greatest of the dangers to be feared.” -Thomas Jefferson -1816

“I have sufficiently urged that all suggestions as to financial innovation be regarded with extreme skepticism” John Kenneth Galbraith from “A Short History of Financial Euphoria”

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