Tuesday, 04 May 2010 03:02

The American Recovery and the North American Economic Outlook

This is a continuation of the reporting yesterday on the American consumer. You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go "splat"!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker - The American Recovery and the North American Economic Outlook.

Is sustainable spending back? Can we rely on the consumer to justify those gains in retail, commercial real estate and casino stocks? Well the most recent consumer spending data points have been released through the pop media, and most of the mainstream is all abuzz with notions of consumer recovery. We at the BoomBust aren't wholly convinced, though. We are still facing the same stalwart, stiff headwinds as last year (housing/real estate, unemployment, credit, deflating assets), simply blowing from a slightly different direction.

The continuous downturn in residential investment is easily accessible from the recent BEA reports.  Residential investment expenditures fell 10.9% from the previous period, and have now been negative for 14 of the past 16 quarters. From a straightfoward, simple math, common sense perspective, the last thing we need in the US is more housing with years of inventory being represented by the foreclosure pipeline, shadow inventory, new construction and existing housing sales. To top it off, we are at the bottom of the interest rate cycle with no where for rates to go but UP!

Much of the general macroeconomic trend in housing has been covered in articles discussed in Things we are Looking to Go Splat! Part 1, particularly with consumers opting for Chapter 7 bankruptcy over Chapter 11 proceedings.  Further, Mark Zandi of Moody’s has recently gone as far as stating the increase in retail sales since the beginning of the year is merely a result of 6 million homeowners who have no intention to pay their mortgages, freeing up $8 billion in cash.  It would even be fair to expect problems in housing to become worse as those participating in extended unemployment claims programs continues to rise, putting more stress on durable goods as a whole.  With the effects of the stimulus beginning to wear off, and the recovery in housing and consumption being incredibly overstated, the likelihood of a downturn in discretionary consumer spending appear to be fair.

Gross Domestic Income:

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The measurement of Gross Domestic Product is the expense measurement of Gross Domestic Income (GDI), so unless FASB loosened up more accounting rules, expenditures should technically equal income on the national scale.  However, statistical discrepancies in BEA data for GDP and GDI have continued to paint two different pictures about the US economy.  The graph above comes directly from the Atlanta branch of the Federal Reserve, and if the Fed did not have the reputation of leaving the printing press on while taking part in lavish Jackson Hole getaways, one could say this helps explain unwillingness by the current Board of Governors to raise interest rates in the face of a “V shaped recovery”.  Measures of GDI have shown a deeper recession than GDP indicates, and stubbornness through the beginning of 2009 to show any signs of recovery.  More Federal Reserve data confirms fears at BoomBustBlog about employment conditions failing to recover in 2010 and the near future (reference Are the Effects of Unemployment About To Shoot Through the Roof?).

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The final graph, showing GDP and GDI measurements of unit labor costs shows a declining wage, which has been confirmed by BLS data.  As wages have fallen, and the GDP price level for non-energy consumption has stayed flat (0.6% growth in Q1 2010), it can (and probably should) definitely be argued that the increases in discretionary consumption and GDP contributions from PCE are coming at the expense of the housing and mortgage industry as opposed to a consumer/worker pick up.

Last modified on Sunday, 18 July 2010 23:35

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