Friday, April 2, 2010
The GDP recovery is underway. But below the GDP hood, the picture is not as bright. The labor market is weak, and income-generating prospects remain muted. The latter portends a back-up of consumer spending down the road without substantial policy support.
Please see Spencer's post at Angry Bear blog for a very nice interpretation of today's employment report, but he sums it up quite nicely:
Yes, the employment situation has quit deteriorating, and there are encouraging details within the report. But the overall rebound in the economy and the employment situation is one of being stuck in the doldrums.But why is the U.S. economy stuck in the doldrums? Isn't GDP recovering smartly? (Read on.)
The chart illustrates the GDP contraction for each recession since 1971, except that for 2001 because in sum GDP did was rather flat. Point "0" represents the quarter where GDP bottoms out. I circumvent the official date of the recession's end as point 0 - the NBER is the agency that "dates" business cycles in the U.S. - because I want to focus on GDP, which is a composite of spending motives (including the government).
On the surface, the economy appears to be improving smartly; GDP bounced back 1.9% since its cyclical low in Q2 2009. But what we've really got here is a inventory-led recovery, with a Q3 boost from auto sales, and depreciated capital and software that must be replaced. Top that off with a small boost from non-defense federal government consumption, where in Q4 that was more than offset by the decline in the contribution to growth coming from state and local governments, and the recovery looks a little less stable.
I work in fixed income. Companies that wish to rollover debt or finance an expansion of capacity may do so through a public bond issuance. As an anecdote, companies will travel to our offices in order to "tell their story" and garner support for the issuance. Guess how many companies have told me that the proceeds of the bond issuance (essentially borrowing funds from the institutional investor at usually a fixed coupon rate) will finance expansion and new production capacity - none this year! Nada. (Actually, that's not totally true: earlier this year an Indonesian power company wanted to rollover debt financed new capacity from last year.)
There's plenty of spare capacity, so that existing resources can supply new demand. However, this portends (in my very small sample) a slowdown in fixed investment growth, and further crimps hopes for a strong recovery.
Jobs growth needs to pick up, or else income and earnings growth will continue down (or at best move sideways).
It is NOT the time for government support to let up. Don't worry about what markets think, worry about what people think. They can't move; and they can't find a job (well at least officially 9.7% of the labor force, or the 9.1m part-time for economic reasons workers). As such, the hope for sizable private-sector income growth is looking negligible.