• 23 hours Markets Unfazed As Inflation Hits 13-Year High
  • 2 days How the Token Economy is Disrupting Financial Markets
  • 4 days FBI Investigating 100 Types Of Ransomware Attacks
  • 6 days Fed Ends Corporate Credit Emergency Lending Program
  • 8 days AMC Becomes the Latest Winning Meme Stock After GameStop
  • 9 days The Real Reason Your 401k Has Been Lagging
  • 10 days China Lifts Cap On Births, Allows Three Children Per Couple
  • 12 days The Market Is Ripe For Another GameStop Saga
  • 15 days Senate Grills Big Banks Over Pandemic Opportunism
  • 16 days Cannabis Has A Major Cash Problem
  • 17 days Ransomware Netted Criminals $350M In 2020 Alone
  • 18 days Russia Is Taking On Google
  • 19 days Chinese Regulators Deal Another Big Blow To Bitcoin
  • 20 days Ohio Residents Brave Vaccine for Chance To Win $1M
  • 22 days Inflation Is Coming. Are You Prepared?
  • 23 days 3 World-Shaking Trends Investors Need To Watch This Year
  • 23 days Travel Might Get Another Supersonic Disruption
  • 24 days The World Is Running Out Of 6 Key Resources
  • 25 days $15/Hour Minimum Wage Might Happen Naturally
  • 27 days Money-Laundering Binance Probe Report Adds To Bitcoin Woes
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

  1. Home
  2. Markets
  3. Other

Who Knows What the Economy Do

(UNEDITED)

With military operations commencing, attention will be focused on Iraq. The war adds complexity in analyzing the economy. The consensus thinks a quick victory will lead to an economic rebound as uncertainty lifts and conversely if the war gets drawn out the economy will likely continue to sputter. Even the Federal Reserve thinks that the geopolitical risks are weighing on the economy The Federal Reserve, "does not believe it can usefully characterize the current balance of risks with respect to the prospects for its long-run goals of price stability and sustainable economic growth." Since the Fed cannot figure out this economy, I figure there is no way I can, so goodnight.

Unfortunately, there is quite a bit going on in the economy. While February is a difficult month to draw conclusion from since much on the country was impacted by weather at some point during the month, it might mark the beginning of a noticeable slowdown in the consumer. Last week, the Commerce Department released February retail sales. February sales dropped 1.6%, the largest drop since November 2001. Most of the decline was in auto sales, (-3.4%), and building materials (-7.5%). This matches the slowing down that retailers are experiencing. The basket of retailers that I monitor experienced the weakest month of year-over-year total sales growth since January 2002. The 26 retailers cumulatively increased sales by 5.3% during February. Excluding Wal-Mart, which makes up over 50% of the combined revenue, growth was only 1.4%. Retailers will undoubtedly face a tough environment with sales grow in the low single digits. Over the past several years retailer have been expanding very aggressively, which drove up their fixed cost. With sales growth slipping throughout most of the retail sector, retailers that the expanded aggressively will likely experience the most dramatic shortfalls.

Not only have retailers been expanding aggressively, but also they have been catering to customers that have shifted their buying to high-end products. Manufacturers have also shifted their product mix as consumers were buying high-end products. Last week, Maytag announced it would not meet analysts' estimates for the first quarter. Maytag noted that consumers have been buying cheaper vacuum models. It will be very important to watch if consumers start trading down, manufactures and retailers will be dramatically affected.

An economic rebound could likely occur after a successful war driven by the consumers regaining confidence. We have seen consumer confidence follow the stock market. If Wall Street breaths a collective sign of relief and the recent rally continues, consumers may begin to feel better about the current economic environment. We know the credit spigot is wide open for consumers, and consumers have proven they have no qualms taking on more debt.

We continue to think the main problem in the economy is that it remains out of balance after the technology and telecom bubble. In fact the recent boom in residential housing and mortgage refinancing as only exacerbated the dis-equilibrium. We cannot continue indefinitely growing the economy through refinancing, or higher medical and food prices. While there was some hope over the past couple months that the manufacturing sector was starting to turn around, recent data reveals that manufacturing activity slowed in February.

Early this month, the ISM survey was released showing the index fell 3.4 points to 50.5. While still above the magic "50" level, this was second consecutive decline. The past strength in the manufacturing sector may have been due to companies stocking more inventories in front of the looming war with Iraq. More notable is what accounted for the declines. New orders fell over 7 points to 52.3, employment dropped almost 5 points to 42.8 to the lowest level since January 2002. Also notable is the jump in prices, up 8 points to 65.5. The weakness in the ISM survey was confirmed with the latest manufacturing surveys conducted by the Federal Reserve Bank of Richmond and the Federal Reserve Bank of New York. According the Richmond survey every index component of the survey reported declined except wages and prices, both paid and received. The only positive takeaway from the survey was that the gap between growth in prices paid and prices received fell. Manufacturers are still suffering from input prices rising faster then they can pass along price increases. That also means that inflation is starting to seep into the economy where it will be noticed. Expectations were just as dim: shipments, new orders, backlogs, capacity utilization, employment all fell, most by double digits. The New York survey dropped to -2.5, signaling the first contraction in activity since October. Shipments, orders and employment all fell double digits to below zero, indicating a widespread contraction.

It is doubtful that the manufacturing sector will be improving in the near future. Earlier this month, General Motors announced it would curtail production by 10.5% in the second quarter. Last week, Ford announced it would reduce production by 17%. With auto sales accounting for about a quarter of retail sales, the impact will likely be felt throughout the economy.

The employment situation remains one of the biggest obstacles for the economy to overcome. It is unlikely any meaningful economic recovery will happen without a pick up in employment. Unfortunately, it appears to be getting worse. The employment situation report from the Bureau of Labor showed the largest drop since after September 11. Overlooking the two months after the terrorist attacks, it was the largest drop since August 1983. While there were a few abnormalities due to military reservist being called up, it does not account for a significant amount of the decline.

I have discussed the increase in health care costs on several occasions. We know employers are passing along some of the additional cost or reducing benefits. These changes are felt household budgets, but there was finally a survey conducted that asked how it is affecting employment levels. SMC Business Councils found that half of the respondents said increased cost influenced staffing decisions, either by spurring layoffs or not hiring additional workers. One more indication that the labor market remains lackluster; Automatic Data cut its earnings guidance citing weakness in its employer division.

Our prayers go out to all military personal, their families, the Iraqi civilians, and everyone else touched by the military campaign.

Back to homepage

Leave a comment

Leave a comment