Wednesday, September 9, 2009

Not Yet Ready to Party

"The fact that the economy may be technically in recovery is irrelevant." -- Paul Krugman, on his blog, Sept. 4, talking about the importance of the labor market.


Now me, I'm not even sure that we're in a recovery yet. We've had massive government incursion into both the financial sector and the automotive sector. We're being propped up by the spring's stimulus package. In a nutshell, it's virtually impossible to determine where the economy would be left to its own devices. We may be out of intensive care, but we've still got tubes running every which way and require a room near the nurses' station. Sadly, the one sector of the economy that the federal government has relatively little influence on is the labor market, which continues to bleed jobs (yes, yes, at a slower rate than last winter).

Unemployment claims seem stuck in mid-500k range, and it's a sure bet the unemployment rate will head somewhat higher before topping out.

Sure, ISM printed above 50, but is it sustainable and how many people did last month's print put to work? What is going to be the driver that turns the labor market around?


Let's talk a little mean reversion:


We know that Personal Consumption Expenditures (PCE) rose to roughly 71 percent of our $14 trillion GDP. The mean is around 65 percent. If PCE simply reverts to the mean, that would imply a loss of about $850 billion of GDP that needs to be "made up for" elsewhere. Anyone? Bueller? Exports? What?


Consumer credit is in absolute implosion mode -- it dropped month-to-month by $21 billion, and year-over-year has dropped well over $100 billion. Behold:





In short, it's almost laughable to talk about the banks' supposed unwillingness to lend -- it appears no one wants their money in any event.


The U.S. Homeownership Rate is still too high:




Consumers are still over-burdened with debt:



Credit was to the last expansion as steriods were to baseball during the home run bonanza that lasted until the league cracked down. I actually looked at the At-Bats/Home Run for players like McGwire, Bonds, and others. It was remarkable how the number dropped during the period they were suspected of (or actually were) using banned substances. That metric floated right back up once they were off the juice. In short, steroids and HGH turned superior players into almost superhuman athletes. Once ridded of the Bruce Banner-like gamma radiation, they came back down to earth. Similarly, our extraordinary economy got artificially pumped up by credit, and we are only now coming off that high. However, unless/until we find another way to get our fix, the road to recovery is going to be subpar at best (but we'll be economically healthier in the long run).


I have focused almost exclusively on the consumer in most of what I write, for the simple reason that I think no recovery will have any sustainability without the consumer on board. On that point, I would note that the Fed's Flow of Funds Report -- one of my favorites, along with CFNAI -- comes out next week. It is always a fascinating report chock full of all manner of goodies.


So, that's where I'm at. Not yet ready to break out the bubbly.