Economic News

I’m again providing the perspective of Brian Wesbury and Bob Stein of First Trust, mainly because they consistently take a honest look at what’s going on.  They certainly have their own views of things, but I’ve found them to be pretty darn accurate in how they see things behaving as we move forward.   They have been calling this a “plow horse economy”, so, with that said……..

More Plow Horse

From mid-2011 through mid-2012, the economy grew 2.1%, very close to the 1.9% growth of the prior year. We think this trend of mediocre growth continued in the third quarter, with real GDP up at a tepid 1.7% annual rate.

If we see any theme in the third quarter, it was that the consumer had growing purchasing power while businesses temporarily pulled back from investing in plant and equipment. Usually, that kind of retreat in business investment would have us more concerned. Almost every time machinery orders are down 10% from the year before, like they are now, we are near recession. But we think many companies are temporarily waiting until after the election to decide what to do.

The US is obviously not in recession; the economy is still growing. But equally obvious is that we’re not enjoying anywhere close to the rapid growth we’ve had during prolonged periods of improved public policy, such as in the 1980s and 1990s, when government spending was shrinking relative to GDP.

For now, our base case is more of the same for the fourth quarter and 2013, with growth averaging roughly 2%, unless we see a change in policy. As we have described it before, pockets of entrepreneurial brilliance offset by the weight and uncertainty of government spending, regulation, and taxes.

Here’s our “add-em-up” calculation of real GDP growth in Q3, component by component.

Consumption: Sales of cars and light trucks were up at a 10.6% annual rate in Q3, while “real” (inflation-adjusted) retail sales ex-autos were up at a 2.8% rate. However, services make up about 2/3 of personal consumption and they grew at about a 1% rate. So far, it looks like real personal consumption of goods and services combined, grew at a 2.1% annual rate in Q3, contributing 1.5 points to the real GDP growth rate. (2.1 times the consumption share of GDP, which is 71%, equals 1.5.)

Business Investment: Business investment in equipment & software and commercial construction both look like they shrank in Q3, by about 3% and 7%, respectively. Combined, they shrank about 4%, which should subtract 0.4 points from the real GDP growth rate. (-4 times the business investment share of GDP, which is 10%, equals -0.4.)

Home Building: Residential construction is headed for its sixth straight positive contribution to real GDP. The growth is still led by apartment buildings, but single-family construction is also rebounding sharply. Home building appears to have grown at a 21% annual rate in Q3. This translates into 0.5 points for the real GDP growth rate. (21 times the home building share of GDP, which is 2.4%, equals 0.5.)

Government: Military spending grew in Q3 but no more than it usually does in the final quarter of the government’s fiscal year. Meanwhile, state/local government construction is roughly unchanged from the prior quarter. On net, real government purchases grew at about a 0.5% rate in Q3, which should add 0.1 percentage points to real GDP growth. (0.5 times the government purchase share of GDP, which is 20%, equals 0.1).

Trade: At this point, the government has only reported trade data through August. On average, the “real” trade deficit in goods has grown compared to the Q2 average. As a result, we’re forecasting the trade sector subtracted 0.4 points from the real GDP growth rate.

Inventories: As always, inventories are the wild card. This is more true in Q3 than usual because of the drought, which often shows up in farm inventories late in the year. Inventories outside the farm sector look strong in Q3, but given the downside risk from agriculture, we are assuming inventories generate only a 0.4 point addition to the real GDP growth rate in Q3.

Add-em-up and you get 1.7% real GDP growth for Q3. Like last quarter, nothing to write home about – just another plow horse report.

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The Declining America Myth.

It’s a little long, but well worth it. It comes from my friend John Thomas, The Mad Hedge Fund Trader. And even though we have our problems here, where else would you really want to live?

Spread it around.

The Declining America Myth.

It seems that it has become fashionable to bash America these days. As I run around the country giving my strategy luncheons, I hear a lament that has become all too familiar.

America has peaked as a civilization, the story goes, and will follow the British, French, Roman, and even the Egyptian empires into the dustbin of history.  Our standard of living is falling, our technological prowess is fading, and our military strength is weakening. It will be just another generation before the Chinese take over the world and we will all be forced to learn Mandarin in high school, or somebody worse will take their place.

Such bouts of doubt, angst, and self-loathing occur every generation in America. I received a big dose after the US withdrew from Vietnam in 1972. My dad felt the same after Pearl Harbor was attacked in 1941. So did my grandfather when the Lusitania was sunk in 1917. The outbreak of the Civil War in 1861 was considered the country’s darkest day. And then there was the British burning of Washington in 1812. I remember it like it was yesterday.

I say horse feathers, bull-puckey, and balderdash to all this talk. When speaking to foreign governments, military leaders, and central bankers during my global travels I keep hearing a recurring theme. The United States is still the great shining example up on the hill. We are dominant in technology and increasing at an accelerating rate. All I hear about are our country’s strengths.

Our economy can evolve faster than anywhere else on the planet. This is because no one can beat us at creative destruction. Some 22 years into Japan’s stock market crash they are still maintaining companies on life support at enormous expense. We cleansed our system in about six months. And try downsizing outdated unions in Germany. We have cut the union share of labor from 35% to 15% in 30 years. Where else can someone with no money but good ideas become a billionaire in a couple of years?

Since I am a numbers guy, let me throw a few out there just to make my case. With a $15 trillion GDP, ours is triple contenders number two and three at $5 trillion, China and Japan. We are nearly four times Germany’s size at $4 trillion. Our per capita GDP is a staggering twelve times China’s. That means it takes 12 Chinese workers to produce an hour of output compared to our one. This is why America’s per capital income stands at $47,200, compared to only $4,260 in the Middle Kingdom, and many Chinese have to work a 70 hour week to take this home.  They are supposed to be overtaking us? Even the Chinese laugh when I tell them this.

Some 18 of the world’s 50 largest companies are still US based, like Exxon (XOM), Wal-Mart (WMT), Apple (AAPL), and Boeing (BA). But this understates the true picture. Ours occupy far and away the highest end of the value added chain. Many of the rest scrape by copying or pirating our products. You never get ahead that way. Look no further than Apple, which pays workers a minimal $15/day to build US designed products for sale at home with enormous profit margins.

It’s hard to find a strategic industry that we don’t dominate. US companies invented “fracking” which has untapped vast new energy supplies, making the Middle East irrelevant. Saudi princes come here for their health care, not England or Japan. “Globalization” has in fact become the polite word for “Americanization”.

I was standing at Piccadilly Circus in London the other day when a bus stopped and unloaded 50 gorgeous high school girls. I couldn’t for the life of me figure out their nationality. They could have come from anywhere. The teacher had a big butt, so I though maybe American. Then a kid lit up a cigarette and no one cared. Aha! French. They turned out to be the winners of a national English language essay-writing contest and the prize was a trip to the Olympics.

Let me just toss a few more tidbits out there:

*The biggest selling luxury car in China is a GM (GM) Buick

* iPhones, Ford Mustangs, and Katy Perry songs are pouring into a newly freed Libya.

*Cubans and Iranians are erecting illegal satellite dishes so they can watch Law and Order

*Travel around Eastern Europe and all you see are blue jeans

*Over 70% of the drinkers of Coca-Cola are outside the US

*McDonald’s (MCD) has 10,000 hamburger stands abroad

*Microsoft’s (MSFT) Windows operating system runs 90% of the world’s computers

*London has 19,000 people a month joining Match.com

While the US has run big trade deficits for 50 years, we have a perennial surplus in services that goes unnoticed. We remain the force to reckon with in banking and finance, thanks to the reserve currency status of our dollar. Transfer dollars from the UK to Japan and it has to go through New York. This isn’t changing in my lifetime. The world’s wealthy and well connected have long sent their kids to American universities. Six out of ten of the world’s best schools are here, matched only by Oxford, Cambridge, Tokyo University, and Beijing University.

You may be concerned about our rising level of national debt. Aren’t we under saving and over spending? The credit markets beg to differ with you. With 30-year Treasury bond rates at 2.55%, the world is literally throwing money at us as fast as they can. With the long-term inflation rate probably at 3%, this means that our government can borrow money for free!

Foreign individuals and institutions regularly take down more than half of our monthly government debt issues. With Europe in trouble, this trend is accelerating. The government’s error is not that it’s borrowing too much money, but not enough. Prices tell us that there is a severe shortage of US bonds. We could probably double the national debt from here without much impact on interest rates. Apparently, the free marketers don’t look at markets very often.

You have heard me talk a lot about demographics over the years. The US still has a modestly positive slope to its demographic pyramid, which is the best in the developed world. This means that we can expect an ever larger number of young consumers to drive economic growth, largely driven by immigration. This will lead to a new Golden Age for America in the 2020’s, which I believe will be a repeat of the 1950’s. Japan, Russia, and Europe suffer from a diabolical demographic outlook. China doesn’t look so hot either, thanks to its “One Child” policy. They’re just not making young people anymore.

Since I am also an old and grizzled Marine combat veteran and stay well connected with the military establishment, let me tell you a few harsh realities. Our military technology is the most advanced in human history, unbeatable, deeply feared, and is improving at breakneck speed. The American soldier is the best trained and most lethal ever deployed into the field. Did you know that no Air Force fighter pilot has been shot down in 20 years, despite being almost continuously at war during this entire time? The next generation of US fighters won’t even have pilots, with drones carrying much of the heavy lifting in today’s combat.

The US now provides for the active defense for about half of the landmass of the world; double that protected by the British Empire at its 1914 peak. Two decades after the end of the Cold War, the United States has no enemies of any real consequence. According to the CIA chief, General David Petraeus, Al Qaida has been worn down to a mere 200 active members. The futility of their efforts, confining explosives to shoes and underwear, show how badly things have gone for them.

We have been doing this with ever declining amounts of money. The military share of US GDP has plunged from 50% in 1943 to 6% at the end of the Cold War in 1992 to 4.7% today. It is about to fall off a cliff. Our defense budget is about to drop by half, back to pre 9/11 levels, either through budget cuts or sequestration. The Joint Chiefs are already prepared for this. Cyber warfare and drones are much cheaper than carrier groups and advanced fighters. If we spend less on weapons, the rest of the world will too. In a year, expect to start hearing about this a lot on your dinnertime news.

What about China, you may ask? They have had the blueprints of our most advanced defensive systems for many years now. But having a picture of a weapon is a long way from building one. They lack the technical expertise and the machinery even to copy what we already have. In any case, everyone knows China is indefensible. Torpedo one foreign grain ship, and the country will be starving in six months. China will never pose a threat as long as they can’t live without us and we have all of their money.

Yes, I know that it is an election year. It is up to the party that is out of power to portray conditions here as badly as possible so they can get elected to fix them. The party in power has to convince us how much things have improved so we can stay the course. The misinformation and apples versus oranges comparisons that get doled out as a result can make life complicated, frustrating, and difficult for traders and investors.

The next time I hear we have the world’s highest tax rate I am going to scream! I moved a company here from Europe 20 years ago because the actual taxes paid are low to non-existent. Just ask General Electric (GE), which pays a 3% tax rate. But hey, if this was easy, it would pay minimum wage, not ten figures, so I’ll take things as they are.

And the next time someone tells you that the US is history, consider that person a great short. It is they who are headed for the dustbin.

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Economic Headlines for the Week Ending October 28, 2011, and What it Really Means.

Economic Headlines for the Week Ending October 28, 2011, and What it Really Means.

All Europe, All Week (Almost)… Equity markets around the world staged massive rallies on the announcement of a preliminary deal to address the European debt crisis.

 What it means… The deal included a 50% reduction in value on Greek debt held by banks, and a call for a recapitalization of banks of about 106 billion euros, as well as the raising of almost 1 trillion in funds that will be backed by the euro zone bailout program (EFSF). Who will invest in European banks? Who will invest in the euro zone bailout fund? These unanswered questions are left for another day. The deal shows a mindset to address the problem, but the details show that a real solution is nowhere to be found.

Greek Pensioners in the Crosshairs… Following on the Greek Tragedy, the national pension system holds 35 billion worth of Greek government debt. This is about to be cut in half, courtesy of the aforementioned agreement.

What it means… There is no way to overstate the size of the problem inGreece and the growing issue in Italy. These economies are shrinking, not growing, and the turnaround plans of the region rely on the fantastical notion of budget surpluses in these countries through dramatic spending cuts with no resulting loss of tax revenue. How likely is it? Ask the nations that have already tried it –Greece, theUK,Italy,Portugal,Spain, andIreland. Close on the heels of this group is France, which is not in a death spiral, but is teetering on the edge of recession and just announced another round of austerity measures.

US GDP Up 2.5%… The 3rd quarter GDP of the US grew at a 2.5% annualized rate, which is better than many had hoped for over the course of the summer.

What it means… Many breathed a sigh of relief that the US moved away from recession instead of toward it, as 3rd quarter GDP doubled the rate of the 2nd quarter. In fact, GDP is now above its pre-recession levels. The problem is that in the 3+ years since the last GDP high we have added millions of new people to the economy, so on a per person or per capita basis, we are still about 3% down. Either way, our current growth rate will not add jobs, and wages have fallen, which is why personal confidence remains low.

No Population Movement… The Census Bureau and the IRS released data showing that the population movement of the US is at its lowest point since the measurement began in the 1940s. The sun states are not gaining, in fact NV and FL lost people, and the large cities of the Northeast staunched their losses.

What it means… If you cannot sell your house, and you are not gaining new employment, then moving is hard. In addition, the previously attractive states were in a feedback loop where more people meant more development which meant more jobs, which attracted more people, and so on. Now the feedback loop is negative, where fewer people mean less development, which means fewer jobs, which requires less people, and so on. Young people are hanging around major population centers hoping the size of the cities will lead to employment opportunities.

Home Prices Continue to Slide…The Case Shiller 20-city Home Price Index fell 3.8% year-over-year, and the median price of a new home fell 10.4% year-over-year.

 What it means… This is no surprise, of course. Housing is still in the dumps, and the main drivers – access to credit, earnings, and savings – are still suffering. Don’t look for a turnaround soon, especially with foreclosed inventory about to hit the markets.

 (source: HSDent Publishing)

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How Much Do Countries Owe?

How Much Do Countries Owe?

Here’s an interesting article from the Bespoke Investment Group showing the debt of the G-7 nations as a percentage of GDP (gross domestic product) and ten emerging market countries.  I think the article speaks for itself, and I agree with the conclusion the article makes; “If concerns over debt are the major issue behind the correction, emerging market countries should rebound the strongest in any rebound.”

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