The U.S. Dept. of Commerce's Bureau of Economic Analysis (BEA) has reported 4th Quarter Gross Domestic Product (GDP) results representing a surprisingly small decrease in GDP for the quarter. Economic consensus expected GDP declines of 5.5% to 6.0%, but the BEA report reflects a 4th Quarter GDP decline of only 3.8%. On the surface, one might suppose that this figure, substantially better than what had been feared, would be welcome news amid all of the other difficult economic data we’ve seen in recent months, but just the opposite is true and the US markets closed sharply lower in light of the data.
Accompanying the GDP figure was the manufacturing inventory report which showed much higher inventory figures for the year end than were expected. This represented goods produced, but not consumed, and the production output currently residing in inventory understates our economic slowdown for the quarter. Accordingly, some portion of the GDP for the quarter went to manufacturing products that are simply sitting in manufacturer’s inventories, which artificially increases output. As the economy consumes this excess inventory in the coming quarters, we will then see a clearer picture of the recession’s impact on GDP.
We anticipated a 5.5% decline in GDP for the 4th quarter, in line with that of most economists. Likewise, we previously forecast 3.5% and 1.5% declines for the 1st and 2nd quarters of 2009. However, the 3.8% decline, coupled with unexpected inventory builds now cause us to adjust 1st and 2nd quarter 2009 GDP expectations to -4.5% and -2%. Where we had anticipated economic expansion to resume in the 3rd quarter, we now expect the 3rd quarter to be between 0% and .5% and anticipate that expansion will resume at roughly 2% in the 4th quarter. Real expansion is not likely to resume until 2010 as we expect real GDP increases of 5%, year over year.
Not only may the better-than-expected GDP figure cast a longer shadow over the recession, but it may be exaggerated by higher-than-expected unemployment increases for the 1st and 2nd quarters. Assuming the manufacturing output increased inventories at the end of 2008 reflects the product of workers ‘on the job’, then we can assume that many of these same workers were not laid off before the end of 2008. If this is true, and we see greater than expected declines in GDP for early 2009, we may also see higher than expected employment displacement for the same periods. Recent unemployment analysis has suggested that we’d seen the worst of the jobs cuts we’re likely to experience. However, if 1st quarter 2009 GDP declines are worse than 4th quarter 2008, then we may yet see more job losses than expected, and it is unlikely that the Obama economic stimulus proposals will have any beneficial impact before 2nd or 3rd quarters.
Just as increased real estate inventory has prolonged the housing crisis, increased manufacturer inventories have the ability to lengthen our economic slowdown. However, there are two very likely scenarios that may play out, either of which could provide a far more positive outcome.
The first, and more likely, beneficial scenario is already underway, though the outcome is far from certain. The Federal Reserve and Treasury have increased the domestic money supply through their multi-trillion dollar efforts to shore up our banking and credit complex. The natural byproduct of the expansion in the primary monetary supply (M1) is an increase in inflation, which we have yet to experience, and a weakening of the US dollar, which we’ve certainly noticed in recent weeks. A weaker dollar makes US exports more attractive to foreign markets, and this may aide in reducing the excess manufacturer inventory, thus easing pressure on the US markets.
Certainly, increased US export activity will not be rampant, due to the economic slowdowns in other economies, but the effect is just as certain; though perhaps not as exaggerated. We’ve yet to experience near term inflation because of the deflationary cycle our economy has flirted with caused by decreasing commodity pricing. This deflationary trend has helped offset inflationary pressures, just as the inflationary effects of the increased money supply has helped dampen the effects of deflation.
The second possible scenario depends on the effectiveness of Obama’s $820 billion stimulus package and the release of the remaining $325 billion in TARP funds. Combined, these programs, along with a few smaller initiatives, will release another $1.25 trillion into the US economy. Not only will this exaggerate the possibilities of the previously discussed scenario, but these dollars could well improve both the housing and labor markets. Prior to the Obama administration’s release of various stimulus plan details this last week, we had been optimistic that this effort would quickly benefit our economy. But, given the plan the US House of Representatives passed earlier this week, which will certainly be passed by the Democrat controlled Senate, the likelihood of real economic improvement resulting from this ‘stimulus’ package is limited.
Of the nearly $820 billion to be distributed through this plan, over $250 billion represents transfer payments, entitlement spending, and welfare, with another $134 billion targeted to consumer economic relief, including consumer tax cuts. We saw virtually no economic benefit from the consumer relief incentives offered consumers through the $110 billion in Bush’s 2008 stimulus program, and there’s no reason to expect that another $134 billion will offer a different outcome. While the consumer relief portion may possibly belong in a stimulus package, the other social spending measures do not, as they provide no economic stimulation whatsoever.
Unlike some, I’m not arguing that these social expenditures are unnecessary, that argument is well above my pay grade; though I will admit that we seem to receive too little societal impact for the vast sums we routinely pour into social programs. I do contend that such expenditures should be considered on their own merit and not included in a piece of economic legislation deemed so immediately important. Had the House and Senate not been dominated by the same party as that of the Administration, the inclusion of social spending in this bill may have put the bill’s passage in jeopardy, and that would have been irresponsible at best.
The remaining $250 billion in Obama’s economic recovery plan is targeted to infrastructure, job creation, and business tax relief, each of which provide real, measureable economic growth. The US Office of Management and Budget estimates that this $250 billion will create some 3 million new jobs throughout the public and private sectors, which should go a long way towards beating back the effects of high unemployment rates, and may decrease the ranks of the nations unemployed by over 3%. If we do the math, we quickly see that each job will cost the US taxpayer approximately $83,000 ($250 billion divided by 3 million jobs); a relatively high sum, but not unrealistic in terms of overall costs. However, if we apply the entire $820 billion cost of the recovery package against the jobs created, we see that each of the 3 million jobs will come at a cost of over $273,000 - an outrageous sum. This simply illustrates why the transfer payments, entitlement programs and social spending bulked into the ‘economic recovery package’ simply doesn’t belong there. It may be that such expenditures are meaningful to our society and perhaps even warranted in these difficult times, but if Obama and his team are sincere about affecting change and increasing ‘transparency’, this certainly doesn’t appear to be the way to go about doing so.
Many who did not vote for Obama have been hopeful, even optimistic, that his efforts will yield a better tomorrow. Though we realize that he may put on a blue suit and red tie each day, rather than blue tights and a red cape, many have granted him super-hero status well in advance of having the opportunity to observe his leadership at work. We’ve listened to bi-partisan rhetoric and mused over what might be accomplished by insightful, integrous leadership, and while we’re still audacious enough to hope, I must admit that we’re disappointed in how quickly our elected officials have reverted to type, as was recently evidenced by the strict party-line voting the House offered on the stimulus plan. Just as I’m certain that there are many excellent, resourceful Democratic Party representatives who voted for this legislation who certainly saw many of its flaws, I’m equally as certain that there were numerous representatives of the Republican Party who saw the plan’s obvious benefits, and chose not to vote for it. Such clearly split voting patterns aren’t likely due to coincidence, rather, they are far more likely due to skilled, partisan leaders doing what they simply seem incapable of not doing, being politicians. We deserve better.
JOB OPENINGS
We recently saw the following and thought you might find it interesting, if not amusing:
Following the resignation of Federal Reserve member Randall Kroszner on Jan. 21, 2009, the seven-member Board of Governors now has three vacancies. The positions of Mark Olson (retired in June 2006) and Frederic Mishkin (retired in August 2008) have yet to be filled. Source: Federal Reserve, BTN Research
Accompanying the GDP figure was the manufacturing inventory report which showed much higher inventory figures for the year end than were expected. This represented goods produced, but not consumed, and the production output currently residing in inventory understates our economic slowdown for the quarter. Accordingly, some portion of the GDP for the quarter went to manufacturing products that are simply sitting in manufacturer’s inventories, which artificially increases output. As the economy consumes this excess inventory in the coming quarters, we will then see a clearer picture of the recession’s impact on GDP.
We anticipated a 5.5% decline in GDP for the 4th quarter, in line with that of most economists. Likewise, we previously forecast 3.5% and 1.5% declines for the 1st and 2nd quarters of 2009. However, the 3.8% decline, coupled with unexpected inventory builds now cause us to adjust 1st and 2nd quarter 2009 GDP expectations to -4.5% and -2%. Where we had anticipated economic expansion to resume in the 3rd quarter, we now expect the 3rd quarter to be between 0% and .5% and anticipate that expansion will resume at roughly 2% in the 4th quarter. Real expansion is not likely to resume until 2010 as we expect real GDP increases of 5%, year over year.
Not only may the better-than-expected GDP figure cast a longer shadow over the recession, but it may be exaggerated by higher-than-expected unemployment increases for the 1st and 2nd quarters. Assuming the manufacturing output increased inventories at the end of 2008 reflects the product of workers ‘on the job’, then we can assume that many of these same workers were not laid off before the end of 2008. If this is true, and we see greater than expected declines in GDP for early 2009, we may also see higher than expected employment displacement for the same periods. Recent unemployment analysis has suggested that we’d seen the worst of the jobs cuts we’re likely to experience. However, if 1st quarter 2009 GDP declines are worse than 4th quarter 2008, then we may yet see more job losses than expected, and it is unlikely that the Obama economic stimulus proposals will have any beneficial impact before 2nd or 3rd quarters.
Just as increased real estate inventory has prolonged the housing crisis, increased manufacturer inventories have the ability to lengthen our economic slowdown. However, there are two very likely scenarios that may play out, either of which could provide a far more positive outcome.
The first, and more likely, beneficial scenario is already underway, though the outcome is far from certain. The Federal Reserve and Treasury have increased the domestic money supply through their multi-trillion dollar efforts to shore up our banking and credit complex. The natural byproduct of the expansion in the primary monetary supply (M1) is an increase in inflation, which we have yet to experience, and a weakening of the US dollar, which we’ve certainly noticed in recent weeks. A weaker dollar makes US exports more attractive to foreign markets, and this may aide in reducing the excess manufacturer inventory, thus easing pressure on the US markets.
Certainly, increased US export activity will not be rampant, due to the economic slowdowns in other economies, but the effect is just as certain; though perhaps not as exaggerated. We’ve yet to experience near term inflation because of the deflationary cycle our economy has flirted with caused by decreasing commodity pricing. This deflationary trend has helped offset inflationary pressures, just as the inflationary effects of the increased money supply has helped dampen the effects of deflation.
The second possible scenario depends on the effectiveness of Obama’s $820 billion stimulus package and the release of the remaining $325 billion in TARP funds. Combined, these programs, along with a few smaller initiatives, will release another $1.25 trillion into the US economy. Not only will this exaggerate the possibilities of the previously discussed scenario, but these dollars could well improve both the housing and labor markets. Prior to the Obama administration’s release of various stimulus plan details this last week, we had been optimistic that this effort would quickly benefit our economy. But, given the plan the US House of Representatives passed earlier this week, which will certainly be passed by the Democrat controlled Senate, the likelihood of real economic improvement resulting from this ‘stimulus’ package is limited.
Of the nearly $820 billion to be distributed through this plan, over $250 billion represents transfer payments, entitlement spending, and welfare, with another $134 billion targeted to consumer economic relief, including consumer tax cuts. We saw virtually no economic benefit from the consumer relief incentives offered consumers through the $110 billion in Bush’s 2008 stimulus program, and there’s no reason to expect that another $134 billion will offer a different outcome. While the consumer relief portion may possibly belong in a stimulus package, the other social spending measures do not, as they provide no economic stimulation whatsoever.
Unlike some, I’m not arguing that these social expenditures are unnecessary, that argument is well above my pay grade; though I will admit that we seem to receive too little societal impact for the vast sums we routinely pour into social programs. I do contend that such expenditures should be considered on their own merit and not included in a piece of economic legislation deemed so immediately important. Had the House and Senate not been dominated by the same party as that of the Administration, the inclusion of social spending in this bill may have put the bill’s passage in jeopardy, and that would have been irresponsible at best.
The remaining $250 billion in Obama’s economic recovery plan is targeted to infrastructure, job creation, and business tax relief, each of which provide real, measureable economic growth. The US Office of Management and Budget estimates that this $250 billion will create some 3 million new jobs throughout the public and private sectors, which should go a long way towards beating back the effects of high unemployment rates, and may decrease the ranks of the nations unemployed by over 3%. If we do the math, we quickly see that each job will cost the US taxpayer approximately $83,000 ($250 billion divided by 3 million jobs); a relatively high sum, but not unrealistic in terms of overall costs. However, if we apply the entire $820 billion cost of the recovery package against the jobs created, we see that each of the 3 million jobs will come at a cost of over $273,000 - an outrageous sum. This simply illustrates why the transfer payments, entitlement programs and social spending bulked into the ‘economic recovery package’ simply doesn’t belong there. It may be that such expenditures are meaningful to our society and perhaps even warranted in these difficult times, but if Obama and his team are sincere about affecting change and increasing ‘transparency’, this certainly doesn’t appear to be the way to go about doing so.
Many who did not vote for Obama have been hopeful, even optimistic, that his efforts will yield a better tomorrow. Though we realize that he may put on a blue suit and red tie each day, rather than blue tights and a red cape, many have granted him super-hero status well in advance of having the opportunity to observe his leadership at work. We’ve listened to bi-partisan rhetoric and mused over what might be accomplished by insightful, integrous leadership, and while we’re still audacious enough to hope, I must admit that we’re disappointed in how quickly our elected officials have reverted to type, as was recently evidenced by the strict party-line voting the House offered on the stimulus plan. Just as I’m certain that there are many excellent, resourceful Democratic Party representatives who voted for this legislation who certainly saw many of its flaws, I’m equally as certain that there were numerous representatives of the Republican Party who saw the plan’s obvious benefits, and chose not to vote for it. Such clearly split voting patterns aren’t likely due to coincidence, rather, they are far more likely due to skilled, partisan leaders doing what they simply seem incapable of not doing, being politicians. We deserve better.
JOB OPENINGS
We recently saw the following and thought you might find it interesting, if not amusing:
Following the resignation of Federal Reserve member Randall Kroszner on Jan. 21, 2009, the seven-member Board of Governors now has three vacancies. The positions of Mark Olson (retired in June 2006) and Frederic Mishkin (retired in August 2008) have yet to be filled. Source: Federal Reserve, BTN Research
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management
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