Originally Published in the Catalyst Quarterly October 2011
Underlying global and U.S. economic underpinnings indicate anemic growth and probable slowdown in 2012, despite positive appearance of intermediate solution to EU sovereign debt problem. Volatility, directly related to your consumers and their confidence in the future, will be exhibited in “daily headlines.” For 80% of U.S. consumer’s, job and income issues will “screen their spending.” You must understand the employment and income realities of the customers you serve in each of your location(s).
Without the launch of some sort of significant QE 3 from Ben Bernanke and the Federal Reserve towards the end of 2011/beginning 2012, there appears no viable intervening economic stimulus outside the private sector. At best, fiscal stimulus looks as if it will continue at a maintenance level; certainly not enough to bring U.S. unemployment levels down significantly given current political gridlock. Ongoing deleveraging in the U.S. economy, and focus on deficit reduction are realities that bring consequence.
With some exceptions, this generally is not a season of job and income harvest.
Practically, take a hard look at your individual markets and their make-up regards probabilities of employment, ability and willingness to spend, incomes levels, and continued falling housing prices as deleveraging continues and the hope that we have reached bottom wanes. Probable global economic shocks in 2012 must be considered by you in terms of local impact. Perhaps your local market employment base is immune somehow, or will even benefit. Often, in a national or international industry restructuring, jobs are brought back to a central core – growing the number of them in that specific geographic location.
The initial estimate for 3rd quarter GDP came in at 2.5%. While this is a solid number in light of some expectations, the underpinnings must be understood. The U.S. savings rate fell in July and August, which is not good for the long run, but contributed to increased consumer spending that bolstered 3rd quarter GDP. Declining oil prices helped import and export total nets and also added to the initial estimate for 3rd quarter GDP. However, Europe and the global economy are slowly contracting which will likely continue through 2012. Keep this in mind as you look to the future of U.S. exports.
We give heed to the Economic Cycle Research Institute’s prediction that the U.S. economy may be headed into another recession. It’s a logical prediction for the country as a whole, but our Stability Strength and Willingness to Spend 3L Scores reveal there are significant sectors, geographies, and local markets that continue to hold strong, despite the tumultuous economy, and present opportunity for business and service growth.
The ECRI says that amid the double-dip hysteria last year, they definitively ruled out an imminent recession based on leading indexes that turned up before QE2 was announced. Now, there is cyclical weakness spreading widely from economic indicator to indicator in a telltale recessionary fashion.
A “new recession” is not viewed by many as a mere measure of economic statistics . The Economic Cycle Research Institute appears to be focused on providing a sane estimate at where we are at in the general national economic cycle. Seems to Catalyst Analytics that they are looking at probable results from continuing and developing trends fairly realistically. A drop in sales, for instance, lowers needed production, which results in declines in employment and income. This in turn, weakens sales further. This general cycle has impact from industry to industry, region to region, and indicator to indicator…even those that are experiencing health and growth.
Many are asking, “Is a new recession possible, just a couple of years after the last one officially ended? Isn’t this too short a run for the economic expansion and recovery that we have been officially declared being in?”
Again we point to observations from ECRI.
“More than three years ago, before the Lehman debacle, we were already warning of a longstanding pattern of slowing growth. Since at least the 1970s, the pace of U.S. growth, especially in GDP and jobs, has been stair-stepping down in successive economic expansions. We expected this pattern would persist in the new economic expansion following the recession, and it did. We also pointed out, months before the recession ended, that because the great moderation of business cycles was history, the resulting combination of higher cyclical volatility and lower trend growth would virtually dictate an era of more frequent recessions.
So it comes as no surprise to us that with the latest expansion only a couple of years old, we’re already facing a new recession. Actually, such short expansions are hardly unheard of. From 1799 to 1929, nearly 90% of U.S. expansions lasted three years or less, as did two of the three expansions between 1970 and 1981. In other words, such short expansions are only unusual with respect to recent decades.
It’s important to understand that recession doesn’t just mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening due to the fact that it’s locked into a vicious cycle. Another recession means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.”
Here’s what ECRI’s recession call really says: if you think this is a bad economy, you are right, and as it necessarily corrects, it may weaken further. And that has profound implications for both Main Street and Wall Street in 2012 in specific sectors and specific markets.