Originally Published in the Catalyst Quarterly June 2011

 

You MUST know the condition of your local market(s)

 

It is imperative you know the condition of your local market(s).

 

While the hope is that the U.S. economy has gained enough momentum to sustain itself on its own now, the numbers reveal that it has not:

 

• Unemployment is at 9.1%: after almost 2 years of “economic recovery” the number of unemployed rose another 205,000 in April, to total 13,900,000. Weakened demand underpinnings and continued deflationary pressure, apart from food and fuel, are well entrenched and work against bringing this number down to the healthy levels we need for mere break even job creation.

 

• Wages and income are stagnant or falling for the lower 4 income quintiles for 80% of U.S. households, and the actual dollars that a household has to spend are being reduced by the higher costs of necessities such as food and fuel. In addition, many households have more mouths to feed as a result of more and more families living together.

 

• The employment to population ratio dropped again and is near an almost 30 year low: 58.5 today as compared to 63.0 in May of 2007, according to the BLS’ Labor Force Statistics (http://www.bls.gov).

 

• For every one new job opening, there are approximately six unemployed people in the U.S. that need a job.

 

• The number of people working part-time for economic reasons rose for three months in a row as household employment fell by more than 190,000 in April 2011.

 

• Dave Rosenberg made an interesting observation about the April 2011 numbers, “At 131 million, payrolls are actually lower now than they were in March 2000. …over this 11 year period of flat employment, the population has risen nearly 30 million.“ He further noted, “Payrolls are actually 7 million shy of where they were when the recession began.”

 

• The majority of U.S. housing markets continue to see, AND WILL CONTINUE TO SEE, falling housing prices. We have not hit bottom, and are far from it in most major markets, with the exception of Washington D.C, and in discrete pockets of solid employment growth elsewhere in the country.

 

It’s great we are adding jobs, and without the fiscal and monetary intervention of the past 2 years we would not have made the progress we have. This has been positive, but the reality is that while we have added 1.5 million jobs, we need to add another 7 million jobs just to catch up to where we left off, and that number ignores the population growth.

 

However, we will not see immediate continuation of significant monetary stimulus as QE 2 ends in June, and job growth will remain stagnant. For our loyal readers you may recall that in our Catalyst Quarterly of 2010 we said 2^nd Quarter 2010 U.S. G.D.P. would come in shockingly low….and it did. Remember when all, (including the Fed), were looking for 3.5% G.D.P., and we landed at 1.6% in the 2^nd Qtr. 2010? The economy and the stock market were headed in the wrong direction until Mr. Bernanke started beating the QE 2 Tom Toms in late August/September, and then implemented it in November. Now QE 2 is waning and we are back to where we were prior to its implementation (except the stock market hasn’t corrected). Now G.D.P. is at 1.9% (second revised estimate), and positive signs indicating this is a mere hiccup are hard to find. Wish we had better news, one day we will.

 

We predict that QE 3 will not follow QE 2 immediately, but we are confident that a new amount, and perhaps form, of monetary stimulus will be introduced before the end of 2011 because our current GDP, as was the case in the 2^nd Qtr. of 2010, will call for it.

 

So what do you do? Weigh what we are saying and place your bet. Remember, unless you are selling your business or service enterprise, your chips are on the table. You are either moving them to another position, or you are letting them ride.

 

The GDP number we predicted last July reflected significant misjudgment by the Fed and major economists about the condition of the American consumer whose spending/consumption accounts for 70% of G.D.P. We encouraged our members and/or anyone reading the Catalyst Quarterly to understand the real condition of the U.S. consumer, including deflationary pressures within the U.S. economic system, and to review their specific business and/or service as appropriate.

 

In our view the U.S. consumer’s capacity and demand for consumption was foundationally not strong enough to sustain the 3-3.5% GDP needed as a minimal base foundation for a sustainable robust recovery. Our view has not changed as we go forward in 2011, and we see the initial and 1^st revised estimate of 1^st Qtr. GDP at 1.8%, the 1.9% as indicative.

 

After the light bulb went on at the end of last July, Mr. Bernanke and the Fed began to quietly lay the foundations for the institution and implementation of significant monetary intervention to stem the tide of economic reversal. The economic recovery was pronounced, yet here was a 2^nd Qtr. 2010 GDP number that portended a “double dip” recession.

 

Later in the summer of 2010, markets reacted to the subtle indications that the Fed would be injecting significant dollars into the economic system. This anticipation was fulfilled when the Fed announced concretely that it would begin a systematic program of printing and supplying an extra $600 billion dollars for circulation. The injection of the full $600 billion completed June 2011.

 

The impact and results of this huge and unprecedented specific monetary intervention has been the subject of heated speculation and debate. Obviously, no one knows for sure what would have happened to asset markets, the U.S. economy, or the global economy had the $600 billion of QE 2 not been introduced in November.

 

However, most agree that a very specific effect of QE 2 has been to push asset prices to higher levels today than where they would be without the $600 billion injection. Similarly, this injection has precipitated significant spikes in commodity prices with direct negative impact on all U.S. Consumers as they are now paying more for food and gasoline as a result of QE 2.

 

The Fed is expert at hiding its hand. No one can predict with certainty what the Fed will do next.