17 Jun 2011 Bad Habits

Rising incomes and asset prices cover a lot of sins. For decades, consumers, businesses, and most notably our government, enabled by a steadily expanding standard of living, have adopted excess as an entitlement. The overwhelming impact of years of excessive spending and over-borrowing is becoming increasingly acute as none of the usual remedies is working. Wasteful government stimulus (with a few possible exceptions from T.A.R.P), Fed-controlled interest rates at near zero for years, and quantitative easings 1 & 2 (Fed buying US debt) have all fallen well short of their usual potency. We seem to have hit the wall; our excesses have finally caught up to us. 

Years ago comedian Red Skelton performed a memorable scene of a drunk at a bar throwing down drinks with abandon until the final one poured freely from his mouth and down his front. Surprised by the unexpected development, he mutters to his companion, “well I mmmust be ffful.”

How many ways is the US full? Housing prices topped six years ago and have been declining since, by far the longest period of decline in US history. US corporate taxes are among the highest in the world. The Republican controlled House has said they are full-up with government spending and they refuse to increase the nation’s $14.3 trillion debt ceiling without substantial ($4 trillion in cuts over the next decade). They have until August 2 before the nation’s debt pours down Uncle Sam’s front potentially risking loss of his AAA credit status or worse.

Vice President Biden and Congress say they will work around the clock to hammer out agreement on how the government will curb its drunken taxing and spending habits that are seventy years in the making.

Can 70 years of binging be undone in a few weeks? While many of the faithful of Alcoholics, Overeater’s, or Narcotics Anonymous will tell you that a lifetime of destructive behavior can be changed in a moment with a decision, the chances of doing so quickly when 247 Democrats (incl. 2 Independents and the president) and 287 Republicans must come to agreement on remedy are remote at best; especially while they are still at the ‘bar.’

According to Bloomberg, Democrats say major changes to Medicare, the long-term driver of the debt, are off the table, while Republicans have dug in against tax increases. Joe Biden told reporters: “At the end of the day we’re going to have to decide on what is good for the country that actually gets the rest of the world saying ‘these guys are getting their house in order, they’re on the right track. It has to be real, there has to be a real down payment and there has to be a real path that people believe ‘Yes, it’s possible, it’s probable they’ll get at the end of 10 years $4 trillion.” The first step ‘Uncle Sam’ is realizing that you have a problem.

The week’s news brought stark reminders that our binge of personal and government fiscal abuses will not be easily or quickly cured. The US consumer, who has historically risen to the challenge in past recessions by spending us out of the doldrums, is clearly not getting it done this time. How could he? His largest asset, his home has fallen in price for six years, without an end in sight. With unemployment at 9 to 17%, depending on how you cut it, if he’s working, he likely feels the rug could be yanked out any time. His income is rising only slowly and his savings, small as they are, are getting no interest, and it now costs substantially more to fill the car and cool the house.

Headline retail sales slipped 0.2% in May, tugged down largely by auto sales and with other components. And as retailers are being squeezed by rising costs of goods sold, they are learning just how difficult it is to get their customers to pay more after they have become quit accustomed to deep discounts.

The University of Michigan’s Consumer Survey fell 2-1/2 points to 71.8, at the low end of expectations and nearly erased the strong improvement during May. Pessimism on the economic outlook and pessimism on current economic conditions pulled consumer sentiment lower, according to Bloomberg. Another survey, the Bloomberg Consumer Comfort Index, improved to minus 44, the highest level since mid-April, but still a very weak reading.

Small businesses (the major source of new jobs) are also growing pessimistic. The National Federation of Independent Business index continues to fall. It was down 0.3 in May to a recessionary level of 90.9. According to Bloomberg, “the report points to weak consumer spending as the main factor, one that’s hitting services which is a central sector to small businesses. The report has a sharp political tone saying, without much detail, that Washington policies aren’t encouraging small businesses to hire. The report’s job creation indications are deteriorating with capital spending and inventory plans weakening. One in four respondents say weak sales are their top problem. Inflation is also cited as a major concern.”

Home builders reported the worst conditions since last year’s post housing-stimulus fade. The housing market index fell a very sharp three points to 13. But housing construction showed signs of life in May. Housing starts rebounded 3.5%, following a revised 8.8% drop in April (originally down 10.6%). Thankfully, housing permits point to improved optimism on the part of homebuilders. Housing permits jumped 8.7% in May, following a 1.9% decrease in April. Overall permits posted at an annualized rate of 0.612 million units and are actually up 5.2% on a year-ago basis.

The government’s announcement of leading indicators today was a pleasant surprise; up 0.8%. But much of the data comprising the rise has since turned south, so the reading may be an optimistic blip. On the clearly positive side though, jobless claims are continuing to improve this month.

Good news came for inflation as overall PPI (producer) inflation in May softened to 0.2% from April’s 0.8% jump. Energy still gained, by 1.5% after a 2.5% gain in April. Specifically, gasoline increased 2.7%, after jumping 3.6% in April. However, food fell 1.4%, following a 0.3% rebound the month before. For the overall PPI, the year-ago pace in May came in at 7.0%, compared to 6.6% in April. Prices at the consumer level also softened. The consumer price index in May grew at a 0.2% rate, down from 0.4% in April. Excluding food and energy, the CPI jumped 0.3%, following a 0.2% rise the month before.

All eyes are on our leaders in Washington for signs that they are going to leave the bar soon. Businesses and consumers alike are waiting to see real signs that Washington will change its bad habits and how. Quite simply, businesses are not going to hire until they know how much it is going to cost them in new taxes, benefits, and regulations to do so. Consumers will not spend more until they get more confident they will have a job next year. The second step in AA’s 12-step program is “to believe that a Power greater than ourselves could restore us to sanity.”