04 Apr 2008 Don’t Look Down
Remember climbing a ladder for the first time and hearing the advice – don’t look down? Seems everybody looked down a couple of months ago and believed the worst. People seem to be frozen like deer in the headlights. In my conversations with friends and clients I hear that their businesses, some related to homebuilding and others completely unrelated, simply fell off the cliff a couple of months ago. While some can be explained by high fuel prices, poor exchange rates, and tight credit policies, the reasons are broader than the economic data. There seemed to be a psychological line that was crossed and people simply put on the brakes.
Businesses are responding by cutting jobs. The number of Americans filing first-time claims for unemployment benefits unexpectedly increased last week to the highest level since just after Hurricane Katrina in September 2005 as reported by Bloomberg. The government reported today that payrolls shrank by 80,000 jobs last month, more than forecast. The decline follows a 76,000 decline in February, more than initially reported by the Labor Department. The jobless rate rose to 5.1 percent from 4.8 percent.
The consumer successfully withstood the headwinds of rising gasoline and food prices, tightening credit policies, and falling home prices for months. But many, including the Fed worry that the last three months of rising unemployment might be a blast too strong. Consumer sentiment already predicts considerable slowing in spending, but the actual numbers are yet to prove that the consumer is going to completely retrench. In fact, there is a possibility that more normal spending patterns will return after the abrupt stall.
The government reported yesterday thatUSservice industries contracted less than forecast in March. The ISM’s non-manufacturing index, which captures almost 90% percent of the economy, rose to 49.6 from 49.3 in February. A reading of 50 is the dividing line between growth and contraction. Combined with the group’s manufacturing index, which earlier this week showed a smaller contraction than anticipated, the report indicates growth is unlikely to collapse.
Further, China, India, Korea, Germanyand others continue to show strong growth. And US businesses are selling to them in record numbers. US exports are up nearly 17%. The Korean Finance Minister reported on April 1st that export growth unexpectedly accelerated in March and that overseas shipments are likely to rise more than 10% percent this month.Korea is an excellent predictor of global trade.
Rather than not looking down perhaps we should be looking up or at least considering the more positive aspects around us. The housing crunch and credit problems are real and may continue to have shock value as new revelations arise, but their power is diminishing. Financial CEO’s and policy makers are saying with greater frequency that the worst of the losses is known.
So, let’s say we are in recession and have been since November or December of last year. Let’s also assume that the recession has a few more months to run as the bad news continues to feed on itself. But remember there are some strong measures of stimulus on the horizon. The government’s tax refunds are due out in May. You can bet that retailers and consumer products manufacturers are getting ready to help beneficiaries spend their unexpected bonuses.
The Fed has already aggressively lowered short-term interest rates and may go a bit further. Banks are in the business of lending money. They will come back to the risk game eventually, if gradually at first. But sooner or later the fires of competition will reignite the economic engine and theUSeconomy will wind back up to speed. The consensus building is for that to happen in the third or fourth quarter of this year.
You may have noted that the stock market has already begun anticipating recovery. The NASDAQ is 10% off its March 17th lows, while the Dow Jones Industrials which bottomed on March 10th is up 7.6%. These gains have come despite reports of a 3.35% decline in corporate profits for the first quarter so far. But stock prices continue to rise spurred on by rising commodity prices and the possibility of better-that-expected corporate earnings growth in certain sectors of the economy. Maybe we’ll start hearing some much needed good news soon. Here’s hoping.
Have a good weekend.