04 Feb 2011 Recovery’s Not Enough
The flurry of economic data released this week was on balance surprisingly strong, with the notable and regrettable exceptions of jobs and housing. Fed Chair Ben Bernanke summed up the economic outlook yesterday. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.” Yet almost every other metric is strong and getting stronger. Quarterly corporate profits are sharply ahead of a year ago, manufacturing is growing stronger, productivity continues to rise, and consumer spending as evidenced by retail sales is gaining strength.
The government announced today that the unemployment rate dropped from 9.4% to 9.0%, defying economists’ expectations. Still, payrolls rose by only 36,000 jobs last month (mostly manufacturing), also far below economists’ expectations. The drop in the unemployment rate is likely explained by more Americans leaving the ranks of job hunters. The unemployment rate has been at or above 9% since May 2009, the longest period since WWII. The report showed that nearly half of unemployed Americans, or 6.2 million people, have been out of work for more than six months. The longer someone is without a job, the harder it is for them to find work, and arguably the less motivated they become to look.
Housing, along with jobs, continues to threaten the recovery. Following their latest quarterly survey of housing-market conditions, the Wall Street Journal reports that prices declined in all of the 28 major metropolitan areas tracked during the fourth quarter when compared to a year earlier. And the size of the year-over-year price declines was greater than the previous quarter’s in all but three of the markets. Madeline Schnapp, director of macroeconomic research at TrimTabs warns that the recovery in housing may take another six years. This assessment falls in line with modern historical observations that asset classes which fall prey to major bubble bursts require at least a decade to recover.
On a brighter note, US corporations continue to perform surprisingly well. With just over 50% of large companies reporting fourth-quarter profits 2010 is poised to stand as the third-best full-year gain since 1998, according to the WSJ. Excluding financial companies, whose losses in 2009 skewed results, weighted earnings for S&P 500 companies are up 17% so far.
The continued strength in corporate earnings argues strongly that the results reflect far more than the benefits of cost-cutting in the early quarters of recovery. Businesses and consumers are clearly spending more with increasing confidence. Sales for the group rose about 9% from a year ago, according to S&P.
And Washington is getting in on the act too. The White House says that President Obama will ask Congress to permanently eliminate capital gains taxes on certain investments in small businesses as part of the budget plan he submits to Congress next month. The proposal is part of a package of initiatives aimed at boosting small businesses and entrepreneurship. The White House will also announce the creation of a new, private organization called Startup America, aimed at getting private companies to expand their support for entrepreneurship programs.
To say manufacturing is in full recovery would be an understatement. Earlier this week the Institute for Supply Management reported that their composite index jumped nearly 2-1/2 points to a rare plus 60 reading at 60.8 for a seven-year high. Bloomberg analysis of the report showed that new orders were the leading component, up nearly six points to 67.8. The other four components of the composite also show monthly acceleration including employment which is also in rare territory at 61.7 for a nearly two-point gain and the first plus-60 reading in seven years, according to ISM and Bloomberg.
Productivity continues to rise as businesses keep a tight hold on labor costs. Non-farm business productivity rose 2.6% in the fourth quarter which follows a gain of 2.4% in the third. Most anyone you talk to who has a job will confirm the observation that businesses are making the most of the employees they have. They find themselves carrying their own load and that of those laid off and the numbers show they are getting the job done.
Consumers are making more and spending more, according to this week’s Personal Income and Outlays report. Personal income in December rose 0.4%, following the same increase in November. For the year it is up 3.9%. Personal consumption spending rose a strong 0.7% in December following 0.3% in November.
Inflation as indicated by the survey jumped 0.3%, following a 0.1% rise in November. The core rate came in unchanged after edging up 0.1% in November. Compared to last year, headline PCE prices are up 1.2% compared to 1.1% in November. Core inflation eased to 0.7% year-on-year versus 0.8% in November.
Fed Chairman Ben Bernanke spoke earlier in the week and said the economic recovery, though not strong enough to create significant jog growth, has become self-sustaining. He noted that consumer spending was reasonably broad-based, but that slow job growth and the poor housing market would continue to dampen growth.
While the US economy is officially in recovery, it doesn’t feel like it to the 9% unemployed or the 7-10% ‘under-employed. If they are paying attention to the value of their homes or additional real estate holdings they must wonder when things will get better. Even gainfully employed folks likely wonder when things will get better as they are exhausted and expected to produce even more at work.
It is clear that the fallout of the Great Recession will be felt for years to come. How fast we all begin to feel better about our future largely depends upon decisions leaders make going forward. We talked about spending cuts and debt repayment last week. While these things are necessary and will largely consume the Congress in the coming year, these things are uninspiring, even disheartening for those caught in the obligatory government downsizing.
The inspiration that will bring us out of this funk will come from risk-takers. I’m not talking about speculative risk, but the kind that challenges the status quo, the kind of risk that excites and galvanizes commitment to its cause. Politically, those who challenge the status quo, who have new and creative ideas for government that are founded on timeless principles and ideals will rise to influence and power in the coming years.
Business leaders who are willing to risk short term profits in order to realign their organizations with their roots, their core beliefs, stand to reap huge profits in the future. Instead of threatening employees with the ax of termination or the knife or pay cuts, think how much more committed those employees will be if they are asked to join the mission of the organization and to share in the benefits as it reaches its goals.
Perhaps the most exciting area of risk-taking that has the most potential to bring us out of our funk is in the realm of entrepreneurialism. In this area, government has much more power to squash it than it does to promote it, but Mr. Obama’s efforts of promotion are to be applauded. It is at this stage of economic recovery that the seeds of entrepreneurship most plentiful. Some among the ranks of the recently laid off may find that they have what it takes risk starting a businesses on an idea, now that the tough decision of leaving more ‘comfortable’ employment has been made for them. Students full of idealistic fervor may be compelled to start their own ventures when employment is illusive.
Every economic recovery in modern history has been energized by innovation. The President was right to speak of it in his State of the Union and government policy can have a significant influence on it. The most significant example is indeed the space race started by John Kennedy in response to the Russian’s being first in space with Sputnik.
But government programs and incentives only go so far. Innovation comes from human imagination and conviction; imagination to conceive the idea and conviction to persevere the costs, the risk, and the sacrifices in order to see it through to fulfillment. Are there enough of these unique individuals around to power a true recovery, another ‘space race’? You bet there are.