Client & Advisor Update - September 23, 2009
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Moving in the right direction but be aware of the crosscurrents Businesses are doing more with less: We learned that nonfarm payrolls fell by 247,000 in July, and 217,000 in August, the fewest since last August, indicating further moderation in the trend of job losses. These figures were less than expected and way down from the 700,000 in monthly job losses that we were experiencing at the beginning of the year. Additionally the average workweek increased to 33.1 from 33.0 hours, the first increase since last August. Also, nonfarm productivity surged at a 6.4% annual rate in Q2, the biggest increase since Q3 2003 and larger than the 5.5% expected increase. Manufacturing productivity rose at a 5.3% rate, the biggest increase in four years. Good news on investments: According to the Associated Press, workers are again embracing 401(k) plans after the market meltdown and ongoing recession left many unable or unwilling to set aside some of their paychecks for retirement. According to Fidelity Investments, which is the nation's largest workplace savings plan provider, defined contribution plans raised the amount they set aside rather than decreased the percentage of pay they put into their savings, the first time that's happened in a year. In each of the previous three quarters, the percentage of Fidelity's 11.2 million plan participants cutting their contributions topped 6%, exceeding the number who increased the amount going into their 401(k)s. But in the three months ended June 30, 4.7% boosted their contributions, with just 3% decreasing it. The average individual account balance rose 13.5% in the second quarter due to rising stock prices and plan contributions by workers and their employers. More than 90% of the 17,500 plans that Fidelity administers for companies have left the percentage they match unchanged since September, rather than reducing it or suspending matches altogether. Improving news on home sales: Existing home sales rose 3.8% in the second quarter as lower home prices and government tax breaks pushed many would-be home-buyers off the fence and into the real-estate market. While down on a year-over-year basis, 39 states reported increases in second-quarter home sales compared to the first quarter. Even more surprising, as sales increased, so did home prices. Construction of new single-family homes rose for the fifth straight month, according to the Commerce Department. The pace of single-family home construction edged up almost 2% and building permits for future construction climbed nearly 6%. The confidence level in the industry this month is the highest in more than a year, according to the National Association of Home Builders. This is a comparative improvement from recent months as new home construction is still off more than 70% from the peak in January 2006. Additionally, July existing home sales were up 7.2%, the fourth month in a row of rising sales. As we have said before, housing has led the rebound from every recession in this country since 1960. Historically, existing home sales pick up first, followed by new home sales and then new home starts. This appears to be the case this time around as well. The Paradox of Thrift: Even as we collect evidence that the recession is receding, there is worry that the recovery may be weak because consumers are reluctant to spend as they increase their savings. This is such a normal and expected phenomenon that it has even been named by economists -- the "paradox of thrift." The paradox is that what is good for the individual (saving), is bad for society in general (low consumtion). Since consumer spending has accounted for 70% of the nation's economic activity recently, even a small decline in spending could significantly depress demand for goods and services, discouraging businesses from hiring more workers. For many consumers, the inclination to buy has been diminished by a year's worth of worry over our investments, our faltering jobs and the stumbling economy. The days when Americans are eager to borrow against their stock portfolios and homes in order to purchase luxuries seem gone. Turning away from credit: In a return to economic life nearly a half century ago -- when people spent the money they had now, not the money they were going to get tomorrow -- households must increasingly depend upon paychecks to finance spending. This is likely to curb consumption. It also may mean a shift from credit cards to debit cards for many people, as they save more. As recently as the middle of 2007, Americans saved less than 2% of their income, according to the Bureau of Economic Analysis. In recent months, the rate has exceeded 4%. Economists are looking up: In a poll by Bloomberg News, economists lifted their estimates for the third quarter GDP by 1.2% compared with July, which would be the biggest boost in surveys since May 2003. These projections followed better than expected reports in manufacturing, employment and home construction. Consumer spending is expected to rise about 1.5% from July to December. This was partially fueled by strong demand thanks to the "cash for clunkers" car-rebate program. Will this increase be temporary or have a ripple effect? The cash for clunkers program was effective and made sense. Ditto for the tax credit for first-time home buyers, this was an excellent targeted program that helped stimulate demand for homes. The cash for clunkers program is over, however, if the tax credit for first-time home buyers is extended, it will bode well for the economy. It will also be interesting to see if the momentum started by these two programs will last or dissipate. Watch home prices and sales figures: Lower home prices and government tax breaks pushed many would-be home-buyers off the fence and into the real-estate market, but will this trend continue? July was the last month that builders can start new homes and have first-time buyers qualify for a new tax credit. Buyers can save 10% on the price of a home, up to $8,000 in taxes, if they complete the purchase by the end of November. Builders and real estate agents are pressing Congress to extend that credit, but if the tax credit expires, "We could see a fallback," said David Crowe, chief economist for the National Association of Home Builders. This is absolutely something to watch the news for. Watch jobs: With the labor force growing at an average 1% rate, the economy needs to grow around 3% just to keep the current unemployment rate steady, which could mean another jobless recovery. Again, an extension of the housing tax rebate would be a big help in creating jobs. Where Americans wind up on the spending vs. savings question will also determine job growth. Watch the WTO-China conflict: Further job creation may hinge on the conflict between the World Trade Organization and China. Around Labor Day, China is supposed to stop many illegal activities that protect their own domestic market against imports, while ignoring rules meant to create free and fair trade overseas. This fight is very important and has wide ramifications. Watch for Americans to feel more secure in their jobs and start spending a little more: With the aforementioned slowing in the pace of job losses, Americans may feel more secure in their jobs and therefore find a happy median between the free spending days before the "great recession" and the tight-fisted ways of today. My guess is this is what will happen if the economy continues to right itself and job losses continue to moderate. Watch the progress of stimulus money: The stimulus money was planned to be released over a period of about two years. That time frame was initially criticized because the economy needed immediate help. Now it looks smart to have some of the stimulus rolling in as the Fed ceases some of its policies that helped save the banking industry. That should help keep the economy stable. As these issues resolve and unfold, the big test for the Fed will be whether Bernanke can avoid raging inflation as he works with the Obama administration to wind down the stimulus programs. All of this hopefully comes at a time when spending finds a happy middle ground between the old days of cash-and-carry and the overboard credit of recent years and, just so happens, as the next presidential election cycle begins. All in all, the economy is in a much better place than it was at this time last year. It is not out of the woods yet, but things are going in the right direction. Stay tuned!
No matter one's political leaning, it seems obvious that we can draw a few basic conclusions from the current economic situation.
First, Federal Reserve chairman Ben Bernanke's nonitary policies were successful. Most of Bernanke's term, which began in 2006, has been spent battling the recession and indeed the possibility of depression. Therefore he was reappointed for a second term in August by President Obama. Second, President Obama's stimulus program is working, even though it has been roundly criticized for all of the following reasons -- having insufficient programs, being a budget-buster, and supplying too little or too much in the way of immediate stimulus.
Recent positive news gives us hope
Crosscurrents
What to watch for now