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No News is No News

DKW, January 11, 2012

First of all, Happy New Year.

Since the last rendering (A Summertime Carnival Ride), things have been all but exciting. While this depends somewhat on your perspective, viewing most of the economic graphs of the last six months has been about as exciting as watching paint dry.

Real GDP growth over the first three quarters of 2011 (latest data available) were 0.4%, 1.3%, and 1.8%. Three percent growth is considered healthy. Real personal income minus transfer payments is up just 1.6% for the period. Real wages are up 0.9%. Real disposable income is down 0.3%. Real personal consumption expenditures are up 1.1% for three quarters of 2011, mostly on spending for durable goods, in particular automobiles. The fact that consumption is growing faster than disposable income means consumers are again tapping savings or debt for purchases. Some consumers are spending above disposable income because they have to, others because they are feeling more confident about their future income streams. In aggregate, consumers are still deleveraging (paying down debt).

Industry activity has been fairly stable as well. The ISM non-manufacturing index has been moving back and forth between 52 and 53 for the last six months (50 means expansion). The manufacturing index has been a little more interesting, moving sideways between 51 and 53. The December manufacturing figure showed a pop to 53.9.

Overall construction spending has begun to show some flicker of life. November construction spending was up 1.2% year-over-year for only the second time in at least three years. Residential construction has started to rouse due to multi-family construction. November multi-family housing starts were up 25.3% to 685,000 units at a seasonally adjusted annual rate (SAAR). Single-family home building was more lackluster with November starts up 2.3% SAAR. Permits were congruently higher for each. Translating through, new home sales were up slightly in November to 315,000 units SAAR. Note this level is about twenty-five percent of what we would expect to satisfy population growth at previous homeownership rates. Existing home sales are warming a bit as well. Mortgage rates are running at historic lows.

Employment is making slow gains. The average monthly national jobs increase for 2011 was 137,000. While this is roughly double the 2010 rate, it still pales to what is required to lower the unemployment rate and absorb new job seekers. We would like the national monthly jobs number to be at least 250,000 to make the economy more self-actuating. We would prefer numbers in the 325,000 per month range. Wisconsin's job front of late has been less robust than the national picture. The state had strong jobs growth in the first half of the year and 16,300 private sector jobs have been created year-to-date, with 5,900 of those in manufacturing. However, the jobs numbers since July have been negative. These job figures are a bit perplexing as Wisconsin employment has increased 15,547 since August, but private sector jobs have decreased almost 14,000. Government sector jobs are down about 14,000 as well. (Note: the employment numbers and the jobs numbers come from two different surveys. Employment numbers are a household survey. Jobs numbers are a place-of-work survey.) As you might expect, the employment numbers usually move in the same direction as the jobs numbers. Deviations from the correlation occur on a monthly basis without uncommon regularity. But the fact that this situation has continued for five months has us searching for a more in-depth explanation.

So, Up or Down

Through the last six months, many economists' projections have ebbed and flowed with the latest data point or point of interest. The projected odds of recession in 2012 have swung from 25% to 50%. (Seldom do economists (or stock brokers or real estate agents) predict a downturn. In fact, there is a professional adage about how economists have predicted two of the last eight recessions.) The projections cluster around a more "muddle through" path with substandard economic growth through 2012 and even 2013, at around 2.0%.

I subscribe to the "muddle through" pathway. I don't see anything to jumpstart this economy at the moment and I do see a few substantial risks that could jeopardize the recovery, such as it is. Major risks are: 1) subpar employment growth, yielding low income growth, dampening consumption; 2) the fiscal crises in the euro zone deepening and spreading; and 3) higher oil prices from the affects of further isolating Iran, sucking away the little remaining cash in consumers pockets.

If we don't get job growth, we will have to continue to depend on exports to support the economy. The euro zone is our largest importer and most of those economies are slowing or even declining, although a weakening dollar against our major trading competitors to Asia, i.e., Europe, has helped.

The euro zone fiscal difficulties are far from over. Every day brings new talks, but little agreement on how to distribute the losses from pending default of government bonds. Much of the discussion is about how short of a "haircut" the private lenders (banks) should take and how much capital the European Union's countries (central banks and supporting entities) should float to buy time for countries such as Greece, Italy, and Spain to get their respective fiscal houses in order. Germany and France are the leaders of the discussion because they have the two largest economies on the continent and would be on tap to make the greatest contributions to a Union bailout fund. They are at odds, however, because French banks have large exposures to the sovereigns' debt, which is threatening the fiscal quality ratings of French bonds, while the Germans would be called upon to make the largest contribution to the bailout fund.

Saber-rattling in the Persian Gulf always comes with higher oil prices. Iran borders the Strait of Hormuz, a 21 mile wide (narrow) passage through which about 20% of the world's crude oil flows.

The latest data have been more promising. Housing is showing some life. Manufacturing and non-manufacturing activity has been encouraging. Employment factors are hinting at greater gains.

While it is a little too early to brighten my outlook, I have often been impressed by the resiliency of the U.S. economy.

So give me up or down, sideways isn't helping anyone and its boring.

Written by Dennis Winters, Chief Economist and OEA Administrator. January, 2012.