The gist of the conversation we had on Business News Network on Tuesday was that the data coming out of the U.S. ahead of the President’s State of the Union address was conflicting. Housing was dreadful, but consumer confidence was up; what’s happening?
Here’s my take:
- Technical recovery almost over. We are leaving the technical recovery phase and are on the verge of a full-blown statistical recovery. Technical recovery won’t feel like a recovery to most, as I said in July of 2009. And it has not. The headline unemployment rate is 9.4% while the broader unemployment rate is over 16%. But, statistically speaking we are moving past the real GDP levels of 2007 before the last recession began. And this is due primarily to fiscal and monetary stimulus and massive bailouts of the financial sector, mortgage market, and auto sector. The real underlying economy is weak and real income growth is poor for the average worker.
- Consumer confidence is up but not high. So consumer confidence is again above the depression-like lows we experienced in 2009. For example, the Conference Board’s Consumer Confidence Index rose to 60.6 yesterday, above expectations. However, this is a far cry from 90, which is generally considered the number associated with a healthy economy.
- Housing remains weak. As I indicated in April, the global economy was set to roll over for a early-to-mid-cycle slowdown. As this slowdown took shape, it wasn’t apparent how far it would go i.e. double dip or just a marked slowing. In line with this slowing was the loss of altitude in the housing market after the housing stimulus expired. The numbers now being released by the Case-Shiller housing index, while awful, are actually from that specific time period when the US economy’s growth rate was slowest. Let’s not beat around the bush though; housing is double dipping as we speak. And that means record foreclosures complicated by fraud and legal battles over those foreclosures. This is a huge drag on the economy.
- The U.S. labour market is weak but job prospects are up. Recent jobs numbers in the U.S. – 100,000 jobs added in December and over 400,000 initial jobless claims - are sub-par. Nevertheless, the trend is moving in the right direction and businesses employment optimism is at a twelve-year high. Moreover, data overestimate job gains leading into a recession but underestimate job gains coming out of a recession. We should expect upward revisions to job numbers, especially due to problems with the notorious birth-death model. Bottom line: the private sector jobs numbers should be getting better.
You know by now that I am cautiously optimistic about 2011. I still think the underlying economic fundamentals are weak and I am dubious as to whether policy makers are putting a plan in place to address structural problems. My hope is that the cyclical upturn is powerful enough to keep things going up so that consumers can deleverage.
Below is the video of the discussion Paul Waldie led with me and Rob Cox. Enjoy.
(click on image for link to video)
The second part of the discussion, focused more on the State of the Union, should follow after the first but here is the link just in case: