Recovery?

Fed Chairmen (paternal or motherly)
Have made a depressing discovery:
If demand isn't great,
You can lower the rate
But you can't cut your way to recovery.

Sales Slump

The heart of the market is rending
When retail is downwardly trending,
But is it a shock
When a nation in hock
Will at times prefer saving to spending?

The US government reported retail sales down 0.5% in June, making the first negative sales quarter since April 2008. These light sales figures will weigh on the reelection hopes of Pres. Barack Obama, confirming as they do the picture of a weak domestic economy. But: is it wise or realistic to expect an overly indebted, underemployed US consumer to reach out of his or her meager savings to jumpstart the economy? Better for Uncle Sam to use his still-first-class credit rating to fund the renewal of our national infrastructure, thereby picking up the economy and providing something useful at the same time.

Economic Driver

Sales of new vehicles, typically,
Recede in recession terrifically,
'Til recovery beckons,
And that's when, we reckon,
They amplify upswings pro-cyclically.

Courtesy of FT Alphaville, we learn that auto sales have comprised 30% of GDP growth in the last two quarters of our tepid, ongoing recovery. Mining a gem from the research of Credit Suisse economists, Alphaville spotlights an interesting insight:

Motor vehicle output is less than 3% of GDP. But its standard deviation is more than nine times the overall GDP’s standard deviation. So in the world of growth rates, the auto sector will tend to punch well above its weight in expansions (and well below during recessions).

To all those who would worry that the surge in US auto sales is unsustainable, Alphaville points out that, as shown in the accompanying graph, the seasonally adjusted auto sales volume is still below the level of typical recessions such as that of 2001.

Delayed Gratification

Said a young man without a home loan,
Back at home with his folks in Bayonne:
"While household formation
Is met with frustration,
My wild oats are sitting unsown."

Might there be demographic implications in the US economic data and outlook? A couple of current posts in The Wall Street Journal's Real Time Economics blog leave one to wonder if a "baby bust" may be developing. First, stagnant wages are limiting consumer spending; since October 2010, real wages have declined 1.2%, and consumers have limited capacity to tap their already tapped-out credit card lines to propel domestic spending. Secondly, RTE reports that the Conference Board has looked into the future of housing and seen a wave of renting and downsizing; actually, that sounds like the present if you add living at home with the parents. It all adds up to less room for the pitter-pattering of little feet, and less money to keep them in baby booties, in the foreseeable future.

A Moving Target

Said Monti: "I honestly never knew,
When to balance the books I endeavored too,
How austerity tends
To lower the trends
Of output and government revenue."

Italy announced that it would not meet the 2013 balanced budget pledge that it made as part of the EU fiscal stability pact. It's not that the "technocratic" government of Prime Minister Mario Monti isn't committed to cutbacks; more so that a downwardly revised GDP forecast is undercutting the revenue side of the balance. The Italian economy, which had been forecast to shrink by 0.5% next year, now has a revised GDP growth outlook of -1.2%. Thus, a projected balanced budget has turned into a deficit equal to -0.5% of GDP. Unfortunately, by tightening fiscal policy in a recession, the government is making things worse. However, they are operating under constraints set by the European Union, and thus had no choice in the matter.

A Crude Iranian Conflict

If an outbreak of Persian hostility
Brings petroleum price volatility,
The economy's cooling
From trouble in fueling
The engine of upward mobility.

Tensions with Iran over its nuclear program have introduced a new round of uncertainty into global strategic affairs, but one thing is definite: if Iranian supply is taken off the market, rising oil prices would impinge on almost every aspect of the US economy. Higher gasoline prices would cause consumers to cut back on discretionary spending, as most have a limited ability to cut back on driving. Manufacturers would be hurt both from higher delivery costs as well as higher prices for plastics and other petroleum-based materials. Even many service industries maintain fleets of vehicles and would feel the effects of a Persian Gulf conflict. The one bright spot at this point is that the prospect of $4.50 gasoline, as in 2008, appears as yet remote.

Little Interest in Saving

Said Bernanke, waxing inventive
On another recession preventive:
"Though our savings must grow,
I'm keeping rates low,
So look for another incentive."

Federal Reserve Chairman Ben Bernanke is making life very easy for Jerry Stiller.  Mr. Stiller (pictured) is the lovable alte kocker who, as spokesman for Capital One Bank, brays happily that his client pays checking account interest "up to five times the national average."  Mr. Bernanke, testifying before the House Budget Committee on Thursday, noted that the fragile state of the US economic recovery dictates that the Fed hold rates to near zero through the end of 2014.  Corroborating the Chairman's testimony, the Capital One website promises to quintuple Dr. Goose's locally average checking account rates to a winning 1.00%. For the foreseeable future, it all adds up to little interest in saving.

2012 Outlook: Bad & Good

Said a hedge fund Colossus: "The crux
Is the global economy sucks;
But, by legerdemain,
To be perfectly plain,
My investors make billions of bucks."

The outlook for the developed economies is so bad that it might be a banner year for one of world's largest and most successful hedge funds. So says co-chief investment officer Robert Prince of Bridgewater Associates in Westport, Connecticut. "What you have is a picture of broken economic systems that are operating on life support," says Mr. Prince to The Wall Street Journal. "We're in a secular deleveraging that will probably take 15 to 20 years to work through and we're just four years in." Mr. Prince can only hope that the new year is as bad as the old, in which Bridgewater made 25% returns while the average "global macro" fund lost 3.7%. Among his firm's winning bets on bonds, stocks and commodities were "long" positions in gold (i.e., betting that the price would rise) and a well-timed call that the euro would fall against the yen.

Euro Downer

The market's unflinching barbarity
Toward the euro zone's flagging prosperity
Has its rate on a path
From a buck-and-a-half
Toward - eventually - dollar parity.

The euro has reached an 11-month low of $1.30, accelerating a trend that has seen the Old World's currency decline 12% from a high of $1.48 in May. As usual, the reasons are many; they include the belief that Europe is headed for a recession if its leaders do not soon restore confidence. European banks are poorly positioned to ease a credit crunch, as their piles of idle cash result from mandated deleveraging and recapitalization. Even the European Central Bank is contributing to euro weakness, based on the expectation of future rate cuts, which typically devalue a currency.
Chart courtesy of The Wall Street Journal.

Who Falls First?

Economists smartly conversed to,
Of three downturns, determine the worst two:
Those of debt uncontrolled
In the New World and Old,
Or of that which exports to the first two?

Writing in the Wall Street Journal, Ian Bremmer and Nouriel Roubini try to analyze, among Europe, China and the USA, whose economy has it the worst. They note that, in all three cases, "kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier." Their unsurprising conclusion is that Europe will fall first and hardest due to the severity of its debt crisis. America and China may not indulge in schadenfreude, however, as both would see their exports to Europe reduced.

It's Your Turn

Said Bernanke, recounting the facts,
While deflecting some Red-State attacks:
"The Fed did our part;
It's on Congress to start
To simplify filing one's tax."

Fed Chairman Ben Bernanke addressed the Congressional Joint Economic Committee on Tuesday, and told them that they and their colleagues must work together with the White House to renew the "close to faltering" American economy. His suggested Congressional to-do list includes finding a permanent solution for Fannie Mae and Freddie Mac; easing mortgage refinancing while enabling banks to rent out foreclosed properties; and simplifying the US tax code. At the same time, he dismissed the ever-more-frequently heard Republican criticism that, by keeping interest rates low, the Fed is enabling federal budget deficits. "I don't think that's a valid point," retorted the Chairman.

Bear Assets

The time-honored stock market lowdown,
In a global economy slowdown,
Is: a market advance,
Like a loose pair of pants,
Proves that what may go up, has to go down.

Stock markets around the world on Thursday heeded the lowdown on the slowdown, and proceeded to go down. Grim economic signs were intercontinental: in the US, where the Fed warned of "significant" downside risks to the economy; in China, where the latest manufacturing data appeared weak; and in Europe, where the crisis of banks and sovereign debt showed no sign of resolution. Proving that bad fundamentals trump all in the stock market, the S&P 500 sank 3.2% to 1130, and other indices also reversed recent gains. Ironically, belt-tightening may not help the situation, but that is a limerick for another day.

Too Small to Prevail

The diminutive banks in the land  
May be showing less profit than planned,  
If for growth they're depending  
On small-business lending,  
For which there is flagging demand.    


Kelly Evans writes in the Journal's Ahead of the Tape that smaller banks do not appear set to report the earnings improvements that the largest banks generally have of late.  The chief reason for this disparity is the smaller banks' greater dependence on lending, which has been slow to recover from the financial crisis.

Not Enough Firepower

Said Bernanke, "I wish there were eight of me
To confront unemployment creatively;
In our current position,
We lack ammunition
To ease into growth quantitatively."   

"Economists React: Fed Prepares for 'Gnarly Ride'," by Phil Izzo of the Wall Street Journal's Real Time Economics, surveys a broad swath of economists' opinions as to the Fed's ability and willingness to stimulate GDP with quantitative easing (the purchase of Treasury bonds).

Keynsian Lament

Said Krugman, full of reproach,
"The White House must change its approach.
If the engine needs gas
We should do it first class,
But they leave us to languish in coach."

The Big Dipper

Said a well-economically-versed one,
"I see bubbles and I've got to burst one:
The one way we'll skip
The next double dip
Is we never got over the first one."

With apologies to David Rosenberg of Gluskin Sheff  as seen in The Big Interview with Kelly Evans of the Wall Street Journal.

Whither the King?

U.S. growth was once buoyant and bubbly,
And by turns became dismal and ugly;
Now the world's in suspense,
As it's poised on the fence
'Twixt resurging, or bottoming doubly.

A New Low

Announced Commerce: "US inflation's
The lowest in two generations."
In recession so deep,
Our labor is cheap,
Which is no cause for wild celebrations.

Dr. Bernanke's Medicine

Said Bernanke, "The time is impending
To rein in our deficit spending,
And though no-one likes taxes,
To raise them in practice
Would show the recession is ending."

Not Lovin' the Recovery

At McDonald's they have a confession:
"We'd prefer to go back to recession.
We sell more dollar menus
At each of our venues
When folks are afraid of depression."

Thanks to Kelly Evans for analyzing fast food's elasticity of demand - "Ahead of the Tape."