National Economic Trends – January 2011

The economy continues to gather momentum as we trundle into 2011. One of the principal concerns
over the sustainability of the economic expansion has been whether the consumer and service sectors
would snap out of their lethargy before the momentum from the industrial/business investment side
became spent. That appears to be resolving itself nicely. Even in the absence of vigorous job growth,
and in spite of another massive East Coast blizzard during Christmas week, the holiday spending
season appears to have been passably bodacious. The latest reading on service sector growth was
likewise above expectations, and business investment and industrial production continue to register
respectable gains. After several quarters of mediocre output growth, most economists expect that
GDP grew at around 3.5% during Q4 – not a blowout, but definitely strong enough to put fears of a
double dip recession to bed and to set the stage for continued gains in 2011.

Despite undeniable signs of progress we

Initial Claims for Unemployment
still haven’t seen the definitive “it month” Four Week Moving Average
Source: U.S. Dept. of Labor
signaling the jobs market has truly turned
the corner. This month was particularly 500,000
frustrating. The four-week moving 490,000480,000
average of initial unemployment claims, 470,000
for example, a reliable leading indicator of 460,000
overall employment trends, continued 450,000
440,000
dropping and is now close to the sub 430,000
400,000 level historically indicative of a 420,000
healthy labor market. The payroll 410,000
400,000
processing firm ADP also released a very Dec- Jan-10 Feb- Mar- Apr-10 May- Jun-10 Jul-10 Aug- Sep- Oct-10 Nov- Dec-
09 10 10 10 10 10 10 10
positive report in the days leading up to
the most recent monthly employment report predicting that private sector employment had risen a
shade under 300,000 in December. Then the government report came out and it was another blah
103,000 gain, with private sector up only about 113,000. If you listened closely, you could hear the
sssss sound of bullish economists deflating across the land. True, the prior two months were revised
up by a combined 70,000 jobs. Also true
that the unemployment rate fell Labor Market Indicators
Source: U.S. Dept. of Labor
dramatically from 9.8% to 9.4%. But the (in 000's) (in %)
600 12.0
unemployment rate calculation comes 400
from the notoriously unreliable household 200
10.0

survey, and nobody much believes the -

8.0

actual rate dropped that much. It wasn’t a (200) 6.0

terrible report, just disappointing – kind of (400)

4.0
like putting an iPad on your list to Santa (600)
2.0
and getting socks instead. We should (800)

point out that next month is benchmark (1,000) 0.0

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
revision time for the employment data, so
Change in Non-f arm Payrolls Unemployment Rate
we might well be cruising for a “never
mind what we said last month” moment.
But for now, it was definitely another socks from Santa month.

Economic Trends January 2011.doc 1

What makes the employment report stand out is Personal Income and Spending
that pretty much all the other economic data is % Change Prior Year
Source: U.S. Dept. of Commerce

looking increasingly spiffy. Real personal 4.0

income and spending – check, up 2.4% and 3.0

2.8% from prior year in November and with 2.0

1.0
clear positive momentum. Manufacturing
0.0
production – check again, up 0.3% for the -1.0
month and 6.0% from prior year in November. -2.0
We’re still down about 8% from peak -3.0

production in 2007, but up 11% from the nadir Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10

reached in mid 2009. Service sector growth – Real Personal Disposable Income Real Spending

check once more, with the Institute for Supply

US Manufacturing Output
Management’s index bouncing up over 2% to Source: U.S. Dept. of Commerce

57.1, indicating substantial acceleration in 94

December. Housing – okay, never mind, that 92
still stinks on ice. But even here, you’ve got to 90
hope that the long-term potential upside is a lot 88
bigger than any short-term downside. 86

84

So we’re left to ponder why the jobs report 82

appears to be an outlier. One possible 80

Nov-08 May-09 Nov-09 May-10 Nov-10
explanation has already been touched upon – it’s
possible that the employment statistics are just
bad and we’ve already turned the corner big-time
ISM Services Report
and won’t know it until after a couple of years’ Source: Institute for Supply Management
>50 Indicates Service Sector Expansion
worth of revisions. This is possible and 65
comforting, but not likely. A more probable 60
explanation is that companies are continuing to 55
find unexpected wellsprings of productivity 50

enhancements, through a combination of 45

technological advancements and periodic 40

flogging of the employees. This was a trend that 35

started long before this most recent recession, but 30

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
the implications are more disheartening when
Services ISM Expanding Economy
you’re near ten percent unemployment than
when you’re under five.
Home Sales vs. Real GDP
Sources: U.S. Dept. of Coomerce and The National Assoc. of Realtors
SA Annual Rate (in $ Billions)
One other inhibiting factor is harder to quantify 8,000
14,000
but very real, and that’s the national loss of 7,500
7,000 13,000
confidence in the wake of this brutal recession. 6,500
12,000
Some of that has been due to regulatory 6,000
5,500
11,000

uncertainty and lack of confidence in 5,000 10,000

policymaking. Those are real issues and the 4,500

4,000
9,000

outcome of the budgetary debates, in particular, 3,500

8,000

will be critically important in coming months, 3,000

Q1 '90 Q1 '93 Q1 '96 Q1 '99 Q1 '02 Q1 '05 Q1'08
7,000

but we’ve discussed these issues in previous Total Hom e Sales Real GDP

Economic Trends January 2011.doc 2

reports and don’t wish to beat a dead horse this month. Even aside from the policy issues, however,
there has been a highly understandable recoiling from risk in general. This is part of the natural cycle
of things. Excessive risk taking is a factor in every bubble, and the popping of these bubbles always
takes us a little too far in the other direction. In this case the bubble that popped was so big, and it’s
popping so dramatic, that the recovery seems like it’s going in slow motion.

To illustrate this point more eloquently, we’d like to reference the immortal words of former
Cincinnati Red first baseman Tony Perez, our second favorite Cuban expat. We grew up in
Southwestern Ohio during the 1970s when the fabled Big Red Machine was tearing it up pretty good.
In recent years the Reds have devolved more into the Little Red Tricycle with two flat tires – and
don’t even get us started on the Bengals – but back in the day they ruled and Tony was a key cog in
The Machine. He was particularly adept at driving in runs and hitting home runs. Back then they
called home runs “taters”, a hopelessly anachronistic term that went out with black lights and pet
rocks and has been superseded by “dingers” and, more lately, “bombs” and “jacks.” Anyhow, the
downside of all this prolific run production is that Tony struck out some. Actually, a lot. A whole
lot. One day a sportswriter covering the team accosted him about his prodigious strike out totals, but
Tony’s dismissive reply was: “You’ve got to pay the price if you want to be a long tater man.” Truer
words have not yet been spoken: if you want to have great success you’ve got to take risks, and there
will be inevitable failures. Every Facebook has a MySpace, every Apple an Atari, every
unconventional gas well a Deepwater Horizon. Calculated risk taking is an integral part of the
American character, and for the economy to regain altitude we have to get back to not regarding
failure as a four letter word. Everybody’s been too happy settling for bunt singles.

This brings us in a strange way to Fed Chairman Ben Bernanke. Now we’ll grant you that the
Chairman does not strike one as the quintessential long tater man, but hear us out. Regular readers of
this space know what we think of the Fed’s
current massive monetary easing: we think it’s S&P 500 Index
Source: Moody's Analytics
loopy and will feed another inevitable boom and 1300
bust cycle in commodities that is going to end
1250
badly. We also have previously pointed out that
it doesn’t seem to be working to reduce long- 1200
term interest rates, which was a stated goal. But 1150
since we are all in uncharted territory here we 1100
freely admit that we could be completely 1050
wrong. One of the other principal goals of the 1000
monetary easing was to encourage the financial 1-Jul 1-Sep 1-Nov 1-Jan

system and business investors to start taking

more risk again, i.e., to trade in safe treasury securities and big wads of balance sheet cash for riskier
assets such as stocks, real estate and other productive assets. The evidence of success in this respect
is actually favorable to date. Since late August, when the idea of QE 2 was first broached, the S&P
500 is up a bit more than 20% and most of the other indicators mentioned here started to perk up
noticeably after a disturbing summer lull. It can be argued that the economy was beginning to stir on
its own accord and that the timing of the QE 2 talk was coincidental. But it can also be argued that
the QE2 talk was just the tonic the economy needed to snap out of its excessive risk aversion funk.
Either way, the rotation of investment money into riskier assets appears to be happening and is a
necessary precursor to brighter days in the employment market. It’s just a continuing question of
when they arrive.

Economic Trends January 2011.doc 3