Economic White Paper - Uncle Ben, Are We There Yet?

Recently, in front of a Congressional committee, Ben Bernanke stated that there were, “tentative signs of the economy stabilizing.” Does that mean recovery? Uncle Ben, are we there yet?

The National Bureau of Economic Research declares when recessions officially begin, and when recessions officially end. Since 1967, recession ending declarations have dovetailed with four economic factors. Some would call it coincidence. I call it the necessary building blocks for long-term recovery, and the foundation for a strong stock market.

1) Sales: Nothing happens until you sell something. Currently, about 80% of corporate earnings reports are positive because of cost cutting, not revenue growth. Savings rates, a much misused term, have been climbing over the past six months and are currently approaching 7%. This means that the consumer is shopping for needs over wants, and thus sales have diminished.

2) Production: Currently, industrial capacity utilization is at a four-decade low of 68.3%. Manufacturing capacity is at a six-decade low of 65%. If you’re not selling, then you don’t need production. Of course, there will be the occasional inventory restocking, which will create the sense of increased production. However, when the items, once produced, sit on the shelf collecting dust and are not sold, then the quick euphoric spurt will evaporate in despair. Currently, we are experiencing that spurt.

3) Employment: Once sales take off and production is ramped up, employees are called back to work. But right now, there are no sales, no production, and unemployment continues to rise. The President himself has called for higher unemployment, and the Federal Reserve has stated unemployment may not start to improve until 2011. Keep in mind, a slow down in unemployment is not employment.

4) Personal Income: One of the most significant statistics to be put forth by the government is the number of hours worked per week. Once at forty hours, it has now declined to thirty-three hours. This 15% decrease means less employees, less income, less purchasing power, fewer sales, less production, and the vicious cycle continues.

I’ll close with this example. In November 2001, the National Bureau of Economic Research declared the recession was over, much as most pundits are doing right now. Unfortunately, employment and income had not turned higher. In fact, not until 16 months and 21 months later, respectively, did all four components (sales, production, employment, and personal income) improve. The Bureau missed the call, and look what happened to the stock market from November 2001 until October 2002. A major disaster.

Currently, not one of the economic pillars is moving higher, let alone four.

Is the market flirting with disaster like 2001? You be the judge.

Please, Uncle Ben, are we there yet?

Till next time,

Bill


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