The Economic Downlook: Retro Numbers

I’ve actually been avoiding writing about the economic news these days because frankly I don’t want to harsh your  mellow this holiday season.  The Fed’s Open Market Committee is meeting the next few days and Dr. Bernanke’s study about Monetary Policy at the Zero Bound is  likely to be on the agenda.  We’re so close to zero interest rates in the credit markets, traditional monetary policy is basically off their table.  You’re going to hear words like liquidity trap (where the interest rates are so low that every one prefers to sit on cash and banks really don’t want to lend at that rate).  You’ll also hear about ‘quantitative easing’.  This is where the Fed uses it’s own balance sheet and it’s own assets to try to prop up the economy.  These are all moves tried by Japan in the 1990s during its lost decade.  We’re still debating their efficacy and the results look mixed.  The Fed can look around its tool box all that it wants but it’s doubtful to find a stash of viagra.  If you want a medical metaphor, the Fed is basically using untested methodology–like those tests of procedures they only let participants into if they’re terminal.  The Fed’s on the side lines.  We’re going to have to rely on stimulus from the folks in Congress and the incoming/outgoing adminstrations now.  (Greater Ethos help us!)

I’ve been looking over the recent numbers (yes MyIQ2xu, i’m throwing those fried chicken entrails again) and what’s really got me in a quandry is the number of times I see leading indicator numbersthat are only comparable to Hoover’s time.  In my three decades of economic study, I have NEVER had to harken back to Hoover’s time as anything more than a history lesson.  We seem to be hitting records on the downside that are puzzling even the brightest economist and believe me, I’m not among those.  However, I’ll try to give you a feel for some of the major indicators and why the global economy appears to be in for a long period of distress.

The Fed is likely to cut interest rates to 50 year lows some time in the next two days.  As I said, no one is expecting that to do much good but it will act as a signal that the Fed continues to follow serious expansionary policy to boost the economy.  It has a lot of leeway now because the recent inflation numbers are astounding.  Economists are expecting Thursday’s inflation rates to be the lowest since 1938 on the upside (1.4%) and the lowest since 1933 on the downside of the forecasts. Estimates by some economists have the U.S. economy experiencing its first negative year over year inflation since the 1950s.  This news is a mixed bag.  Basically if you’re a consumer, everything you want is about to become very cheap.  The problem is with the next set of numbers.  How many folks will be in the position to buy them?

Jobless claims hit a 26 week high last week.  Home building has fallen to its lowest level since 1959.   Both of these numbers are beyond grim and don’t show any sign of improvement.  In the job market, more and more folks are finding  themselves in part time jobs when they don’t want to be.  Also, the number of folks who have just given up on finding jobs–the discouraged worker– is on the climb.  Duration (how long people are out of work) has also gone up.  All of these are basic indicators that the jobs markets are in a major decline.  The numbers, again, are harkening back to levels we havent’ see in decades.  Hours worked, duration, and jobless claims are much better indicators of what the job markets are really like.  So much tinkering of politicians around what counts and doesn’t count as unemployment and the definition of  being ‘in the labor force’ has made the unemployment rate a bad indicator for the true state of joblessness.  You have to dig deeper to get a better sense and the deeper you dig, the more grim the statistics.   The  unemployment rate today is 6.5 % but could most models show it up to 9% by this time next year.  That’s basically a rate we haven’t seen since the Reagan/Carter years.  So far, this doesn’t look quite like the great depression, but it will rival the rates were saw at the end of the 70s.  

Meanwhile, the manufacturing sector continues its decline.  If it wasn’t for hurricane damage down here in the gulf states, it would be a lot worse.  The outlook is even worse for 2009.   Philadelphia and New York appear to be the next two states to be hit hardest.   We all know about the continuing issues in auto-related industries.

So this downturn looks to be the worse we’ve had since World War 2.  (I don’t know how many of you remember the recessions in the 70s and the beginning of the 8os, but they were NO fun and this will be worse.) My advice still hasn’t changed, even though the numbers are looking more dreadful than the last time we chatted.  Keep your job if you can.  Don’t buy anything you don’t really, really, really need.  Keep you money someplace really safe.  Ignore any investments you have right now.  Try not to look at them and try to leave them alone for what may be several years.  If you have long term funds, you can try to find some cheap investments because there are many out there, but if you’re the nervous type or you’re going to retire about 5 years out, I’d stick you’re new 401 contributions some place safe and just work to maintain your balance at the moment.  There will undoubtedly be some huge bargains in 2009.  If you’re in a fairly safe position, you might consider buying those big things then.  This is not what’s best for the economy right now, but it is what’s best for you. 

Definitely downsize your holidays.  Use this year to regain a more simple meaning.  Don’t run up your credit cards.  This could be one of the next hard hit financial areas and these guys are going to be looking for fee income and better terms.  If folks start defaulting on their credit cards, it’s only going to get bad for anyone left holding a balance and a payment. 

Remember, the true meaning of this time of year is the Winter Solstice and a celebration of getting through the winter to date and looking forward to spring and easier days.