Van Eck Hotline on Money and the Economy
For: Friday, August 27, 2010
The Commerce Department released the first revision of second quarter GDP today. Due to a much larger than expected trade deficit during June, it was widely anticipated that the April to June growth number would be revised lower. Most economists expected today's revision to come in at 1.3%. As it turned out, the actual number was 1.6%. That must have been a disappointment for all of the bears and skeptics out there that are now heavily betting on a new recession in the U.S. economy and a crash/new bear market in U.S. stocks. During the past few weeks, I have devoted some time to discussing the economy in a broader context than is usually the case in the media or even behind closed doors at the big financial firms these days. Such a big picture view of the world has left me convinced that the economic recovery remains firmly in place. In fact, in some ways it could be considered stronger to date than we have seen during some of the other recovery cycles of the past two to three decades.
When the June trade deficit report was released a few weeks ago, I pointed out that the expansion in imports carried some bullish implications. If America was importing more than expected it stood to reason that demand within the U.S. from consumers, businesses and governments was also stronger than expected. That is real demand. While it was unfortunate that more of the stuff bought by Americans was not made domestically, it was still a sign that demand was holding up rather well during the second quarter. A few days ago, I heard one commentator openly wonder how imports could have been so strong during the latest quarter. We got the answer to that question with today's GDP revision report. Personal consumption for the second quarter was revised up to a growth rate of 2.0% - from the originally reported pace of 1.6%. That is a relatively big increase and it just goes to show that things have not been as bad with U.S. consumers of late as the media and others have been saying.
The stock market got off to a strong start today on the GDP news. That strength absolutely infuriated the bears. They said Wall Street was foolishly celebrating the GDP number just because it was not as weak as expected. That is a superficial way to look at the situation. The fact that personal consumption was revised higher played a big role. Also, the GDP deflator reading was revised up to 1.9% from 1.8%. Apparently, the deflation that so many people have been talking about this year is still refusing to make an appearance. In my opinion, the economy is far more likely to fall toward the inflation side of the scale during the next few years than to enter a deflationary period. That's because so much liquidity has been released into not only the U.S. economy but into the global economy as well. With the November elections now only 9-1/2 weeks away, it seems likely that the White House and the Democratically-controlled Congress will throw even more money at the economy. The current mini slowdown in the economy fits right in with the pattern laid down by past recoveries. If that continues, then growth should increase by late this year to early 2011. By that time though, the economy will likely have even more liquidity sloshing around - setting the stage for a new period of growth. A lot of people are looking for recession and deflation during 2011. Those expectations are going to be rolled back during the year ahead.
If the president is scared about the Democratic losses that are going to take place in the House and Senate during November, he can take solace in the idea that the economy will likely be in far better shape two years from now as he is in the teeth of the campaign season for his second term in office. I know a great many Republicans believe that the economic policies Obama has already implemented have put the economy on a collision course with disaster. New regulations and higher taxes are at the top of that list. Businesses and investors will no doubt be challenged by such higher costs/taxes but the marketplace will do what it does best and adapt to the situation - always looking for better and cheaper way to make and do anything. The economy has a number of things going for it these days. Consumer debt is down. In fact total credit card debt during the second quarter fell to the lowest level in eight years. Corporations have lots of cash on the books. Even the housing market should be able to contribute to economic growth during the year ahead as people come to realize that the overly-hyped shadow inventory of homes will never come crashing down on the market. While the housing market is certainly facing plenty of excess supply these days, I expect job growth to help work that situation out during the year ahead.
That brings me to the employment situation. Some months ago, I pointed out to you that employment is always one of the last parts of the economy to turn higher following a recession. That fact is just as well documented as the early recovery dip that always takes place during the first year of an economic rebound. Last week, jobless claims jumped to a higher than expected total of 500,000. The media went nuts at the number. After all, the weekly total had been below the 450,000 level just a month or so earlier. A jump of 50,000 in jobless claims in a short period of time was all that some people needed to declare the economy destined for a new recession. I have studied the numbers closely in recent months and something has bothered me about the way the jobless claims data has been presented in the press. With very few exceptions, reporters and commentators have not even mentioned that the recently laid off census workers have been temporarily skewing the weekly jobless claims data higher. (Note: Yesterday the previous week's jobless claims total was revised up to 504,000. However, the latest week registered a decline of 31,000 - coming in at 473,000.)
Every decade, the jobs numbers get stretched out first on the upside as census workers are hired and then on the downside as they are let go. When census hiring was helping to bolster the monthly employment data earlier this year, the bears sneered at the very mention of it as a positive story for the economy. Now their convictions seem to have weakened on the subject. While they dismissed census hiring as a temporary factor - they have now embraced the negative impact of the recent census layoffs as proof that the economy is headed for recession. Can you imagine if jobless claims had just dropped by 50,000 in a short period of time due to something as temporary as census hiring? Media reports would be dominated with talk about how the census was skewing the results. Also, the Federal government's recent extension of jobless benefits has brought a sort of "re-registration" for a large group of unemployed that had recently exhausted their benefits. Layoffs at the state and local level have also been pushing jobless claims higher in recent weeks. Some of those jobs were saved until recently due to the near-term boost from stimulus money. All of that is driven by temporary factors. As the economy catches its traditional second wind during the year ahead, the weekly jobless claims data should head back below 450,000 and then likely go below 400,000 next year. That would represent net job growth in the economy and would go a long way toward stabilizing everything from consumer spending to housing.
A week from today, the August employment report will be released. Early estimates call for a decline of about 120,000 in nonfarm payrolls. Just as was the case with the reported 131,000 decline in July, the number will be negatively impacted by layoffs of census workers. In terms of the private sector - which is going to be the engine of economic growth in this recovery - it is expected to post a net gain of 44,000 jobs in August. That brings up an interesting historical note that I have been meaning to share with you. As of the most up to date jobs data, the U.S. economic recovery has been in place for 13 months. During that period of time, the private sector has lost a total of 338,000 jobs. That compares to total job losses of 498,000 jobs during the 13 months following the 1990-1991 recession and a total of 1.323 million job losses in the 13 months following the 2001 recession. Since the census has skewed the jobs data of late, now is the time to focus on the private sector. This economic recovery has actually been stronger than the previous two recoveries - at least in terms of jobs. That is not something that makes headlines these days, yet it holds such bullish implications for the economy and the stock market going forward. More next week.