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State of the Economy – June ’10

July 5, 2010

Pew researchers just concluded that “of the 13 recessions that the American public has endured since the Great Depression of 1929-33, none has presented a more punishing combination of length, breadth and depth than this one.” Continuing on… Pew states: This recession “has eroded more household wealth than any other episode in modern economic history.”

The economy looks to be plodding along in just about the same condition it was in before Lehman’s bankruptcy, before the government saved Fannie and Freddie, before the Federal Reserve cut rates to zero, before the massive fiscal stimulus was voted on. Vehicle sales: weak. Employment: weak. Manufacturing output: decent, but fading fast as the stimulus dollars fade. Factory orders in May suffered their biggest tumble since March of last year. Retail sales are down. The typical workweek declined. Average earnings dropped. Construction, home sales, confidence: weak, weak, weak.

  • New home sales imploded 33 percent to a seasonally adjusted annual rate of 300,000 units. That’s the lowest ever recorded!
  • Durable goods orders tanked 1.1 percent in May, while housing construction skidded 10 percent.
  • Consumer confidence plunged to 52.9 in June, according to the Conference Board. That was a huge drop from 62.7 in May and well below the 62.5 that economists were expecting.
  • The Dallas Fed’s gauge of manufacturing activity dropped to -4 percent from 2.9 percent. The Chicago Fed’s activity index fell to 0.21 from 0.25. The Richmond Fed’s index fell to 23 from 26, while the Philadelphia Fed’s index plunged to 8 from 21.4, the worst reading in 10 months.

  • The Economic Cycle Research Institute’s Weekly Leading Index is falling off a cliff. Its growth rate just fell to NEGATIVE 6.9 percent, the worst reading in a year and far below the high of POSITIVE 28.5 percent in October. The last time this index tanked this much, recession struck within a few months.
  • Real unemployment is still at 16.7%. Yes, 16.7%! This is the official number reported by the Bureau of Labor Statistics (BLS). The unemployment situation is getting worse.

This isn’t some isolated, regional downturn. It’s one that’s spreading to every corner of the United States. Talk about a laundry list of worrisome reports.

And the reason for the decline in the Unemployment Rate appears to be not that workers are finding jobs, but that they are leaving the workforce because they are discouraged. Falling wages. Falling employment. The Fed says US unemployment is likely to stay high for a long time, and that justifies zero interest rates indefinitely. The Fed’s rock-bottom short-term interest rates – are having almost no effect.  That’s because jobs and wages are so lousy that consumers don’t have enough money to buy much of anything, making small businesses bad credit risks and causing big business to sit on the huge pile of cash they’ve accumulated.

The housing market is in serious free-fall.

As housing sales fall so will big bank balance sheets. That means we are facing another credit collapse. We have a credit-based economy. And what we are seeing is the destruction of credit… and the slower speed of money. Is this Ground Hog’s day? As I wrote in March, the Money supply is all cash plus all credit. Here we are in the largest credit-based economy in world history, and some people still forget the entire ‘credit’ half of the money supply when checking to see if the money supply grew (inflation) or shrank (deflation). Hey, the cash grew! Oops, the credit shrank. Which event was larger?

In the last 10 years, the engines of growth have been spawned primarily from consumer spending and credit creation. The credit creation model, which came from banks accounted for 50% of loans. Finance Co’s and securitization firms were the other 50% which is presently idle. So half the credit creation market today is gone. Evaporated. Poof! The question now becomes how banks can lend more in the future since the finance and securitization firms are shut down.

Simply put, the amount of credit needed where banks can lend more is hampered by the deposits available in the credit creation market space. All this effects trade flows and capital flows and new investment when half the engine of new credit creation is gone.With both engines evaporated, the combined crisis of consumer consumption coupled with limited credit creation in a credit-driven economy has created market-sector-wide chaos in our economy. You might be able to spend your way out of a typical business cycle recession… but, the thing is…

This is not a business cycle caused recession. This is a bursting credit bubble recession.

Trying to re-inflate a credit bubble with more borrowed “stimulus” money is basic economic insanity destine for major failure. A debt problem isn’t fixed with more debt. Yet that’s what the geniuses in Obama’s government are hell bent on doing. You really can’t boost the economy by confiscating the money from the productive sectors of the economy and handing it out to the unproductive sectors… Or to big Dem donors? How did we get out of the Carter depression? Tax rate reductions and cuts in federal regulations. Free the American people and small business from an obtrusive government and good things will happen.

If you are not from a finance background but still like to understand the whole credit crisis, just watch the following video (animated story) that explains the entire story of the Credit Crisis in Plain English.

In simple terms, a crisis is caused by banks being too nervous to lend money to us or each other. Where they will lend, they charge higher rates of interest to cover their risk. In the real world, that means more expensive mortgages, and in the worst cases, repossession and bankruptcy of businesses. There is no doubt that the credit crunch has exacerbated a downturn in the housing market and the broader economy. Homeowners are struggling to meet mortgage repayments and are unable to remortgage their homes to free up extra funds. And, such ‘uncertainty’ is the bane of business success. Uncertainty’ stifles creativity, kills jobs, offers up more crises.

The deteriorating economic outlook has undermined business confidence. With too many mandates, regulations, red tape, and the second-highest corporate income tax rate on the planet, government has heaped too many burdens on business. Small businesses are paying the price for an economic crisis they didn’t create. More and more small businesses are being rejected for loans. It doesn’t matter how ‘creditworthy’ or what the business is; they are being rejected. If a small business is not growing (and very few are) or hold more personal assets (which many don’t in a service-based economy) banks won’t lend. With credit creation stalled, banks not lending, small businesses not growing or hiring; the economy can’t produce new jobs; this is an obvious recipe for a stagnant economy for the next three or more years.

During the Reagan administration lowering taxes increased revenues to the treasury due to increased economic activity (higher profits for businesses, more entrepreneurs opening new businesses, and increased employment all led to higher tax receipts). The Obama Regime that has taken control of our government want our economy to collapse so that they can install a control and command economy and move our country one-step closer to being a totalitarian socialist state. Naturally, we will need a new Congress before any improvement in the treatment of business can be expected. Can you imagine Pelosi or Reid cutting taxes and regulations on business? Unfortunately, we are going to have to go through a prolonged period of tough times. Unemployment will remain high. The economy will remain stalled. And, 2011 will be brutal.

But, not all news is terribly bad. While we can theorize about leading and lagging indicators of the economy, rail traffic is a good economical indicator as it moves heavy industrial goods as well as huge quantities of regular consumer goods through our economic system. Freight rail is a “derived demand” industry — demand for the rail service is tied with demand for the products that the railroads haul. Simply put, it’s a measure of how much stuff is being shipped. If stuff is not moving, the economy is not moving. Rail traffic, therefore, acts as a solid barometer of the overall health of the economy. While there has not been that much improvement in overall traffic, there has been some ‘less negative’ movement in most freight rail categories. Rail traffic remains relatively steady, up 11.4 percent compared with the same week in 2009, but down 13.2 percent from 2008. And,  cargo freight demand was up 6% more than pre-recession levels.

Summary

To the Obama regime, it’s all about power. It’s actually easier to gain total control over a vastly weakened country, with a needy populace when the economy is hurting. We are not going to get the toothpaste back in the tube anytime soon, if ever. And, 76,000,000 eligible voters stayed home last election. Democrats desperately need to fool midterm voters into believing that they’re doing something to create jobs. Don’t buy it. More of the same won’t solve our economic problems. The global economies are dying from a lack of strong capitalism and available credit to spawn free market mechanisms. This is neither a V-shaped recovery nor a double-dip recession. What recovery have we seen? The already bad economy is not growing or expanding as unemployment gets worse.

Banks are not lending. Unemployment is running at near double-digit levels in the US and the Eurozone. Consumers are worried about losing their jobs and are having their incomes squeezed; consumer confidence is way down. That makes businesses anxious about investing. Housing is in a free fall with new home sales imploding. The commercial real estate bubble has yet to pop.  Durable Goods have tanked. Business profits down. Technical indicators suggest market investors are about to get clobbered. We are still trying to manipulate ourselves out of an inevitable depression. Fundamental storm clouds are gathering. This is going to get bumpy. This economy and this country are heading toward a collapse. Yes, collapse, if we do not reverse course soon.

Not much has changed since ‘State of the Economy – March 2010″. You might want to read back from a historical perspective.

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