This Week In Your Wallet – June 14, 2011
Last week I had the pleasure of spending an hour listening to Dr. David Kelly, Chief Market Strategist for JP Morgan Funds. Dr. Kelly is the kind of economist that has popularized the profession. He’s smart. He’s funny. He’s relevant. I left the hall thinking that if he’d been my professor for Econ 1-A, I might have actually emerged with an A. Who knows, I might have even changed my major.
As questions of whether we’re headed for a double dip loom large, I decided to devote this week’s newsletter to Dr. Kelly’s thoughts on the subject.
“Is it getting better? Or do you feel the same?”
Dr Kelly began his address with these two questions ala U2 (he would later quote “the noted philosopher Beyonce” ) and answered them: Yes, and yes. The fact that it is not getting better fast enough explains why 63% of Americans believe we’re in recession now, despite the fact that we’ve been in recovery since June of 2009. When most recessions end, we come roaring out of the gate with 6 or 7 percent growth in GDP. That’s not been true of this recovery, which has been marked with substantially slower growth and economic data that continues to disappoint.
“You can’t collapse because you’re already in the basement.”
Despite that, Dr. Kelly believes a double dip unlikely. Why? Five factors. Number one: Growth. When you look at the cyclical sectors – cars, housing starts, private investments, capital goods orders – we’re already at such lows we have nowhere to go but up. Auto inventories, he noted, are already tight as a drum. Those cars owned by Americans are just getting older and older. Eventually, we’ll capitulate and buy a new one. Ditto housing. Right now, housing starts are on an annual pace of 523,000 a year, compared to our prior low water mark of 798,000 a year. When you consider that every year about one-quarter million homes are ruined by fire or flood and have to be replaced, it seems clear too that those numbers have little choice but to rise.
“About a million people are getting hired a week.”
And then there’s number two: Jobs. There is no arguing (from Dr. Kelly, at least) that jobs growth is going to be slow. We lost 8.8 million jobs in the recession. We’ve replaced 2.2 million thusfar. On this pace, it will take us 3 years to get back to go. By 2015, we should have 5 percent unemployment. But despite how down-and-out Americans are feeling, this is no where close to what we experienced in the Great Depression. Last year, the JOLTs (job openings and labor turnovers) report showed that over the 12 months ending in April, hires (not seasonally adjusted) totaled nearly 47.7 million and separations (not seasonally adjusted) totaled 46.4 million, yielding a net employment gain of 1.2 million. What that means is that about one million people are being hired a week. If you’re not one of them, Dr. Kelly advises asking: “Is your resume in the right pile?”
“An Irish summer of a recovery.”
Did I mention that David Kelly is Irish? He’s from Dublin. And to his mind, we’re in an Irish summer of a recovery. Not only because it’s been miserable. But in an Irish summer, “It rains a lot, it’s never very hot, it’s never very cold, but everything grows.” Kind of like profits (number three) recently. The environment we’re in has been great for corporations. They’ve been able to hold down their costs. Combine that with low tax expenses and low depreciation and the fact that workers aren’t angling for wages (which led to the Beyonce quote – why would you angle for a raise when you have the feeling that your employer “could have another you in a minute”) and corporate profits are doing just fine.
“Inflation is a wage phenomenon.”
Inflation is the fourth factor on Dr. Kelly’s list and he’s not worried about it. Why? Because, as he explains it, the difference between the rising gas prices of the 1970s and those we’ve experienced recently was that in the ‘70s unions were much more powerful. When their members started to notice their purchasing power eroding, their leaders went to bat and – successfully – drove up wages. That provided support for the higher prices, which lead to higher prices still, which lead to additional wage increases. Today, the unions don’t hold as much sway and without them we won’t get inflation that sticks. (He believes the threat of deflation has been pushed off as well.)
“A recession is when people want to wait and see.”
Finally, there’s the fifth and final element – interest rates. The Fed’s program of buying Treasuries has half worked (in that it kept long-term interest rates low) and half not in that the income sensitive sector of the economy is not stimulated. What the Fed needs to stop doing, he believes, is telling people that interest rates will stay low for the foreseeable future. Why? Because it doesn’t give anyone the feeling that their ability to lock into those interest rates is a short-term opportunity – and that has people cooling their heels to see what comes next. That’s a problem, says Dr. Kelly. “A recession is when people want to wait and see. A recovery is when people want to do it now.”
So, what happens next?
There are two things that could go wrong with his prognosis, Dr. Kelly notes – oil, to which America is terribly vulnerable, and the sovereign debt crisis, to which he suggests the best solution would be for someone (perhaps Germany) to write Greece a nice fat check of a gift. (Not a loan, a gift.) And there is one thing that could go right, and that’s confidence. “America needs to get its mojo back,” he says. Everything else will follow.
Have a good week!
Jean
