FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 7, 2010

IN THIS ISSUE:

1.  Economic News of Late Improving, Sort Of

2.  Economic Conclusions & Sober Realities

3.  Outcome of Lame Duck Congress Still Uncertain

Economic News of Late Improving, Sort Of

On November 23, the Commerce Department reported that Gross Domestic Product increased at an annual rate of 2.5% in the 3Q.  In the previous report, the GDP number for the 3Q was only 2%, so the latest number was above most pre-report estimates.  GDP increased only 1.7% in the 2Q, down significantly from 3.7% in the 1Q.

The better than expected 3Q GDP number was primarily the result of personal consumption expenditures (PCE), private inventory rebuilding, nonresidential fixed investment, exports and federal government spending, according to the Bureau of Economic Analysis.

The question, of course, is whether the better than expected GDP report for the 3Q is an indication that the economic recovery is gaining momentum.  Based on some other recent economic reports I will outline below, and the initial reports on holiday shopping trends, it looks like the 4Q could also come in slightly above expectations.

The Conference Board reported last Tuesday that the Consumer Confidence Index rose by a better than expected 4.2 points in November to 54.1, up from 49.9 in October.  The Expectations Index increased to 74.2 in November from 67.5 in October.  Lynn Franco of the Commerce Dept. noted:

“Consumer confidence is now at its highest level in five months, a welcome sign as we enter the holiday season. Consumers’ assessment of the current state of the economy and job market, while only slightly better than last month, suggests the economy is still expanding, albeit slowly. Expectations, the main driver of this month’s increase in confidence, are now at the highest level since May…”

The news on the holiday shopping trend is also positive.  Initial results are in for Cyber Monday and Thanksgiving week shopping, and the winner is the consumer. The International Council of Shopping Centers said last week that chain store sales rose 5.8% during Thanksgiving week over year ago levels.  Wholesale clubs jumped 8.5% and department stores were up 6.8%.

NPD Group, a marketing research firm, said last Tuesday that 35% of Black Friday shoppers bought items for themselves, representing “a strong number for any year,” said chief industry analyst Marshal Cohen.  In an average year that number is about 25%, and the trend all but disappeared in the last two years during the recession.

The Commerce Department reported that retail sales rose 0.5% in October, slightly above the pre-report consensus.  That report suggests an improvement in the retail sales numbers we saw for most of the summer.  Sales at auto dealerships were up a full 5% in October, the best showing since the Cash For Clunkers program ended.

The Index of Leading Economic Indicators (LEI) rose a solid 0.5% in both September and October.  As you can see in the chart below, the LEI has risen substantially since early 2009, which suggests that the economic recovery should continue at least modestly into 2011, barring a major negative surprise.

On the manufacturing front, the ISM Index edged slightly lower in November, falling from 56.9 to 56.6.  Any number above 50 in the ISM Index indicates that manufacturing is increasing.  Construction spending rose 0.7% in October for the second straight month.  Not all the news was good, however, as durable goods orders plunged 3.3% in October, the largest decline in 21 months.

Regarding the unemployment rate, the news is bad.  The official unemployment rate rose from 9.6% in October to 9.8% in November.  Part of the reason was that as the economic recovery continues, more people who previously were not counted as unemployed have begun to look for work again.  As they do, they must again be counted as unemployed.  We could see even more of this in the months ahead, and some forecasters believe the official unemployment rate could go back above 10% early next year.

According to last Friday’s report, the economy added only 39,000 jobs in November, while pre-report estimates expected at least 145,000 new jobs.  Weekly “initial claims” for new unemployment benefits fell to 407,000 for the week ended November 20, down from 441,000 the prior week.  This raised a lot of optimism briefly until the number for the week ended November 27 rose to 436,000.

Last Friday’s unemployment report marked the 19th consecutive month that the unemployment rate was above 9%. That breaks the post-World War II record set in the 1980s recession.  This dubious milestone shows that even if job growth picks up as some expect in the coming months, progress will be slow, and it may take years to put a big dent in the unemployment rate.  The economy lost more than 8 million jobs since the recession began in late 2007.

The Federal Reserve recently forecast that the jobless rate will still be hovering around 9% at the end of 2011 and will fall slowly to about 8% by the end of 2012.  The chronic level of high unemployment shows that many Americans are still suffering, even though the National Bureau of Economic Research has said the recession officially ended in June 2009.

On the housing front, both existing home sales and new home sales declined modestly in October, following increases during the summer.  Housing starts in October fell to 519,000, down from 588,000 in September. The one piece of good news in October was that pending home sales increased 10.4%.  All in all, expect the housing industry to continue to be a drag on the economy for the foreseeable future. 

One reason is the so-called “shadow inventory” of unsold foreclosure homes.  These are the unlisted bank-owned homes and potential foreclosures.  As of the end of August (latest data I could find), there were 2.1 million of these unlisted homes, compared with 4.2 million homes listed for sale.  These unlisted homes have to come on the market at some point, which could depress home values even further in some areas.

On a final economic note, according to the Federal Reserve, consumers took on more credit card debt in September for the first time in 24 consecutive months.  Consumer credit increased 1% in September after posting a third-quarter decline at an annual rate of 1.5%.  This is consistent with the recent improvement in consumer confidence and retail sales noted above.

Economic Conclusions & Sober Realities

No doubt the economy has improved modestly in the last half of 2010.  Several of the reports discussed above are encouraging.  The question is, how much additional improvement are we likely to see?  The key lies in bank lending.  As much as we hear about banks loosening lending standards, you would think that lending is increasing at a brisk pace.  Yet that is not the case.

The latest statistics from the Federal Reserve Bank of New York show more than 75% of small businesses that applied for a loan during the first half of 2010 did not receive the credit they needed.  During hard times such as these, businesses need capital more than ever; it spurs growth, innovation, and job creation.  Small businesses are in a Catch-22.

Banks, on the other hand, claim it’s hard to find qualified applicants and, for the most part, they believe the majority of small businesses simply aren’t credit-worthy.  And in this economy, banks are not willing to take a risk.  As a result, business lending continues to suffer.

To the contrary, the nation’s four largest banks claim they significantly increased lending to small businesses in the first half of this year as compared to last year.  Bank of America says it pledged to increase lending to small business by $5 billion this year and reports it was almost to the halfway point in late July.

Wells Fargo, which owns Wachovia, says it increased small business lending by 30% in the 2Q, again as compared to last year.  The bank also said it is taking a “second look” at previously declined applicants.

Meanwhile, Citigroup said small-business lending had doubled at the bank in the first six months of this year. JP Morgan Chase said its lending was up 37% in the first half of this year; of course, that figure includes its huge credit card operations.

Keep in mind that this is the reported experience of only four large banks.  Also, while these percentage increases look impressive, they are compared to lending levels for the same periods in 2008 when the recession and the credit crisis were at their worst, and most banks were lending very little if at all.

I’m not suggesting that these large banks are being untruthful about the amounts of money they reported having lent to small businesses (and credit card users in the case of Chase), but they have not lent enough money to even show up on the Fed’s chart of commercial loans, as you can see below (chart is as of October).

Blue Chip Economic Indicators (BCEI) is a monthly service I subscribe to that canvasses the latest forecasts of 50 top economists and analysts each month.  The consensus of the group calls for 4Q GDP growth of 2.4% (versus 2.5% in the 3Q) and growth for all of 2010 at 2.7%. 

The latest consensus for GDP growth for 2011 is only 2.5%, with growth for the 4Q of next year improving only to 2.9%.  If this forecast proves remotely accurate, this means the economy will probably still not be producing net new jobs by the end of next year.

In addition to asking the top 50 economists and analysts for their forecasts on the economy, interest rates, inflation, etc., they also ask for their views on various other topics periodically.  One question they asked in the latest issue was about the forecasters’ views on the housing market by mid-2011. Unfortunately, 61% of the forecasters believe that home prices will be lower in June of next year than they are today.

Outcome of Lame Duck Congress Still Uncertain

I have focused on the current “Lame Duck” session of Congress for the past several weeks.  As you will recall, the main question was whether this Lame Duck session, in which the Democrats still control both Houses of Congress, would try to ram through more of President Obama’s most liberal agenda items. 

Or, would this Lame Duck session focus on passing the really serious issues that need to be addressed this year and leave the politically-charged issues for the new Congress in January?  Frankly, it’s still too early to know for sure, but the good news is that time is running out fast, and so far very little has happened.

As a reminder, here are the serious things this Lame Duck session really needs to accomplish before Christmas.  Atop that list is the need to pass a new federal “budget resolution” to keep the government operating in the absence of passage of a new budget for fiscal 2011.  The budget for fiscal 2010 expired on September 30.

Last week, the Senate and the House passed a new budget resolution that is set to keep the government operating until only December 18 – the end of next week.  It remains to be seen if Congress will pass another continuing resolution that extends into early next year when the new Congress will have to deal with it.

Then there is the issue of extending the Bush tax cuts.  By now you know that the debate is focused on whether to extend the Bush tax cuts for all Americans, versus letting the cuts expire for those in the top two tax brackets as President Obama wants.  The Bush tax cuts – all of them – legally expire on January 1 unless Congress votes to extend them.

As you probably are aware, President Obama reached a compromise with Republicans on Monday afternoon and agreed to extend ALL of the Bush tax cuts for two more years.  In return, the Republicans agreed to extend unemployment benefits for another 13 months – at an estimated cost of $150 billion.  Congress is expected to pass legislation on both of these matters before the end of the year.

Of course, there are other priorities that President Obama is still pushing to get passed in this Lame Duck session before the end of this year.  One is the so-called “Dream Act” that would grant amnesty to illegal aliens that came to the US when they were minors, if they graduated from high school and/or are attending a US college or university.  The issue is, if the Dream Act passes, this would allow these newly appointed citizens to be able to bring their alien family members to the US as well.

Another issue is the proposed “START” nuclear disarmament treaty with the Russians that President Obama agreed to with Russian President Dmitry Medvedev in April, and needs the support of 67 out of 100 senators to be ratified.   Now President Obama is pushing the Lame Duck Congress to pass START before the end of this year as well.

Plus there’s the “Don’t ask, don’t tell” (DADT) policy regarding gays openly serving in the military.  Obama wants this policy eliminated this year as well.  It remains to be seen if the Lame Duck Congress will pass the Dream Act, START or DADT before the end of the year.

If space permitted, I could write several more pages on what will, or will not, happen in this Lame Duck session of Congress.  It remains to be seen.  But I suggest you keep a close eye on the political scene over the next 2-3 weeks.  It could be legendary, but hopefully not.

Time to hit the Send button.  Good luck with your holiday shopping!

Very best regards,

Gary D. Halbert

 

SPECIAL ARTICLES

Why Obama caved on the Bush tax cuts (very interesting, whether you’re conservative or liberal)
http://www.realclearpolitics.com/articles/2010/12/07/why_obama_caved_on_the_bush_tax_cuts_108166.html

Why banks aren’t lending to small businesses
http://www.foxsmallbusinesscenter.com/sbc/2010/11/17/america-isnt-lending-small-businesses/

What the Debt Commission plan left out.
http://www.realclearmarkets.com/articles/2010/12/06/what_the_simpson-bowles_plan_left_out_98782.html

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