The Economy in the New Year
by Guy Baker
The Labor Department said job losses "were large and widespread across most major industry sectors."
The manufacturing sector lost 149,000 jobs in December. Once lost, these jobs are rarely replaced when compared to jobs in the service sector. It is much more difficult for a factory to restart for example than to rent more office space.
Data from economy.com shows the average worker has a shorter work week and is earning less pay.
- The unemployment rate rose to 7.2%, the highest rate since 1993
- Payroll employment declined by 524,000 jobs
- Additionally, October and November restatement of data showed 154,000 more jobs lost than originally reported
To add to this news, other indicators show how impacted the economy is right now.
- Credit cards and auto loans dropped by -$7.9 billion
- The ISM non-manufacturing index (40.6), was higher than predicted, which is good news, but it needs to be above 50 if the economy is expanding.
- Construction spending declined -0.6%
- Factory orders were also down by -4.6%
What to Expect?: This is not going to be a quick recovery. It could take 18 months or longer before the economy works through all of the negative financial problems it is facing. The jobless rate is predicted to go to 10% before a recovery begins. Congress is attempting to pass a bill to help unemployment, but it would take several months for this to help.
THE MARKETS
The Dow [-4.82%; -2.01%], the S & P 500 [-4.45%; -1.40%], and the NASDAQ Composite [-3.71%; -0.34%] all declined after a rally the first week. Corporate earnings are falling as evidenced by the S & P 500's P/E decline over the last week. The spiral of bad news is certainly not building investor confidence. However, historically, a consensus of bad news usually marks the beginning of a rally. So it will be interesting to see if it happens this time.
Historically, markets start to recover during the middle of recessions. So now is the time to accumulate money for the long run. We may look back and see 2009 as one of the best times ever to invest in the market. But when? It is hard to know. The best outcome is that the market will not drop much more in the months ahead, if at all. That being the case, then there should be room for optimism once the ISM goes above 50. But that is only one indicator.
Energy prices are continuing to edge higher but are much lower than we saw six to eight months ago. It is unlikely these prices will fall back. There is too much demand for foreign oil for the price to remain under $50. When that happens, we will see a ripple through the economy as prices start to rise and inflation tilts up again. But for now, we are in a deflationary period.
Interest rates are very low. Treasuries are only .06% as of last week. That is the spread between 30 years mortgages and a one year ARM. It is probably a good time to refinance if you have any equity left in your home. But then again, rates might drop more. Who knows?
I am still waiting to see what happens when the ARMs reset in February. This could cause another round of financial disruption. But hopefully, it will also cause the banks to find ways to help homeowners who are going to lose their homes because they cannot afford the higher mortgage payments.
The U.S. Dollar gained against the Euro despite all of our bad news. We are still seeing foreign investors investing in the U.S., although China has said they are done for a while. If that is a long term decision, then we may see long term rates rise to attract more foreign money to pay for the trillion dollar infusion Obama plans for the country. However, if the Fed does not react, Treasury prices would fall even more, resulting in awful returns for U.S. Treasury bonds.
Sorry this is not a more positive prognostication of things to come. But I think the malaise is with us for a while longer. It is going to take a major shift in attitude to turn the emotional attitude of our country into an optimistic one. Maybe our new President will be able to produce this result.
On a final note, the following article by Pat Dollard about Ayn Rand’s 1950’s novel Atlas Shrugged is prophetic. It will be interesting to see whether reality mirrors fiction. You may want to read it. http://patdollard.com/2009/01/ayn-rand-was-right/
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