Signs point to another slump
Last week I blamed the Democratic Party exclusively for putting politics over the country’s well-being and this was unfair.
True, the Dems are attempting to hold firm on maintaining the current entitlement structure. But that position is no more absurd than the Republicans insisting that the path to prosperity requires no tax increases on the rich.
I have one question for both parties: How’s any of this workin’ out for us?
With demographics squarely against us, Social Security and Medicare must change. We can do it now or we can do what we’ve always done: wait for the situation to reach crisis proportions.
As far as relying on the wealthy to stimulate economic growth, let’s get real. These days the only thing many of the country’s richest are stimulating are their own bank accounts. Clinton proved higher taxes don’t squelch growth. If there is a buck to be made, the wealthy will invest. Face it: Putting their money in CD or Treasuries ain’t gonna make the monthly NetJet payments.
So in fairness to the Democrats, the Republicans aren’t any better. They just happen to have staked out the correct position on reducing government spending.
For months the economic news has been mixed but trending upward. But of late there’s been a subtle shift toward the negative. Although the markets tried to ignore the spate of bad news last week, the professional money is beginning to run for the hills.
Just about every indicator is signaling a slowdown from already modest growth. Hopefully the pause will be temporary and relatively short-lived. Housing and jobs remain the key indicators, but we’ll get to them in a bit. Other data points illustrate the impact of continued weakness in real estate and employment.
Depending upon your position in the retail food chain, results varied. Together, the 24 retailers tracked by Thomson Reuters posted below expectations growth of 4.9 percent in May. The good news is that sales continue to grow. The bad news is that this was the first miss in growth estimates since last December.
High-end retailers Saks and Nordstrom registered above trend results. That must be the wealthy stimulating the economy with all the money they’re saving from the lower tax rates.
Costco fared well with an 11 percent increase. But strip out gasoline sales and same-store sales were up only 6 percent. The numbers from BJs weren’t quite as strong: 7.4 percent with gas and 3 percent without. Target’s numbers were much bleaker, missing the bull’s-eye in May when it posted only a 2.8 percent rise in same-store sales. Wal-Mart no longer reports but you can bet their numbers aren’t pretty.
More alarming was the Institute for Supply Management Purchasing Managers’ Index, which plummeted from 67.6 in April to 56.6 in May. Now anything above 50 signifies growth and manufacturing represents only about 13 percent of GDP, so one could argue the drop is no big deal. However, the magnitude of the drop is the disturbing part. It was the worst drop since Lehman Brothers went belly up and the second largest monthly drop since 1980.
Now let’s review housing and employment.
The most recent Case-Schiller Index was not welcome news. Home prices fell another 4.2 percent in the first quarter and are now back to 2002 levels. Twelve of the 20 metropolitan areas tracked in the index posted new lows in March.
Here’s a stat that sheds some light on how important housing is to a recovery. In the recoveries of the 1980s, the 1990s and the early 2000s, residential construction added to economic growth for at least a year and a half following the downturns. In this recovery it has subtracted from growth in four of the seven quarters since the recession ended in June 2009.
Does anyone expect new homes to start springing up any time soon?
The home-buyer tax credit helped home prices to level off but when it ended last summer so did price stability. For many, home ownership is no longer a dream but a nightmare and there’s a growing renter mentality emerging.
As you would expect, all this weighs on consumer confidence. The Conference Board’s confidence index fell to 60.8 in May from a reading of 66.0 in April.
Then there’s the jobs market, and last Friday’s report was abysmal. Only 54,000 new jobs were created in May and the March/April numbers were revised downward by 39,000. This was the weakest private sector job growth since June 2010. Unemployment ticked up to 9.1 percent.
The Fed had predicted 2011 economic growth in the low 3 percent range. With predictions in the high 2 percent range, private sector forecasters weren’t as optimistic. But with this latest news – and companies from Clorox to Hewlett-Packard cutting their fiscal year outlooks – expect all these estimates to be revised downward.
This should come as no surprise. Just ask yourself this simple question: how does a consumer-driven economy recovery if unemployment remains high and most people’s single largest asset – their home – continues to lose value?
The answer is it doesn’t. It may not dip back into recession but it sure isn’t going to look very healthy. Not to worry, though, Washington has our back.
Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso is a marketing and management expert and CEO of Phoenix Finishings.