Our Current Economic Illusions

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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When reading economic statistics, you should see if they are consistent (they rarely are) and make sense based on real world observations (lately they don't). On Thursday, December 3rd the U.S. productivity numbers were released, as were same store sales and weekly unemployment claims. The story these three pieces of data are telling are quite different, which means at least one and possibly two of them are not correct.

Productivity in the U.S. is supposedly up astronomically. It rose by 8.1% last quarter and this is after being revised down from being up 9.5%! The recent downward revision of third quarter GDP from 3.5% to 2.8% meant the productivity numbers would be lower as well. Productivity is essentially the amount of GDP produced per worker. Since employment is falling in the U.S. and GDP is supposedly rising (the two moving in opposite directions is illogical) productivity has to go up. According to the government, it is going up a huge amount. Is there any major new technological advance or innovation accounting for this? None, that anyone knows about. Economists claim that productivity has gotten better because the least productive workers have been fired. While this might give the numbers a percentage or so boost, it wouldn't give them an 8% boost. The alternative explanation is that GDP is being grossly overstated by the U.S. government. There is substantial documentation that this has indeed been the case for the last three decades.

Same store sales is not a government report and the November numbers clearly show an economy in trouble. Sales were down 0.3% year over year. While this may not seem so bad initially, it is when you consider sales were down 7.7% last November, which was the height of the Credit Crisis meltdown. They are even lower now. Analysts (who are almost always wrong) originally forecast a 5% to 8% increase for this November. Consumer spending accounts for 72% of U.S. economic activity and is still obviously in bad shape. Yet, the government tells us that GDP is growing nicely. There seems to be a contradiction there.

If you read the mainstream media coverage of the weekly jobless claims you would have seen that the U.S. employment situation is getting better because there were only 457,000 new claims during the week of Thanksgiving. Of course, you might consider that few employers would lay off workers right before a major holiday and that state unemployment offices were closed because of the holiday, so this would obvioulsy lower claims. The BLS (Bureau of Labor Statistics) states that they make some 'adjustments' for this though. Claims at even the 400,000 level indicate significant recession and they need to drop to the 300,000 level to indicate a healthy economy (you will see much higher numbers cited in most mainstream media reporting). Continuing claims are still rising and have hit 5.5 million. This number doesn't include an additional 4.5 million on extended umemployment benefits. A large percentage of the American work force is not eligible to collect unemployment as is, so the numbers are even worse than they appear. While there are those who claim that unemployment is a lagging indicator, statistics from the past don't support this notion. The real lagging indicator seems to be the truth about what is really going on in the economy.

NEXT: U.S. Employment Figures Don't Add Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Black (Plague) Friday for Retail

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Profit for most U.S. retailers is determined by sales from the day after Thanksgiving (known as Black Friday) to the end of the year. There is an old saw in the trade that retailers actually lose money up to Thanksgiving day, and that shopping the next day determines the tone for the holiday season. As of now, that tone looks like it's going to be pretty cacophonous. Retail sales are being hit by a negative wealth effect caused by declining home and stock prices and a reduction in employment and available consumer credit. Without a good holiday shopping season, a wave of retail bankruptcies should be expected next spring - and this is one industry the Fed is not likely to bail out.

This past spring there were eight mostly mid-size retailers that went under, including Sharper Image, Levitz, Fortunoff and Linen 'n Things. In July the department store chain Mervyns declared bankruptcy and on November 11th, Circuit City. Crushing debt levels accumulated during the credit craze days in the early 2000s is what led to the first bankruptcy filings. The high debt load, which is common throughout the industry, combined with a tanking U.S economy will be responsible for the much bigger number of retail failures next year. The set up for Black Friday is bleak. In October, the consumer confidence figures were the lowest on record, literally falling off a cliff. Consumer spending plunged 1%. Same store sales were the worse in 35 years, with apparel retailers generally suffering the most. Discounters, such as Walmart did well however.

Don't expect relief from home prices or the stock market either. The just released Case-Shiller report has U.S. home prices falling 16.6% year over year in the third quarter. The stock market may close the year with the biggest drop on record, although it's too early to make that call. S&P 500 earnings were estimated to be down 21% in October, with financial and consumer discretionary firms bearing the brunt of the losses. Amazingly, brokerage analyst earnings estimates for 2009 have S&P profits increasing 17%, even though many of their own companies are only surviving because they are on the government dole. Recent reports have also indicated hefty outflows from mutual funds, close to 20% of the total so far this year, with investors increasingly losing confidence in the U.S. stock market.

Historians estimate that there was a 35% chance of surviving the bubonic form of the Black Plague during the Middle Ages. Hopefully, the survival rate in U.S. retail will be higher than that. Even healthier chains are closing large numbers of stores however. This pattern is likely to accelerate further and not just because of the bad economy. Rising real estate values have increased rents and have made the break even point for profit much higher than it used to be, just as sales are falling. The Internet of course, offers a cheaper alternative. Expect a lot of empty stores in the future. Also a lot less jobs in the industry. This in and of itself has major implications since retail is the largest employer in the private sector.

NEXT: When Silence Isn't Golden

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.