I want to start publishing articles titled “Current state of the economy”, approximately once per month. The goal is give my understanding of all major forces that are pulling or pushing the economy and if any of those forces are fading or getting stronger. The second point is to list sectors that are booming or are in recession

Major headwinds

  • The biggest headwind is the reduction of mortgage equity that home owners are able to pull out from their homes. Please note the jump in outstanding credit card balances, which proves that people need credit to keep on going, the paychecks do not cover all expenses
  • Besides MEW troubles, there is everything related to real estate – decline in prices, loss of jobs and troubles in everything in construction/sales/mortgage food chain
  • Gasoline prices. This is getting a lot of media attention, but I believe it’s a minor problem comparing to housing bust. Besides, all and even more of the dollars we send to the Middle East for the oil is returning back as investments and feeding our current account deficit

Major tailwinds

  • The current account deficit, which is holding in the $800 bln/year area. The unprecedented inflow of “money for nothing” is finding the way to everything money can buy. Every stupid idea gets funded, similar to 2000 when everything with dot-com in the name always had investment money
  • Mergers and acquisitions, including leveraged buyouts. Removal of publicly traded shares is feeding the stock market, which, in a vicious cycle, is attracting foreign capital
  • Strong corporate profits (last three years were just spectacular)
  • Yen carry trade. Japan economy is still recovering from its real estate meltdown over 15 years ago (i.e. they are 15 years ahead of us) and the Yen is as week as ever

What is in recession

  • Private residential construction
  • Mortgage lending
  • Small regional banks
  • Auto sales
  • Retail sales

What is booming

  • Private equity, mergers and acquisitions. Almost every decent company has some acquisition premium build-in in the stock price
  • Low grade bonds (yield compression). It’s just stupid not to borrow while money are so cheap. Essentially it’s subprime lending for corporations
  • Aircrafts (helped by weak dollar and Airbus troubles)

What is rebounding

  • Manufacturing clearly improved in the last few months

What is decelerating

  • Personal income slows down in April and employment is not growing as fast as last year. Personal savings rate is even more negative than before (-1.3% in April)
  • As you can see here employment growth is approximately as slow as it was at the beginning of the last two recessions
  • GDP itself. Even bears did not predict the 0.6% GDP in Q1 (Roubini predicted 0.8%)
Advertisements