Benson's Economic & Market Trends
April 8, 2008
"The Economy's Summer Holiday Has Already Begun"
Memorial Day is still seven weeks away but economically the summer doldrums have already begun in many parts of the country. Over nine hundred thousand pink slips were issued over the last year, and in March alone the BLS Household Survey of Employment reported 438,000 people would begin their summer vacations much earlier than expected.
But even with the rise in the unemployment rate to 5.1 percent, Wall Street hasn't lost its sense of humor. One familiar firm has been renamed "More Gone Stanley", while the trading floor at Bear Stearns is now just "Bare". In the world of major brokerage houses, banks, and hedge funds, thousands of aging preppies, hopeful yuppies, and wide-eyed Generation Xers have been asked to pack up their belongings in cardboard boxes and clear out. The Generation Xers never expected to stay very long anyway, but their colleagues from earlier generations aren't adapting as well to the loss of work.
One might also expect an early summer in the Hamptons where "For-Sale-by-Owner" signs will be popping up in the front lawns of many former big wig bankers and analysts. The fifty thousand people who have been laid off in the Big Apple will have company in the fall. It's likely they'll be joined by another wave of twenty thousand or so job seekers who like them will be pounding the pavement, or checking their Blackberry's and computers at the local Starbucks for job listings.
Meanwhile, back here on Main Street in Middle America, it's looking a lot more like Mean Streets every day. My jaw dropped recently when I read a statistic reported in the Wall Street Journal. It said that said only 16 percent of families have made vacation plans so far this year, when ordinarily 45 percent would have. I suspect that when gasoline prices reach $4 dollars a gallon, the percentage will go down even more. (Today, the joke in the real estate industry about why homeowners are walking away from their properties is not just because they can't afford the mortgage; it's because they can't afford to drive there.) With many vacation plans on hold, this summer will be remembered as the summer spent barbequing with friends, going to the movies, or even camping out. Camping is cheap and who needs to pay for a hot shower at a hotel, when the economy is already taking a bath?
When you compare what is happening now in the economy to the dot-com crash in the spring of 2000, the similarity is that job losses will be significant and long. Job losses back then continued well into 2003, but first the companies blew up throwing workers out the door. Then, because of job losses, consumer spending fell.
In the current recession, the problems in the housing sector have caused consumer spending to contract. The weakness in spending is leading to a drop in employment. As workers continue to get laid off spending will decline even more, and as this vicious cycle continues into 2009, this recession is likely to be far worse than the last economic contraction.
The blow out of the housing bubble is like an octopus with tentacles that have now reached far beyond real estate into many sectors of the economy. Think about it. Just last year, homeowners were taking out $800 billion a year in home equity loans and lines of credit and spending like crazy. But now the housing ATM is out of money. Home equity lines and credit cards are maxed out, and consumers are too.
The tentacles are beginning to sting by spreading into the corporate sector. Construction spending on commercial property is way down and has a long way to go. Companies are also cutting back on investment and employment (Who needs that new factory when people aren't buying the goods? Who needs the workers?) Sales at Toyota are so bad they may be forced to close an auto plant, following in the footsteps of Ford, Chrysler, and GM.
The technology sector is also hurting because mortgage companies and financial institutions, affected by the subprime mess and capital market freeze, are auctioning off unwanted computers and servers. It's highly unlikely they'll need new ones anytime soon.
State and local governments are even starting to feel the pinch. They have also issued pink slips and put freezes on hiring and spending. Why? Like the federal government, state and local tax receipts decline as capital gains and corporate profits vanish. Local taxes are particularly affected when real estate prices all. Because state and local governments don't run massive deficits, lower tax receipts mean they must cut back. The list goes on and on.
Only the US Treasury can borrow without limit and then rely on the Fed to print up the money to pay for Federal deficits.
Everywhere you turn there will be good reasons for Americans to spend less this summer and fall. Job losses and a lack of borrowing have cut several hundred billion dollars a year out of consumer spending, and if you think the $600 per person government rebate will save the economy, think again. That money will be gone after a few visits to the grocery store. Inflation is pounding the economy, and even Americans who have jobs realize the cost of staples, food and fuel, are rising much faster than incomes. This means that the average worker is spending more but actually buying less! Buying less means less production, and fewer workers!
In a few months, investors will begin to realize there are too many retail stores, fast food restaurants, hotels, motels, office buildings and, of course, factories, businesses, and workers. Those Wall Street analysts projecting earning gains of 40 percent for the second half of 2008 are just telling another Wall Street joke. If you don't want the joke to be on you, it's actually an excellent time to use the latest come back in the stock market as a wonderful opportunity to get out.
For those who think that investing overseas is safe, think again. Factory owners in China and the rest of Asia are close to panic. This is the year that Santa Claus will cancel his orders before the Olympics so he can stay on an extended summer holiday well into 2009.