Sunday, June 21, 2009

Economic Reports from the Front Lines

Today, your intrepid blogger braved drizzly Beverly Hills skies and had breakfast with the founder of a medium-sized chain of jewelry stores in the Southern California region. Did this gentleman, who had long since given his stock to his descendants, see green shoots? More no than yes, unfortunately. To wit: Last year the company had become unprofitable. Their long-time bank pulled their line of credit for that reason only. The company had minimal need for short-term debt, financed their needs out of the founding family's pocket temporarily, and found a new bank. The old bank that stiffed them had a separate asset management division, which had no clue that it was about to lose a long-time client. (It would be good if these divisions communicated!) Anyway, enough employees were fired or otherwise had hours reduced so that the company is profitable again. The bad news is that sales still stink, probably down 15% from two years ago. Two major competitors have gone bankrupt in the past year or so, so all other things being equal, business should be up as migration to the survivors has occurred, and it is not noticeably up.

Furthermore, Beverly Hills and nearby less tony areas have immense amounts of high-profile empty commercial storefront for lease. It's a severe situation, and commercial real estate is a lagging indicator, suggesting worse to come. It was hard to look at all the rentable commercial space and not expect a prolonged time return to the prior peak level of economic activity.

Moving back to the home (Florida) front, a report from a banker with a major lender is that there are no green shoots. None. Refi activity has recently shrunk to near zero with the pop up in mortgage rates; home sales are horrible, and home prices are eroding. Other personal sources in California and Florida report no green shoots visible yet, either.

Perhaps other regions are more buoyant.

That's a quick report from the front lines. Here's a comment from one of the largest corporations in the known universe, General Electric, from, in GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders:

General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

It is more than 3 months since Dr. Bernanke green-shooted (green-shot?). The stock market has responded with a major bull move. Yet the economist David Rosenberg points out that more than all the up-indicators in the Leading Economic Indicators were financial ones; the real-world indicators actually were slightly down in May. If Paul Krugman is correct that the U. S. is in a liquidity trap, then the financial indicators will overstate the future response of the real economy. Furthermore, both the LEI and the ECRI's indicators take rising commodity prices as positive signs. I question whether a rise in the price of oil is a positive leading economic indicator. Perhaps it was in the days when the U. S., Western Europe and Japan were the only importers of oil that counted. To the extent that the rise in oil price and that of other commodities relates to China using oil and the other commodities for its internal growth, it would appear that this is a positive leading indicator for Chinese GDP and a negative indicator for U. S. GDP.

One final observation: Much as the Street likes to speculate on the future with various indicators, the action of the Dow Jones post the 1932-3 bottom(s) in the market correlated closely with one variable: dividend payments. As companies resumed or increased dividend payouts after the Crash, stock prices rose; when dividends were cut after the 1937 recession, stock prices fell apace. In other words, investors need not neglect the facts they see around them. All the rest is guesswork about the future; and in the other direction, an over-reliance on historical precedent can also lead one seriously astray.

With many markets balanced between their 12-month high and low points, and with several sitting by their declining 200-day moving averages which are now intersecting with their rising 50-day ma's, there is lots to follow fundamentally and technically: a rare time of equilibrium in a variety of ways. Lots of pots a-boiling.

Copyright (C) Long Lake LLC 2009

1 comment:

  1. Rising oil prices are an excellent leading/coincident indicator for economic downturn. Jim Hamilton has commented lucidly on this over at Econobrowser.

    The business I'm in is pure private sector investment with strong dependence on autos and construction. No green shoots obviously. Neutral cash flow is possible only through work hour reductions of up to 50%. If employee unemployment benefits run out before the business climate improves,there are painful choices to be made.