Sunday, December 03, 2006

Hard Landing, Soft Landing.....any landing at all....


With all the negative economic news in the recent months and all the talk of hard and soft landings, I thought it would be interesting to look at some of the recent news a bit more.

It certainly is easy to miss or dismiss things during the holiday season....but it was the lack of Black Friday shopping traffic that initially made me pause and consider the situation. (though E-Commerce sales seems to have increased nicely 42% over last year)

My interest in HARD vs SOFT landings came when reading articles like this one which talks about how the currency markets are worried about a weak US economy. Apparently the Dollar slid further against the Euro and the Pound, and hitting a 14 year low against the latter.

But surely a piece of the currency traders concern includes announcements by China that they will diversify some of their currency reserves into other currencies....and away from dollars. Now this announcement is a bit dated, but that together with a possible slip in the US economy may have the currency traders thinking that China will make good on their word sooner than later. (I have heard people say that if there is a dollar crash, everyone gets hurt....but those that get out fast get hurt less)

So with talk like that, perhaps the dollar slide is a self-fulfilling prophesy!

So perhaps the next bit of news about the unexpected manufacturing contraction in November was another piece of the reason for the latest pessimism. Apparently the Institute for Supply Management said its index of national factory activity unexpectedly dropped to 49.5 from 51.2 in October. Economists had forecast a slight rise to 51.5. It was the first time the index had fallen below 50 since April 2003. An index below 50 indicates shrinking activity in the sector.

It was the first time the index had fallen below 50, which indicates shrinking activity in the sector, since April 2003. The Commerce Department reported U.S. construction spending declined 1 percent in October, more than expected and adding to a growing pile of evidence that the housing market is cooling." type="hidden"> U.S. construction spending as reported by the Commerce Department declined 1 percent in October, more than expected. But this simply adds to the already large mound of evidence that the housing market is more than cool......is perhaps stone cold. (but we probably will NOT be able to assess that until the normally spirited spring sales season rides around)

What about retail....we don't have to wait for spring for an assessment there....holiday time is the hot time for retail. Well, the market is apparently worried that Walmart may be the canary in the coal mine as they have recently reported November sales were their first month's decline in sales in 10 years. They also warn that December projections only indicate a 1% increase, and they are looking forward to a very disappointing holiday shopping season. (to be fair, Target reported sales increases above what the analysts expected, but then again, JC Penny and Costco also fell short of Wall Street expectations.)

But even with all the pessimism, there are plenty of people who are not ready to use the word recession. Of course, it is my experience that recessions are not "called" until after the fact. (I think this is because predicting it early can result in a self-fulfilling prophesy)

But what about this report of US income and spending increases for October? This surely indicates good signs. Well, this does indeed bode well, except the pessimist in me worries that the average US citizen may not be all that good with their money because they are the very people who bid up housing costs to mania levels while maintaining a zero balance savings account. I'm not sure why as continue to spend....the only answer I have is because we were offered more credit. (not because we actually have any money saved)

Yes...I warned you...I am often a pessimist.

So how about the other "unexpected" report a few days ago about the jobless rate being higher than expected.

The Labor Department reported that the number of U.S. workers applying for jobless benefits rose a higher-than-expected 34,000 to a seasonally adjusted 357,000. Analysts had predicted claims would edge down to 314,000, so this increase seems like another "surprise".

It was also reported that claims in the prior week were revised UP slightly to 323,000 from the prior estimate of 321,000....also a sign that the current increase is probably not a mis-calculation. Today's news article has a very similar conclusion.

Of course, the Federal Reserve is not so negative....though they are currently using worrisome words like "cautiously optimistic" when talking about the holiday retail sales picture. They often seem to "cherry pick" their statistics to paint the picture they want to see. I suspect they want to always paint a positive picture and never be the "reason" for the economy slowing down. They are much more comfortable "calling" the slow-down after it happened with a set of "revised numbers".

The third quarter US GDP numbers have also been revised upward to indicate a 2.2% growth. But the news report had a comment by an economist that indicated that these numbers are not a rosy as they look because "some of the new business investment seen in the past quarter went into inventories." Increased inventories mean an eventual further slow-down in production until those inventories are consumed. (possibly not good news for future production businesses)

There was apparently a downward estimate of imports in a prior report, but this was even a possible further sign of a slowdown as it might indicate a general decrease in purchasing. (which sounds consistent with the numbers from Walmart and Costco)

In the latest reports from Japan about their stock market, it appears that perhaps some or all of the above is enough to depress Japanese stock prices. Ditto for reports about the Australian Stock market.

Oh, one last thing....the weather is a bit warmer here in the Northeast than normal....but this has not kept fuel prices from continuing their slow yet steady rise in recent times.

As an aside, I looked at the Wiki article on the "Housing Bubble", and found it to be very detailed and complete. (as far as I can tell) In fact, I have to read it over again because it really seems to be a great synopsis of the whole situation.

At this point we might want to get our reading on "soft-landings" up to date....for this I also recommend the Wiki on "Growth Recession" and plain old "Recessions". (let's hope there is no need to read ahead to "Boom / Bust", Panic, "Long Depression", "Great Depression" or "economic disaster")

Remember....I can't see the future, I'm not even an economist.....I'm just an Engineer who tends to be a pessimist. (who is rarely disappointed)

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