The Decade Isn’t Over Yet

You’d think people would have figured it out after all the misguided hoopla about 2000 starting off a new millennium. You need to remember there never was a year 0 because the concept had not yet been invented in 525 AD when the famous monk, Dionysius Exiguus, came up with the idea of separating time into “BC” (Before Christ) and “AD” (Anno Domini) in order to set the date for Easter. [Exiguus named "AD," St. Bede the Venerable named the English "BC" about a hundred years later.]

Thus, his count went directly from 1 BC to 1 AD with no year in-between. That means that 2010 is the last year of the first decade of the 21st century or of the second millennium AD.

Of course, the monk was off by a few years in his demarcation line as it is known that King Herod died in what is now known as 4 BC. The great planetary conjunction that many astronomers believe is what the Bible is talking about as the “Star of Bethlehem” occurred on September 15, 7 BC.

In any case, decades of millennia always begin with the years ending in 1 (2001, 2011, etc.). They always end in years ending in 0 (2000, 2010, etc.)

That means we have one more year to be rid of “the Naughts” or whatever you want to call this decade. Here’s hoping “the Teens” are much better.

A New Trade Agreement Is a Good Omen for 2010

On January 1, China and the six “core” countries of the Association of Southeast Asian Nations (ASEAN) (the countries are Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) launched a trade agreement covering the activities of 1.9 billion people. Some 90.0 percent of goods are tariff-free among these countries now and the goal is to include the other four ASEAN members (Burma, Cambodia, Laos and Vietnam) by 2015. Click here to read the full post and comment (Insights subscribers) »

At Last, Much Better Employment Data

If you’re going to get a huge “upside surprise” only occasionally, it’s great to get it on what is at least politically the most important economic variable, mainly jobs. The BLS did just that for us yesterday when they reported that the drop in nonfarm payroll employment was 11,000 jobs. That was far below the consensus expectation of a loss of 125,000 such jobs. Click here to read the full post and comment (Insights subscribers) »

Secretary Geithner Tells Banks to Make More Risky Loans?

As a reminder, Dr. Dunkelberg is Chairman of Liberty Bell Bank in Philadelphia as well as Chief Economist for the National Federation of Independent Business.

At a Treasury conference on jobs (11/18), Secretary Geitner railed against banks for not making enough loans, thus (his conclusion) hindering job growth. He must feel that banks are turning down good (profitable) loans for some reason. “Banks bear some responsibility for the extent of the damage caused by the crisis. And you carry a substantial obligation to help our communities get back on their feet”. Huh? It sounds like he is arguing that since taxpayers bailed out some banks, the banks owed it to society to make some more bad loans. We created a lot of construction jobs in the last expansion by making a lot of bad loans (which were sold to unsuspecting investors and government agencies who knew, but felt compelled to buy anyway). I don’t think we want to go that route again.

First, keep in mind that banks are not venture capital firms, they are not supposed to take unusual risks. So, complaints that banks won’t make loans to new ventures are inappropriately directed at banks. That’s simply not in their job description as the regulators will tell them when it’s time for an audit.

Second, according to the National Federation of Independent Business survey (of their approximately 400,000 member firms) in October, only 4 percent of the owners say financing is their top business problem, compared to 33 percent who report “weak sales” as the top issue. Plans to invest in inventories and capital equipment and expansion are at 35-year lows–no sense in spending money on these items if there are not enough customers. Better to wait. This means loan DEMAND is low for these activities typically supported with borrowing.

Third, the same is true for hiring–owners who have no customers to serve don’t hire workers. Meanwhile, consumer saving is up and community banks have money to lend to small firms on Main Street (not your typical Goldman borrowers). And a tax credit for hiring won’t get owners to hire workers (very costly) to get a few thousand dollars in tax credits. Workers will be hired when they can, in the judgment of owners, produce enough sales to pay for them. Lending firms more money won’t create more sales or jobs.

Trying to push banks to make more loans (a) assumes they are turning down good loans and that the government knows better about loan risk and/or (b) assumes consumers are storming the walls trying to buy stuff but that firms won’t get the inventory or buy the equipment to make stuff or hire workers to complete the sales because banks won’t lend into these opportunities. The facts tell a different story. Lenders were careless about risk in the expansion. Hopefully government is not pushing them to return to the old ways.

Consumers: Can Bad News Be a Harbinger of Great News?

On October 27 the Conference Board told us that their measure of consumer confidence fell from 53.4 (1985=100) in September to 47.7 in October. Even worse, the part of the index that measures what consumers think about current conditions fell to 20.7 from 23.0 in September, the lowest since the 17.5 of February 1983.

Both these results are undoubtedly due to the high rate of unemployment. That was 9.8 percent in October compared to 10.4 percent in February 1983. Click here to read the full post and comment (Insights subscribers) »

Good Inflation News and Fair Retail Sales Data

On October 15 the BLS gave us more good news on the inflation front. While the CPI for all urban consumers (CPI-U) rose 0.2 percent from August to September, that was only half the increase from July to August. Furthermore, the index was 1.3 percent below a year earlier.

The CPI-U excluding food and energy index rose 1.5 percent from September 2008. Energy prices were 21.6 percent below a year earlier and food prices declined by 0.2 percent over the same period. That’s the first year-over-year decline in food prices since April 1967. Click here to read the full post and comment (Insights subscribers) »

Competitiveness Is Independent of Health Care Costs

Michigan’s governor, appearing on Fox News Sunday (10/11), said that we need the public sector to pick up more of the health care bill so that the private sector can be more competitive. It is this kind of flawed economic thinking that gets us into so much trouble.

Does the governor think that the public sector gets its funding from thin air, or that doctors work for nothing? The private sector pays for the entire health care bill in every country under every scheme. After all, it IS the private sector that “contributes” money to the public sector for all public programs. The government does not produce stuff, the private sector does, and earns the income that pays for everything the government promises.

I can pay for my health care directly, or I can pay taxes to support Medicare and Medicaid, which pay for health care with a lot of administrative costs. Firms don’t have to provide insurance and don’t have to keep up with rising costs. It’s not law (yet). It is part of total compensation which includes cash, taxes and benefits. In most of the economy, this “pay package” is negotiable. Not so with union contracts, however.

The governor complained that health care costs are a large part of the cost of making a U.S. car, making them less competitive. Well, as noted, providing health insurance is not mandated, but in the governor’s state it is a result of heavy-handed union activity over the past decades aided by government’s foot on the neck of the industry to avoid strikes. Union power is simply a way to tax non-union workers to the benefit of union workers by forcing companies to pay above-market wages and benefits and overcharge for the union-made products. In other words, unions want their workers to get benefits that other workers don’t get, but to do that, their companies have to charge more for their products to cover the costs. This is a self-inflicted problem.

This same process destroyed our basic steel industry and our domestic auto industry in spite of government attempts to use protectionism to shield this bad behavior. A decade ago I and other economists predicted the demise of these companies as a result.

The only sector of the economy where unions thrive is the public sector, which faces no competition and has no bottom line. Garbage collector strikes are always settled so that voters do not get too unhappy and the cost is passed on in higher taxes. Private-sector firms do not have that luxury. They face “re-election” daily in a competitive market and must be efficient or “lose the election” as our steel and auto companies have. Taxpayers spent $50 billion to save union jobs at GM – a continuation of very ill-advised policies that leaves our private sector weaker.

Continuing to look to government to solve our “problems” and “save us” is a downhill path to lower prosperity. If consumers want to consume a lot of health care, it is the job of markets to provide it. Spending a lot is not a “crisis,” unless we demand too much because we face the wrong prices (“free” doctor visits for example).

Update to the Outlook

This piece was written for a customer who deemed it too long for his use. So, since I hate to waste 2000 words–enjoy! Regular readers will note that there is some repetition here for you, but that’s because you’ve already learned this stuff while new clients haven’t.

It’s a hard cruel world out there with much economic turmoil and concern. Since August 9, 2007, the day that the huge French bank BNP Paribas (one of the 10 largest in the world with assets in excess of $1.3 trillion) told owners of shares in three of its mutual funds they could not redeem them “because we own bonds based on U.S. subprime mortgages that we can’t put a value on right now,” financial panic has spread around the world.

Nothing makes an investor madder or more scared than being unable to cash out his or her investment from a fund. This problem has recurred many times throughout history. A comprehensive documentation that is also a most delightful and interesting book to read is Manias, Panics, and Crashes: A History of Financial Crises (5th Edition) by Charles P. Kindleberger and Robert Aliber (ISBN 978-0-471-46714-4). This wonderful book, which has always been a huge hit with my MBA students in the several second-year elective courses when I’ve used it, covers the history of financial panics around the world from Kipper-und-Wipperzeit of 1619-1622 and the Dutch tulip bulb episode in 1636-1637 through the Asian collapse in 1997 as well as the Russian default and the collapse of Long Term Capital Management in 1998 and the corporate scandals of 2001-2003 (Enron, Worldcom and so on).

The Wall Street Journal had a lead editorial on September 16, 2008 (“Surviving the Panic”) referring to the usefulness of this book in understanding the current situation. You’ll feel better if you get a copy of the book and peruse it carefully.

Few people were sorry to see 2008 pass into history at the stroke of midnight on December 31. Many will be happy to see the end of 2009 as well because it has seen the largest decline in global economic output and international trade since the end of World War II.

The International Monetary Fund (IMF) in its October World Economic Outlook expects world output to shrink by 1.1 percent in 2009 after having grown 3.0 percent in 2008. They expect global growth of 3.1 percent in 2010 and for growth to average 4.4 percent a year in the 2011-2014 period. Click here to read the full post and comment (Insights subscribers) »

“Main Street” is NOT Wall Street

In a recent Wall Street Journal opinion piece (10/2), Meredith Whitney correctly identifies the importance of small business in the economy, but being knowledgeable about credit issues on Wall Street can result in a biased perspective on what is happening on “Main Street.”

Writing that, “Large, well-capitalized companies have no problem finding credit,” Ms. Whitney then asserts, “Small businesses, on the other hand have never had a harder time getting a loan.” Well, that’s just wrong.

Many small businesses are “well capitalized” enough to operate without the use of credit (about 40 percent have no loans). The National Federation of Independent Business has surveyed its hundreds of thousands of small business members for 35 years, covering recessions starting with 1974. The most difficult period for credit availability was 1980-82, not the current period. So, they HAVE had a harder time getting a loan. Then, as many as 28 percent of regular borrowers (those accessing credit markets at least once a quarter) reported loans harder to get than the previous attempt. In the 1983-91 expansion, complaints started at 2 percent in 1983 and rose to 12 percent in 1991. In 2003, only 3 percent reported loans harder to get, rising to 15 percent in 2009, the highest since the 1980-82 period, but only “half as bad” based on complaints. There was no “spike” in complaints that corresponded to the “credit crunch” on Wall Street.

Owners have also been asked over time to identify the “most important business problem” facing their firm. In 1979, 39 percent cited financing and interest rates in contrast to no more than 5 percent in the current credit episode. Over 30 percent reported this as their top problem for nearly all of the 1979-80 period. Clearly, by these measures, the 1980-82 recession period was a far more difficult credit period for small firms.

Over the past 12 months, we have addressed a number of bank conferences from Florida to California. By show of hands, very few Main Street banks have tightened their credit standards over the past 12 months and virtually all report that they have money to lend. Most report that they have experienced a decline in applications, consistent with NFIB survey results showing record low plans to invest in inventories and new plant and equipment. The demand for credit is down, not its supply on Main Street. Increased consumer saving is increasing the supply of loanable funds.

Over 80 percent of small businesses do use credit cards for business purposes. Nine percent reported some sort of adverse change in terms, less than 1 percent reported a cancellation (survey taken late in 2008, some further deterioration likely occurred). Most use the cards as a financial convenience, paying balances in full each month (about 75 percent), not as a source of credit to finance business operations. Although widely used, they are not a “major” source of credit (confirmed by both the NFIB national samples and Federal Reserve surveys). Banks are the primary source of credit once the firm has a track record (only about 1 percent of all small businesses have a government-sponsored loan). Banks are not venture capitalists that provide loans for new start-ups. Such loans must be secured with personal assets and guarantees (somewhat more problematic recently with the declines in house values, but it appears that this process has bottomed out according to Case-Shiller data).

The biggest problem faced by small businesses is not access to credit but a shortage of customers. After overspending disposable income for years, consumers are now under-spending, and repaying the debt they used during the expansion (record reductions in consumer credit). At some point, they will restore the percent of their disposable income spent to a “new normal.” Just when that occurs and at what level (percent of income) is less clear. The average ratio of consumption to disposable income from 1970 to 2009 was 90 percent and 94 percent from 1995 to 2009. One percentage point of disposable income (about 70 percent of GDP in magnitude) represents a lot of sales. When growth resumes, firms will want to borrow to replenish inventories and acquire new plant and equipment and Main Street banks will be there to meet their needs.

Key Indicators Are Trending Upward

It’s not a booming recovery, but things are still improving. The latest BEA report noted that real GDP fell at a tiny 0.7 percent seasonally adjusted annual rate in the second quarter of 2009. That was an improvement on the 1.0 percent decline at a seasonally adjusted annual rate previously reported. Click here to read the full post and comment (Insights subscribers) »