Welcome to the CEO's monthly economic newsletter. The newsletter provides a basic narrative overview of recently published economic indicators for your reading pleasure. You should not rely on this information when making investment decisions, but rather seek professional advice from qualified investment brokers.
Preliminary Gross Domestic Product (GDP) numbers for the fourth quarter came in a little better than expected; however, still very negative at -3.8 percent. The subsequent revisions may result in a larger negative decline. This confirms the already acknowledged recession, since the third quarter of 2008 was -.5 percent. So far the recession has lasted for 13 months as of the end of January. The longest recessions of modern times (over the last 40 years) have lasted 16 months, and in case you were wondering, the Great Depression lasted for 43 months. While I do believe we will surpass the 16-month milestone, I also believe we will finish this recession in a timeframe closer to more recent historical periods than the Depression.
Manufacturing continues to be hammered. With the timber industry, auto industry and construction trades all cutting back in the face of the economic downturn, it will be awhile before these numbers move back above the expansion level index of 50, which is published by the Institute for Supply Management. The January number was up a little, to 35.6 from 32.9 in December. Industrial Capacity moved down again by nearly 2 percent over the preceding month. Durable Goods and Factory Orders were both down by almost 4 percent in December as well.
Auto sales, including pickups, have gone to unrealistic levels. I say unrealistic because if sales volume does not change, it will take roughly 23 years to replace the existing vehicles on the highways today. Historically the replacement rate has been around 13 years. Clearly there will be a pent-up demand once the recovery begins.
We see a very similar replacement issue emerging in the housing markets as well. Presently there are an estimated 130 million dwellings in the United States. Annualized Housing Starts in December totaled 550,000 units. Based on that number, it will take about 235 years to replace the existing housing. Most homes last 75 years or so. Therefore, once the excess inventory of around 1.5 million units is absorbed, we will eventually see home construction increase to something in the neighborhood of three-fold its present level. The Congressional-proposed home buyer tax credit and low mortgage interest rate will help to accelerate the housing recovery.
Meanwhile the jobless situation is very dismal, but we must remember this is a lagging economic indicator. Unemployment generally increases even after a recession has ended. Companies that have never had a layoff have been forced into taking this type of action. Recently the unemployment rate increased from 7.2 percent to 7.6 percent. The expectation is for this number to surpass 9 percent by year-end. Last week, Non-farm Payrolls declined by 598,000 jobs, the largest amount since 1974 when 602,000 jobs ended. It is important however to put this in perspective. In 1974 there were 87 million jobs; today we have roughly 150 million jobs. The media wants us to think this is the worst ever and, in raw numbers it is, but clearly not even close percentage-wise to total payroll jobs.
As you know, inflation is the least of everyone's worries these days. All the data from the Consumer Price Index and Producer Price Index point to virtually zero inflation. It is times like these the Federal Open Market Committee (FOMC) worries about deflation. Regardless, there are a number of things that give rise for concern, not the least of which is the ballooning government stimulus package.
Since the economic crisis is global, each country is implementing some sort of stimulus package of their own, hence, the U.S. dollar is holding up quite well. The dollar's strength is also, in part, why the cost of oil is lower. Regardless, inflation could become a very real threat down the road.
Short-term interest rates are going to remain low for at least six months and may remain right where they are through the end of 2009. One thing is certain, they cannot go lower. As the economy pulls out of the recession we will see short-term interest rates gradually increase from a Fed Funds rate of 'zero' to something slightly above the core rate of inflation; then back to their normal spread over inflation, which tends to be about 2 percent over the core inflation rate.
By the time you read this, the stimulus package will have been announced. Please keep in mind that every type of economic stimulus takes time to work into the economy, generally six to nine months. Even the $2 decline in the cost of gas has to have six months or so before those savings become positive contributors to retail sales activity.
Dennis A. Long is chief executive officer of the Bank of the Pacific.