Thursday, January 14, 2010

5 Reasons That The US Economy Is Far From Recovery

Moses Kim discusses factors that indicate that the US economy is far from being out of the woods. Rising energy costs, ongoing contraction of consumer credit, and a very weak labor market are just a few of the factors that weigh heavily on consumers and businesses alike. See the following post from Expected Returns.

I think we are past the period when economic indicators and company earnings surprise to the upside. Case in point, Alcoa's big earnings miss yesterday. Forward earnings estimates for 2010 are in the stratosphere, which means surprises will come on the downside.

As we move ahead, here are some key economic trends that will determine whether our economy recovers or not in 2010.

Rising Energy Costs

We all remember the economic dislocations rising energy costs brought in 2008. Job losses were just beginning, yet consumers were hit hard by high energy costs. Consumers received a temporary and much-needed reprieve from high energy costs as crude oil collapsed to $33 dollars a barrel. However, crude oil has rallied over 100% in a little over a year, which means consumers are getting wacked again at the pump.

Demand for crude oil is relatively inelastic, meaning consumers are going to bear the brunt of price spikes. With gasoline prices approaching $3 dollars a gallon, discretionary spending is going to be seriously constrained moving forward.

Trade Deficit Growing

The government announced yesterday that the November trade deficit increased. The economic spin is that rising imports reflect an economy that is on a strong upward trajectory. However, digging beneath the report we see the following:

1. Crude imports are at the lowest level since February 1999

2. 7.3% rise in petroleum import prices in November

3. $72.54 average per barrel cost- highest since October 2008

The collapsing imports of crude oil strongly evidence an economy that is weakening. If crude oil prices remain elevated in the $70-$80 dollar range, I expect consumer spending to fall sharply.

Consumer Credit

In November, consumer credit contracted for the 10th straight month to the tune of a record $17.5 billion dollars. This is a historic contraction of credit that trumps the credit contraction during the Great Depression. The Fed is turning on the printing presses to counteract this credit contraction, but as the massive rise in commodity prices shows, with most commodities up over 100% YoY, the massive reflationary programs of the Fed have consequences.

Weak Labor Market

The surprisingly weak December unemployment report with the recent report that job openings declined by 156,000 in November. Firms are still reluctant to hire, and this holds especially true for small businesses.

Small Business Optimism Falling

Small business optimism dropped again in December, and remains at recessionary levels. The report shows that small businesses are losing pricing power in this abnormally weak economic environment, which means profit margins will remain low along with new hirings.

Small businesses will be absolutely critical to any economic recovery. We just aren't seeing the kind of optimism we need to see from a sector that accounts for over half of the jobs in America. Many small businesses have seen their access to credit disappear, which has forced small businesses into cost-cutting measures. With not much margin of error left, small businesses will start going bust if the economy doesn't improve quickly.

Conclusion

There is no recovery. Rising energy costs in particular should be enough to bring about a double-dip recession in 2010. Pretty soon, it will be hard for the government to conceal the true state of the economy, which at the very least, is still at recession levels.

This post has been republished from Moses Kim's blog, Expected Returns.

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