Rosenthal's Economic Update

Thought for the Week 4-21-09

Could it be that These Are The Good Old Days?

It sounds crazy! 
We are scared....we are in financial distress....we are in pain...so where's the good?

Aren't we also talking to each other more?
Aren't we now connecting more about our life issues, fears and hopes rather than material issues like our new car or latest remodel?

Young people today are starting to be more interested in making a difference, whereas a few short years ago when it was all about making big bucks.

Our generation has known no real global adversity.
But during the Depression and WW II, our parents showed that adversity can bring out the best in us.

So now it is our chance to respond to our global crisis by giving the best that we have to offer.
This crisis will only truly subside when we have learned that life is not all about me doing for me.....it is all about us doing for each other.

In the days and weeks ahead, may each of us choose to look for ways that we can help.
May we reach out to those we know and to those we don't.
May we offer our own unique talents and gifts to help someone else who is struggling.
And by doing so, years from now may we be able to look back on these days of challenge, and say that those were the good old days.

Have a good week!

Economic Update 4-21-09

Friends and Colleagues 

This week in the midst of continuing economic madness, we share some thoughts from a surprisingly upbeat economist. 
Scott Anderson of Wells Fargo Economics suggests words like: "optimism, rebound, renewal, and recovery" are now being used in conjunction with our economic and financial data.  
Read on to see why he believes the seeds of recovery have been planted.

Markets Are Up; Consumers Are Gaining Confidence

Stock markets around the globe are up substantially from their lows:

• Germany +26%
• Japan +24%
• China +48%
• US +34%

Are these sustainable rallies or Bear Market bounces?  Only time will tell......

University of Michigan's Consumer Sentiment index jumped in April to 61.9, up from its November low 55.3.
So we are feeling better about things....aren't we?!?

Anderson projects a rising likelihood that the economy will be growing again, perhaps as soon as Q3 of this year!

Housing Is On the Rise

Velocity of existing home sales is similar to a year ago, and in some states, substantially higher than a year ago.
Many of these are foreclosed and distressed sales, but Anderson contends the market is working as intended to clean out existing inventories and restore balance to supply and demand.

• Per the California Association of Realtors, existing home sales were up 83% Y-O-Y in Feb, and have been rising strongly for the past 11 months.
• California unsold inventory of existing homes has fallen to just 6.5 months of supply.
• Sacramento and San Diego unsold inventories have fallen below 4.0 months of supply.
• Lower-priced areas with substantial foreclosure and distressed sales activity are showing the largest gains in sales velocity.

While the press has focused on fiscal cuts and financial stimulus, the housing market in many areas has been quietly repairing itself and building a foundation for growth.

Deflation!

Consumer prices just declined year-over-year for the first time in 55 years!!
Anderson shares that he never thought we would see this day with a money system that is backed only by the faith and credit of the U.S. government, not a hard asset like gold.
He believes the ability of the Fed to increase the money supply to any level it sees fit should be insurance enough to keep deflation at bay; nevertheless, we now have deflation.

What Are the Impacts of Deflation?

Deflation, if severe, can trash the Fed's ability to reduce real interest rates, since nominal interest rate reductions can be offset by declining prices.
Deflation can also cause consumers and businesses to hold off on purchases if they believe prices will always be lower in the future.
If this behavior took hold on a widespread basis, it would be an economic disaster.

So What Lies Ahead Today?

According to Anderson, disaster does not appear to be in the cards this time.
He contends deflation will only become a problem if people believe it is here to stay.
He even projects that a little deflation is actually doing some good, as everything from gas & groceries to housing appears more affordable again, giving consumers much needed spending power.
If consumers see this as a temporary price cut, they will be looking to snap up merchandise today, before the sale ends.
Anderson believes this is the case, as consumer confidence improves and retailers report somewhat brighter sales trends.

Well, there you have it...one upbeat economist's opinion in the middle of the storm.
So, what do you think?

As always, stay tuned as our saga continues.........

Thought for the Week 3-23-09

Hey, How Are You?

We all know the age-old ritual....
"Hey, how are you?"
"I'm fine thanks....How are you?"

But today it seems to be a different story.
"Hey, how are you?" has taken on new meaning given the current state of the world.
Today we are really asking...How are you holding up?  Do you still have a job?
Do you have enough business to get by?  How long until you run out of cash?

Today, when we ask the question, we really want to know....How are you?
Many times we can see the answer written on their face.
Times are tough....business is challenging....cash is tight.

Asking the question and caring about the answer is one way we can reach out to help others.
And today, who can't use a little help?

In the days and weeks ahead, may we each take the time to truly listen when we ask, "How are you?"
And may we remember that despite our own challenges, each day is a new opportunity to help someone else.

Have a good week.

Economic Update 3-23-09

Friends and Colleagues 

This week, in light of the Fed pumping a massive amount of liquidity into the system, we consider whether we should be bracing for hyper-inflation in the foreseeable future.  Scott Anderson, Senior Economist at Wells Fargo Economics shares key reasons why we should currently have No Worries on the inflation front.

1.  We Are Still in a Deep Recession

• Leading economic indicators plunged once again in February, after two months of gains.
• Job losses are not subsiding.
• The IMF now projects the global economy to contract 0.5% to 1.0% this year, the worst global performance in 60 years.
• International trade is declining at a rapid pace.
• Recessions do not bring on inflation.

 

2.  Fundamental Supply and Demand

• Basic economics tells us that inflation occurs when there is too much money chasing too few goods.
• Today, goods are way too plentiful, and demand is low.
• Per Fed data, US Industrial capacity utilization slumped to 70.9, a new record low.
• High Supply and Low Demand does not add up to inflation.

3.  Unemployment

• When there is excess slack in the economy like today, unemployment rises and inflation falls.
• Conversely, when unemployment falls below the full-employment level of 4.5% to 5.0%, inflation rises.
• Currently US unemployment is at 8.1% and projected to rise to 9.5% by year end.
• High unemployment does not lead to inflation.

4.  Wages Remain Low

• If wages are increasing at an increasing rate, this can put upward pressure on prices.
• Current data on wage trends point to decelerating wages ahead.
• Low wages do not lead to inflation.

5.  Increased Government Spending and Fed-sponsored Liquidity

• Yes, the Fed is pumping $trillions into the economy....but demand remains a key ingredient for inflation.
• The underlying premise for inflation is too many dollars chasing too few goods.
• Monetarists tell us that: The Money Supply x The Velocity of Money = Nominal GDP.
• In other words, if velocity of money (the amount of times the money supply circulates in the economy) is stable, then more money in the economy must equal higher prices.
• Therefore we may think that inflation is always linked to the quantity of money in the system.
• However, today while the money supply is growing, the velocity of money (the amount of times the money supply circulates in the economy) is still declining.
• As long as demand for goods remains low, money supply growth should not lead to inflation.

Conclusion:

Currently, we do not have the ingredients needed to ignite inflation. 
In fact, a little inflation today would be a welcome sign that the economy is turning. 

The critical issue will come down the road when today's trends have turned around. 
Will the Fed be proactive about draining liquidity out of the marketplace before inflation becomes a problem? 
We can only hope that they will.

As always, our saga continues, so stay tuned......