Surprisingly, according to initial GDP reports for the second quarter, US GDP contracted by only 1% during the second quarter vs. a decline of 6.4% in the first quarter and a decline of 5.4% during last year’s fourth quarter. But, what is the story behind the decline of only 1%? It’s rather simple, inventories!
Inventory accumulation let to an unavoidable economic downturn in US manufacturing and now we are beginning to see the reverse. Inventory levels are so low that we will unavoidably see economic activity pickup in the manufacturing sector to rebuild those inventories. As a result, we are likely to experience economic growth over the next two quarters.
So far, according to CNBC reports, 74% of companies have reported earnings that top estimates, which could mean that analysts expected the decline in business activity to be worst than it actually turned out to be, or that analysts underestimated the ability of US companies to manage their business activity during this economic downturn by cutting costs.
Nevertheless, unemployment remains high and will likely exceed 10% by mid 2010. Whether this recent pick up in economic activity results in an increase of part time or full time employment remains to be seen. I believe employment is the key measure to sustainable economic growth; therefore, until we see employment numbers improve, the economy remains fragile. Because the US is facing high unemployment and higher taxes which don’t normally work in favor of economic growth and because they do not generate growth in disposable income, high employment is key to sustaining this GDP good news momentum given the current political and economic conditions.
But how can we improve employment, consumer confidence, and control oil prices at the same time? Should we have more regulation and taxes, or should we offer more incentives and tax cuts? Can we improve US net disposable income with high unemployment and higher taxes? And what about the housing market?
So far, I just see inventory levels low, I still do not see housing and unemployment numbers improve significantly just yet. I remain optimistic because I believe in the invisible hand, which I feel will work faster and more efficiently if left alone. Eventually, we will see economic activity pick up and housing and employment will improve. But we still need to see what will happen with health-care reform and how it will affect the US economy as a whole. I think we are still facing uncertainty in the markets and we have about another year to go before the government/business relationship becomes clear. Until then, I remain cautiously optimistic and would continue to look at emerging markets with open market policies that encourage economic growth and would be very selective to pick business in the US that won’t be surprisingly affected by government regulation. I would continue to concentrate on infrastructure and green energy for both, new employment and investment opportunities.
Share your thoughts, tell us how you feel about this current upward momentum and what you think these numbers really mean to you!
Tags: GDP, health-care reform, housing, inventories, unemployment
OK, I have an opinion, that is just MY OPINION!
I was born in the Old Soviet Union, where life was really successful, and I feel sorry that you didn’t have the privileges that we had (such as FREE education; 1, 2, 3—or however many colleges or universities you want to finish for FREE: books, dormitory, tutoring, and + you had money for living), also—you knew that you would have a job 100%, on the other hand it had a lot of big mistakes too, and I am glad that you were not a part of it. That was the first time I discovered that everything that happened—was planned! By who?—that’s another question!
From that life and US history I understood that crisis and hunger was “somebody’s” plan that was permitted by the government to form conditions to introduce some changes in society that were planed before. The Great Depression started in US when the stock market crashed in October 1929, and then it affected every country, rich and poor, especially those dependent on heavy industry. Shortly after that, when things seemed really bad, for “some” optimism persisted; John Rockefeller (who was one of the four who established the private Central Bank in 1913) said: “These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.” Doesn’t it seem like he, and not just him, knew that on the right time (for them) it will be a happy end?
You are talking about an invisible hand or hands that will have power to change the situation—I believe that too; life will change thoroughly. People can think logically and play with numbers, or they can feel/hope for a change, you cannot take part in both—it’s impossible; you have to be for the first or second. IT IS INTERESTING THAT YOU PICKED THE SECOND CHOICE NOW, BUT NOT THE NUMBERS! That’s why we should work hard not just to get out of the crisis, but to sign into a new epoch in history. We will never be back to the life that you had here.
Governmental programs, (for example):
1) Reform in medicine. Where do they have the money??? (no jobs—no taxes)
2) Continuation of payment for unemployment (now it’s a little longer then 6 month)
3) 4.500$ for an old car (huge %–who benefits?)
That shows that the government has programs and resources (money, natural resources…) to change things. From each of us obedience and hard work for many years is expected.
I think the economy is going to pick up very soon. Housing and employment will improve. Employment is the key measure to sustainable economic growth. Inventories are so low that businesses are going to need to start hiring workers to keep up with the needs of consumers. The 74% number shows a sign for the better and disbelief. Health care is still up in the air.
Reduced inventories may temporarily help us, but in the long(er) run we are still in trouble. Where to improve is tough. One can only imagine what a perfect economy can be. Maybe taking a page from another country could help. Canada has a health care program for all of it’s citizens. When I was in school there I was amazed at the fact that I could take my friends there and they would present their health card and be out in a matter of hours with no bills and no copays. Their dollar, which has not seen a positive exchange against the U.S. dollar in many years, is seeing just that right now. According to the Economist Intelligence Unit, Canada will see Real GDP grow by 2.5% in 2013 (see link for all proposed data)http://www.economist.com/COUNTRIES/Canada/profile.cfm?folder=Profile%2DEconomic%20Data
While we are struggling to pull our economy up, the Canadian’s are enjoying life. We never seem to hear of a horrible economy from them, they almost always seem to be even keeled. It may be similar to the U.S. for living conditions and standards, but they have also surpassed us in healthcare and (I also believe) in some other areas as well. Maybe we can learn a thing or two from those that some believe live in igloos and wear mukluks surrounded by snow.
A good way to raise inventory would be to give the consumer incentives to go shopping and make purchases by lowering prices of the product, but then get them with higher tax on it. So it will eventually even itself out. You will just be tricking the consumer making them think that they are spending less when in reality it doesn’t matter because they spend the same amount as they would have. People are afraid of another depression happening so they are all saving their money like crazy when in reality, if everyone just went about spending as nothing was going on then the market might bounce back. Employment is key because if people have jobs, they are more willing to spend money which in turn will aid the markets. While employment rates are at a 9.4 high, i do not see the economy bouncing back, if we lower the unemployment rate, then there will be a great increase in our current economic state.
The first thing to be said in regards to creating more inventory is that businesses need 1) the credit to obtain it and 2) enough people being employed by the manufacturers to actually handle and create the amounts requested. The easy solution to this is to just say that the manufacturers should hire more people to build the products and then extend lines of credit to businesses until they are able to pay for the shipments. The problem is that without a sufficient amount of cash flow the manufacturers will be unable to pay their employees and work would come to a halt, no one works for free! This is why as I had stated in a previous blog that banks need to commit to providing a greater number of loans to businesses, which in turn would stimulate the economy. Yes we all know that this is one of the biggest reasons for the recession, however the loans being made back then were primarily subprime mortgages to buyers that would never have recieved financial backing even 20 years ago. This is a completely different scenario in that the loans would stimulate the economy in a postive way by encouraging the hiring of many new people. At the same time I do feel that the numbers are a little misleading. In no way do I feel that the recession is over. The fact that many companies report earnings higher than estimated does not encourage me, mainly because in anything, slightly higher than the worst is still bad. As to the fact of should taxes be raised or cut, or should there be greater incentives, this is a very difficult question. In my mind the taxes should be raised in certain areas, specifically for large conglomerates and businesses. I remember reading a year ago that Microsoft paid a single dollar in taxes in 2008. Imagine that, Microsoft, one of the biggest companies in the country, let alone the world, paying $1 in taxes! The fact is that many of the larger corporations out there pay no significant sum in taxes due to the amount of loopholes in the system and the abilities of their accountants. My proposal would be to close these loopholes and tax these companies as any normal citizen would be. On the flipside of this argument I would authorize several tax cuts for the middle- and low-class citizens. Why not include the upper-class you ask? In my mind taxing someone who makes $10 million a year 45% of their income leaves them with $5.5 million, while a tax of 30% to someone making $100,000 leaves them 70%. Again some would say that the rich have much greater living expenses and that it is all relative. To that I say, then cut down your expenses. I do not feel sympathy for someone who can not pay their $10,000 a month Bentley payment when there are people who are hard-working and honest that can barely afford their house payments after their interest rates went up. Back to the tax cuts for the lower classes, I would like to see such cuts because I believe that the lower classes at much more likely to put that extra income back into the economy than the rich who I believe would simply place it in a bank account to gather interest for the next 30 years. Similarly I feel that incentives such as deductions for money spent on gas over a certain price per gallon and those already given to couple with children will put more money in the hands of the average person who will in turn spend that income, thus boosting the economy. The big problem though is the unemployment and that is something for which there is no easy fix. In order for the unemployment rate to be lowered significantly there must be a jobs available for those that seek one. The only way to assure this is for a greater level of spending to take place, which will necessitate that more people are hired to manufacture products, deliver and ship them, sell them, and so on. However since a majority of consumers lack a decent amount of disposable income right now the only way to provide it to them is through creidt. Even providing credit is not a guarantee though, as smart individuals will not leverage themselves for fear that they will be next to join the ranks of the unemployed, being left no way to pay back their credit lines. As I had stated in a previous blog, this is the crux of the matter and in a way it is similar to the old story of the chicken and the egg, which must come first when both must be derived from the other. It is a dilemma that sopme of the birghtest economic minds have been contemplating for the past few quarters and it appears we are no closer to a solution now as we were back then.
In regards to the inventory situation and the current unemployment rates, these two are interrelated. With the low inventories, there is really no need for workers in a company when there is no profit being made. By having these employees in the business with no work, the companies are losing more money than they are making. I also agree in the benefit of the invisible hand because if the economy is left separate then there will be more of a focus upon the struggling market and those involved will be able to fully address the problem and work towards solutions to bring the economy out of the recession.
The real backbone of the United States economy is its workers. without the workers the economy just wont work. they higher the unemployment rate the lower the output and due to the high unemployment companies see lower inputs. that is just a recipe for disaster in my mind. if you are able to keep people in there jobs and they feel secure they will spend more money, its almost a given. personally i am able to spend my money with a lot less frugality when i know i have a good paycheck coming in. without that steady paycheck all my money is going t stay in my pockets not some companies. i think that the opportunities for employment that are present due to the low inventories are a perfect way to open up jobs for the unemployed. if the unemployed get hired and the unemployment rate goes down everyone in the country will feel safer with there job, and as a trickle effect they begin to spend more of there money allowing the companies to keep the u formerly unemployed employed.
Obviously you want see levels improve just yet. Companies can’t order more inventory until they sell sell sell. I think companies need to make employees feel safe at their jobs right now. People aren’t going out to buy right now because people are afraid they will lose their jobs and that will be money wasted. I think right now ads need to be aimed towards kids, tweens and teenagers, they don’t care and they will spend money. I know right now the economy is bad but i want an i phone. I don’t care how bad the economy is, i’m eventually going to get it, and i feel like that is also how other teens are thinking, they want it they will get it. Advertising to teenagers should make inventory levels move. It might only be a slight improvement but it is and improvement. Even with our tax increase i don’t see a big deal. It didn’t make things really that more expensive that i’ve noticed it still go out to eat so maybe raising taxes isn’t so bad it’s just how far is to far?
I agree with Andrea Rovendo i really truely agree that advertising to teenagers makes inventory level move because thinking about it its true people (kids) dont really stop and think about what will the consequences be tomorrow if they purchase any expensive,unafordable product. I mean i believe that parents should really teach their children how to really manage their money.so that they wont complain that they dont have no money and so that they may be prosperous people. For example lets say you have 300 dollars its not wise to spend 250 on a phone that you dont really need when you can get it for 50 and save up 250.
I agree with taz319 to a certain extent when it was said that to increase inventories you must first get the consumers attention with incentives. However to cancel those perks out with a higher tax will only increase sales to a certain percentage (of course it all depends on how high that company decides to raise taxes.) Also, as a result of the current economy situation a majority of the population are being more frugal which in trun has an incredable affect on company”s sales. (no matter how many coups are sent to them) I believe the solution to this problem is to cut back on employee pay not firing, and to throw some coupons in the mail.
I agree with Tas319 that people are so afraid of another Depression that they are watchin every penny and nickel instead of just living life normally. As long as people just start spending at a normal rate without going overboard on things than the economy will start to pick up. As for the increase in the unemployment issue I beleive that technology has alot to do it. With the evolution of machines our lifestyle has been simplified. Meaning that machines and computers are making things easier and get things done faster. This creates less need for poeple to get paid to do a job that a computer/machine can do faster and more efficient.
I agree with the article, that factory inventories are so low due to no manufacturing going on due to lack of sales. But the recession has been going on for so long , factory inventories are low. The biggest problem will be can factories produce goods and make a profit due to higher taxes and operating overhead.
If the economy picks up then factories can slowly raise their prices and make a profit. If the economy stalls then I believe the US economy is in much more trouble than before.