Don't Panic - the Best Is Yet to Come

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Don

Currently, the domestic and global economic situation is the most disrupted it's been since at least 1990. In fact, it closely resembles the S&L crisis of the late '80s and early '90s. Back then, the big problems were caused by junk bonds.

Today, the big problems are caused by the notorious portfolios of mortgages known as Collatoralized Debt Obligations (CDO)s. But, as much trouble as these securities and the housing crash they fueled may be causing, there are two big under-appreciated economic trends emerging that point the way forward:

  • The first is the bold stance taken by the Federal Reserve to contain the credit crisis.
  • The second is the stabilization that is beginning to take hold in the U.S. housing market.

As we'll explain, these two trends will have dramatic implications for the stock and bond markets and the broader economy. But before we explore these in detail, let's take a look at the economic fundamentals that best describe the present situation.

Let's start with the job market. U.S. payrolls dropped by 80,000 jobs in March, after falling an adjusted total of 147,000 in January and February.1 However, economists Brian Wesbury and Robert Stein remind us that there are at least five reasons to doubt that these numbers signal a recession:2

  • First, the number of hours that Americans worked actually increased in March. The average workweek went up from 33.7 hours to 33.8 hours. This extra time per week, spread across the workforce, is the equivalent of increasing U.S. payrolls by 120,000 jobs. If the economy was really in a recession, the average workweek would be going down, not up.
  • Second, the Bureau of Labor Statistics cites the weather, which was unusually bad even for March, for skewing the statistics by 55,000 jobs.
  • Third, it's not that unusual for employment figures to go up and down due to normal fluctuation. This has happened many times over the years. The first half of 2003 is typical: On average, payrolls dipped by 57,000 each month, while real GDP climbed at a 2.3 percent annualized rate.
  • Fourth, even though the four-week moving average for jobless claims stood at 378,000 in the middle of April, it did not reach the 400,000 mark, which is the figure that we'd be likely to see in a recession.
  • Fifth, even if the total number of jobs falls, the economy will continue to expand because of increases in productivity...

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