To facilitate perspective on size and what “big” really means and how the earth stacks up in the galaxy, visit this video. Or, watch similar information here.
Holding that view, back on earth can seem mighty miniscule. But we are asking more practical questions about our economy. In a keynote presentation in Las Vegas, David Kelly of J.P. Morgan Chase told an audience of financial advisors the obvious: the current economic recovery has been slow by historical standards. Usually, economic growth roars back after a deep recession, but the latest numbers show a 3.2% (annualized) expansion of the U.S. economy in the fourth quarter.
Going forward, the question in Kelly’s mind is whether 2011 will see us reach 4% growth – the level where we begin to create enough jobs to start reducing the unemployment rate.
There are several possible reasons to think we can. One is pent-up demand around the economy. Kelly noted that many large corporations have postponed new technology purchases, and told a funny story about how he asked his own IT department for a laptop to replace his broken one. They went back into the store room and came back with what Kelly described as a “legacy machine,” dusted it off, applied a fresh layer of duct tape and handed it over. As part of the recent tax package, companies will be able to write off the full cost of equipment purchases this year, which means technology and equipment orders should look better in 2011 than they have the past three years.
Another potential for optimism comes in the auto industry. Auto sales managed to increase to 12.5 million units in 2010. But Kelly pointed out that some 13 million to 14 million cars are hauled away to junkyards each year. If you add in 2.4 million new drivers between January and December, there is reason to think that new car demand will reach 16 million in 2011. Even if it does not, a 10% increase in demand from 2010 to accommodate half the new drivers buying cars would boost car sales to 13.75 million which would equal the number of cars hauled away to junk yards and a 20% rise would boost car sales to 15 million sales all three of these scenarios in our low interest rate environment are not so farfetched.
Housing demand may be on the verge of an increase as well. Kelly showed a slide that traced a long, slow three-year recovery up to 555,000 housing starts last December. But Kelly indicated that this is far from normal levels. “We have 50 years of good monthly data on housing starts,” he told the audience, “and prior to the recession, the lowest number ever, since the Eisenhower Administration, was 798,000.” And that was when the US population was less than half the population it has today. From this level, Kelly offered, the odds are more likely that we’ll go up rather than down.
Consumer balance sheets are another potential source of optimism. Seventy percent of all debt held by Americans is mortgage debt. This debt is being refinanced at what Kelly described as “the lowest rates we are ever going to see.” Even the darker statistics have optimistic overtones; banks are writing off mortgage debt at record rates. Add it up, and the percentage of peoples’ income used to make debt payments has been falling steadily, from a peak of 40% of disposable income in 2007 to 11.6% today.
Kelly briefly touched on record corporate profits; by the third quarter of 2010, earnings reached $21.58 a share on the S&P 500, and could breach the all-time high of $24.06 later this year. How is that possible in this tepid growth environment? “This kind of economy is great for profits because it holds down interest rates and keeps labor expenses in check,” Kelly told the group. “Nobody is pounding on the boss’s door to demand a raise because they think they’re irreplaceable.” Rather, they see the news reporting one out of four people are either unemployed or underemployed and they are glad for a job.
Add in the two-year extension on lower tax rates, and the payroll tax cuts, and Kelly says it isn’t a stretch to expect 4% growth for 2011.
That would reduce unemployment, right? Yes and no. The higher economic growth rate should lead to rises in job creation. But Kelly said that the 9.4% unemployment rate we see today doesn’t count people who have stopped looking for work. “If the economy starts to grow,” he said, “people are suddenly going to look up and realize that there are jobs out there again, and start looking for work.” The effect, paradoxically, may be a spike in the unemployment statistics – which most people read as a discouraging signal, when in fact it is a sign that the economy has come back to life.
If you have children, friends or neighbors who are looking for work, Kelly had some good news for them. When you see that employment grew by 800,000, as it did last year, most people don’t realize that’s a net number. Kelly invited the audience to go to the web site www.bls.gov, and look at the “Job Openings and Labor Turnover Report.” You’ll find that last year 50.8 million people were hired, while 50 million people left the work force. With the Baby Boomers starting to retire, not all of those people leaving the work force are people being laid off. A significant number are retiring baby boomers. Per the Social Security Administration its website www.socialsecurity.gov, about 800,000 people a year (as of 2009 the last date of figures) are added to the retirement roles, so the number of younger workers filling those positions is probably 1.6 million rather than the 800,000 that the statistic shows.
“People don’t realize how dynamic our labor market really is,” said Kelly. “That means that there are 50 million resumes on various desks around the economy, and the top resumes on those piles are going to get hired this week. There are jobs out there, and a lot of people are hired in America every day.” Also the US Gross Domestic Product, according to the Commerce Department on January 28th, 2011 released that the US economy grew to $13.38 trillion in the fourth quarter of 2010 which is greater than the peak reached in 2007 of $13.36 trillion. A little statistic quoted by Bloomberg on January 29th, 2011 shows that consumer spending in 2011 grew by 4.4% in the last quarter of 2010, the most since 2006. Since 70% of our economy is driven by consumer purchases, that news is sorely needed. The big question is whether that growth momentum will continue into 2011; early indications point to a continuation of that growth. With recent events in the Middle East the certainty factor has diminished. That lack of certainty is a drag on the economy, which means, fewer companies will hire. However, barring oil prices peaking (gasoline prices reaching $4 a gallon in the US or some other catastrophe), which would divert increase household spending to energy from other goods and services, the continued increase in growth in consumer spending, should propel 2011 to greater economic growth than in 2010. Although with unemployment still high, it may not feel that way, there is hope that things are improving. So looking beyond the emotional response generated by fear, the numbers look promising!
