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What the economic recovery? What recession?

In early November, Talking Heads were breathless state of the economy "Mayor" of 3.5% in the third quarter … quarter that the economy was recovering. The end of the economic downturn also marked the end of the recession that began in the fourth quarter of 2007. It attributed much of this growth recovery in auto sales. To read the full report government, go to www.bea.gov.

The index of leading economic indicators, which was positive for seven months also suggests that the economy is recovering.

So is it true? Are we on a sustainable growth path today? "This latest version of government on the economy: the worst is behind us? Does the index of leading economic indicators tell us the same thing?

Well, let's review the reports and see where it comes to growth. Maybe this this will give us some answers.

To begin, the growth rate in Q3 was revised down to 2.8%. And the schedule below shows the contribution to growth from the various sources of our economy.

The contributions to growth were:

I welcome this data table is a bit busy, but it is important to understand the true nature of what some call recovery. You will notice that the most important thing in the third quarter, economic growth was the restocking of inventory. In my mind, things back on empty shelves is not growth. It is simply the reverse of the mass removal and aggressive, we've seen in the fourth quarter of 2008.

Thus that removing the storage, the growth rate slips to 1.9%. Remove defense spending and health care, no growth items. After all, support our troops in Iraq, Afghanistan and around the world should not be regarded as economic growth. And more health care for an aging population should not be considered new growth.

If we eliminate the defense and health, growth has fallen to only 1.1%. But also a major contributor to this growth is still in vehicle sales. Now we will see a little later in this article.

Month by month car sales are highly volatile and seasonal. So while we have sufficient liquidity "idiot lemons" gift from the government that began to kick some sales in the third quarter, two other factors are more important. Pent-up demand is growing and money was the catalyst for clunkers.

The pent-up demand is the average age increase of automobiles on the road, now more than 9 years. In addition, interest rates on auto loans are almost half what they were beginning 2007. The average car has over 100,000 miles on this and interest rates on new car loans are low. Underwriting standards, 10% deposit, no have changed in recent years and prices have not changed much and are just under $ 30,000.

Most of us are accustomed to seeing the number all vehicles purchased, as illustrated in the chart below. But remember that many cars we buy are imported and not add to economic growth in the USA. This table gives a complete picture of consumer purchases of cars in the last ten years.

As you can see, from auto sales long stop about 16 million per year. As car buyers went on strike last fall, car sales have plummeted to less 10 million per year, a sales level not seen since the eighties.

However, the cumulative demand of the aging fleet of vehicles and rates low loan demand for cars will rise from its current level.

There is another factor that will give us an overview of future car sales. Today there are 1.2 cars per driver. This means that 83% of the cars we buy are needed for transport. The remaining 17% Discretionary and purchased to support our lifestyles. So anytime we're in a hurry and reduced, as recessions can be easily reduced back into the car purchased.

Obviously, this is what we saw last fall and during the first half of 2009. We can not put off car purchases, and have. The elimination of this requirement of discretion, car sales will stabilize at about $ 13 million per year.

Now we will see car sales affecting our growth economic. The following table shows the cars sold each month has made the United States.

Source: U.S. Department of Commerce

The areas of pink areas on the list are the periods of recession. You'll notice car sales have been declining steadily over the past ten years, recession or not. We see a dramatic fall earlier this year and sales have partially recovered in the third quarter. However, this recovery is actually a great piece of long-term model is not unique to this recession.

The result of pent-up demand and borrowing costs low through sales car will be more than the monthly sales drop this year. I hope that car sales are likely to resume its long tradition of seasonality and volatility.

Now back to our "growth" story. As we have seen, the only significant contributor to growth in Q3 was car sales. Many analysts attribute the government's recovery program. It makes no sense.

Aging, high mileage vehicles, and low interest rates are more durable and powerful influences on sales of cars than any government can be present. The compensation of these two positive elements is negative discretionary decisions hire purchase of 17% of total demand. Purchases of automobiles can be easily delayed or even canceled … at least time.

Trade Imbalance = oil

And before you all too excited about this rampant growth that we have remind ourselves of the influence of negative trade growth less than 0.8%. This is mainly due to our oil imports. More growth will make this imbalance worse name, and to import more oil to accommodate more companies.

The Congressional Research Service, the research arm of Congress recently published a report on oil reserves in the United States showing the U.S. has the world's largest reserves fossil fuels, but even Russia. The report is entitled "U.S. fossil fuel resources: Terminology, and summary report and was released October 28, 2009. Go to www.opencrs.com To download this report.

We have the largest budget fossil fuels for all countries and the importation of large quantities of oil. This is the result of bad policy and political pressures on the environment. Unfortunately not exploit our own resources, reduce our economic growth continues and puts downward pressure on the dollar.

Main economic indicators

The Conference Board index of leading economic indicators has been saying since April that the economy is recovering. The index has been positive in every month since then. But look more closely at the components of this index. The main contributors to the positive results was the performance of suppliers (stocking shelves) and the stock and bond markets. As I said before putting things on the empty shelves that should not be considered sustainable growth.

Stock markets and bonds have moved closer. The bag is 62% since its low in March. The corporate bond prices also rose, particularly the high yield market up 56% from its low in March. These price increases have come without the benefit of increased revenues, assessments nosebleed levels of magnification.

Other components, such as consumer expectations (low and below), without labor claims (bad, but stabilization), average workweek (stable at 45 year low), and building permits (from a very weak base and too low) Send to a very different story. So it seems that the index of leading economic indicators to mislead, with the only growth indicator is an unjustified increase in prices of capital market.

Some "growth story, eh? Cautious investors should be extremely cautious in this environment.

What about next quarter?

I think is important to see this touted "growth" story of the economic results of the third quarter as a unique event.

After all, where is this quarter and next quarter's growth is coming … more war? More bands and ducks? More cars than they really do not need? I think not.

The growth in the long term sustainable economic growth comes from entrepreneurial initiative offering goods and services demanded by consumers. These companies to hire more workers and increase because their products are sold at a profit. This pursuit of self-interest by each of us responsible, it can happen …. Unless our government prevents this phenomenon and hinders the natural growth rates and taxes on expensive procedures and regulations.

And here we are. No contractor in its good sense, will start a business today. The barriers to success and growth are too high, too risky business. The prospects for strong and sustainable economic growth is not good until the government removes these obstacles.

What are the chances our Muslim radical socialist president and a spirit, and Congress understand the real sources of growth? The measures taken by this administration and Congress to ensure date limited and short-term economic recovery. The economy significantly underperformed potential.

What recession?

Now we have established that there is very little growth Growth in number in the 3rd quarter and outlook growth in coming quarters is not good, let us pause to recession and see how bad it is.

It was a recession? Absolutely. However, we consider a closer look at his ideas about gravity, duration and dispersion. The mere acceptance of disclosure by the government that real GDP during the two consecutive quarters of growth is not very useful for investors.

We have to understand the sectors of the economy are strong, safe, and the parties stretching and vulnerable. In fact, it seems useful to think in economic conditions Recent developments in the economies 2.

Two economies

There is a recession or two economies? I think the latest economic developments are better explained by disregarding a monolithic economy increases or decreases together and unity, but rather to consider economies 2 relatively independent of each other.

A stable and healthy economy, and another is ill, sick and had no business running for first place. But they are interrelated … for better or for worse, though they may appear in the performance of another.

The first concerns the provision of goods and services that everyone needs such as housing, food, clothing and other needs of the family normal American. This includes education, entertainment and lifestyle. As you can see, this economy is essential, important, healthy and functioning.

The second economy is one that should never have existed in the first place. It is an economy based on the liars and the losers buying houses that are not among them. The economy is sick and dies and a given time will not be possible.

As for the endless stream of economic data in the context of two economies will give us an overview of investment opportunities and risk.

The real economy

The numbers of titles are often unemployed. And indeed, unemployment is already above 10% and shows no sign of abating. Underemployment is 18%. Apparently a lot of pressure policy for something high and rising unemployment and the government will probably try. But the bad actions, as always, will be too late and on. The recent summit Employment is a giant joke.

The following table compares the total wage employment (not unemployment), whose total income and personal consumption expenditures. Payrolls include most of us. Does not include self-employed and agricultural workers.

Normally, unemployment is the figure commonly reported, but too many. Includes the unemployed to report every week, but not those who do not report or whose benefits have expired, or those who have stopped looking for jobs. There is million of these people and the unemployment altogether ignored. It seems more relevant to consider how many of us are employed and how it has changed. That's why I'm using employment rather than unemployment.

Payrolls (blue line) has plummeted since late 2007. About 8 million people lost their jobs in the past two years. Both economies have been affected. For example, 1.6 million laid off construction workers because of the lack of construction work. But the real economy also lost jobs. Manufacturing employment fell by 2.1 million people. This reflects both the trend long term than in the U.S. manufacturing and the net reduction related to the interruption of supply chain panic last fall.

Payrolls behaves as it has during previous recessions. During the recession of 2001-2002, employment declined and continued to decline after the recession had finished. We expect the same this recession … a continuing decline in employment.

The table also shows income people (green line) and Consumer spending Staff (red line). Although employment has fallen from a cliff, income and personal consumption remained unchanged. In the pre-recession income and consumption continues to rise as employment fell.

Revenue fell slightly and personal consumption has not decreased at all during this recession. Average income increased. The same happened in the last recession. Average classified consumed outside and staff have continued to increase.

There are several parts of personal income. It includes compensation of employees, the bulk of investment income and government revenue as transfer payments. Examples of government payments are securing welfare and Medicare payments.

No downturn in personal consumption. 70% of consumption is one of the services personal and this sector has increased each quarter. In fact, service charges have never fallen in any quarter, recession or not.

This table compares the total Revenue comes, which has not declined in this period of recession in employee compensation that a. In fact, you will notice two lines t expansion, in particular, since 2005. Average wage is important because it is the main driver of total revenue. And is the source of payment of state taxes.

Given the large number of unemployed could expect from a lower income employee and he has, but not significantly. Indeed, revenue per employee grew into a recession.

Service employment is almost the same. The decline in employment in the sector were offset by increases in employment of health workers and federal employment.

Healthcare and federal government workers are asking "What recession?"

Source: St. Louis Federal Reserve Bank

Although income levels have remained virtually unchanged during this downturn, the troubling point in this chart is the wage income is decline. If the earned income continues to decline, our economic "recovery" will be short lived.

Here are some Anecdotal indicators to examine the crisis from a different perspective of the indicators the Government alone. We watched entertainment, charitable donations, the cost of living, and others to gain a better understanding of this recession. "

America 's animals

Consider the history America's love with our pets. According to the National Survey on Pet Owners, 62% of U.S. households have a pet. The property is enhanced by the time, compared with 56% of households when the first survey was conducted in 1988.

The following schedule shows the total cost of ownership of company during the decade.

Annual Pet

($ Millions)

As you can see, our body care pet has increased in past recessions. The property and the amount has been extended. New products, such as palliative care and an airline with nothing that pets are just two examples of how we give our pets, not recession.

Our pets are wondering "What Recession?"

Garbage

Next, we consider our waste. In particular, the number of pieces of food produced by American homes and restaurants.

U.S. Food Scraps

Source: Environmental Protection Agency

Tonnage produced has fallen slightly in the last recession in 2001 but rose again next year. Even with the decrease of 2%, the percentage of food waste to all solid waste increased to 11.4%. In 2008, the year of recession, both the quantity and the percentage increased. United States produced a record 32 million tonnes of waste food during the worst recession since the seventies.

Garbage Carriers are asking: "What Recession?"

College Football

Ask fans of U.S. college football. We will check your response this recession facing the National College Athletic participation Division I Football Association record for the past six years. This does not include attendance at all football, but Division I is the highest level of competition in college football and has the largest number of followers. The following table shows the annual attendance records included 119 schools in Division I.

Source: National College Athletic Assn.

As you can see, attendance is increasing every year, recession or not. In the deepest recession since at least mid-70s, attending college football continues to rise.

College football fans are wondering: "What recession?"

Business News

As we all know, small businesses are a important and vital to our economy and employment in general. There are about 6 million businesses in America that people use. The difference between large and small firms is the number of employees. Large companies are defined as those with 500 employees or more. Only there are 18,000 large businesses in the United States. Small businesses, those with fewer than 500 employees, representing 64% or 14.5 million of the 22.5 million new jobs added to the economy from 1993 to 2008. Third of these new posts work came from a new business.

The following table shows the total number of new businesses started by the number of deaths and the proportion Start the closure. Approximately one percent of new firms are added each year to the 6 million existing businesses. The failure rate of new companies during the first five years of existence has always been high, around 80%. The table below is not followed, it shows only the number of businesses open and closed each year, not longevity.

As you can see, the closures amounted to approximately 85% of the formation of nine cases from 2004 to 2007. However, the ratio rises to 95% in 2008, which clearly reflects the challenging business environment.

Company formations and failures

Source: Administration Small Business

Creation of new businesses is a key element in employment and economic growth. While new starts have remained virtually unchanged, the failures have increased dramatically. The recession is just one reason. Federal Regulations, is another. Here the cost of federal regulation of business each year.

The annual cost of federal regulations

(Cost per employee)

Source: Administration Small Business

As you can see, the best engine for economic growth, small businesses, is the regulatory burden. Regulatory costs federal small business is 45% greater than the costs for large companies. This tends to discourage economic growth and making small business failures more likely. High taxes and regulations to ensure the punishment economic growth in coming quarters will be warm and vulnerable.

Charitable Giving

You might expect to reduce charitable contributions when times are difficult. And has not decreased in 2008 but not significantly. Interestingly, contributions to churches and national organizations and international charities actually went up. The decline was larger social service agencies and education.

The schedule below describes the charitable donations during this recession, with attribution, that are the primary individuals, and beneficiaries, which are mainly churches.

Charitable Giving

Source: Giving USA 2008 report

The Most donors say 'do not care if there is a recession. "And many churches and charities, saying:" Thank God for the generosity the American people, even in difficult times.

Compressions

Is that all? No, no, of course. Discretionary spending refused. We're buying fewer cars, as we have discussed, and our vacations are less expensive and extravagant. We must reduce eating out, especially in restaurants luxury. The days of the sculpture is $ 50,000 business lunches are on the ice … at least for now. And no one will miss, except the ice sculptor.

To most families go on their lives as they always have. But fifteen million unemployed will have some impact on us all. You and I may have a job, but a family member, friend or someone we know is probably outside of work.

The recession and unemployment will lead to economic problems. But we remember recessions are a natural and necessary part of the business cycle. That's why we call it a cycle … having high and low phases. Economic cycles are healthy. The cycle development goes too far. At its peak, it encourages marginal investments not. These failures cause economic confusion, including unemployment, but also pave the way for the next cycle to begin.

Solomon, the wisest man who ever experience assures us there will always be cycles and there will always and when the ground there. So instead of trying to ban them, because governments desperately trying to do, so we include in our planning investments, as normal and recurring.

The false economy

This is an economy that never should have existed in the first place. There could be no liars and losers. I speak for millions of houses that we built that are not among them. Liars and losers purchased at prices higher still, all facilitated by government requirements for banks to lend to unqualified borrowers and void. This was the triumph of hope experience and inevitably end badly. Liars are not worthy of loans and the losers can not provide.

The housing bubble that led to take the time to form the following table illustrates.

Source: U.S. Census Bureau

The blue line shows the steady increase total of U.S. homes. The sharp drop in 2002 is only a change in the way the Census Bureau tracks this information and not an actual decline.

From 2002 to 2008 United States added to its inventory of homes. In 2002, our housing stock was 117 million households in 2008, our inventory of homes was 130 million households. At the end of the 3rd quarter of 2009, was 130,302,000 units. This includes invaluable. The number of households has stagnated over the last 6 years, approximately $ 110 million. The current number is 111,612,000.

Approximately one million new households are formed each year. And in need of housing. A rule of thumb is that America needs to build new houses of equality training to new homes each year.

The number of houses and the number of households should follow closely. In the past, these two lines (blue and red lines) were very close. In 2002, the blue line and the red line began to diverge. From 2002 to 2008 we have built 13 million homes that do not need and are not occupied. It's a bubble!

Figure also shows the average price of homes in the green color scale (right), which began rising sharply from the recession of 2001-2002.

Price increases housing, we have built more houses. The difference between the houses and the homes are empty houses, which continues to grow, even to build more houses.

This construction model of high prices and empty houses just kept getting worse, creating a massive housing bubble. Of course, all this possible the idiots in Washington that he wanted every voter to be the owner, even if it was temporary and frivolous.

The music stops when prices could further up the house and began to fall mid-2007. After a delay, construction of new homes started declining from the unsustainable pace of 2.2 million per year.

As you can see in the chart below, housing rose rapidly after the recession 2001-202, despite the lack of increase in households. And so now, construction of new homes have fallen below the level of new household formations. As it absorbs excess inventory, start new resume a more normal and lasting approximately 1 million per year.

Source: U.S. Census Bureau

We will add another dimension funding to this picture sorry. If all these homes were built with 100% of capital, not built. The reason they were built because 100% or nearly 100% financing was available to worthy borrowers. Congress passed laws requiring banks to lend to the liars and losers. This has created a recipe for the evil that has built the biggest bubble that market forces would permit.

The following table shows the total household debt in the U.S. (line blue). This is mainly mortgage debt, but includes also 2.5 billion dollars of consumer debt such as car loans and cards credit. It also includes two sources of funding for mortgage financing that has made the housing bubble, much worse than it should.

The first source was blocks Mortgage (red line), organized by hundreds of artists of mortgage loans and sold to retail investors by Wall Street firms. The second pool was backed government agency, like Freddie Mac and Fannie Mae (Green Line).

Source: Federal Reserve

Following the rapid rise from 2002 to 2008, total household debt has stabilized and begun to decline. Pools of mortgages dropped sharply. In essence, no new deposits have formed and existing pools are resolved de-energized or charged. The saddest part is that government-subsidized loans continue to rise. Everyone, apparently has a housing bubble, except the government.

The construction of houses, do not have to be financed by loans they could not pay millions of employees. Many are now unemployed.

The following table shows employment levels both in construction and financial services. As expected, the construction industry is more volatile than banking. However, both sectors have invested millions of employees over the past two years.

Source: St. Louis Federal Reserve Bank

One million six hundred thousand construction workers and almost 500,000 financial services workers have been fired since the recession began.

According to the American Bankers Association, 14.1% were detached houses in a state of distress or execution mortgage. This is an absolute record of the American Bankers Association. data collected in 1972. This amounts to over 4 million homes.

As the leading mortgage lenders, banks are suffering huge losses and gains and losses. So far this year, 129 banks failed and were closed by the FDIC. This compares with 26 bank failures in 2008 and only three in 2007.

Unfortunately, the real economy and numerous banks and normal and prudent borrowers trapped in the bubble. The increase in housing prices affects the whole family went for business or professional reasons. They had to pay more and ask more to their new home. And the bubble burst left with less capital when they bought the house. In fact, they are stuck, at least for the next few years in households with loans larger than the value of the house.

Loans limited

Banks have become much more cautious loans since the collapse of the housing sector and the freezing of credit markets. The following table shows where to invest now. It is certainly not in the loans businesses and consumers.

As you can see, commercial loans (called C & I loans) have fallen in 250 billion dollars the year past. And consumer loans has decreased slightly. The real revelation is the excess of deposits banks must keep with the Federal Reserve Bank.

All banks are required to maintain a minimum reserves held on deposit with the Federal Reserve. The minimum is shown in green line of 2000 to October 2008. Much of the $ 700 million of government rescue money that went to support major banks last fall was immediately re-file with the Federal Reserve. As you can see, in excess reserves increased by almost zero last year to $ 1 billion.

Conclusion

The decline in bank lending, falling employment, housing prices lower, bank failures, seizures of housing, begins a further decline are clear evidence that they compromise the false economy.

The false economy is not very large compared to our national economic engine, but still causing much pain. Unfortunately, it forms bubbles … in pain and loss.

Ok, let's add the following:

"The Most of our economy is strong, functioning and healthy.

"The outlook is slowly growing risk / reward is better balance

"It endangers the housing bubble deflates and the false economy

Portfolio Strategy

My analysis is that there was no recession in most of our economy, and certainly was not recovered.

The picture is for us to spray down, dragged by excessive regulation, confiscatory taxes, and the slow abandonment of Business Administration School of us the strongest economy on earth.

In this context, it is essential to adhere strictly to our investment disciplines of high and sustainable income. We will continue related investments to avoid false economy, like housing and housing finance.

May you live long and prosper

Mike Williams, CFA,

About the Author

Mike Williams is a professional money manager and Chief Investment Officer for Panhandle Portfolios, Inc. He has a BBA from the University of Massachusetts, an MBA from Southern Illinois University, and has held the Chartered Financial Analyst (CFA) certification since 1990, Certificate #13376.

He has been a credit analyst, a foreign exchange exposure analyst, an international pension expert, an international equity portfolio manager, a Japanese stock analyst, and the founder and chief executive officer of several companies engaged in a variety of business ranging from commercial real estate in New England to recycling electronics in China.

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