Important Economic Indicators

Are we in a bull market or a bear market? Is the US economy improving--or are things just getting worse?

The slide presentation below provides a snapshot of key economic indicators--some of the important ingredients that shows if the US economy is vibrant & healthy.

Many of the slides come from BullandBearWise.com This organization provides regular updates as new information is released. From time-to-time I will update this particular blog article with the latest news.

Before viewing the slides, it would be instructive to discuss these indicators:

Bull/Bear Index This is a composite index of the state of the US economy.

Gross Domestic Product (GDP) This is the total cost of all finished goods and services produced. See That GDP for more information.

TED Spread The TED spread is a common measure of fear and risk in the capital markets. See Where's TED Now for more information.

Inflation Right now deflation is an important concern. This slide provides a hint as to the direction of that risk.

ISM Manufacturing Index Any reading above 50 is considered a healthy sign for US manufacturers. These companies often make Durable Goods and Export products, hence those two charts follow.

ISM Non-Manufacturing Index Comparable to manufacturing, this measures the health of the US services industry. The Retail Sales chart provides further detail.

Housing Market Index This is comparable to the manufacturing & services indexes. Again, a reading above 50 is healthy. This is supported by the Housing Affordability Index--and indication of whether buyers can, in general, afford to purchase homes.

Unemployment Rate This is a vital measure of the US workforce--and naturally a low unemployment rate means workers can afford to buy durable goods, services & homes. Consumers are one of the key drivers of US economic growth. The Initial Jobless Claims report provides a glimpse of where the unemployment rate is trending.

That GDP

Gross Domestic Product, or GDP. Such an arcane term...such an important number.

Every country has a GDP. The US GDP in 2007 was $13.8 trillion.

Some nations are quite wealthy, per capita. Others are quite poor.


We want to see a steady increase in the GDP. For a mature nation like ours, a 3% annual increase is nice. When we see it decline, especially for two successive calendar quarters, we call it a "recession."

A healthy GDP helps answer the questions:

• Will I have a job?
• Can I afford to buy things?
• Will I earn money on my investments?
• Can I afford to retire?

So just what is a "GDP?" It is the total cost of all finished goods and services produced.

Let's picture what this is. GDP is the sum of four items:

1. Personal consumption. This is what we spend on food, rent, medical expenses and so on.


2. Business and household capital purchases. Examples for businesses include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. For individuals, this would be for new houses.


3. Government spending. This includes salaries of public servants and purchase of weapons for the military. It does not include social security or unemployment benefits.



4. Exports to other nations, less what we import.



GDP per capita is often used as an indicator of standard of living in an economy, the rationale being that all citizens benefit from their country's increased economic production.

As such, it is a very broad measure...and as you can see, throughout the Middle Ages, poverty was the norm. In the recent decades, people in North America and Europe have become quite wealthy.

As we ponder the future, China and India, for example, may catch up to our standard of living.

Still, there is likely to be billions of people who live impoverished lives.

I guess when can be thankful--even the poorest in the US are relatively well off. And we should give thought to economic development & humanitarian efforts to help those in the world who are not as fortunate.

Obama's Recovery Plan

Christina Romer is the new chair for the Council of Economic Advisors. On January 9 she released a 14-page document on "The Job Impact of the American Recovery and Reinvestment Plan" to be presented to Congress.


The preliminary findings are:

• The goal is creation of 3-4 million jobs by the end of 2010.

• Tax cuts & fiscal relief to the states may create fewer jobs than direct increases in government purchases. However, there is a limit on how much government investment can be carried out quickly. Since tax cuts and state relief can be implemented quickly, they are crucial elements of any package aimed at easing economic distress.

• Certain industries, such as construction and manufacturing, are likely to experience particularly strong job growth under a recovery package that includes an emphasis on infrastructure, energy and school repair.

• More than 90 percent of the jobs created are likely to be in the private sector.
  

All of the estimates are subject to significant margins of error. Estimates of economic relationships and rules of thumb are derived from historical experience. Furthermore, the uncertainty is higher than normal because the current recession is unusual both in its fundamental causes and its severity.

The table shows that the plan could meet the goal of creating or saving at least 3 million jobs by the 4th quarter of 2010.

The U.S. economy has already lost nearly 2.6 million jobs since the business cycle peak in December 2007. In the absence of stimulus, the economy could lose another 3 to 4 million more. Thus, we are working to counter a potential total job loss of at least 5 million.

Keep in mind that job loss is an unfortunate by-product of this recession.

While this proposed recovery plan may prove helpful, it is the fundamental problem...linked to the liquidity crisis created last September, the fear that ensued and the remarkable decline in the velocity of money (ie, rate at which Americans are spending) that are at the root of this recession.

And of course that was precipitated by the housing bubble...and all the problems associated with sub-prime mortgage lending.

Hence, efforts that have been underway by Fed Chairman Bernanke & Treasury Secretary Paulson...and carried forward by new Treasury Secretary Geithner may play a much larger role in overall US recovery...as we have seen glimpses of already.

Bend Not Break

US banks were under great stress last year. This is a principal reason why the Troubled Asset Relief Program (TARP) was passed. Once the $700 billion was secured, Treasury Secretary Paulson considered how best to spread the wealth.

As it turned out, he decided to have a private meeting on October 13 with the leaders of the nine largest banks.

Each received a one-page document that said they agreed to sell shares to the government...and they were asked to sign it before they left the room!

The chairman of JPMorgan Chase said he thought the deal looked pretty good. The chairman of Wells Fargo protested strongly. He said his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout.

At the conclusion of this 3 1/2 hour meeting, all nine chief executives signed. This put in motion the largest government intervention in the American banking system since the Great Depression.

Paulson presented his case in blunt terms. The nation's largest banks needed to begin lending to each other for the good of the financial system. To do that, they needed to be better capitalized.

Paulson was well aware of the stakes. If you look at the worst performing stocks last year, you'll see that all but one (ie, Circuit City) was a financial company.



Paulson's plea was that for the good of the country, these nine major banks needed to take the money. Paulson didn't have any particular terms for the use of the money. He simply wanted to see their balance sheets strengthened.

After dishing out $125 billion, he could then go to the mid-tier banks and ask them to accept money, too, in exchange for non-voting stock ownership by the US government, and other constraints on their business.

Did it work? Did this achieve Paulson's goal of stabilizing the banking system--and therefore averting collapse? Well, yes, it did. This is in part why were are seeing a bit of recovery in the US financial system, albeit it in the very, very, very early stages.

Following is a chart of the bank failure last year as compared to failures over the last four decades.

Where's TED Now?

The TED spread is a common measure of fear and risk in the capital markets. The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt ("T-bills").

TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract. The TED spread is calculated as the difference between the three-month T-bill interest rate and three-month London Interbank Offered Rate (LIBOR).

If you want to know about the financial meltdown that quickly occurred...beginning in September...you'll want to know about the TED spread.

When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans is increasing. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.

On September 17, 2008, an all time record was set as the TED spread exceeded 300 bps. On October 10, the TED spread reached another new high of 465 basis points.



Why was this happening? Recall that the US government had to step in to help troubled Fannie Mae & Freddie Mac. Then Lehman Brothers was forced into bankruptcy. And insurance giant, AIG, had to be propped up by the federal government. These were matters of historic proportion that occurred together within 1 1/2 weeks.

This instilled fear among major lenders...and subsequently rattled the US consumer, causing them to rein in spending. This pushed the US into a recession.

Before September, the only part of the economy experiencing negative growth was the housing industry. Now with this liquidity crisis, the problem became widespread.

In technical terms, we witnessed a slowdown in the velocity of money. When that happened, the Fed was compelled to pump in an enormous amount of money into the US economy to offset this slowdown in spending.

This has helped greatly in the short run...and within a couple of years, the Fed will need to take action to avert a significant inflationary problem. But right now that's a problem they are willing to accept to avert another depression.

In the 1930s, the government made the opposite move. A move which made the liquidity problem much, much worse...and pushed the US into a depression.


It was this rapid jump in the TED spread that alarmed Fed Chairman Ben Bernanke. He realized he didn't have all the necessary tools to help the economy--so he contacted Treasury Secretary Hank Paulson.

Together they worked on this issue, along with help from incoming Treasury Secretary Tim Geithner. This was the genesis for the $700 Troubled Asset Relief Program (TARP) that was debated in Congress, and ultimately signed into law by President Bush in early October.

As you can see by the graph, TARP (and subsequent efforts by the Fed & Treasury) are working. While it definitely takes time to relieve a liquidity crisis, we are now seeing improvements in lending...and we are seeing some initial healing in the corporate bond markets.


The US economy has a long way to go. However, without the bold, new actions that were alertly taken this past fall, we would be in far worse shape as we enter the new year.

The Four Agreements

Have you considered setting any goals--or making any special resolutions--for 2009? I'd like to share one of my favorite books with you. Perhaps it will stimulate some thought.

The Four Agreements is a book written by Don Miguel Ángel Ruiz. He went to medical school and was a surgeon until a near-death experience impelled him to seek answers in ancestral traditions of the Toltec.


His most famous and influential work was published in 1997 and has sold around 4 million copies. It was featured on the Oprah television show. It advocates personal freedom from agreements and beliefs that we have made with ourselves and others that are creating limitation and unhappiness in our lives. Ultimately, it is about finding one's own integrity, self-love and peace within this reality.

One Agreement is to "do your best." This is one of my favorite of the Four Agreements--and it is one that recurs in my goal-setting every day.


Abraham Lincoln put it this way, "I do the very best I know how - the very best I can; and I mean to keep on doing so until the end."

A few years ago I asked a few of my top clients for feedback regarding my financial service. One of the attributes they often cited was integrity. I am pleased they noticed--as this is one of my core principles.


The idealist in me wishes more people would value this principle. It seems we have examples of this each & every day...from diverse sources, such as:

* People who shoplift at the store where my wife works part-time. Yes, sometimes people "speak" by their actions and not their words.
* Bloggers who write viciously on well-known Internet web sites
* Those who take narrow-minded swipes at elected officials, therefore castigating them for offering no redeeming value to society

There was someone who lived a couple thousand years ago who had an interesting reply to all of this: Let him among you who is without sin be the first to cast a stone.

I recently watched Easy Rider. As the boys explore the USA on their bikes, Captain America (played by Peter Fonda) and Billy (played by Dennis Hopper) find themselves in the Deep South--trying in vain to get service in a local cafe.


They are baited by the local good old boys, including the town sheriff--but they will not be provoked. (In a modern movie you are likely to see a big fight scene ensue.)

Our heroes take it in for a while--and when they realize the waitress is "instructed" not to give them service, they calmly put on their hats and walk outside to their bikes.

That's one way of "not taking things personally."


As you see, the problem was not with them--not they way they dressed--not Billy's long, scraggly hair.

The problem illustrated in this scene was the blind prejudice of the red-neck trouble raisers. As Mr. Ruiz wrote, what others say & do is a projection of their own reality.

Keep that in mind the next time you receive a snide remark--any you'll be a whole lot happier--and maybe even reflect on this quote from Alexander Pope, "To err is human, to forgive is divine."

I find that it is very easy to "know" what someone else is thinking. Many of us make assumptions all the time. Yet, are they correct? We really don't know why someone is responding the way they are--at least not without asking them & probing their rationale and emotions in depth.


We have begun a successful endowment program at our church. During a committee meeting that I lead, we were discussing who was coming to our May dinner seminars.

Pastor Paul expressed disappointment that one particular family had declined our invitation. I asked him if he was familiar with The Four Agreements and specifically mentioned this Agreement, "don't make assumptions."

We had a nice discussion about it. My point was that just because that family declined our gracious invitation, it wasn't necessarily a negative thing. Indeed, they may have it in their heart to do something else favorable to the Lord's work.

When the dinner seminar came around, I noticed a different family who came--and yet they did not choose to meet later with our charitable giving counselor. I know the reason--their parents were from a church in Green Bay--and so they had already decided to include a charitable gift in their estate plans for that church. Perfectly reasonable once one knows their rationale.

And that is the bottom line of this important Agreement. Don't make assumptions. Be careful, because you rarely have all the facts. Without the facts, it is easy to mis-judge the situation and the motives of others.