Looking at the Economy Through Gray Colored Glasses

By Jeff Harding of The Daily Capitalist

I try to balance my day by reading well known optimist and pessimist economists. My two favorites are Brian Wesbury of First Trust in Chicago as my “Mr. Sunshine” and Dave Rosenberg as my “Joe Btfsplk"* (the name “Dr. Doom” was already taken by Nouriel Roubini). I know what to expect of them every day.

I like Rosenberg, formerly the chief economist at Merrill Lynch (remember them?) before he moved to Gluskin Sheff. Rosenberg raised the caution flags before the crash. Brian Wesbury didn’t. I saw Wesbury talk several times at conferences before the crash and he always said there was no problem with housing. He was cheerful throughout the crash and, back in May was one of the first economists to call the bottom. Also he is against mark-to-market accounting for financial institutions. Wesbury is a favorite of Kudlow, and is frequently published in Forbes.

Wesbury just published a report in which he argues that his prediction of a “V”-shaped recovery is coming true. Lots of charts showing obvious growth and improvement in the economy. The flaw in his argument is that he points to data that support his conclusions and ignores the ones that don’t. For example, he point to reports from the Richmond Fed and the NY Fed to show that their economies are picking up in their regions. I review data from Chicago and St. Louis and can point to sluggish growth there.

Rosenberg points to a drop in consumer confidence (unexpected), disappointing corporate earnings, and contracting bank credit.

Who’s right?

Wednesday the ADP jobs report came out and unemployment continues to increase, but at a slower pace (est. 9.8% unemployment from another 254,000 jobs lost). OK, everyone says employment lags a recovery. Got it.

But here is something that I think is important:

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts -- including new businesses and units of existing businesses -- fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.


This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.


The recession may have ended, but history suggests business creation won't rebound quickly. The 2001 recession officially ended in November of that year. But business starts didn't begin growing again until mid-2003. A sustained lull in company formation "could have huge implications for the economy down the road," Mr. Headd says.

If small business is the engine of the economy, then we’re in trouble because that’s where most of the jobs are. According to the ADP report:

The job losses were especially severe among small businesses with fewer than 50 workers. Those companies shed 100,000 jobs compared to the 93,000 jobs lost at medium-sized firms and the 61,000 lost at large employers with 500 or more workers.

This isn’t good. Tomorrow the BLS employment data comes out.

Here are a few other tidbits that Mr. Wesbury didn’t mention:

  • Consumer spending fell a revised 0.9% compared to the 1.0% decrease from previous estimates, but still worse than the 0.6% increase in the first quarter.
  • Consumer spending increased by 1.3% in August MoM.
  • Business spending dropped by 9.6%, up from earlier reports of a 10.9% decrease.
  • The Chicago Purchasing Managers' Index unexpectedly fell to 46.1 from 50.0.
  • Consumer confidence fell to 53.1 in September from 54.5 a month earlier according to the Conference Board Consumer Confidence Index.
  • Initial claims for jobless benefits rose by 17,000 to 551,000 in the week ended Sept. 26.
  • The ISM index for manufacturing activity in the U.S. slipped to 52.6 in September from 52.9 in August.

The important thing to note about the August consumer spending report is that it is a result of higher gas prices, back to school purchasing, and Cash for Clunkers. Except for the back to school spending (reportedly the worst season ever), these things represent an transitory effects, not a result of an improving economy.

The Case-Shiller housing report did improve, and, as I have been saying, housing is finding a bottom. But, as my new best friend, Richard Fisher, president of the Dallas Fed said:

"While housing is showing some signs of having reached a bottom, we need to recognize that it is a sector still on life support," Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said Tuesday, according to excerpts of his speech. "The market for housing will not become truly robust until market forces replace the prostheses of government support."

Theory is everything in interpreting data. Everyone has one and through that lens, the data is filtered. My filter (basically Austrian) believes that we’ve been through the biggest credit cycle in the history of mankind and the resulting debt explosion needs to be liquidated or paid, and until this zombie debt is paid off, we won’t see a robust economy.

* A character from the comic strip “Li’l Abner” who jinxed everyone around him. He was pictured with a raincloud over his head.