March 2, 2006
THERE'S NO STOPPING JOE
Joe Sixpack's demise as a consuming animal has been widely predicted for some time, but greatly exaggerated, to judge by yesterday's update on personal income and outlays for January.
The Bureau of Economic Analysis reported that personal income rose by a healthy 0.7% in January over December. But as is the inclination these days, Joe and his counterparts across the country spent more than they made in the first month of 2006 by elevating spending by 0.9%.
The trend of spending in excess of income is nothing new in the American economy. Deficit spending generally is very much the fashion these days, in both government and on the homestead. And if one defines the money supply by the M3 series, the central bank seems only to happy to make sure that everyone has enough paper to keep the spending train in motion.
One only has to look at the state of Joe's income and outlays to find the evidence of said rolling on the consumer front. Indeed, for the third month running, the percentage change in consumption expenditures has risen at a rate above that of personal income's advance. Going back over time, that's far from atypical. To be sure, elevating one's spending by a pace that exceeds income growth will eventually hit a brick wall, although one could die waiting for such economic constraint to kick in when it comes to our beloved Joe.
But for all the anxiety that persistent consumer spending causes among dismal scientists, the trend is clearly a boon to the economy, which relies overwhelmingly on Joe and his friends for expansion in gross domestic product. And in light of yesterday's update on personal income and outlays, it's a little harder to argue that this party's about to end.
Case in point: spending is heavily dependent on income growth, and the connection looks intact. For starters, employment growth keeps chugging along, which in turn is putting a potent tailwind behind wage and income growth. Indeed, January's 0.7% rise in income was the strongest since September 2004. Joe may be digging himself into a debt hole, but if his income keeps rising at this rate it could be a long time before the red-ink ditch spawns any blowback.
Adding to the belief that Joe and his cohorts will keep spending comes by way of yesterday's release of the February ISM Manufacturing Index. Challenging the notion that an economic slowdown is in the offing, this widely followed index continues to exhibit strength. Last month, ISM Manufacturing rose to 56.7, the highest since November 2005, and up from January's 54.8. Any reading above 50 implies an expanding manufacturing sector, and by extension, a robust economy overall, and so recent readings are clearly bullish.
The smoking guns of late may be changing the bond market's nonchalant mood, although this line of prediction too has been a less-than-fruitful exercise in recent years. Nonetheless, the benchmark 10-year Treasury yield is at 4.60% as we write this morning, the highest since mid-February.
Whether any of this persuades some rethinking among the pessimists on the outlook for the economy is an open debate, and an important one at that. The folks at the giant bond shop Pimco, for instance, expect a stumble triggered by a housing slowdown. And in fact, there's been some evidence this week that real estate may be cooling.
But Joe Sixpack doesn't give up his spending habits easily. As a result, the pressing question at the moment centers on whether any slippage in the property market will offset any gains in wages and income. The bond market overall seems unsure. Anyone else willing to take a crack at a prediction?
Posted by jp at March 2, 2006 9:18 AM
I have been bearish for two years. Essentially, I have been right from a fundamental perspective but wrong from an investing perspective.
The stock market is straining at the leash to go higher. Since October 17, the gain in the S&P is on the order of 10 %. The last time I recall this degree of unbridled, unquestioning optimism was 2001 and before that, 1987.
Too much money, chasing too few assets. I can't really predict where the market will be in the future. The problem with economic data, of course, is that it measures where we have been, not where we're going.
From a fundamental point of view, I have chosen to take a certain 4.5 % return from the risk free security rather than the likely, uncertain gain or loss from the market. Maybe Wall Street and their cohorts can deliver 3 sigma. The problem with 3 sigma is that the probabilty is less than .0001 %.
The current leaders in the market horse race are mining companies. That in itself, does not inspire me, having worked in the mining business for a couple of decades. These companies tend toward Fascism as an unspoken political agenda, wrapped in a cloak of red, white, and blue. Any young person being seduced by these monsters, don't do it. Mining company CEO's like to portray themselves as rugged, individualists bred from the can-do American heritage. As is generally the case, what you see is not what you get.
The production of metals will always disturb the environment. One only has to calculate the Gibb's free energy of metal reduction to appreciate and realize that the natural environment has stabilzed the reactive metal elements as oxides or sulfides because metals spontaneouly react with other elements to produce compounds of a lower energy state. Therefore, it requires an enormous input of energy to reverse the forces of nature to produce pure metals. Most people don't realize that the reduction of iron ore (oxides by CO) is one of the most environmentally and thermally efficient processes ever devised by man. The problem is not the quality of efficiency but the quantity of energy required to reduce iron oxide to iron. The energy requirements to produce that old piece of steel can be likened to a controlled nuclear explosion. No amount of environmental engineering can change that. Metals production has environmental consequences.
The problem today, is that mining and metal company executives are dumb which has exacerbated the problem. Their culture places a premium on bravado, while stamping out brilliance. The child-like innocense and openess of creative genius, displayed by their best and brightest youngsters, is viewed as a weakness and dealt with accordingly. What we end up with are environmental disasters like Grassberg, like Morenci, like Butte, like Youngstown, like .....
People investing in the mining business today will suffer from environmental liability costs in 2015.
Other than that, godspeed.
Posted by: STARK at March 2, 2006 2:59 PM