Demand and the Expansion
- Posted by ToddSullivan
- on April 12th, 2013
Economic expansion is all about Supply/Demand and at recessionary levels we see ~2% RGDP as the basic demand level for our economy. This is not a predicted number, but one that is simply empirical, i.e. observed. Periods of economic maturity come in ~4% RGDP, again a simple historical observation.
The Light Weight Vehicle Sales(LWVS) series reflects both economic recessionary lows and mature highs. I interpret LWVS as not only capturing the basic need for transportation, but since many of these sales are financed, LWVS also captures lender confidence which is obviously lowest at recession lows and highest at expansionary peaks. The LWVS series is good as a basic economic indicator. But, once we have moved off the lows, one begins to look forward to what future months are likely to bring.
Judging the future once we are off the lows is done by tracking labor demand indicators, i.e. Help Wanted Online, Bureau of Labor Job Openings and even the Gallup Job Creation Index. Together the trends of these provide roughly 6mos-12mos forecast of the US Employment trend. As we bring in more individuals to meet economic demand, this itself creates additional demand. Economic activity is spurred by leverage. Our system lends to the newly employed so that they can buy cars, trucks and houses with the expectation that the current economic trend will continue. Economies in general add leverage as employment rolls expand. This continues till lenders are scratching the “bottom of the barrel” of those who are credit worthy in an economy which is expected to last long enough to pay back the credit which has been issued. The problem occurs when we run out of credit worthy individuals and suddenly we discover that we financed the standard of living increases of millions of individuals who suddenly become default risks. Like a rubber band the economy has been stretched too far and credit issuance is retracted and hiring is reversed as defaults rise and lenders/businesses suddenly realize that demand is falling and they are over-staffed. What captures the start of a slowdown are the readings of the labor demand indicators in my opinion.
The labor demand indicators lead LWVS and housing activity. In turn LWVS and housing activity lead actual employment in their respective areas and in the general economy. There is no single labor demand indicator which signals a turn, but all together provide a decent view of the current trend. You can see from the chart below of Household Survey vs. Job Openings, Gallup Job Creation and HWOL Indices that the current trends supports higher general employment in the next 6m0s-12mos. Economic data by the nature of how it is collected is very choppy monthly and subject to correction as additional information becomes available. For instance, the Job Opening data was just revised back to Dec 2000 in the Feb 2013 report. This does not change an interpretation based on trend analysis at any point in its history. The Gallup Poll Job Creation looks stalled currently while the Job Opening data just had a spike higher while the HWOL looks to remain in a decent uptrend.
The recent call by many that the economy has stalled based on a single disappointing jobs report last Friday is not supported when one looks at multiple labor demand indicators. Economic data while it never exactly repeats does have internal correlations and it does lead the investment markets with generally enough time to make prudent decisions.
Rates should rise as businesses and investors sell bonds to invest in the returns expected in their businesses and the equity markets. Rates should rise till the economy tops out with the equity markets. As rates rise, we should see traditional bank lending expand and this will be the final push as home mtgs become more accessible than they are today. Home building has the potential to add some 4.5mil to the employment rolls and this in turn has historically spurred additional economic activity right to the point of economic maturity. The guess remains that we have ~5yrs for this to play out.
Historically markets ($SPY) peak with the economy. There is no reason to expect it to be different this time. We should be able to observe this occurring 1mo at a time as the data come out and the 6mos trends begin to roll over. Today, the economic data is looking reasonably positive with housing just lifting off.
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