We are halfway through the year, and what a ride it has been. Today I will share my thoughts on what the next six months could look like, and endeavor to keep it short and simple.




We Should Be OK, Except…

The economy should be in Muddle Through range (around 2% growth), absent any shocks. For instance, last Thursday, we had the June ISM number, which was stronger than most analysts expected, at 55.3. Of the 18 industries surveyed, only 12 reported growth.

But Muddle Through is not going to allow us to really cut into the unemployment problem. We need at least 3% growth and most economists think we need to see 3.5% to result in some real strong jobs numbers for several months in a row. That just doesn’t seem to be in the cards.

What I mean by Muddle Through not being enough to really cut into unemployment is that GDP seems to be slowing rather than picking up. The correlation between employment and growth is not encouraging. And if you look at the NFIB (National Federation of Independent Businesses) data, small businesses are not really back in the hiring game, and that is where the action needs to happen. We will see a new survey this week, but I doubt we will see a major jump in expectations.

Several months ago, I wrote a rather lengthy article in The Weekly Commentary about why unemployment would be a problem until at least the middle of the decade. When you lose 8 million jobs, with about 2-3 million of those jobs permanently gone, it is tough to dig out of the hole. We can’t look to housing construction to be the driving force that it once was for another 3-4 years, and commercial construction is falling.

I was talking to a friend recently who is an officer in a local bank. He pointed out that while the government wants banks to lend, the regulators (including the Fed) are critical of banks which make real estate development loans without very large equity components. All too frequently, banks want 50% loan-to-value of very-reduced valuations. This is not the environment that makes real estate moguls want to part with their cash. Nor does it bode well for construction jobs.

The Economic Cycle Research Institute points out that their leading index is simply signaling a weakening economy but does not signal a recession. But, the recent trend is disconcertingly downward and must be watched (Source, in part: The Big Picture).