Friday, May 20, 2011

Economics 101 from Reprographics 101

I’ve had a lot of spare time the past few months, and inasmuch as I have no hobbies (other than Reprographics 101) and inasmuch as I don’t play golf or tennis, my spare time has pretty much been devoted to reading articles, and listening to videos, about the economy in the U.S. Many of those articles (and videos) were about the A/E/C industry, but most of those articles (and videos) were about the broader economy in the U.S., and, in particular, about the “recovery” mode the U.S. has been in, since the “great recession” ended in June 2009.

As to the idea that the recession ended in June 2009 (or at anytime subsequent to that), here’s a brief clip from an article (dated September 2010) that I found on the Internet:

It's official: The Great Recession that started in late 2007 is over, the eggheads who crunch numbers at the National Bureau of Economic Research say.

In fact, it ended in June of last year, they insist.

Tell that to the millions of Americans still looking for work, losing their homes and sinking into poverty in record numbers.

"I think these people are ostriches with their heads stuck in the ground!" said Judith Berdy, 62, a former education administrator from Roosevelt Island.

Berdy, who has been job-hunting for three years, ran out of benefits last spring and is barely getting by.

"For some people [the recession is over]; for some, it isn't. For the small-timers, it ain't," said Dominique Alexander, 27, waiting on line at the Varick St. unemployment office.

Alexander, who has an 8-month-old baby at home in East Harlem, has been out of work since losing his construction job a year and a half ago.

Nowadays, many people, especially those who have the attention span of a gnat, use Twitter to keep up to date on what’s going on in the world, so, because I’d like Twitter-erers (or, should I refer to them simply as “twits”?) to listen to the points I’m going to make in the rest of this post, I’ve decided to make my points in numbered-outline-form; but, sorry, the points won’t necessarily be limited to 140 characters. (Frankly, I don’t know how anyone can really learn anything, in depth, from a 140- character message, but, whatever….)

Before you read the following numbered-list, keep in mind that my training in Economics is pretty much limited to the three or four Econ courses I took in college and to the independent research I’ve done over the years about recessions and recoveries (and, as to the latter, I’ve gone through several recessions, given that I’m, ugh, 64 years old.)

Nonetheless, after reading lots of articles by, and listening to lots of videos of, Economists (real Economists), I’m convinced that most Economists know about as much as I do – which is “not much” - about recessions and recoveries, most recent “recession” and current “recovery” included.

Based on my research, my points and opinions are:

1. The U.S. recovery cannot take hold – in any meaningful way - until the construction industry participates in a meaningful way.

2. As reprographers are well aware, there are two primary parts to the construction industry, a) Residential and b) Non-Residential; a meaningful recovery in both parts has to happen in order for the construction economy as a whole to provide any meaningful lift to a recovery in the overall U.S. economy. It’s been two years since the “technical end” of the recession, and, as of yet, we have yet to see any meaningful improvement in either Residential or Non-Residential Construction. The Residential Construction Industry is mired in a depression – home prices are still falling in some areas of the U.S., foreclosures are still happening in large numbers in several areas of the U.S., and “sales” are very adversely affected by what’s still a very high unemployment rate and by tightened credit. If you don’t have a job, you can’t buy a home, unless you have the wherewithal to pay cash. If you defaulted on your mortgage (short sale or foreclosure), good luck at being able to qualify for a mortgage on another home. [Our country has a habit of “overcorrecting” after we’ve had a problem. Prior to the crash caused by sub-prime loans, just about anyone (who moved, and I’m speaking about movement in terms of “jello”, not relocation) could get financing for a house or a condo. Now, after the problem, lending institutions have gone completely to the opposite side of the spectrum; it’s very hard to qualify for a mortgage, comparatively speaking.] Financing is still difficult for commercial real estate development projects. Vacancy rates are still high for many types of non-residential real estate. Stimulus spending, which, for about two years, helped stimulate public-sector non-residential construction projects (transportation projects in particular), is now on the decline. Local (state, county and city) governments are strapped for funds – don’t expect a surge in local government-sector construction projects anytime soon. (As we speak, Florida’s Governor is looking at slicing out of the current, proposed state budget a significant amount of funding the legislature just approved for new construction at Florida college campuses.)

3. It is likely that the U.S. will soon begin reducing troop levels in Afghanistan and that same thing has already begun to happen in Iraq. Unless there’s another fiasco soon to take hold elsewhere (and it’s impossible to predict that sort of thing), the defense spending part of the U.S. budget will decline over the next couple of years. That’s going to cause job losses in that part of the U.S. market (both public and private sector jobs.)

4. Many economists, the past couple of months, have made downward revisions to forward GDP growth. It’s been reported that GDP was positive in Q1 2011, but that it came in at less than GDP growth in 2011. Sounds to me like the economy is struggling. Companies such as Staples, Cisco, HP, and many others who’ve recently reported their Q1 2011 earnings, are forecasting slower growth for the rest of 2011, slower growth than they previously forecast. Even Walmart is concerned, given high gas prices expected to have an adverse impact on its lower-income customers. If the U.S. economy does experience slower growth, is it not possible that we’ll tip over and experience another recession? Even though most economists do not believe that will happen, it certainly could happen.

5. I listened, yesterday morning, to an economist on Bloomberg radio (Sirius-XM satellite radio, and I’m addicted to Bloomberg) talking about job growth – he said that temporary employment has recently declined, said that often (in the past) led to a fall off in permanent employment. Said that 250,000 new jobs per month may decline, temporarily, to 175,000 per month (or thereabouts) Even job growth of 250,000 per month is not sufficient to spur a very meaningful recovery. New unemployment claims are still in the neighborhood of 400,000 monthly.

6. Seniors now make up a considerable portion of the U.S., and I’m speaking about “retired” (or unemployed seniors). Those who saved money and had CD’s and Savings accounts were previously (before the Fed stepped in and artificially brought down interest rates) earning 4-5% interest. Now they are lucky to earn 1-2% interest on cash. In short, seniors are increasingly “pressed”, budget-wise, since their income has fallen considerably. Don’t look for seniors to help the U.S. “spend” its way out of this recession. (Ooops, sorry, I forgot, the recession ended two years ago.) The Fed will continue its policy of keeping interest rates low; looks like that’ll be the case until at least sometime mid 2012. If the Fed tightens up earlier, that will exacerbate problems in the residential real estate market. Interest rates for business loans (for established businesses) are reportedly low, but is that really true and how easy (or how difficult) is it to get a business loan? And, if small businesses aren’t expanding, why, anyway, would they need to borrow more money?

7. The stock market appears to be due for a correction. Since bottoming in March 2009. On October 12, 2007, the S&P 500 was at 1,562. From there, it sharply declined to 684 on March 6, 2009. Since then, and with the exception of a few occasional downturns, the S&P 500 has increased, and it hit 1364 on April 29, 2011. “I’ve been told” (and have read articles that say that) the stock market moves based on “anticipation.” If the market has moved up “in anticipation” of a steadily recovering and growing economy, will the market, at some point in the not too distant future, begin moving “south” based on expectations that the recovery is stalling? Companies who release earnings results that aren’t meeting estimates or who are releasing reduced forward guidance, are not being treated very kindly by the market. (HP’s stock, CSCO’s stock, Staple’s stock, The Gap’s stock, just to name a few, have taken considerable hits the past month or two.) If you ask 50 high-profile, “knowledgeable” finance guru’s where the market is headed over the next 6 months, 25 will likely tell you that the market is headed for a correction (i.e., headed “south”), and the other 25 will likely tell you not to worry, that the market is going to continue going up for well into the future. So much for the “experts.” LINKEDIN’s public debut was stunning. Went as high as $120 per share the day it began trading (yesterday). But, an opinion released by Morningstar Research, this morning, says that Morningstar has assigned a $27 “fair value.” This morning, one of the Bloomberg guys said that what happened to LINKEDIN’s stock is an indication of a bubble. Bubble’s burst. Large-cap companies that pay decent dividends are doing well, and have been doing very well this year. But, as their share prices have gone up, yields are coming down. Perhaps demand for large-cap stocks is an indication that “big” investors are moving money into safer buckets?

Okay, that was a lot of mumbo-jumbo - meaningless, worthless commentary. But, I’m not yet done. I’m going to make some predictions. Predictions that will likely be well off the mark, but given the predictions I’ve heard experts make, it appears to me that they pretty much use the same prediction method I use, which is the SWAG method.

My predictions (and you know where I just pulled these out of):

1. On December 31, 2011, the S&P 500 will be between in the 1,150 to 1,200 range. (Today, it’s right around 1,334.)

2. On December 31, 2011, the average interest rate for a 30-year fixed mortgage will be 5.50% (zero points.) (Today, reports that the current average interest rate is 4.77% (zero points, 20% down)

3. On December 31, 2011, the yield on the 30-year U.S. Treasury bond will be 4.85%. (Today, Google Finance reports that the current yield on the 30-year U.S. Treasury bond is 4.31%.)

4. On December 31, the Euro/USD exchange rate will be $1.31. (Today, Google Finance reports the Euro/USD exchange rate at $1.415.)

5. For the full-year 2011, ARC’s “U.S.” Sales will come in at right around $384 mil. (In an article on this blog on March 10, 2011, we included a table that showed ARC’s “U.S.” Sales at $676.7 mil for 2008, at $473.4 mil for 2009, and at $404.5 mil for 2010.) Please note that these numbers exclude ARC’s sales in countries outside the U.S. And, please note that my prediction for ARC’s “U.S.” Sales are based on “organic” sales; and I point that out because ARC may decide to acquire a few companies during the 2011 year, and there’s no way for me to guess at what “acquired” sales ARC may end up adding to its U.S. Sales.

6. ARC’s stock price will be $8.20 on December 31, 2011.

7. The AIA ABI Index – for May, June, July, August, September, October, November and December (2011), will be above 50 in four of those months and equal to or below 50 in four of those months. (Up down, up down.)

8. The NAHM Home Builder’s sentiment index will be 20 in the month of November 2011 (number for Nov will be reported in Dec.)

9. The U.S. GDP number for year 2011 will come in at +2.4% (for the full year 2011).

10.The officially reported U.S. Unemployment number reported in December 2011 will be 8.8%.

If you read this entire post, congratulations, you managed to completely waste at least 20 minutes today. You should find better things to do with your time!

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