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Mondays with Dr. Joe:
June 9th, 2008

Sign Up for the June 18 Webinar
The Supposed Recession: Get Used to Not Having One
Speaking of Inflation
Dr. Joe's Inbox
A Special Event
Upcoming Dr. Joe Sightings

Sign Up for the June 18 Webinar

The next economic outlook webinar, sponsored by MindfireInc, will be broadcast on Wednesday, June 18. Topics include:

The Recessionless Slowdown: Strategies for Managing Through the Economic Muddle

Our Readers’ View: Latest Economic & Research Center Reader Survey Results

Beat the Summer Heat with Dr. Joe's Latest Reading List

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The Supposed Recession: Get Used to Not Having One

We'll talk about this a bit more in next week's webinar, but the economic reporting most of us see and hear reflects the expectations of experts and talking head economic reporters who seem to have little historical perspective. The experts are regularly surprised by the economic data. The data are nothing to get excited about, but things are not as bad as they are being made out to be, and the economic slowdown is not being blamed on its true causes.

A good example was last week's ISM Manufacturing Index, portrayed as being negative even though it was an improvement over prior reports that were grotesque and scary. Though the report was still below 50 (at 49.6), implying contraction, it did not reflect recessionary levels, which according to the ISM would kick in at a reading of 42. A reading of 49.6 is not recessionary, especially when there has been an improvement over the preceding three months. The internals of the report were good as well, except for the inflation indicator. New orders, production and exports were up. Even imports were up, and that's a good sign in light of the fact that many materials used in the manufacturing process must be imported since they don't exist here. I read the entire report, and I actually felt better by the end. Good thing I didn't read the newspapers or watch the cable financial networks first or I may have slit my wrists unnecessarily.

The Commerce Department released growth rates for manufacturing industries. We've added GDP and CPI to the list below for reference purposes. Some of the growth, even for industries above the inflation line, is a result of their ability (and in some cases their need) to charge higher prices because of increasing input costs or tight supplies.

Petroleum and coal products +35.0%

Nondurable goods industries +11.3%

Primary metals +8.8%

Food products +8.7%

Machinery +8.6%

Chemical products +6.1%

Beverage and tobacco products +6.0%

All manufacturing industries +5.8%

Apparel +5.1%

*LAST FOUR QUARTERS CURRENT DOLLAR GDP +4.7%

Miscellaneous durable goods +4.3%

*CONSUMER PRICE INDEX (last 12 months) +3.9%

Paper products +3.5%

Plastics and rubber products +1.6%

Computers and electronic products +1.3%

Fabricated metal products +1.2%

Electrical equipment, appliances, and components +0.9%

Durable goods industries +0.7%

Printing -1.2%

Wood products -2.8%

Transportation equipment -4.4%

The ISM Non-manufacturing Index also improved overall. The index was down 0.3 to 51.7, which drove the reporters to near breathless despair, but as recently as January it was only 44.6. Business activity, new orders and export orders were up. Growing non-manufacturing industries were real estate; rental & leasing; arts, entertainment & recreation; information; public administration; wholesale trade; utilities; health care & social assistance; professional, scientific & technical services; educational services; and retail trade. These two comments were quite telling: “No commodities are reported down in price... Skilled labor is the only commodity reported in short supply.” Does that sound like a recession?

The employment data are also better than many have forecast. Though employment is a lagging indicator, the fact that there has been little change in initial jobless claims tells us that the economy is tolerating its problems. The four-week moving average of initial jobless claims fell to 371,250. The number would have to reach more than 800,000 to be equivalent to the 1980-1982 period.

The unemployment rate rose to 5.5%, with a decrease in payroll jobs of -49,000 and revisions to prior months of another -15,000. Remember, full employment is between 4% and 6%. The household survey was down -285,000. One of the stranger aspects of the report is that the total workforce (employed + unemployed) rose by 577,000 compared to last month. That is, more than half a million workers entered the workforce. The denominator increased, and the number of employed people only went down by 0.2%. That means that 0.3% of the 5.5% was from new workers. This frequently happens as the economy emerges from a slow period. Is it any wonder with mortgage and other higher costs that households would send second workers into the marketplace? Or if someone in that household suspects they will lose their job, a nonworking member looks for work? There are times in economic expansions where the workforce shrinks because households are more secure and can do without their second wage-earner. This unemployment report is more about people entering the workforce than leaving it. Average weekly earnings of production workers went up by $0.05 per hour.

The productivity report for the first quarter was released last week, and it, too, surprised the experts by coming in at +2.6%. Businesses, anticipating the slowdown, obviously did a pretty good job at cutting their costs, and with sales in some industries being bolstered by greater exports or just not being as bad as anticipated, they were more productive overall. The manufacturing sector did well, with a +3.6% increase.

The good productivity report is not always good, however, for the employment outlook. The ISM reports did not suggest that a surge in employment would be happening anytime soon. We're already at full employment levels (don't tell members of the press), so more employment would be hard to create. When productivity exceeds GDP growth, you can actually have an employment contraction. Since productivity was +2.6% and GDP was +0.9%, it's clear that economic growth can be covered with the existing base of capital and labor.

There's also another problem. If inflation is at 3.9%, then that exceeds productivity, as well. This means that businesses will constrain spending until inflation starts to head downward.

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Speaking of Inflation

Inflation is a monetary issue, when there are not enough goods and services compared to an excess of money. The growth of the U.S. money supply compared to those of other currencies has been responsible for the declining exchange rate. It is seen in the price of oil in dollars compared to Euros. This is our latest chart.

Click to Enlarge

While everyone focuses on the price, no one seems to focus on the use. Rarely reported is the productivity that we get out of the energy used today compared to prior years. A couple of weeks ago, the oil price hit $134 a barrel, which was a little above the inflation-adjusted 1980 price. Basically, oil costs the same now as it did then, when it was comparatively cheap, especially in the 1990s. According to the Energy Information Administration, the U.S. Consumed 15.13 thousand BTU's per real dollar of GDP in 1980, compared to 8.75 thousand in 2006. Using that same rate for this year, even though the actual figure is probably lower, that means every dollar of GDP is generated using 43% less energy. This means that the “actual” oil price is nothing near what it was, even in 1980, but more like $76 if we applied today's usage rate to that time. It means that oil has to go to $230 to be equivalent to 1980 as oil was used at that time. No wonder the economy has not collapsed as the doomsayers predicted.

The same is plainly evident in cars. My beloved 1978 Ford Granada got 14 miles per gallon (in the EPA's dreams, actually), but the roughly equivalent car today, a Honda Accord, gets 21 gallons in the city. That means my cost per mile is much better today even with higher gas prices. I get 50% more miles per gallon than I did then. In order for me to experience 1980 pricing, gas prices must go up much more, almost another two dollars per gallon, to have the same effect on my wallet than they had then.

There have been news reports about declines in miles driven by consumers. But look how far prices had to rise to create such a decline. And that decline is minimal, at 4%. This just proves that energy prices are more inelastic than previously believed. Because it is a necessity... people have to go to work, after all... other goods and services get pushed out of the family budget, are downgraded, or reallocated. That reallocation, such as fewer meals out of the home, less retail spending, and other decisions, are the real measures for understanding the effects of economic change.

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Dr. Joe's Inbox

The Business & Media Institute has published its analysis of how broadcasters and reporters are continually discussing the economy using phrases like “...since the Great Depression.” No wonder consumer confidence data are so pessimistic and so out of line with what the data report about their very own economic behavior. The report focuses on the Bear Stearns collapse and compares it with the economic reporting of the Depression. The latter actually had more irrationally optimistic reporting in its day than is commonly known.

From the study: “...economist Gary L. Wolfram explained, 'These numbers are so far afield from what we are experiencing today that it is difficult to comprehend their magnitude... The Great Depression was a period of decline that involved not just the economy of the United States but that of the entire world. The economy began to falter in 1929. When it hit bottom in 1933, world production had fallen by one-half, with the United States economy declining by 29 percent.'”

Among the study's recommendations: “Learn – and Report – History: Anyone who compares today’s economy to the Great Depression knows nothing about either. Today’s America isn’t like the America of the Depression at all. Unemployment is vastly lower. The stock market has seen comparatively minor losses, and numerous government regulations have been created to prevent a repeat of Depression-era economic problems.”

Economic reporting takes quite a beating in presidential election years. Anyone who suggests that things are not dire or that the economy is resilient and dynamic is painted as out of touch or an ogre. This column's editor, Cary Sherburne, and I chuckle when I say “I hate years divisible by 4.”

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A Special Event

Last week, Dan Webb and I tempted fate a few days before his actual graduation with honors on June 8. He put on his high school graduation gown and I donned my NYU doctoral garb for the first time in 18 years (when I marched in the graduation at St. Joseph's College in Patchogue, NY, where I last taught on a full time basis). Many of you have met Dan at various times through the years, from the time he was a toddler to most recently at 2007's On Demand event. Dan will be attending Bryant University starting this Fall. His desired major changes now and then, but he seems to be leaning toward finance with a minor in economics. Mom and Dad are proud of the young man, as are all of you who have graduates in your families this year. Cutting edge printing organizations, start your 2012 recruiting now.

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Upcoming Dr. Joe Sightings

Quarterly Economic Webinar, June 18, sponsored by MindFireInc, free, register now

Pacific Printing & Imaging Association Fall Conference, September 26 – 28, details to be announced

Graph Expo, Chicago, October 28, sponsored by MAN Roland, details to be announced

Recent Sightings (download slides and audio)

Webinar: Managing Smarter: Magic Numbers to Live By, in collaboration with CEO Advisor and Mergers & Acquisitions Expert Bob Rosen, April 9, 2008.

Economic Webinar of March 26, 2008, sponsored by MindFireInc. (also read post-event Q&A)

Graph Expo's “Speculative Look at Graphic Arts 2017” event, sponsored by MAN Roland, includes forecasts of the industry and its demographics to 2017. For a special treat, the presentation can also be viewed at SlideShare. The audio will play automatically, but the slides must be advanced manually.

What do you think? Please send feedback to Dr. Joe by emailing him at drjoe@whattheythink.com. To have your question answered in the next column, click here

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