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What the economic recovery? What recession?

In early November, the talking heads were breathless reports of the economy "grew" by 3.5% in the third quarter … that the economy is recovering. The end of the economic downturn also marked the end of the recession that began in the fourth quarter of 2007. It attributed much of this growth to increased car sales. To read the full government report, go to www.bea.gov.

The index of leading economic indicators has been positive for seven months, also suggests that the economy is recovering.

So is it true? Are we on a sustainable growth path now? "This last version of government on the economy: The worst is behind us? Is the rate of Leading Economic Indicators tell us the same thing?

Well, let's look at the reports and see where the growth of wine. Maybe that will give us some answers.

For starters, the growth rate of the 3rd quarter has been revised downward to 2.8%. And the following timetable shows the contribution to growth from various sources in our economy.

Contributions to growth were:

I welcome this data table is a bit busy, but it is important to understand the true nature of what some call a recovery. He notes the largest contribution for the third quarter economic growth was the restocking of inventory. In my opinion, to put things back on the empty shelves is not growth. It is simply the reverse of the massive destocking and aggressive than we saw in the fourth quarter of 2008.

Thus, if we take out the stocking, the growth rate slips to 1.9%. We will also eliminate defense spending and health care, which are not growth articles. After all, support our troops in Iraq, Afghanistan and around the world should not be considered economic growth. And more healthcare for an aging population should not be considered new growth.

If we eliminate the defense and health care, growth has slowed to only a 1.1%. However, an important contribution to this growth is the sale of vehicles. Now let's look a little more on this topic.

Month to month sales car is very volatile and seasonal. Thus, while the idiot was "Cash for lemons" government giveaway that program kick started some sales in the third quarter, two other factors are more significant. Pent-up demand has been growing and the money was just the catalyst pots.

Pent-up demand is the increasing average age of cars on the road, now more than 9 years of age. In addition, interest rates on auto loans are about half of what they were in early 2007. The average car now has over 100,000 miles on it and the interest rates on new car loans are low. The criteria subscription at 10% down payment, have not changed in recent years and average prices have not changed much and just under $ 30,000.

Most of us are accustomed to see the total number of vehicles owned, illustrated by the following graph. But remember, many of the cars we buy are imported and not add to U.S. economic growth. This table gives a complete overview of the car-buying consumers over the last decade.

As you can see, car sales have stabilized for about $ 16 million a year. As buyers of cars went on strike last fall, car sales fell below 10 million a year, a sales level not seen since the eighties.

But the pent-up demand from an aging vehicle fleet and low loan rates will increase the demand for cars from current levels.

Another factor give an idea of selling automobiles in the future. Currently there are 1.2 vehicles per licensed driver. This means that only 83% of the cars we buy are needed for transport. The remaining 17% are discretionary and are available to support our lifestyles. So, anytime we are in trouble and should be cut, as recessions, we can easily reduce cars purchased.

Clearly, that is what we saw last fall and during the first half of 2009. We can delay purchases of cars, and have. The removal of this discretionary demand, car sales will stabilize at about 13 million a year.

Now let's look at car sales affecting our economic growth. The following table shows the cars sold each month, which were manufactured in the United States.

Source: U.S. Department of Commerce

The areas of pink areas of the letter are periods of recession. You notice the Auto sales have been on a steady decline in the last ten years, recession or not. We saw a dramatic fall earlier this year, and sales have partially recovered in the third quarter. However, this recovery is actually part of long-term pattern is not unique to this recession.

The result of pent-up demand and low funding costs means that car sales will be greater than the monthly sales decline this year. I hope the car sales will resume its long-standing pattern of seasonality and volatility.

Now, let's go back to growing our "history. As we have seen, the only significant contributor to growth was the 3rd quarter of car sales. Many analysts attribute this to the incentive program government. This is absurd.

Aging, high mileage vehicles, and low interest rates are more durable and powerful influences on sales car gift that any government can be. Offsetting these two positive elements is negative discretionary decisions to buy cars equal to 17% of the total demand. Purchases of automobiles can be easily delayed or even canceled … at least for a while.

= Oil trade imbalance

And before you all get too excited about this runaway growth that we have to remind ourselves of the negative influence on growth of trade minus 0.8%. This is mainly because of our oil imports. More growth will make this trade imbalance worse as importing more oil to accommodate increased economic activity.

The Congressional Research Service, the investigative arm of Congress recently published a report on the hydrocarbon reserves of the United States showing the U.S. which have the world's largest reserves of fossil fuels, but even Russia. The report is entitled "U.S. Fossil Fuel Resources: Terminology, reporting, and "Summary" and was released October 28, 2009. Go to www.opencrs.com to download this report.

We have the largest endowment of fossil fuels of any country, and we are importing large quantities of oil. This is the result of poor policy and political and environmental pressures. Unfortunately, not exploiting our own resources reduces our economic growth and exerts a continuing downward pressure on the dollar.

Home Economics Indicators

The Conference Board index Major Economic Indicators has been saying since April that the economy is recovering. The index has been positive every month since then. But let a little closer to the components of this index. The major contributors to positive results have been the provider's performance (the restocking of the shelves) and stock and bond markets. As I said before putting things on the empty shelves should not be viewed as sustainable growth.

The stock and bond markets have expanded more. The bag is 62% from its low in March. Corporate bond prices have increased, especially in the high yield market up 56% as low in March. These price increases have come without the benefit of increased revenues, which extends to the valuations nosebleed levels.

Other components, as the expectations of consumers (low and falling), jobless claims (bad, but stabilization), average workweek (stable, a 45 year low), and building permits (up from a low base and still unsustainably low) tell a very different story. So I think the index of leading indicators is leading us astray, with the only indication that growth is an unjustified increase in prices in the capital market.

Ones " The growth in history, eh? Prudent investors should be extremely careful in this environment.

What Next quarter?

I think it's important to see this highly touted "growth" story of the economic results of the third quarter as a unique event.

After all, in which this quarter and next quarter's growth going to come … more war? More bands and ducks? Most cars do not really need? Do not think so.

Long-term sustainable economic growth comes from new business formations that provide goods and services demanded by consumers. These companies hire more workers and expand because its products are sold at a profit. The impetus for the interest of every one of us said that to happen …. A Unless our government undermines and frustrates the phenomenon of natural growth with high taxes and burdensome regulations and costly.

And that's where we are. No employer in their right mind is going to start a business today. The obstacles to success and growth are too large, which very risky business. The prospects for strong and sustainable economic growth is not good until the government removes these obstacles.

What are the possibilities of our Muslim radical socialist president and Congress Related to understand the true sources of growth? The measures taken by this administration and Congress to date limited warranty and short-term economic recovery. The economy performance significantly below potential.

What Recession?

Now that we have determined that there is very little growth in the number of growth of the 3rd quarter and outlook growth in coming quarters is not good, let's take a look at the recession and see how bad it is.

Was there a recession? Absolutely. But we have to look a little more for ideas about gravity, dispersion, and duration. The mere acceptance of the revelation of the government that the GDP real fell for two consecutive quarters is not very useful for investors.

We must understand the parts of the economy are sound and safe, and parts that extend and vulnerable. In fact, it seems useful to think of the recent economic events in terms of 2 economies.

Two economies

Is there a recession or two economies? I think the latest economic developments are best explained not a given monolithic economy rises or falls in concert and unity, but rather by considering 2 economies that operate somewhat independently of each other.

An economy is stable and healthy, and another is wrong, sick and had no deals in the first place. But they are interrelated … so good or poor performance one may appear in the performance of the other.

The first concerns the provision of goods and services everyone needs, including housing, food, clothing and other normal requirements of U.S. families. This includes education, entertainment and lifestyles. You see, this economy is vital, important, healthy and functioning.

The second economy is one that should never have existed in the first place. This is an economy based on the liars and the losers buying houses that were not households. This economy is sick and eventually die and cease to exist.

Examination of the endless stream of economic data in the context two economies will give us ideas on investment opportunities and dangers.

The Real Economy

The main issues are often on unemployment. And indeed, unemployment is already above 10% and shows little sign of abating. Underemployment is 18%. There seems to be a lot of pressure policy to do something about the high and rising unemployment and the government certainly will try. But as always, will be too late and go the wrong actions. The recent Employment Summit is a giant joke.

The following table compares the total payroll employment (not unemployment) to total revenue and staff costs consumption. The lists include most of us. Does not include self-employed and agricultural workers.

Normally, unemployment is the number commonly reported, but a confusing series. Contains the unemployed to report every week, but not those who do not report, or whose benefits have expired, or those who have stopped looking for jobs. There are millions of these people and the number of unemployment altogether ignored. It seems more important to consider how many of us are busy and how it has changed. That's why we use employment instead of unemployment.

Payrolls (blue line) has decreased dramatically since late 2007. About 8 million people have lost their jobs in the past two years. Both economies have been affected. For example, 1.6 million construction workers have been dismissed because there is construction work. But the real economy has also shed jobs. Manufacturing employment fell by 2.1 million people. This reflects both the long-term trend of fewer U.S. manufacturing and cuts related acute panic stop in the supply chain last fall.

The payroll is behaving as it has in past recessions. In the recession of 2001-2002, employment declined and continued to decline after recession had ended. We expect the same of this recession … a continuous drop in employment.

The graph also shows personal income (line green) and personal consumption expenditures (red line). Although employment has fallen from a cliff, both income and personal consumption has remained flat. On admission before the recession and consumption continues to rise as employment fell.

Revenues decreased slightly and personal consumption has not declined as all during this recession. The average compensation has increased. The same happened in the last recession. Income level and consumption continued to rise outside.

There are several parts of personal income. Includes compensation of employees, most of the investment income and government revenue in the form of transfer payments. Examples of government payments are social security, welfare and Medicare payments.

No recession in personal consumption. 70% of consumption is personal service and this sector has increased every quarter. In fact, service charges have never fallen in any quarter, recession or not.

This next table compares the total income that has not fallen into this recession in compensation to employees. In fact, one notices a t expansion of the two lines, especially since 2005. Earned income is important because it is the main driver of total revenue. And is the source of the payments from the government through taxes.

Given the enormous number of unemployed people expect earnings to decline, and he has, but not significantly. Indeed, revenue per employee has increased in this recession.

Employment service is virtually the same. The decreases in employment in the sector has been offset by rising employment and the use of federal health workers.

Health and federal government workers are asking "What recession?"

Source: St. Louis Federal Reserve Bank

Although income levels have remained essentially flat during this recession, the point of concern in this chart is the income wage is decreasing. If the wage income continues to decline, our economic "recovery" will be of short duration.

Let's look at some anecdotal indicators to examine the crisis from a different perspective than just indicators of the government. We'll see on entertainment, gifts charities, living expenses, and others to gain a better understanding of this recession. "

America 's Pets

Consider love affair with our pets. According to the National Survey on Pet Owners, 62% of U.S. households have a pet. The property has increased over time, over 56% of households when the first survey was taken in 1988.

The following program illustrates the total cost of ownership of company during the decade.

The annual cost of pets

($ Millions)

As you can see, our care the pet's body rose in both the last two recessions. Both the property and the amount has been extended. New products, such as care of hospice, and an airline that carries nothing but pets are just two examples of how to worship in our pets, not recession.

Our Pets are asking "What recession?"

Garbage

Next we consider our garbage production. In particular, the amount of food waste produced by households of America and restaurants.

States United Food scraps

Source: Environmental Protection Agency

Tonnage produced was reduced slightly in the last recession in 2001, but increased again the following year. Even with this decrease of 2% the percentage of food wastes to total solid wastes increased to 11.4%. In 2008, the year of recession, both the number and percentage increased. United States produced a record 32 million tons of food scraps for most recession since the seventies.

Garbage Carriers are asking, "What Recession?"

College Football

Let's ask the fans of American football in college. We will check your response to this recession looking National Football College Athletic Association Division I attendance records for the past six years. This does not include attendance at the school all football games, but Division I is the first level of competition in college football and has the widest following. The following schedule shows the records annual support to the 119 schools included in Division I.

Source: National College Athletic Assoc.

As you can see, attendance increasing every year, recession or not. In the most severe recession since at least mid-70s, attending college football continues to rise.

The College football fans are asking, "What recession?"

New Business

As we all know, small businesses are crucial and significant to our economy and overall employment. There are about 6 million businesses in the U.S. people of the employees. The difference between large and small firms is the number of employees. Large companies are defined as those with 500 or more employees. Only there are 18,000 large businesses in the United States. Small businesses, those with fewer than 500 employees, 64% or 14.5 million of the 22.5 million new jobs added to the economy from 1993 to 2008. A third of these new jobs came from new firms.

The following table shows the total new firms started compared to the number of businesses closed, and the proportion of starts to the closures. About one percent of new firms are added each year at 6 million existing businesses. The failure rate of new businesses within the first five years of existence has always been high, around 80%. The table below does not track that simply shows the number of businesses open and closed each year, not his longevity.

As you can see, the closures amounted to about 85% of new business formation from 2004 to 2007. However, the ratio rose to 95% in 2008, which clearly reflects the difficult business climate.

Business Formations and failures

Source: U.S. Small Business Administration

Creation of new businesses is a key element in employment and economic growth. While new starts have remained essentially flat, the failures have increased dramatically. The recession is only a reason. The federal regulation is another. Here is the cost of Federal regulation on business each year.

Annual cost Federal Regulations

(Cost per employee)

Source: U.S. Small Business Administration

As can view, the best engine of economic growth, small businesses, has the largest burden of regulation. Federal regulatory costs for small businesses are 45% outweigh the costs for large firms. This tends to deter the strong economic growth and make small business failures more likely. High taxes and regulations to punish ensure economic growth in coming quarters will be warm and vulnerable.

Charitable Giving

To expect charitable giving to decline when times are tough. And he has fallen in 2008, but not significantly. Interestingly, contributions to churches and national and international charities actually went upstairs. The big drop was a human service organizations and education.

Calendar below describes charitable giving during this recession, showing the source, which is the main individuals and groups who are mainly churches.

Charitable Giving

Source: Giving USA Report 2008

Most donors are saying "No us whether there is a recession. "And many churches and charitable organizations are saying," Thank God for the generosity of the American people even in difficult times.

Clippings

It is what goes up? No, of course not. Discretionary spending has been reduced. We buying fewer cars, as already discussed, and our vacations are less expensive and extravagant. We have reduced eating out, especially in high-level restaurants. The days Business lunches $ 50,000 ice sculptures are more … at least for now. And no one will miss, except the ice sculptor.

For the most hand, families go about their lives as they always have. However, fifteen million people were unemployed will have some impact on us all. You and I may have a job, but a relative, friend or someone we know that is probably outside of work.

The recession and unemployment caused by economic difficulties. But we remember recessions are a natural and necessary part of the business cycle. That's why they call a cycle … has both top and bottom phases. Economic cycles are healthy. The heating cycle goes too far. At its peak, it encourages marginal investments not. These failures cause economic disruption, including unemployment, but also pave the way for the next cycle to begin.

Solomon, the wisest man who ever lived, assures us that there will always be cycles and that there long as the earth exists. So instead of trying to banish them, as governments desperately try to do, so we include in our planning investments, as normal and recurring event.

The false economy

This is an economy that should never have existed in the first place. Could not exist without the liars and losers. I'm talking about millions of homes we have built houses were not. Liars and losers purchased at prices ever higher, all facilitated by government requirements for banks to make loans to unworthy borrowers and without reservation. This was the triumph of hope over experience and was inevitably going to end badly. Liars are not worthy of loans and the losers can not afford them.

The housing bubble that was took the time so that the chart below shows.

Source: U.S. Census Bureau

The blue line shows the increase constant total housing units in the United States. The dramatic turnaround in 2002 is only a change in how the Census Bureau tracks this information, not less real.

From 2002 to 2008 United States added to its inventory of homes. In 2002, our inventory of homes was 117 million units in 2008, our inventory housing was 130 million homes. At the end of the 3rd quarter of 2009 we had 130,302,000 units. This includes both single family and multifamily dwellings. The number households has not changed in the past 6 years at about $ 110 million. The current number is 111,612,000.

About a million households new form each year. And in need of housing. A good general rule is that the U.S. needs to build new homes equal to the formations of new homes each year.

The number of houses and the number of households should track closely. In the past, these two lines (blue and red lines) were very close together. In 2002, the blue line and red line began to diverge. From 2002 to 2008 we have built 13 million homes that do not need and do not were occupied. That's a bubble!

The graph also shows the average housing price in the green color scale (right), which began to increase considerably out of the recession of 2001-2002.

As house prices rose, they built more houses. The difference between houses and homes empty houses, which continues to grow, even as they build more houses.

This enhancement pattern of higher prices and kept the empty houses worsening, creating a housing bubble. Of course, this was all allowed by the idiots in Washington that he wanted every voter to be a homeowner, even if temporary and reckless.

The music stopped when house prices could rise further and began to fall in mid-2007. After of delay, construction of new homes started to decline from the unsustainable rate of 2.2 million dollars a year.

As seen in figure then starts rose rapidly after the recession of 2001-202, despite no increase in households. And today, new housing starts have fallen well below the level of new household formations. As it absorbs excess inventory, new home construction will resume a more normal and sustainable around 1 million a year.

Source: U.S. Census Bureau

Let's add another dimension to this sorry picture, funding. If all these houses were built with 100% capital would not have been built. The reason was because it was built 100% or nearly 100% financing available to borrowers is indignant. Congress passed laws requiring banks to lend to the liars and losers. This created a recipe for the evil that built the biggest bubble market forces would have allowed.

The following graph illustrates the total debt outstanding of all U.S. households (blue line). This is mainly mortgage debt, but also includes $ 2.5 trillion in consumer debt such as car loans and credit cards. I have also included two of the sources of funding for mortgage financing that made the housing bubble worse than necessary.

The first source was pools of mortgages (red line), organized by hundreds of smaller mortgage originators and sold to investors by Wall Street firms. The second pools was backed government agency, such as Freddie Mac and Fannie Mae (green line).

Source: Federal Reserve

Following the rapid rise from 2002 to 2008, total household debt has stabilized and is beginning to decline. The pools of mortgages have declined sharply. In essence, the pools have not formed new and existing pools are being canceled or charged off. The sad part is that loans are sponsored by the government continues to increase. Everyone seems to understand that a housing bubble, except the government.

Housing construction did not need loans financed who could not pay millions of people employed. Many are unemployed.

The following table shows the levels of construction employment in both the service and financial industries. As expected, the construction sector is more volatile than banking. Even so, both industries have shed millions of employees in the past two years.

Source: St. Louis Federal Reserve Bank

One million six hundred thousand construction workers and about 500,000 financial services workers have been fired since the recession began.

According to the American Bankers Association, 14.1% of the houses are detached in any criminal or foreclosure status. This is a record high since the American Bankers Assoc. has been collecting data in 1972. This amounts to little more than 4 million homes.

As the largest mortgage lenders, banks are suffering big losses and penalties. So far this year, 129 banks failed and were closed by the FDIC. This compares with 26 bank failures in 2008 and only three in 2007.

Unfortunately, the economy real, and many normal and prudent banks and borrowers caught up in this housing bubble. Rising house prices hit any family business moved or for reasons of race. They had to pay more and borrow more money for your new home. And the bursting bubble has left them with less capital than when they bought the house. Indeed, they are stuck, at least for the next few years, households with loans larger than the value of the house.

Loans limited

Banks have become much more conservative in their loans from the housing crisis and the freezing of credit markets. The following table shows where they are investing now. It's certainly not in lending to businesses and consumers.

As you can see, commercial loans (called C & I loans) have fallen by $ 250 billion in the last year. And consumer loans have declined slightly. He opened his eyes is the excess deposits banks must keep with the Federal Reserve Bank.

All banks are required to maintain a minimum amount of reserves held on deposit at the central bank. The minimum is shown in green line from 2000 until October 2008. Much of the $ 700 billion in government rescue money who came to support the largest banks last year was immediately deposit with the Federal Reserve. As you can see, the excess reserves soared from near zero to $ 1 trillion in the past year.

Conclusion

The lower availability of bank credit, the decline in employment, prices declining, bank failures, housing foreclosures, and very low new housing construction are clear evidence of this false economy is disappearing.

The false economy is not very large relative to our national economic engine, but still causing much pain. Unfortunately, That's how bubbles end … in pain and loss.

Ok, so let's add this:

"Most of our economy is solid, functioning and healthy.

"The outlook is for slower growth until the risk / return in better balance

"The housing bubble deflates and false economy is disappearing

Portfolio Strategy of

My analysis is that there is recession in much of our economy, and certainly was not recovered.

The picture is for us to sputter along, drawn by overregulation, confiscatory taxation, and the slow abandonment of economic principles that has made us the most powerful economy on earth.

In this environment becomes essential to adhere strictly to our high-income investment disciplines and sustainable. We will continue to avoid investments related to the false economy as residential housing and finance.

May you live long and prosper

Mike Williams, CFA,

About the Author

Mike Williams is a professional money manager and Chief Investment Officer for Panhandle Portfolios, Inc. He has a BBA from the University of Massachusetts, an MBA from Southern Illinois University, and has held the Chartered Financial Analyst (CFA) certification since 1990, Certificate #13376.

He has been a credit analyst, a foreign exchange exposure analyst, an international pension expert, an international equity portfolio manager, a Japanese stock analyst, and the founder and chief executive officer of several companies engaged in a variety of business ranging from commercial real estate in New England to recycling electronics in China.

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