Bad is looking good Or vice versa?
April 20 2008
Although there are by now a plethora of facts and factoids emerging from the US economy it is increasingly difficult to draw sense from them. Economic results, projections and behaviour seem to bear so little relationship to each other that an increasing number of pundits are shaking their grizzled heads and muttering variations on the theme of “wait and see”.This is in part because indicators lag considerably behind performance as I mentioned two weeks ago. Today we have genuine uncertainty. Markets put on points when the economic news appears to be bad or lose ground when things at least are not confirmed as being as bad as they seemed.
I fear that I do not have enough hair left to claim to be “grizzled”, but I ask myself with little hope of a straight answer, “Who is a guy to trust?”
Downturn or disaster
The labour market should be a good indicator of the state of the economy. If jobs are being cut, the outlook is bleak. If the number of those that are in work is increasing, then it is a cause of celebration. So what is happening? The short answer is that it depends who you listen to.
Automatic Data Processing Inc., a leading payroll consultancy firm in the USA have produced an answer. In March nonfarm employment in the USA rose by 8,000 jobs. Not enough to give cause to throw a party, but indicative of nothing worse than a slowdown in job creation and possibly a suggestion that the economy has reached a plateau -good? Well maybe not.
Official figures issued by the Labour Department indicated that 80,000 jobs were actually lost last month, suggesting the start of a potentially serious downturn or worse. Unemployment in the USA currently stands at 5.1 per cent. This is the worst level since September 2005, but in September 2005 5.1 per cent was regarded as disappointing rather than disastrous. As one commentator puts it, “You can pick your poison”.
More regulation?
Henry Paulson Junior, the US Treasury Secretary has been busy. He has issued a 200 page report recommending greater regulation of financial institutions. He recommends that the Fed be given greater powers, that new regulatory bodies should be created — a boost to employment? — and that an increasing number of professionals in the financial field should be licensed. His report ranges widely and has hit desks with a very dull thump.
The lack of enthusiasm stems less from the suggestion that the report contains nothing of value, than that, with an election due in November it is unlikely that any parts of it will travel the long road from suggestion to legislation.
Financial institutions
UBS, the leading Swiss bank announced a further write down that slightly more than doubled previous losses on the mortgage crisis and the Chairman, Marcel Ospel announced his departure. Conversely Lehman Brothers, widely tipped to be the next Bear Stearns, appear to have successfully launched a rights issue to shore up the balance sheet and increase liquidity.
So the news is bad, or perhaps it is good. Again you can take your pick and if you want something to add to the mix you can throw in the fact that Deutsche Bank, the largest German bank is preparing to write down $4 billion of assets as the credit crisis widens.
Meanwhile in the USA some pundits are predicting that 200,000 banking jobs will be lost this year with a similar per centage forecast to go in Europe. A current guess at the total cost to the global economy is in the region of $1 trillion.
Mr. Bernanke
As the Fed pours ever more cash into Wall Street to stave off the “credit crunch” and therefore recession, Mr. Bernanke seems to blow hot, then cold, aggressive then conciliatory. He puts up a robust defence not only of the Fed’s untested actions — which one would expect — and hints at recession as he makes it clear that the government’s $168 billion injection that is designed to avoid the downturn will have succeeded by the second half of this year.
The Bank of England has finally dropped the concept of refusing to reward venal behaviour and is following the Fed in shoring up the guilty banks.
Inflation
Official inflation figures rarely provide any accurate indication of the extent to which the cost of living is rising. In the UK for example, they are based on a highly selective basket that takes no account of the population’s need to feed themselves or keep a roof over their heads. For all practical purposes they are meaningless — other than to politicians.
At present in most countries and by most measures the real cost of living continues to soar. On the other hand if you would rather buy a fancy new television than eat, prices are going your way.
The idiotic rush to destroy forests and curtail food production in order to develop questionable biofuels has led to food shortages and degradation of the environment on a massive scale. Current estimates are that payback in the mitigation of climate change will be between 300 and 400 years from now — if ever. Meanwhile more people go hungry today.
Markets
Investors in the USA are probably happy to see the back of the first quarter. In spite of considerable volatility the Dow Jones Industrial average has gone through the worst quarter in its history, the S & P 500 recorded five consecutive months of losses and the Nasdaq declined by almost 20 per cent from the highs of last October. Yet on a daily basis shares occasionally soar as those that I assume to have a better class of crystal ball pick up bargains.
As markets bounce from low to wow, some pundits suggest that gold, the usual haven from turmoil, may double in price.
Not a happy one
Given this degree of uncertainty the life of an economist is not a happy one. As a simple businessman, however, I have a credo for tumultuous and more gentle times. I continue to believe that through all the confusion some businesses will thrive and those businesses will be those that place and keep the customer at the centre of the business develop that customer’s loyalty and convince customers in ever increasing numbers to be become advocates that are fully engaged with promoting the well-being of your business. For once in my life making sense of human behaviour seems to be easier than analysing the numbers.
Tom Lambert is an international businessman and distinguished academic and author. He will be contributing a weekly column from Europe to the Khaleej Times.
