Printing Shipments Show Positive Improvements

Gross Domestic Product for the second quarter was +1.9%. I had heard estimates as high as three percent, and even some that it would be negative. This rate is nothing to write home about; the post-WWII average is +3.3% and since 1980 is +3.1%. It must be noted that each GDP report is subject to revision in three steps—the advance estimate, the one just released; the preliminary estimate which we will get next month; and the the final estimate which comes out the following month.

Did I say “final”? Not so fast. The Bureau of Economic Analysis just revised data going back to 2005. Every July the department revises the data again. It certainly changed our view of last year. The second and third quarters were raised to a robust +4.8%; the fourth quarter, however, was negative, -0.2%. So there, we have the down quarter everyone was looking for. The rule of thumb is that two consecutive negative quarters define a recession. That has not occurred in this case. Employment trends are also a predominant means of judging whether or not we are in a recession.

The unemployment rate came in at 5.7%. This is still in the range of full employment (which academics consider as between 4% and 6.4%. In fact, when I was studying economics in college in the late 1970s and early 1980s, economists were raising the full employment level to 6-8%). So why the hubbub? Here's something you won't see in the news: there are more people employed today than in April 2007, yet the unemployment rate has gone from 4.5% to 5.7%. More than 2 million people have entered the workforce. The size of the workforce is the denominator in the calculation of the unemployment rate. Any time you increase the size of the denominator, the value of a fraction decreases. The formula is

1 minus (employed workers divided by the total workforce) = unemployment rate

In yet another untold story, when households have trouble covering their increasing energy bills, job losses in housing, and other things they must deal with, other people in the household go looking for work. In this case, 2,060,000 million of them, a 1.4% increase in the civilian workforce.

The initial claims for unemployment 4-week moving average was 393,000. This was an increase of 11,000. Here's an interesting problem: unemployment benefits were extended for more weeks than usual. Economic research has historically shown that this increases the unemployment rate because workers are pickier about the jobs they take. Roughly one-third of the unemployed find work quickly; one-third wait until their benefits run out; and the rest find work somewhere in between. This legislation only increases the duration of unemployment for that middle third.

GDP was positive because of a decrease in imports, an increase in exports, and a decrease in inventories. Those inventories will have to be replaced, which is positive for GDP, so the latest ISM Manufacturing Index is a good preview of what we can expect.

The ISM Manufacturing report came in at a neutral 50. Overall, it was a pretty good report, with the employment measure jumping to positive territory. Of concern: exports were down; perhaps the weak dollar's effect is dissipating. Prices paid for materials backed off a very small amount but are still very high.

The biggest problem right now is inflation. The GDP report stated that inflation for consumers was +4.2% in the second quarter and +3.5% in the first. Import prices were up more than +28%, largely due to the weak dollar. Many raw materials used in manufacturing are imported, of course, and this causes downward pressure on manufacturing activity.

Workers are not getting a fair shake in this inflationary environment. The employment cost index shows that since 2003, the CPI is up by +3.6% per year, but wages are up only +2.9%. Benefits costs are up +4.0% per year. Total compensation costs are up +3.2%. For the last 12 months, the CPI is up +5.0%, but total compensation is only up +3.0%. Higher energy and other costs have pushed wage increases to the side.

Few of those workers understand that the Federal Reserve's multi-year money supply expansion, with a special acceleration since September, is the primary cause of their woes. If the Fed had known that the third quarter GDP would be +4.8%, would they have cut rates as steeply as they did? Probably not. Instead, the Fed has unleashed severe dislocations in trade, wages, energy costs, and natural market forces, here and abroad, while backing itself into a corner. It can't lower rates because it's afraid inflation will get worse; it can't raise rates because the economy is slow. Because they won't raise rates, stagflation will get worse. They should start raising rates, but won't.

High inflation makes businesses cautious about hiring and investing. It also means that the costs of the factors of production (labor, materials, knowledge) might be so high as to be unprofitable. Do not take any comfort in the recent decline in oil prices: it's still more than $120 a barrel, and companies and consumers are still adjusting their purchase patterns.

This GDP report is also likely to be revised down. The way that imports and their inflation adjustments are handled probably distorted the growth estimate. This is not normally a problem, but the intensity of the rise in import prices, caused by the Fed's monetary actions, amplifies the anomaly. It is possible that second quarter GDP could be revised next month and be negative, but I doubt that. It may be cut in half. Stay tuned.Another aspect of the GDP report was the increase in computer expenditures; with higher costs, it looks like companies are looking to add more automation to counteract their other costs. Sometimes, unfortunately for us, that added automation minimizes the need for printed communications within and between organizations. Sometimes that silver lining hides a dark cloud.

Key action items:

    * know your costs,
    * talk to suppliers about what they see ahead and don't take “I don't know” for an answer,
    * as mentioned last week, keep key employees happy and engaged; rising costs of living could send them elsewhere if they don't see an upside to their continued current employment
    * discuss upcoming needs with clients and prospects. Get in on their 2009 plans now.

Next year will be a high inflation, slow-growth year. While budgets for communications may get cut, and printed materials used in the normal course of business will be under scrutiny, now is a great time to look for services that clients can outsource to you.

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John Ryding was the economist at Bear Stearns, one of the best in the business. He was a casualty of the Bear Stearns collapse, and has ventured on his own at RDQ Economics. Their news and analysis is free until September. Until then, enjoy the free newsletters by signing up at the new site.

And on the lighter side, the satirical site The Onion had a marvelous piece about financial bubbles. There's a great line in it that perfectly illustrates the unfortunate nexus of economics and government: “We are in a crisis, and that crisis demands an unviable short-term solution.” It reminds me of my favorite line from Animal House: “I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part.”