Chicago Daily Observer

While some economists argue a recession is underway, it is hard to tell from the data. Yes, the unemployment rate has been rising, but almost all the weakness is coming from housing and high energy prices. Other areas of the economy are still doing well and overall economic growth has been positive. What is clear is that strong productivity growth is allowing the US economy to move forward despite headwinds.

While gross domestic product measures the total output of goods and services, productivity measures output per hour. And even as the number of hours worked has declined, output per hour has gone up enough to keep total output rising.

In fact, output per hour in the non-farm business sector is up 2.8% versus last year and is likely to be revised up to about 3% when new figures arrive in the first week of September. In the past ten years, ... Read More...

Commodity prices have fallen dramatically in the past five weeks. As recently as mid-July, gold was trading at $975 per ounce. Now it’s roughly $800, down about 18%. Meanwhile, oil has dropped from $145 per barrel to roughly $115, a decline of nearly 21%. As a result, many analysts are saying the Federal Reserve can be less concerned about inflation and can postpone raising interest rates.

I find this argument wrongheaded for two reasons. First, because inflation is running far above where the Fed ever should have let it go; second, because it contradicts the arguments about inflation and the Fed many of these same analysts have been making since last summer.

In the past twelve months, consumer prices are up 5.6% and producer prices are up 9.2%. The last time inflation was a bigger problem was when disco balls still hung in clubs throughout the US, and not because ... Read More...

We want to add our congratulations to the US Olympic Men’s, 4×100 Freestyle Relay Team. A new world-record, and an amazing anchor leg comeback over the favored French team, was simply amazing. How ’bout them apples?
The technology behind the new Speedo swimsuit worn by most swimming medalists in Beijing is a reminder of the fact that the globe is still in the midst of a technological boom. But, unlike the 1990s, this productivity growth is not holding back inflation. Neither is weak economic growth – experienced in the US since last fall when the subprime crisis first unfolded.

In fact, the value of the gold in a gold medal is up 115% since 2004, while silver prices are up 130%. Much of this increase in commodity prices has occurred in the past year, pushing the 12-month changes in consumer prices to 5% and producer prices up to 9.2%.

Initial estimates of second quarter real GDP put growth at 1.9% annualized, less than consensus expectations, and weaker than the First Trust forecast. At the same time, the Commerce Department revised its estimates to show a very small 0.2% decline in Q4–2007 real GDP.

However, government estimates of inventories – the part we have the least information about – fell by the second largest amount in history. We believe this decline was overstated and Q2 real GDP growth will be revised up in the months ahead. Real final sales (which exclude inventories) grew at a robust 3.9% rate.

In response to the data Dr. Victor Zarnowitz, who serves on the recession dating committee of the NBER, told the Wall Street Journal that “There is no cyclical decline, yet.”

Despite this, some analysts argue that Q2 data overestimated the true pace of real growth because the government ... Read More...

The Dow Jones Industrials Average is down roughly 20% from its peak in 2007 and fears of recession (or worse) are rampant. Bearish sentiment on equities is elevated and as is typical in fear-filled environments, opportunity exists.
Not only are fears of recession overblown, but earnings continue to surprise analysts to the upside. The bottom-line is that the US equity market is at least 35% undervalued. And when we survey the entire investment landscape it is clear the equity market is the only broad market category where significant future gains can be reasonably expected. Equities are the most undervalued asset class.

Consider the alternatives – real estate, commodities, and bonds. Although there are regional pockets of resilience, on a national average, residential real estate is still in the process of adjusting to a Fed-induced “bubble.” We still do not see home prices hitting bottom until mid-2009.

While commercial real ... Read More...

Late next week the government will release initial estimates of real economic activity in the second quarter. Not long ago, in early April, when the quarter was just beginning, the consensus forecast for Q2 2008 real GDP growth was 0.0%, with as many economists predicting contraction as were predicting growth.

Now, three months later, the consensus is up to 2.2%. And no surprise – we are forecasting a 3% growth rate, more bullish than almost any other economist.
Yes, it is true that the home building and autos sectors have been hammered. But, it is not true that this weakness has spread. Outside those sectors, the economy is not just healthy but downright strong, reflecting relatively low tax rates and loose monetary policy.

Home building is still correcting from the excess liquidity of Alan Greenspan’s final years, but home construction will likely turn up by early 2009. That ... Read More...

Confidence in the economy is very low. Oil prices are very high. Stock prices are falling. Financial companies are losing money…some are failing. The government is busy bailing out Fannie Mae and Freddie Mac, creating “stimulus,” establishing new lending facilities, and cutting interest rates. With all of this happening at the same time, it’s not surprising that some people are questioning the basic underpinnings of capitalism. Trust in free markets seems to be falling and the idea of “market failure’ is gaining ground.
For example, United Airlines just sent an open letter to all its customers asking them to join in a protest against “market speculation,” which it says is driving up oil prices. At the same time, politicians are demanding more regulation of financial institutions.
A running theme is that if only the government had been more active in the first place, these problems could have been ... Read More...

In his final warning before hiking interest rates last week, European Central Bank (ECB) president Jean Claude Trichet said, “If we are not resolute, there is a risk that inflation will explode.” With this he lifted the overnight lending rate to 4.25%.

We are not sure of the exact numerical definition of “exploding inflation,” but the ECB is clearly worried that 3.7% growth in the European CPI over the past year is fueled by more than just energy and food.

This leads us to ask a rhetorical question: where does inflation come from? Sometimes an answer can be found at the extreme and today’s extreme on the inflation front is Zimbabwe, where prices are doubling every month.

So why is this happening? Is it due to rising commodity prices? Or, rising wages? No. Zimbabwe is experiencing hyperinflation because the government is printing money to meet its payroll. They ... Read More...

Our favorite non-religious holiday is Independence Day, celebrating the Declaration of Independence, which declared freedom from the Kingdom of Great Britain.

In 1776, America was an agricultural economy, with levels of productivity that lagged significantly behind most of Western Europe. Since then, on a very consistent basis, these United States have increased living standards and wealth. Today, US GDP is more than double the next largest country (Japan), and no country is as powerful – economically or militarily.

This nation is blessed with abundant natural resources, ports and an agreeable climate. But, the number one attribute of economic success is freedom, which allows people to find and exploit their own God-given talents. This freedom creates a sense of adventurism and entrepreneurship that many other societies strive to emulate. It also breeds optimism, which has been consistently reinforced by more than two centuries of success.

Despite this history, Pouting Pundits ... Read More...

One of our recurring themes is that US monetary policy has been too loose for at least the last five years and that the rapid “emergency” interest rate cuts from September 2007 through April 2008 – implemented to address credit market turmoil – were a mistake.

Gold prices hovered around $665/ounce in the six months through late August 2007. By mid-March, gold had risen roughly 50% to above $1000/oz. and still stands at about $900/oz. today. In addition, oil, which had been at about $75/barrel last August, rose 85% to a peak of $139/bbl. earlier this month and is now at about $135/bbl.

The purchasing power of the US dollar had dropped not only against commodities but versus other major currencies that have not adopted as inflationary a monetary policy as the Federal Reserve. For example, while it took $1.36 to buy a Euro last August, it took $1.60 in ... Read More...