It is impressive we have had any economic recovery at all despite the weakness in these “big ticket” items. But you know what? Cars get older and need to be replaced. The U.S. population is still growing and eventually new households will strengthen the housing market. Bottom-line – there has been some pent-up demand brewing here in the U.S.!

Autos sales have recovered nicely from the bottom (the big dip in the chart). This year, they’re actually sitting very close to their long-term average units sold of ~15 million units (the solid black line).

Why is this happening? According to Polk, a leading supplier of data for the automotive industry, the average age of passenger vehicle and light truck in the U.S. in 2011 was almost 11 years. Can you say pent-up demand!

So what about housing? Well it’s interesting. Historically speaking, big ticket items tend to trend together. Look at this second chart. New home sales and auto sales have typically mirrored one another. But now, we are starting to see a divergence. Will new homes sales catch up?

I think they will. However, it is difficult to predict when that recovery will occur. One thing is for certain. Housing has not been this cheap in a long time. Take a look at this chart below. It’s the U.S. Housing Affordability Index.

This index uses median home values, median family income and borrowing rates to gauge housing affordability on an index level of 100. Typically, a median income family has almost exactly enough income to afford a median priced home. Today, these families have almost double the income needed to afford a median priced home! The conditions for a housing recovery are there. Now all we need is demand.

Overall, the good news is we are starting to see a pick-up in these big ticket items, especially auto. This pent-up demand could give a big boost to the U.S. economy going forward.

Whether it is the problems in Europe, slow economic growth, high unemployment, budget deficits, etc. we will continue to address these topics until we get them right! 

A little less than a year ago, we were worried about rising oil prices. Guess what, it’s a Groundhog Day moment! High oil prices are here again. Also like early last year, the stock market is up. In 2011, Middle East turmoil triggered a rise in oil prices and what started as a strong year sure ended up being anything but.

The parallels to 2011 are certainly there as are the fears that 2012 could turn out like last year or worse. Groundhog Day!

Déjà vu anyone?

Will rising oil prices threaten economic recovery again? Oil price shocks (aka sudden increases in oil prices relative to the five-year average) are associated with recessions (the grey bars on this chart). Luckily, today’s ratio is still shy of those peaks over the years.

With the current five year price of crude at $84/barrel, today’s price must climb to above $135/barrel to compare to past recessionary levels. Another big difference this year is although oil has increased, other commodities have not. Last year, nearly all commodities increased in price, creating a large expense for the U.S. consumer and thus the economy. Groundhog Day averted…so far.

Relief in sight

Certainly an increase in gas prices hurts the consumer. According to the Federal Highway Administration, vehicles travel on average 11,600 miles. At about 17.6 miles per gallon and 240 million cars in operation, an increase in gas from $3.30/gallon to $3.79 gallon is a tax of almost $700 per household! With prices still rising, when can we expect relief?

With commodities, the cure for high prices is often high prices. Remember Econ 101: producers will produce more of a good to take advantage of the high prices. This increases supply. Without an equal increase in demand, prices should theoretically lower.

And supply is certainly going up. Baker Hughes puts out oil rig count data, and there has been a huge increase in the number of U.S. rigs. This seems to be a response to the high price of oil.

Like last year, the big risk here is still Middle East tension. If there is a major skirmish or the U.S. steps up its involvement, we might see oil prices soar.

Bucking the trend

Thankfully, there are some offsets to the Groundhog Day situation we find ourselves in today. There is some slack in disposable income due to the drop in household debt that could counter rising prices at the pump. With the stock market rising, household net-worth is higher. Also, the job market continues to heal. Initial unemployment claims have dropped to multi-year lows.

So, like Murray, we might finally be able to right our wrongs. There are some positive signs, but it’s still too early to be sure.

Europe…that faraway land with castles, the metric system and Nutella croissants, how can its fiscal woes impact us? In a global economy, decisions overseas affect us a great deal. Will Europe’s problems cause another recession here in the U.S.?

The Economic Big Leagues

I must confess; I don’t have the answer. I do know the collective Euro Area has roughly the same Debt-to-GDP percentage as the U.S. (aka its debt vs. the value of its goods / services). In fact, according to the International Monetary Fund, the U.S. will be in worse shape in a few years!

In that case, why’s everyone worried about Europe in particular? It’s because in the U.S., we’re one country with one fiscal policy. The European Union has 17 countries with 17 fiscal policies. Getting them to come together is no easy task.

Without a unified fiscal agenda, each country is doing what is in its best interest. Yet they are united by a common monetary policy and currency. That’s where we are today. When one country gets in trouble, will the stronger ones, like Germany and France, step up and bailout their neighbors? The indecision is killing me (and the stock market, too)!

How will this affect the U.S. as the drama continues to unfold? In my last post, I was slightly optimistic. All bets are off if Europe falls into a severe recession, as the Euro area represents about 20 percent of global GDP.

However, our economic situation has improved since 2008. We’re not as vulnerable to European unrest.

• Corporate balance sheets are in great shape and flush with cash.
• While unemployment is high, U.S. consumers are feeling a bit more optimistic.
• U.S. banks have restructured and are better equipped to endure events like a default in Europe.
• The U.S. is seeing economic tailwinds: lower initial unemployment claims, lower gas prices, low interest rates and a rising money supply.

Ultimately, the financial markets won’t find solid footing until a decision is made and a credible solution appears from across the pond. Maybe that will be as soon as this week. Like Europe, Cardinals fans now have their backs against the wall. Go Cards!

Economic woes that started during the intense negotiations on raising the U.S. debt ceiling culminated last Friday with Standard and Poor’s (S&P) downgrading the U.S. debt rating for the first time in our history.

“It’s the end of the world as we know it…”

What’s the fallout so far? Pick up any newspaper, and you’ll see the consequences consuming the front page. As expected, the stock market plummeted. As the chart shows, suddenly the market is reminiscent of the recession.

In short, it looks like economic Armageddon (maybe my son isn’t so far off after all?). The S&P downgrade was just a warning shot, and investors are worried monetary policy might not be enough. Is it time to duck and cover?

“…and I feel…”

While I’ve addressed a potential double-dip recession before, it’s hard to predict the effect of recent events on public sentiment. The economy goes into a recession because consumers and businesses believe a downturn is unavoidable and freeze up in fear. However, if you dive deeper into those newspapers’ pages, you’ll find there are still some positives out there.

• Businesses’ finances are strong, and they have controlled costs since the last recession. Cash levels are near all-time highs.
• Consumers are in much better shape than they were before our last recession. The savings rate is around five percent (up from two percent). Debt obligations have declined, too.
• Factors that slowed our economy in the first half of 2011 – gas prices, extreme weather, supply chain shortages due to the Japanese crisis – have subsided.
• Export growth remains strong on the back of a weaker dollar.
• Jobs are being added. Hours worked and per hour wages are increasing.

Also on the bright side, the S&P500 Index is still 65 percent higher than it was in March 2009 (see above chart). The spending power of consumers is healthier, but will economic shell shock prevent them from using those funds?

Long-term, one positive is instability could spark much-needed discussion in Washington. If threats of a double-dip aren’t realized, we can hope the markets regain confidence soon.

Call me a glass-half-full guy, but I’m definitely not a Chicken Little!

The S&P 500 has now fallen six out of the past seven weeks, bringing its level to 1,268 as of June 24. That’s a mere 1 percent higher than its 12/31/10 closing value of 1,257. Talk about a drop from a high of 1,363 (4/29/11) in late April!

Check out Chart 1. The steep decline shouldn’t be hard to spot.

If this S&P 500 volatility isn’t costing you sleep, what is? Every investor has something keeping them up at night. Is it the European sovereign debt crisis, the middle-east turmoil, commodity price increases, high unemployment, the flat-lined housing market or the growing U.S. debt?

The old adage is the stock market climbs a wall of worry. In today’s climate, it has its work cut out for it. However, I’m here to tell you perhaps it’s not as bad as you might believe.

A double-dip isn’t just a cocktail party foul

Let me preface by saying, I don’t have all the answers; no one does. I’ll repeat that: no one does. However, I will say the amount of news coverage on the previously mentioned topics probably isn’t warranted. It’s certainly not proportionate to the probability of any of them evolving into their worst case scenario.

Now, let’s tackle everyone’s biggest worry: a double-dip recession.

Personally, I feel worries about a double dip are overstated. I think we’re in a “muddle through” economy. Now, that doesn’t mean I’m overly bullish on stock market prospects either. The market is still 20 percent higher than a year ago, and let’s face it, sometimes stocks go down!

With a “muddle through” economy, it might feel like a recession to many. However, there’s a lot of data to support my theory. For starters, take a look at this second chart.

Trace the line and see consumer confidence typically peaks prior to recessions. The economy gets “over-heated,” which results in a slowdown. It’s certainly difficult to argue today’s economy is close to over-heating with confidence so low. Fear is in the driver’s seat as confidence is at levels consistent with past recessions.

Also, sectors that typically lead to a recession are still depressed, such as the housing and auto market. Jobs are still hard to come by. These things make it difficult for me to believe our economy is in store for a big move, up or down. We’re simply muddling through.

Hopefully, I alleviated a few of your fears! Feel free to leave a comment with questions or suggestions.

Earlier this month, one piece of data that caught my eye was the April nonfarm payroll report released by the Bureau of Labor Statistics. The headline read: “Nonfarm payroll employment rose by 244,000, and the unemployment rate edged up to 9 percent.”

So, in one report, there’s good and bad news. What does one make of that?

More jobs = economic growth

Let’s look on the bright side: jobs were added! Even better, these 244,000 jobs go a long way towards growing our economy. Check out this first chart. You can see changes in payroll growth and personal consumption expenditure growth are highly correlated. Also, both have increased substantially from their 2009 bottom.

Source: The St. Louis Federal Reserve (4/11)

The bottom line is if people have jobs, they spend money and the economy grows. With about 70 percent of gross domestic product (GDP) coming from consumer spending, it’s easy to see why employment is so important.

Remember: good news is meant to be shared! If you know a friend who could use it, “like” this post on Facebook, or share it over Twitter or via email.

More jobs on the horizon

Will this rise in employment continue? Like almost everything we look at, there are a lot of moving parts. However, if you strip away those parts, you get a simple truth: if the economic recovery we’re experiencing is sustainable, so is job growth. Way to go out on a limb there, huh?

However, one thing I think that is encouraging for future growth is that productivity per employee is actually declining from a year ago. This is a good thing, you ask? It is if you want a job! Look at this second chart to see what I mean.

Source: The St. Louis Federal Reserve (3/11)

You’ll note when productivity of workers drops, like it is now, jobs are added. When it appears a business’ employees have met their capacity, they will hire more workers soon. If this trend continues, job growth will follow!

This data is backed up by business surveys like the Philadelphia Fed Survey on Future business hiring as well.

The long road ahead

Now for the negative side ­– unemployment remains stubbornly high at 9 percent, increasing from 8.8 percent in February.

• Nonfarm payrolls peaked in January 2008 at 137.9 million jobs.
• We’re now at 131 millions jobs, close to 7 million less than in 2008.

To give that context, at our current rate of job creation (244,000 jobs per month) it would take almost 2 ½ more years to get back to where we were.

So why the 0.2 percent uptick? Although jobs are being created, they’re not being added fast enough to outpace unemployment. Also, my 2 ½ year estimate doesn’t even account for population growth. There are almost 14 million people currently unemployed.

Needless to say, we still have a long way to go to fill this job gap.

Misery loves company

To add to the mixed economic messages, last month the Bureau of Economic Analysis projected the seventh consecutive quarter of GDP growth for the first quarter of 2011. Despite this, the job market is stuck in neutral at 9 percent unemployment.

To get some perspective, let’s look at this third chart. I went back and examined payroll data from each recession between 1949 and 2009. The month each recession officially ended, I indexed the nonfarm payroll number to 100.

With the trends aligned, it’s easy to compare our current (2009) recovery in terms of jobs to past recessions.

Source: The St. Louis Federal Reserve (3/11)

If you trace the red line, on the right side, you see we’re adding jobs…slowly. However, on the left side, you’ll note that red line took quite a nosedive. The decline in jobs during the 2009 recession was far worse than average, making the road to recovery that much steeper.

Still, with more jobs on the horizon, there’s hope for steady economic growth, even if it’s not as strong as we would hope.

What do you make of this data? Is the economy recovering as fast as you hoped? Share your thoughts in a comment below and with your friends using the social media sharing buttons.

The pinch of $4.00/gal gas prices is here. Unrest abroad has helped push up the price of oil (West Texas Intermediate Crude, WTI) almost 30 percent from a year ago. Just look at the chart. See that rising line? Yep, not a great sign.

This certainly raises some questions. What does it mean for the economy? With 70 percent of the economy reliant on consumer spending, will the rise in oil prices trigger another recession? What about inflation?

Source: The St. Louis Federal Reserve (4/19/11)

As a COUNTRY Financial Investment Officer, I am constantly asked about the effects of increasing oil prices. However, questions like these are difficult to answer. There are a lot of moving parts involved.

The inflation threat

On one hand, our economy appears to be growing, but there is a lot of slack in it. What do I mean by slack? The U.S. still has a high unemployment rate: around nine percent. At the same time, businesses have a lot of excess capacity.

Good news first ­– under these conditions, it’s generally difficult for inflation to take hold. Employees are underrepresented, and businesses don’t have the ability to raise prices (aka slack).

Now, the bad news – pockets of the economy could still be affected, such as consumer spending on discretionary items. Luckily, as a whole, the threat is muted.

Lessons from history

However, what if oil continues to rise as its current rate? What can it actually do to an economy? Looking back over time, it appears oil price shocks played a part in five of our past six recessions.

I define oil price shock as a sudden increase in the per barrel price of oil relative to the common price. In looking at this chart, the common price I’m using is the trailing five-year average price of WTI crude oil.

Source: The St. Louis Federal Reserve (4/19/11)

Don’t get too caught up in the numbers. Let’s break it down.

Some recessions, like in the mid-1970s, could be attributed to an oil price shock. In other cases, like the recession that we’re currently clawing out of, oil prices were just one of the factors. While our current economic climate remains accommodative (easy money, fiscal stimulus, cheap dollar, etc.), an oil price shock could be the single biggest threat we are facing.

According to the chart, the average level of the oil/five-year average price ratio was about two prior to a recession. Right now, with WTI crude oil at ~$112/barrel and the trailing five-year price of oil at ~$80/barrel, our current ratio is around 1.4.

However, this ratio is rising and drawing closer to that average two-times-level proceeding the past several recessions. Even though we’re not there yet, oil price is an economic influencer. With prices going up, it’ll require close monitoring going forward.

In the meantime, you can expect me (and my wallet) to be feeling the squeeze during our next fill-up.

How are you dealing with the rise in gas prices?