A concise, well-written economic analysis was just released by Hoisington Investment Management Co. Echoing the themes printed here over the past many months, they call for a negative 4th quarter 2011 and subsequent 2012 quarters.
They cite slowing real GDP growth (H:1<1%), combined with surging unit labor costs (+4.8%) as leading causes for a decrease in business productivity of .7% annually. A drop in productivity concurrent with rising labor costs will lead to increased layoffs, with attendant ripple effects. At the same time, inventory investment has risen to 1.18% of real GDP versus the average (since 1990) 1.0%. In an economic expansion, this is fine; rising demand will pick up the slack. But, in July and August, consumer good production increased at a 3.2% annual rate while real retail sales contracted at a 1.4% annual rate. Oops…more contraction, more layoffs.
The report contains some facts that might surprise many readers. For instance, although M2 has been increasing at a annualized pace of 20%+ of late, it’s not due to QE2. The real culprits are a shift from non-M2 assets such as commercial paper to (theoretically) more secure M2 assets, and a shift from Euro-based to USD-based deposits.
Also, as will come to no surprise, US debt:GDP ratio (350%) is better than Japan (470%) and Euro Zone/UK (450%); but, we’re also better than Canada (410%.) And, who knows what the true Chinese picture is, but the feeling is it’s fast becoming just as big a problem.