So far this year, we have seen mostly positive economic data. We believe the economy is turning the corner and expect to see some acceleration at this point. Company surveys are positive from International Strategy and Investment, a research group engaged in investment research, sales, trading, and portfolio management, and the ISM diffusion indices—which is basically the good data minus the bad data—are also up. Year-to-date on Thursday, January 13, 2010, the Standard & Poor’s Index was up 2.15%.
The Producer Price Index, released on Thursday, showed that prices for finished goods climbed 1.1% in December, driven by fuel and food prices. Excluding food and energy, core prices for finished goods increased by a mere 0.2%. Prices for intermediate and crude goods also rose. We believe this points to strengthening in the economy. It will likely take some time for producers to push any price increases through to the consumer.
Hours worked are up, which we feel indicates that companies will have to begin hiring. The looming questions are what does this mean for the unskilled part of the labor force, and is unemployment cyclical or structural? We believe it is a bit of both. Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work. The lack of employer demand comes from a lack of spending and consumption in the overall economy. Structural unemployment results from changes in the basic composition of the economy. These changes simultaneously open new positions for trained workers. It is debatable whether many of the construction jobs will come back. The real estate market contributed nearly 30% of the job growth in the past decade. With a slow recovery in the real estate market, we believe there will have to be some retraining of the workforce.
In the 1970s, when mortgage interest rates were 18% to 19%, we had six to seven years of inventory in the housing market. Today, we do not have a clear understanding of the inventory. Banks are pushing off foreclosures because they know the more they put on the market will drive the price down. Real estate will recover one day. While the country needs 1.5 million new homes to keep up with population and immigration, the banks have close to 1 million foreclosures that are back on the market. In our opinion, we need infrastructure projects to put people back to work.
However, the real estate market has stabilized in some parts of the country. Many of the foreclosures are concentrated in areas that experienced fast paced growth like Arizona, California and Florida. Even some areas of Georgia experienced overdevelopment. It was around 2006, where the trend was to build multiple subdivisions in the outlying areas of high growth urban areas. It may be a possibility that some of the ghost towns may be torn down and cease to exist. Other parts of the country, like Charlotte, N.C., have stabilized because of population growth in the area.
We suspect that some specialized manufacturing will come back to the United States. The U.S. Trade Deficit narrowed unexpectedly for a third consecutive month, as the Commerce Department said the deficit decreased 0.3% to $38.3 billion. U.S. exports grew 0.8% to about $160 billion, the highest level since August 2008.
Getting back to unemployment, the reality is college graduates are facing 5% unemployment while the country is near 9.4%. This indicates to us that some retraining will have to happen. Baby Boomers are staying in the workforce a few extra years, and while the job market is different for the two generations, it still adds to the problem. This is a similar problem to what is happening in the United Kingdom, as retirement age has been raised from 65 to 67.
Means testing on Social Security is a debate we have internally. While we do not want to see benefits cut for the generation who served our country in World War II, we would understand cutting benefits for those in their 30s and 40s now, where they could not receive benefits until they are 70. Changes will have to happen for Social Security to survive.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
