Economic Expansion Far Weaker Than Average Comstock Partners, Inc. Thursday, January 12, 2006
Despite the euphoria about the economy in the media and on the Street, a cold look at the numbers indicates that the current expansion is one of the weakest in the post-war period. The bottom of the previous recession occurred in November 2001, and was 48 months old at the end of last November. The following compares this recovery to other post-war expansions at the end of 48 months.
Real GDP was up 13.9% compared to a previous average of 20.9%. The shortfall was mainly due to the relative lack of payroll employment growth, which rose only 2.6%, compared to the prior average of 12.3%. As a result real personal income less transfer payments increased only 6.7% against a previous average of 18.5%. Industrial production rose by 10.2% compared to a 23.1% average gain in past expansions. While the unemployment rate this time was down to 5.0% at the end of 48 months compared to an average of 5.8% in prior expansions, this was made possible mainly by a decrease in the overall participation rate, which dropped each year from 2000 to 2004, and was about flat in 2005. If the participation rate had increased as it did in all prior expansions, the unemployment rate would be far higher. A well-known strong point in the current period has been productivity, which jumped 13.4% compared with an historical average of 10.1%. This too was made possible by the sub-par employment increase.
To engender even this below average recovery required one of the easiest monetary policies on record, two major tax cuts, a massive jump in household debt, a sharply reduced savings rate and an unsustainable increase in housing prices. The weakness in employment and income was offset by the hundreds of billions of dollars in mortgage equity withdrawals (MEW). That is why the current softening we see in the housing market is so important. MEW has simply been the key underlying support for the entire economy, and as it declines there is nothing on the horizon to take its place. The 413,000 combined new jobs created in November and December only made up for the shortfall caused by hurricane Katrina. However, for the last six months of the year monthly employment on average rose by only 147,000 compared to 190,000 in the first half, indicating that a resumption of solid income growth is not in the cards.
In sum, we still regard this as a fragile, unbalanced economic recovery that still has to absorb the impact of the most recent interest rate hikes. With the stock market P/E in the high end of its historical range, the current rally has only increased the downside risks ahead.
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