THERE IS NO RECOVERY ON MAIN STREET
The recent reports of record bonuses on Wall Street have Main Street citizens dumbfounded as to the current economic situation. What did Main Street get out of the bailouts? What has changed from a year ago? With unemployment at 10% and a record wealth gap the skepticism regarding the stock market rally and the economic recovery increases with every day. The job market is actually still worsening, consumer credit conditions have worsened and small businesses are struggling more than ever.
A recent report from the NFIB on small businesses confirms many of the underlying concerns about the economic recovery. Chief among these problems is the weakness in the credit markets and the continued weakness in sales growth. The latest survey of small businesses showed slight improvement in business optimism which bottomed in March 2009. 32% of respondents continue to be concerned about the rebound in sales. The NFIB reports:
The Index of Small Business Optimism gained 0.2 points, rising to 88.8 (1986=100), 7.8 points higher than the survey’s second lowest reading reached in March 2009. The gain was minor, so the good news is still that the Index did not decline. But all in all, the gain is less than was hoped for. Four of the ten Index components posted gains, two were unchanged, and four declined. The biggest problem continues to be poor sales, as 32 percent said “weak sales” was their top business problem.
Respondents reported the 6th worst reading in the 35 year history of the report as employment trends showed no change since July. Over the next three months 16% plan to cut more jobs while just 7% plan to increase employment. Using the average pace of historical recoveries, economists believe we will not recovery the lost jobs from the current recession until 2016:
The profit outlook for small firms remains equally bleak as credit markets remain tight and sales fail to rebound. Capital spending expansion fell slightly to 44% of all firms. The net percentage of small business owners reporting higher sales remained near all-time lows at -26%.
The lack of demand is reducing the pricing power for small businesses and compounding the profit problems:
Reports of positive profit trends were unchanged at a net negative 40 percentage points. The persistence of this imbalance is bad news for the small business community and a contributor to the reported difficulties in obtaining credit. Not seasonally adjusted, 14 percent reported profits higher (down two points), but 50 percent reported profits falling (unchanged). Weak sales and price cuts are responsible for much of the weakness in profits.
These problems have continued to result in weak credit conditions:
Thirty-three (33) percent reported regular borrowing, typical of the post-1983 period, down a point from July. Overall, loan demand remains weak due to widespread postponement of investment in inventories and record low plans for capital spending. In addition, the continued poor earnings and sales performance has weakened the credit worthiness of many potential borrowers.
The survey shows, that while much of the economic rebound is showing up in the banks and the larger firms it is still far from reality on Main Street. The NFIB’s commentary is surprisingly realistic with regards to the real state of the economy, the recovery and the potential of more wasteful government spending, i.e., devalue taxpayer’s dollars:
Although third quarter real Gross Domestic Product growth will likely be over three percent (a stunning improvement from the six percent shrinkage in the first quarter, the surge has not shown up on Main Street as of yet. Reported capital spending was at a survey-low level (started in 1973). More firms plan more inventory reductions than plan to invest, and more owners plan to trim their workforce than plan to increase employment. Quarterly reports on sales reveal 41 percent experiencing declines compared to 21 percent reporting quarterly gains. Quarterly profit trends are the worse in survey history, with 50 percent reporting declines compared to 14 percent reporting gains.
And, owners are not looking for a lot of improvement. About 40 percent expect real sales volumes to decline in the coming months in contrast to about 25 percent expecting gains. Only seven percent think the current period is a good time to expand, near the survey low. Credit markets are expected to remain difficult for those wanting to borrow, but with inventory investment and capital spending plans near historic lows, it is clear that loan demand (not the supply of credit) is weak. Legislative activities in Washington undoubtedly dampen the outlook with talk about health care mandates, cap and trade, card check, and new taxes on all sorts of goods and services. Many will wonder if it is worth the effort to try to grow the firm.
Now, some in Congress are considering “Stimulus II”, which may take the form of a jobs tax credit similar to that enacted in 1976-77. Some feel this was a successful program, creating new jobs. But it is likely that “government job creation” is an oxymoron. Such a program does not pass a simple “smell test” of logic. Even a minimum wage worker costs about $20,000 (all in). For example, who would spend $20,000 to get a $5,000 credit if there were no use for the worker (e.g. the worker could not generate more than $15,000 in revenue to cover the cost of hiring). Firms will not hire people to just stand around, and cannot pay workers more than the revenue they generate for the firm. With weak consumer demand, more workers are apparently not needed and owners are not hiring. A jobs credit
will not bring in more sales.Such a program, if passed, would be the “cash for clunkers” program for the job market. Hiring might be delayed in anticipation of the program if it is proposed in Congress and debated for a period of time and, unless prevented, might induce some firms to release workers and re-hire them as “new.” Such a program will involve red tape and complex formulas to compute credits, and most if not all of the money will be paid for workers that would be hired anyway. All this would not induce many consumers to increase their spending, the top need identified by business owners. Labor is cheap, customers are needed. Maybe giving the money to consumers would be simpler. When consumer spending picks up, firms will have reason to hire.
The NFIB aren’t the only ones reporting the extreme weakness on Main Street and at small businesses. Meredith Whitney recently discussed the issues at smaller firms:
“With the exception of large-cap companies, smaller-sized businesses are struggling to raise capital and the wider implications for the economy are bearish. Small companies employ 50 percent of the U.S. workforce and contribute 38 percent to GDP, or Gross Domestic Product.
“Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find and credit-card lines (a critical funding source to small businesses) have been cut by 25 percent since last year. I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010.”
“Second half” of the credit crisis is absolutely correct. We may very well be past the panic portion of the deleveraging cycle, but the long-term problems in the small business community and in the job market are structural problems that will take years to be resolved. Anyone expecting a quick recovery (despite how irrational equity market participants react in the short-term) is likely to be disappointed.
To read more on the two part credit crisis please see “And Now For The Hard Part” & “The Two Part Credit Crisis“.
Source: NFIB
What did Main Street get out of the bail-outs? They got the financial system more or less intact so that the unemployment rate, however you want to calculate it wouldn’t be twice what it is now. Sad but true.
Wall Street, as far as I’m concerned, should be taxed substantially on “speculative” earnings.
MDTerp Reply:
October 19th, 2009 at 8:36 AM
oh please. Wall Street is back to business as usual while Main Street is at rock bottom. Its disingenuous to imply that we got much out of the bailouts.
James Reply:
October 19th, 2009 at 9:06 AM
MDTerp, Paul is obviously being sarcastic by saying we have twice the unemployment for the bail outs.
TPC Reply:
October 19th, 2009 at 9:31 AM
I didn’t read it like that either. I think Paul means that the unemployment rate would be at 20% right now if it wasn’t for the bailout.
Personally, I don’t buy the whole “we were going into a depression if the banks didn’t start lending again” argument. The banks still aren’t lending. We were never headed for a depression. Things might have gotten worse, but not depression worse.
James Reply:
October 19th, 2009 at 9:40 AM
Nevermind, I am the one who misread what Paul said and I don’t agree with him either. And Yes TPC, I am thinking more than ever that the bail outs weren’t really needed. The governments could have just taken over the institutions so people didn’t panic. The bailouts were a scheme to bailout the BANKERS. There is no two ways about it now.
“The bailouts were a scheme to bailout the BANKERS. There is no two ways about it now.”
Exactly. They extorted Congress with the help of the cronies at Treasury and the Fed. If we had made them take their hits, having bond holders swap debt for equity to recapitalize them and instituted a debt for equity swap arrangement for underwater homeowners with provisions to prevent windfall profits (ala John Hussman’s PAR plan), we would have had a period of instability and a big hit to the stock market, no doubt, but we would have a much more stable base from which to build. Much more complicated than that, and a lot of regular folks taking hits too, but there’s no easy way out of this, as much as we wish there were.
TPC,
Do you sense a waning sense a bullishness and a rising sense of skepticism in this earnings season so far? The ride down and the rally up has always been about the financials, and with GS and BAC disappointing in their own ways, I sense we are on the verge of a significant sentiment shift. Your thoughts?
TPC Reply:
October 19th, 2009 at 12:49 PM
Very much so. I put some hedges in place late last week because of this. I am still having trouble finding a scenario where a major sell-off occurs (because earnings will continue to beat), but expectations are definitely creeping higher.
This whisper number of 1.60 for AAPL after the bell is a great example. They could very easily miss and tank the market tomorrow. The risk/reward on the long side is getting increasingly poor. After earnings season begins to wane we could be setting up for a sizable decline.
TPC,
looking further out to 2010 and beyond, do you see the market rolling over below the March lows? I just don’t see employment recovering to the extent it needs to in order to support valuations. David Rosenberg has been pounding the table for months now about how the record stimulus, deficits and government largesse has bought us so little in terms of improvement in the macro picture. At some point, you have to figure that the deficit hawks in Congress and the rising public backlash towards bailout nation will put a ceiling on how much further govt life support we can expect. In that case, a double dip would seem likely and it would be a perfect set-up for repeating the fall below the previous lows like in the 30’s and with Japan. Your thoughts?
TPC Reply:
October 19th, 2009 at 1:21 PM
I don’t think you’ll get another shot at S&P 666 in 2010. Beyond that I am not much of a forecaster (and neither is anyone else). For now, the market is bolstered by incredible amounts of stimulus and an earnings environment where analysts continue to underestimate the health of corporations.
I believe the recovery will be a disappointment in 2010 assuming the government stops the stimulus programs, but I have a feeling they could extend the housing credit and even pass a second stimulus plan. If that occurs we could continue with this bull market for quite a while. What happens after the government is done destroying the dollar and pumping liquidity into the system is a whole different story. As of now, we might not be dealing with those problems for a long time. Remember, the markets short-term gyrations have little to do with the real macro situation. Very little has changed since 2007. This will feel like groundhog day if Ben inflates all of these bubbbles again.
The ramifications of that might not be felt until later 2010 or after depending on what occurs. The laws of supply and demand will take hold of the housing markets and commodity markets sooner or later. I fear we have done absolutely nothing to resolve the long-term structural problems we face. But we’ll try to make money in the meantime – even if that means being a bull at points….
So if it’s a stimulus story and the equity bull market can go on indefinitely with govt support, then maybe the currency, oil, and bond markets can stop the party if the Fed won’t. Do you have dollar index (DXY), oil price and 10 year bond yield levels in mind that once breached, would change the game? For me, crossing below 70 on DXY, $90 oil and +4.25% on the 10 year would all be game changers.
TPC Reply:
October 19th, 2009 at 1:43 PM
Those don’t sound like unreasonable targets, but prices have a tendency to overshoot.
Apple just obliterated their earnings. This bull market will continue right thru the next few weeks….
Is it still a good time to buy 10 yr treasury bonds?
David Einhorn speech at Value Investing today
http://www.fundmymutualfund.com/2009/10/david-einhorns-speech-at-value.html
We got a big f-ing bill.
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