Random Economic Thoughts

http://www.nytimes.com/2010/05/02/business/02buffett.html?emc=etaa>1

Now that the first four months of the year have passed, some of the economic activity that was hoped for has come to pass. The 3.2% improvement in GDP for the 1st quarter isn't the 5.6% pace that ended 2009 but it is a continued movement upward. To some economists, the underlying dynamic is actually "healthier" and better balanced (at the 3.2% number vs the 5.6% number): more of the rise in GDP came from domestic demand and less from inventory correction.

At this point, the prospect of a double-dip recession can be taken off the table (unless, of course you are Nouriel Roubini, who predicts the worst every year - and, every 25 years, he's right!). The underlying pace of core growth due to another strong quarter of capital expenditures is there.

That all important 70% of domestic economic activity (the consumer) expanded expenditures by 3.6% in the first quarter. One of the most important points of reference here is the double digit improvement in durable goods consumption. Thru mid-2009, consumer interest in durable goods was limited by credit availability. With credit now more accessible, consumers aren't using it to spend on durables because they're using "cash", and they're spending at a rate not seen since the first quarter of 2007.

The job market reports should be out over the next few days, and "jobs" are the lagging indicator of whether the economy can continue to come back. We began the last decade with a "jobless recovery" because businesses were reluctant to hire and because new productivity improving processes were available to at least partially substitute for "labor." Attitudinally, the Great Recession probably caused an even more severe reaction in the business community to hiring back employees if it can be avoided. That may mean that the "labor" part of the equation may take longer to come back.

But, the "cyclical" components of the GDP that one would hope to see rebounding at this stage of any recovery (consumer spending, equipment and software investment and inventory accumulation) are doing so. That said, the drag from other areas like state and local government spending, could temper the gains.

We've attached one of the summaries of what was said at Warren Buffet's annual meeting. He sees the economy coming back (which should help the railroad he bought). Interestingly, he defended Goldman Sachs and Loyd Blankfein for their actions in the SEC lawsuit. Basically, his position is that all sides were sophisticated in the transaction so what's the problem? Now, Buffet invested $5 billion in Goldman during the crisis so one could say that he has a routing interest, but he doesn't leave that impression. Plus, his investment in Goldman returns a nifty 10% per year in interest ($500 million).

Speaking of "financial regulation", it would appear that Congress will be passing something in the coming weeks and there is quite a bit of activity going on behind the scenes to see what kinds of "amendments" can be added to the final legislation. One that is gaining traction is the Brown/Kaufman amendment which would impose "caps" on the largest banks for the deposits they can hold. The "Volcker Rule" (barring banks from proprietary trading) continues to have bipartisan support.

If we can get reasonable financial regulation (and it appears we will) and continued GDP growth (three quarters in a row is a good start), then all those lagging indicators that we worry about will start to come around. A very good lagging indicator gauge will be the actual unemployment rate by year end 2010. If it's still in the 10% range, there are still problems.