“The Sky Is Blue, Water Is Wet … and the U.S. Economy Is Officially In Recession”

Things are so bad now that even the government has had to admit the painfully obvious: the U.S. economy has ground to a halt and is now trying out the reverse gear. According to the official numbers, it’s going backwards at the rate of 0.5% as per the third quarter.

Bloomberg, eminently more sensible than the government, claims the recession actually began in 2007 which makes it the longest recession in nearly 20 years – already!

Aside from the negative GDP growth, the most worrisome number in that table is the inflation percentage. Especially when you compare it to the average hourly earnings in the Employment Situation table below:

The consensus rate of a 0.2% monthly increase in earnings is not keeping pace with the 3.66% quarterly rise in inflation by any stretch of the imagination. This is ominous for the long term worth of your savings and your ability to enjoy the same standard of living into the foreseeable future.

And bear in mind, the government has been massaging the heck out of that 3.66% to ensure it appears as “low” as they think they can get away with. Even the government magicians … err, statisticians can’t fight trends, however.

The CPI has been forecast to keep rising thanks to recent brilliant moves by the Fed and Treasury. Right now we’re currently in the calm before the next leg of the storm, if this projection by the Financial Forecast Center is to be believed:

The data provided by the Financial Forecast Center (a service of Market Research International and Applied Reasoning) reveals that not only is there a bull market in inflation but also that you’ve lost a remarkable amount of purchasing power since 1984 when this chart was baselined at a value of 100.

When you consider that your purchasing power has been essentially halved in only 24 years – and that inflation in the next decade should be even more severe – prepare for a financial hangover of historic proportions.

Jobs Are Going,
Going, Gone …

One other thing you might have noticed in the aforementioned Employment Situation table provided by Econoday is the loss of 300,000 jobs month over month. Businesses are being forced to sell off assets, trim their payrolls and otherwise cope with falling profits.

People are getting edgy and worried and it has nothing to do with trepidation over the perfect gift to buy their families for Christmas this year. Instead, some people are wondering if they’ll have the money and security to buy any gifts at all.

And so they’re not shopping much despite the holiday displays going up in malls everywhere. That’s got the government and certain economists all aflutter, as it’s apparently an American patriotic duty to start shopping more. After all, too much borrowing and too much spending in the bubble years was the most likely cause of the current problem, so surely more of the same will magically fix everything forever?

A Trillion Dollar Deficit …
And Counting, And Counting

You’ve probably already heard that a $1 trillion deficit has been forecast for 2009. You may not be aware that it’s been underestimated. Jim Davidson in Forbes has tallied up a few numbers:

That comes to a tad more than $1 trillion, don’t you think? Especially when an additional $800 billion has just been committed to two new loan programs. This balloons the total of all known financial rescue initiatives to $8.5 trillion, according to Bloomberg News.

This is about 60% of the nation’s estimated GDP, with most of the money company from the Fed. Only $3.2 trillion has been used so far, but the recent drop in housing prices alone has shaved about $11 trillion in equity from the market. Even if the government spends all $8.5 trillion, that leaves a $2.5 trillion deficit.

This kind of fiscal madness can only lead to higher interest rates and higher prices. Please refer again to the steadily rising CPI projection we’ve included earlier in this report: It means that higher prices for everything in your daily life will be arriving any month now.

Even if commodities as measured by the various indexes aren’t looking impressive at the moment, the picture below will look radically more bullish six months from now:

So, is there anything to be cheerful about?

Well, at least you’re not Thailand, which has spent the last week destroying its international reputation and domestic economy with a protest group’s sit-in at the country’s two major airports in Bangkok.

Although the week-long sit-in is now over, as many as 250,000 tourists were stranded without a flight home and the airport was unable to process the 3% of the world’s air cargo that it normally carries.

As a result of the fallout from an illegal action the police and military declined to resolve, tourism may collapse by 50% or more next year and up to a million jobs may be lost. This is on top of already pessimistic projections made shortly after the onslaught of the global financial crisis.

What’s worse, the People’s Alliance for Democracy (the aforementioned protest group) is threatening that if the “wrong” party is re-elected in next year’s elections, they’re going to do exactly the same thing all over again. Good-bye tourism and good-bye economic growth for the foreseeable future!

At least in America, airports still function as they ought to and regardless of which political party wins the elections.

Good investing,

Nick Thomas
Analyst, Oxbury Research