Ask five economists what the economy will do and you’re likely to get five different explanations.  Unlike calculus which has right and wrong answers, economics is a combination of math, art, science, and divination.  That’s why there’s so much disagreement.  Where one economist’s tea leaves point up, the other economist’s pig entrails point down. Determining where we are in the cycle is just as questionable. Still, we humbly offer some thoughts for your consideration.

About a week ago, the official August unemployment report was released. According to the Bureau of Labor and Statistics (which many suggest underreports the bad news), total unemployed including “marginally attached workers, plus total employed part time for economic reasons” has climbed to 16.8% – up 54% compared to last August. That means 1 in 6 Americans are either jobless or delivering pizzas to keep their refrigerators stocked.

Most of us feel the pain. That’s probably why consumers aren’t buying as many Starbucks Caramel Macchiatos or Whole Foods organic quail burgers.  The spending contraction is real and sustainable.  Our buying habits have been changed by our shrinking paychecks – both at home and in business. This will not abate anytime soon.

In addition to consumer problems, five more regional banks were closed on Friday (9/4/09), bringing the 2009 total to 89 and climbing.  I don’t expect the JP Morgans or Wells Fargos of the industry to fail, but bad loans are still hurting smaller institutions. Time will tell how many other banks  succumb to default risks.

These and other reasons are why one of those aforementioned five economists is reading negativity in his economic horoscope. NYU Stern Business School’s Nouirel Roubini said…

“I believe that the basic scenario is going to be one of a U-shaped economic recovery where growth is going to remain below trend … especially for the advanced economies, for at least 2 or 3 years…Within that U scenario I also see a small probability, but a rising probability, that if we don’t get the exit strategy right we could end up with a relapse in growth … a double-dip recession”

But what about the market? Isn’t it pointing up to a recovery with its generous uptrend?  I agree – it’s hard to argue with a chart. Since the early-summer doldrums, popular wisdom of “sell in May and go away” has proven bad advice.  But need I remind you, dear student of the market, we just started September. Our dreaded October is a mere 3 weeks away. There are many days left in 2009.  Determining what happens between now and then is a matter of conjecture, math, and tarot cards.

Brandon Clay
Invest With An Edge