David Rosenberg’s Latest Take On The Economy

In his latest Lunch with Dave note, Gluskin-Sheff’s chief economist and strategist David Rosenberg says people are finally coming to grips with reality in realizing how bad the economy is as the Federal Reserve begins to warn towards a second round of QE.

Gluskin-Sheff: “We need a little perspective on the economic backdrop because I am becoming increasingly concerned. The fact that some at the Fed are beginning to warm towards the idea of more quantitative easing, vocal support from a growing number of Democrats to extend the once-reviled Bush tax cuts, and now chatter of another government-led bailout of “upside-down” homeowners, suggests that I am not alone in this concern.

Even before the release of the nonfarm payroll data, we received the ADP number for July, and while fractionally surpassing market expectations, the results were simply awful. To put it into some perspective, when the economy was coming out of its lull in 2003 and 2004 we were already north of 100k on ADP, on a monthly basis, and by 2005-06 we were printing 200k-250k numbers consistently. A 42k print is actually horrible and is telling you that the economy is either fundamentally weak or that companies are still rationalizing on labour.

Again, to put a 42k print into context, it printed 78k in December 2007 when everyone thought a recession was being averted (it started that month). That same month, the ISM non-manufacturing index came in at 52.3 and if I recall, the widespread sentiment at that time was that we were seeing a pause that refreshes. To sum it all up, the data points don’t tell you a whole lot right now that is very good. They certainly don’t give anyone a green light for cyclical exposure any more than the December 2007 data-flow managed to do. And, as for the non-manufacturing ISM, like its manufacturing counterpart, showed that the number of industries reporting “growth” is on the decline — down to 13 in July from 15 in June and 16 in May, and at a five-month low.

What we know is that we are heading into the third quarter knowing that there was minimal growth coming from that key 70% of the economy otherwise known as the U.S. consumer. July’s data on chain store and auto sales were both below expectations. Personal bankruptcies jumped 9% in June (138,000 personal filings during the month) and 2010 is now on track to be the highest in five years, with respect to consumer insolvencies (908,000 thus far or just under 1% of the total number of households). If capital spending is going to do the heavy lifting, keep in mind that just to keep the economy steady, it has to accelerate by nearly 10 percentage points for every percentage point slowing in household spending. Now that is a daunting task.”

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