Economic Commentary
Daniel Laufenberg, Ph.D.

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Essay No.1 - Costs
Essay No.2 - Revenue
Essay No.3 - Budget Deficits

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). Therefore, this page is designed to provide commentary on the more recent data and their implications for the economic outlook.

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Consensus too pessimistic about everything
(April 16, 2012)

The Laufenberg Quarterly outlook for 2012 is little changed from a month ago. The expansion
continues, inflation is relatively mild, the unemployment rate continues to decline, interest
rates stay unusually low, and corporate earnings remain high. For the most part, these are
also the same basic features of the consensus forecast, although they may differ in terms of
degree. For example, real gross domestic product is expected to increase somewhere in a
range of 2.0% to 3.5% for all of 2012. The consensus seems to be closer to 2.0%, while my
forecast is closer to 3.5%. The key to this difference once again will be consumer spending,
which I expect will surprise the consensus on the upside over the four quarters of 2012.

In particular, consumers’ wherewithal to spend will climb, reflecting solid jobs growth that in
turn will lead to solid income growth. In this regard, the March employment report was
perceived to be disappointing. I disagree. Indeed, I thought it was on track to deliver my
forecast of 3.2% real GDP growth this year.

The concern was that payroll jobs in March did not increase as much as expected by the
consensus; that is, an increase of 120,000 rather than the consensus estimate of 201,000.
Indeed, the whisper number before the data was released was even stronger. I believe that
this concern is misplaced. My forecast for payroll jobs growth in 2012 is 210,000 a month or
roughly 2.5 million jobs for the entire year, which would be higher than the 1.9 million new
jobs for all of 2011. Through March, nonfarm payroll employment has increased an average
of 211,000, very much in line with my estimate. I expect that payroll job growth will continue
to be uneven from month to month over the remainder of the year—much like it always is—
but that it will total about 2.5 million new jobs by year end.

In addition, market participants seemed to dismiss the fact that the unemployment rate
slipped lower by another 0.1 of a percentage point to 8.2% in March. The commentary around
this development was that the unemployment rate fell for the wrong reasons—the labor force
declined more than employment in the household survey data. First, recall that the
household survey is not designed to provide employment data from month to month but
rather to generate an estimate of the unemployment rate only. In other words, the only
meaningful statistics in the household survey data worth considering in any one month are
the unemployment rates and not the level of employment or unemployment.

Over a longer period, thanks in large part to revisions around benchmarks, payroll jobs in the
establishment survey and total employment in the household survey generally track in the
same direction if not at the same pace. For example, over the twelve months ending in March,
the labor force has increased less about 1.3 million, while the number of employed persons
increased 2.4 million. In the establishment survey, total payroll jobs were estimated to have
increased 1.95 million. Remember, the household survey is designed to generate ratios and
not levels.

Second, the unemployment rate for adults (age 20 years and over) in March fell to 7.5% from
7.7% in February. Unfortunately, the unemployment rate for teenagers rose to 25% last
month. Ugh! It appears that any hesitation on the part of employers to hire in recent years
has been in large part aimed at teens. The unemployment rate for teenagers reached a record
high 27% in Oct. 2009 and again in Oct. 2010, and has remained stubbornly high since. By the
way, the unemployment rate for people age 25 years and over slipped to 6.8% in March from
7.0% in February. Although this is still well above the level considered full employment, it is
a lot closer than the overall unemployment rate that includes teens. Productivity
improvement, which is essential to U.S. employers if they are to compete globally, may be an
issue with hiring teenagers, especially given the uncertainty around the future cost of such
hires.

Jobs will grow, the unemployment rate will fall and average hourly earnings will increase. As
a result, consumers will continue to acquire the wherewithal to increase spending. Although
personal income grew a mere 2.6% over the year ended in February, it was not because of
sluggish gains in the wages and salaries component of personal income. This component,
which represents over 50% of all personal income, increased 4.4% (5.4% for the private sector
alone) over the same period. In addition, personal dividends and rental income of persons,
both additional components of personal income, increased rather sharply (5.0% and 14.7%,
respectively) over the last year. What did not do well was personal interest income, which fell
3.1%. Such a drop in interest income should not be surprise given that interest rates have
been at historically low levels for a considerable time. By now, most debt obligations that
paid a high coupon have been called, have matured, or have been refinanced. For this reason,
my more optimistic assessment is that interest income may not fall much further, as investors
tire of zero interest on cash and start to stretch a bit more for return.

This stretch for yield may generate some interesting new financial products. Of course, given
that the tax and interest rate incentives favoring activity in the shadow banking industry are
still in place, financial regulators will need to be particularly vigilant to guard against bad
behavior. Unfortunately, it is difficult for regulators to identify bad behavior until after the
fact. But this is a subject to be discussed another time.

In addition to more income, consumers now seem to have the capacity to borrow again.
According to the Federal Reserve Board, the share of income used to service household
financial obligations has plunged to a level last seen in the early 1980s. This suggests that the
household sector’s relative cost of servicing its financial obligations, including mortgages,
currently is less than it has been anytime in the last 30 years. This does not bode well for the
saving rate over the next few years or so.

The bottom line is that consumer spending is expected to support solid real GDP growth in 2012
and probably again in 2013 despite some potential policy headwinds. Clearly the key to this
outlook will be jobs, but probably not as many as most seem to suggest are needed. period

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For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

Dlaufenberg@stonebridgecap.com

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.


2012 Commentary

Consensus too pessimistic about everything
-- April 16, 2012

Risks to the forecast
-- March 7, 2012

A good finish to 2011 but still not good enough
-- January 27, 2012

2011 Commentary

More evidence of a strong finish
-- December 22, 2011

Finishing Strong
-- October 14, 2011

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

Surprise!
-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

2010 Commentary

What's going on?
-- October 15, 2010

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