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Soft Spots Go Beyond Employment

Posted By Barry Ritholtz On January 17, 2006 @ 6:30 pm In Earnings,Economy,Employment,Inflation,Real Estate,Retail | Comments Disabled

One of the odder bits of analyses we have happened across over the holidays is this bit of explicative: “Of course employment has lagged prior recoveries, as we have been adding jobs from unusually high levels of employment.”

As you may have surmised, we find this explanation
wanting. First, it fails to address the issue of NILFs [1] – the millions of people who are no longer in the Labor force (See Participation
Rate, 2000-2005
). As we
have noted before, the basis for this is the false comparison with prior post
WWII recoveries, rather than post-Bubble
environments
.

Second, it fails to recognize that across the
entire economy, the recovery has been sub-par. As the nearby chart reveals,
excepting Real Estate, all other areas show relative weakness to prior
recoveries, including GDP, Personal
Income, Consumption, Equipment
and
Software
.

Indeed, recent data has revealed several ominous
signs about the economy. The holiday shopping season was significantly
below
consensus
. We also expect that prevalent deep
discounting will affect Retailer’s profit
margins
; we interpret these data
points, combined with the generally weak December Retail [2], as proof
the consumer has finally started to tire. And, it has only begun to bite into
sales.

Also noteworthy is that even Real Estate [3] has started to show
signs of distress
. Inflation, driven primarily by overseas
commodity demand, remains robust, and the Fed can do little about it [4], short
of inducing a global slowdown. And as recent events in Nigeria and Iran have made all too clear, the world’s economy is hardly insulated from the impact of yet another energy shock.

Thus, it is against this backdrop that we begin what is likely to be the last earnings season [5] of double digit growth. With 67 S&P members reporting this week, and nearly half – about 30 – in the financial sector, we will get an early read on
how the flattened and just inverted yield curve is impacting earnings of this key sector. We are expecting only a modest influence on
financials as of yet. The more pronounced effects [6] may not be felt until later
this year.

Besides, the bulk of the S&P500 year-over-year
earnings gains have not been reliant on the financial sector. Instead, about
half of the gains [7] have been a function of energy sector earnings. We can chalk
up about a third of the year-over-year
gains
to the half a trillion dollars
in share buybacks last year
. Thus, market gains remain perversely dependent
upon high energy prices and share repurchases – hardly the historic basis for
sustained performance . . .


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URL to article: http://www.ritholtz.com/blog/2006/01/soft-spots-go-beyond-employment/

URLs in this post:

[1] NILFs: http://bigpicture.typepad.com/comments/2006/01/whos_dropping_o.html

[2] December Retail: http://bigpicture.typepad.com/comments/2006/01/december_retail.html

[3] Real Estate: http://bigpicture.typepad.com/comments/real_estate_/index.html

[4] about it: http://bigpicture.typepad.com/comments/2006/01/has_the_fed_kep.html

[5] earnings season: http://bigpicture.typepad.com/comments/2005/02/how_to_use_earn.html

[6] pronounced effects: http://bigpicture.typepad.com/comments/2004/02/chart_of_the_we_2.html

[7] half of the gains: http://bigpicture.typepad.com/comments/2005/10/earnings_withou.html

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