The U.S. Economy: Always confusing, Always Amusing

Forget about the Snow job you'll be fed by our train conductor in the Administration. If you really want to effectively gauge how the economy is doing, you can do so by looking at a very few key trends. Numbers mean nothing. They are static and only give you a snapshot, rather than a movie.

Today's better than expected ISM Report(Institute for Supply Management) is encouraging, but it is the trend that moves markets. The trend in U.S. manufacturing looks very healthy, but will at some point stall. There is even an uptick in the ISM's employment index, which has now been positive for two months.

It appears that the much discussed 'economic recovery' is indeed a reality.

It is the quality of the recovery that is troubling. The housing boom appears to have a few cracks in its quite remarkable armor, as evidenced by slowing growth in single family mortgage applications reported by the Economic Cycle Research Institute. Although still very strong, this important indicator has slipped. Consumers are burdened with record levels of personal debt, and our real earning power is in decline. I don't see earnings power improving in any reasonable time period.

All of this is well and good, but what are those few indicators, Todd? Okay, I'll tell you. The one leading indicator that will tell you as much as any ten economic theories is the trend in the price of copper. Yes, that reddish common metal is a very strong indicator of economic trends. Copper is still trending upward, and is almost always correct as a leading indicator of economic trends.

The other one indicator is actually two rolled into one. Jobs, and earnings. A trailing indicator, as companies wait to see 'real' improvement before they begin new, or replacement, hires.

Contrary to much of the rhetoric of the GOP, U.S. real jobs and earnings growth isn't anywhere near historical levels this far into a recovery. This is going to really test the strength of this economic cycle. The quality of earnings -- the amount that one earns, and what those earnings will purchase -- is troubling as well. In order to remain competitive in world makrets, many of the best paying jobs have left the U.S. and are simply not going to return. The service sector has been bleeding jobs over the past couple of years, whilst the manufacturing sector has been loding jobs over the past 30 years.

Short term, this is what I see. A slowdown of economic growth beginning in the second quarter of 2004. A marked decline in housing prices at some point. I have no idea how long the current bubble in housing prices will last, but I am confident that the market will correct. This is the short term view. Pretty neutral overall.

Big wildcard: The U.S. dollar. I have no idea how fast and how far the buck will go. Currency devaluation could easily undermine any recovery.

Longer term, I see trouble. Once the boomers start retiring in droves, you will see a period of rapid economic change. Social Security increases will be a certainty given the massive voting bloc of retiring boomers. Housing prices are likely to fall precipitously as the boomers move into smaller quarters. Some areas of the country will be a true depression due to the exodus of the boomers.

Of course you can plan for this transition. Keep your eyes focused on both the big picture and the smaller details. The aging of America will be dampened by immigration, but this is likely to be a small part of the economic picture.

That's the view from a completely armchair economist. I know I'll be wrong about some of this, perhaps all. But some of these are real trends and are not going to go away.