March Tatum/Roulston Report

March 7, 2013

There is a reason this economic cycle is different. This month showed a significant improvement in virtually all areas of the Tatum Survey of business climate. As corporations and banks are awash in cash they are cognizant that returns are not available in non-risk assets. With a deficit of demand they are only looking to spend cash where revenue or productivity can be gained. Only since late 2012 have we seen a slow transfer into the stock markets from cash and fixed income. Coincidentally the survey shows banks are making credit more available.

So what is different? Consumer confidence and debt usage is rising primarily with student loans, auto loans, credit cards and even mortgages off their lows. We believe this is reflecting the period of time since 2008-09 that has passed creating higher comfort in stability of the economy. The Fed’s QE battle encouraging more aggressive lending practices is having an effect. Reaching this acceptance at some point was inevitable with so much cash being pumped into the system. This just took us longer than any prior recovery.

So let us look at some consumer behaviors. In the auto industry, it just stands to reason that some folks who are still employed (93% of the employable work force)  reach a point where they must purchase a new car (usually an early purchase in a recovery cycle) or other necessary items. Although those with higher incomes are not as economic sensitive, once a car gets to a certain age the marginal buyer (the majority) face car maintenance decisions that make purchase of another car more prudent. The cycle is extended when these decisions are delayed and sped up when the decision to replace the old car is decided. There has been a shortage of used cars due to both the extended new car cycle from the depressed economy and the fact that many cars going into the used car market are in worse condition (i.e. there is more wrong with the cars). Thus the new replacement cycle has arrived and although delayed has been providing some economic support. Housing is bottoming by any measurement after a multi-year free fall. But it has simply stabilized. It has a long way to go to reach 2007-08 prior highs and don’t expect it. That was credit induced and that bubble level is not coming back any time soon without another bubble occurring. Yet the stability now gives consumer some confidence of not getting worse.  Foreclosure activity at double digit numbers is still a historically unchartered impact. This liquidation will continue to be a head wind, but overall housing should no longer be a drag and confidence should improve as the consumer gains confidence that their biggest asset is no longer declining. Finally, although credit card usage will grow don’t look for this debt increase to be an economic catalyst.

The real takeaway in the Tatum Survey is the tenuous stability occurring. Corporate confidence is reflected in employment and spending. Companies tell us they now feel they can cautiously replace critical needs and nothing more without visibility which means limited revenue and economic growth. With the current regulatory environment acting as a growth inhibitor in many industries, it is easy to see that GDP growth will not be a tail wind like past recoveries. Thus employment will not materially improve and inventories and cap spending will probably only grow in fits and spurts. This has not been and is not going to be a traditional recovery. Companies will have to get smarter with the allocation of resources. Our world economic culture is digesting an onslaught of information and technology. The convergence of productivity, forecasting and technology will be challenging with different skill set combinations than we have ever seen. Using data to be competitive will personalize the consumer and customer. Corporations will have to manage resources more effectively than ever. Certain industries will be handicapped with regulation hindering growth. Health care, finance, and energy are some examples with significant lack of clarity. It is not that these industries won’t grow, its just they have less confidence in their forecasting and therefore the velocity with which they will spend and move forward will be slower than otherwise. Thankfully energy technology may decrease the influence and volatility from outside global participants which has been a decades old wild card in so many ways. The U.S. in particular may become more energy independent decreasing our reliance on such an unpredictable and significant economic challenge. The value of this should not be underestimated.

The debt of government and the consumer won’t disappear any time soon. These will also not be the historic catalysts of past recoveries. Without the traditional engines of economic growth industries will also struggle with the headwinds of export weakness with the European slowdown. What will happen in the Far East seems to be a question with different daily answers. The Middle East continues to be a ticking time bomb. Washington is an environment that is better than 2008-09 and the volatility that followed the housing bubble. We now must overcome the hangover of the debt bubble which must be addressed for longer term market comfort. Corporations, the banking industry and the consumer have made progress. This has increased confidence in short term stability. Markets hate uncertainty. But with more time and comfort, the markets are responding to the Federal Reserve stimulus. Inflation is still the nemesis that could bring the house down but that is not on the short term concern list. We feel at this point that some stability has been obtained for the first time in the last five years and that is good for markets at this juncture. With so many moving parts from domestic and world politics to the challenges of the new economic reality of debt digestion, lack of economic growth and technology we have more uncertainty. This creates more market volatility and less confidence to spend and grow. Our challenge is to adapt in a more unfamiliar environment. To view the tatum survey please visit March_2013_Tatum_Survey.

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