3/6: Taking the Pulse of the Economy

March 6, 2012 by  
Filed under Featured, Mike Santoli

Mike Santoli

Mike Santoli

Is the U.S. economy really in a recovery?  What about gas prices, and what role could the economy play in this election year?  Associate Editor of Barron’s, Michael Santoli, spoke with The Marist Poll’s John Sparks about this and more.  Listen to the interview below.

Listen to Part 1 of the Interview:


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John Sparks
Michael, some folks are saying our economy is in a recovery.  Are we indeed in a recovery?

Michael Santoli:
Yeah, I mean in most of the measurable ways, we certainly are in a recovery. I mean the basic way is to say that at the end of last year, the total size of the economy, the nominal gross domestic product was basically where it was at the peak in 2007. So in other words, all the economic activity that was lost during the financial crisis and the recession had been recovered in nominal dollar terms, and we’ve basically had positive economic growth statistically for a couple of years now and created close to four million jobs in the last two years. Now, the problem is the hole was so much deeper when this kind of unsatisfying recovery started because the recession was so bad that we haven’t recouped obviously all of the jobs that were lost. It really regained only less than half of the jobs lost. And, of course, the housing market, even though it might be showing a little bit of signs of life, is well, well, well below where it was then both in terms of activity and home prices. So, a lot of the things that people can kind of see and touch and feel don’t really appear as if this is a recovery. But, in the ways that an economist or a commentator would talk about it, yes, it’s a recovery. You’re kind of better off now than you were a couple years ago.

I also would finally point out that over the last 12 or so months, the monthly rate of employment growth is basically the same as it was at a similar point following the prior recessions in the early 2000’s and the early ’90’s in terms of the absolute number of jobs created per month. The problem, again, is that we had lost so many more in this recession that it just doesn’t seem like it’s quite enough. So, I don’t think the economic recovery is doing anything particularly unusual or perverse, it’s just that things had gotten so bad that what’s been achieved since then just based on what the business cycle can do has not really been evident to so many people.

Listen to Part 2:


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John Sparks
One thing that is on my mind concerns oil, Iran, the Straits of Hormuz, rising gasoline prices.

Michael Santoli:
Well, it’s definitely one of the big swing factors from this point on that’s going to determine whether we can kind of maintain this momentum that the economy had coming into this year or not. That’s for sure.  So obviously the fact that gasoline prices are significantly higher now than they were one year ago is going to be a drag, and you see the retail sales numbers were not great this past month, so I do think it’s going to be a bit of a headwind. But, at these levels of both gasoline and crude oil prices, it’s not yet enough to really impede or derail what’s now a decent, if unsatisfying recovery, simply because we’ve been here before in terms of these prices. It doesn’t feel good, but we have. And, also the pace of increase in energy prices has not quite been as rapid as it was say in 2008 when we went from about $100 a barrel for crude oil to $150 in a very short period of time. So, we’re still kind of that in mode of: okay, fine, higher oil prices are more or less telling us that the global economy is demanding more energy and it’s growing to some degree, and then of course you have the Iran stuff that’s adding a premium on top of that. But to me, it’s mostly about the demand continues every single day to slightly outstrip supply, so the trend is higher. So, I do think there’s that risk that that’s the thing that potentially chokes off economic growth here, but we’re not yet at that level. We’re not yet at that real panic point to me when it happens. I would point out too that if you adjust for inflation, the price for a gallon of gasoline in this country throughout history has been between $2 and $4 a gallon, so clearly we’re on the upper end of that range, but we’re not in unchartered territory, and price per mile driven is actually down from significantly from the peak just because we’re a bit more efficient. We’re driving less these days.

Listen to Part 3:


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John Sparks
You’re in an election year.  What can we expect between now and the November elections as far as our economy goes?

Michael Santoli
Well the economy came in — like I say, came into the year looking a good deal better than it did several months earlier just because you had the European crisis that was sort of a finger in the dike there, and the banking crisis didn’t really spill over just yet. And companies here are quite strong, and they’re actually spending a fair bit, and business investment has been pretty good. And the consumer, even though we’re nowhere near the heavy spending days of a few years ago or just speculating on homes and all that other stuff, it’s just in better condition. The cost for the average consumer to service his or her debt is down to levels that were common in the 1980’s. So, even though we have so much debt, people can kind of afford to spend because the cost of servicing that debt is relatively low. So, I do think between now and the election, we probably should have kind of persistent kind of slow growth in spurts and then pulling back to slower growth. So, to me, the trends look like they’re relatively positive going into the election, but I don’t know that it’s going to be so dramatic that it’s going to be quite obvious exactly how, say, the election goes simply because the economy’s gotten up a huge head of steam. I don’t really see that as being very likely. There’s still these constant threats that are out there that could really derail the growth story at any moment.

John Sparks
No president since the Second World War has ever been re-elected if the unemployment rate is higher than 7.2%. Now January, I think we were at 8.3.

Michael Santoli:
Yes.

John Sparks
Will Obama benefit… Will Obama benefit if the recovery goes at the pace it’s going right now?

Michael Santoli:
Wel,l first of all, it’s unlikely that, unless we really go off to the races, that the unemployment rate does go down below 7.2 in the next six or seven months. It could happen, but it’s unlikely. That being said, all those numbers are completely valid except that the sample size is so low. I mean there’s only been a couple of elections when you’ve had the unemployment rate above that level, and I would — I guess what I would say is it’s the trajectory of the unemployment rate that’s probably a little bit more important than the absolute number. So, at this point, the world knows those statistics, and yet the kind of polls and the betting, the political betting sites that you can find out there are still kind of giving a slight edge to Obama, mostly because the incumbent tends to have that advantage, like the home field advantage but… so at this point, I don’t think that the economy is going to be so great that it’s a no-brainer that there’s a second term, but I also don’t think we can cling too tightly to that rule of thumb on 7.2 or plus or minus just because there just haven’t been enough elections to — for me to really think that there’s a ton of statistical significance there.

Listen to Part 4:


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John Sparks
Sure. Now the Dow was just below 8,000 when the president took office, lately it’s been vacillating around 13,000. What do you see for the Dow down the road for 2012?

Michael Santoli:
Well, I actually think it’s a similar story where we’ve come a long way. We definitely have kind of built in a lot of good news into stock prices at this point, but I think we’ll probably have a little bit of turbulence. If tradition holds, you have a little bit of turbulence and a little bit of kind of downward movement maybe into the summer, spring or summer. And then, most likely somewhere around the election, it tends to rebound, and I actually think that business conditions will probably support that. There is an upward bias at this point to the market just because a lot of folks have been kind of under invested in stocks. We… this bull market that’s been going on roughly since, by coincidence, roughly since Obama was in office (I say “by coincidence” because he had the good luck of coming in just after the stock market had been cut in half in a few years.) is — it basically has been tested a couple of times pretty well, so we’ve… It’s not been just sort of like kind of greedy straight up in the sky type of move, it’s been pretty difficult along the way to get from 8,000 to 13,000. But usually there’s a good harbinger that there’s actually underlying business strength that’s driving things, so I think there could be a little bit more upside. I don’t think it’s going to be like the ’90’s where we just kind of coin money just by putting a few bucks in the stock market, but I do think that we’ll probably have a little bit of indigestion period, maybe we back off a little bit in the next several months, and then maybe finish out the year pretty strong. In fact, the pattern historically is that if an incumbent, no matter who the incumbent is, is re-elected, the stock market does better than if the incumbent is voted out, which kind of makes sense because the pre-conditions for an incumbent being voted in again is obviously the world doesn’t look so terrible.

John Sparks
Consumer spending, what do you see the rest of this year?

Michael Santoli:
I think just slow and steady. I really don’t see it taking off. I mean it’ll kind of probably advance in line with job and income growth. There’s definitely been in addition to just obviously being the tremendous challenges of unemployment and great jobs not being abundant, you have a psychological change. I don’t think that people are very willing to take on a bunch of debt just to feed their consumption habits as they were several years ago, so I feel like we’ll kind of just trudge along and grow slowly on the consumer side, but definitely in a positive direction just because people can generally afford to do it in a sober way. And hopefully if job growth kind of continues the current trend, they’ll have the capacity to do that.

Listen to Part 5:


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John Sparks
Do you see anything looming on the horizon that could derail this slow recovery that we seem to be in?

Michael Santoli:
Yeah, the one obvious…  Well, the couple of obvious things, and we already talked about the — an energy shock, which could certainly happen. I mean whether it’s because of hostilities breaking out somewhere, or just because we get this trading move in oil like we did in 2008, people just like pile into it and it creates a shock to the system. A couple of other things that really could go wrong is a major economic accident in China would be a big deal. I mean they’ve basically been kind of managing their economic growth pretty well with certain hiccups along the way, but there seems to be a bit of a real estate bubble there. If something really kind of goes off the rails in China, they’re such an important piece of incremental bit of global economic growth that that’s a problem. And then finally, Europe’s not a done deal. I mean even though we’ve kind of had these measures that have taken the risk of an absolute all out panic and crash off the table for the moment, there’s so many delicate negotiations and so many wild cards over there that it could kind of just feed into the banking system both here and over there very quickly, and I feel like people wouldn’t really wait around very long before getting worried and pulling in loans and tightening up credit and all that kind of stuff again. So, those are the major things that I think that are out there as the obvious risks.  Of course, you always have to acknowledge that sometimes it’s that thing that you don’t predict that’s out of the blue that really hits us.

 

Has the Economic Crisis Bottomed Out?

How long will the economic crisis last?  Associate Editor of Barron’s, Michael Santoli, shared his observations with The Marist Poll’s John Sparks.

Here’s the transcript of their discussion:

Mike Santoli

Michael Santoli

John Sparks
Michael, we conducted a national survey, and we asked Americans how long they think the current economic crisis will last.  I’m curious about your thoughts on that, as well as how does one define that point?

Listen to Part 1 of the Interview:

Michael Santoli
Well, your latter question actually I think is very relevant.  If you consider the economic crisis to be the recession, in other words, a period when the economy is shrinking, I think we’re looking at least another several months.  Really, the optimistic forecast that the economy might get back into growth mode in the very latter part of 2009, maybe into 2010.  If the economic crisis is defined as a period of weak employment when we lose jobs month in and month out, that probably is going to last a little bit longer. Employment is a lagging indicator.  It isn’t going to come back until after the sort of statistical measure of economic growth returns.  But in terms of the crisis that began last year with the financial institutions at the risk of failure and the sort of banking systems ceasing to function and all that, I actually think we’re through the real acute phase of that crisis.  We don’t at the moment have a concern about big institutions falling into chaos the way Lehman Brothers and AIG did, so that real intense period of the crisis might already be past.

John Sparks
Now you mentioned the last few months of 2008.  I recall there was a lot of discussion, especially during the last days of the Bush administration, about when is a recession a recession.  How would you define it?

Michael Santoli
I would define it… I think the standard definition as opposed to the sort of technical statistical definition is a prolonged period when economic output and employment are in decline, and we’ve had that obviously for some time.  A lot of folks want to say, “Well it has to be at least two consecutive quarters of negative gross domestic product numbers.”  I don’t know that that one is sort of sufficiently broad or applicable to every situation, so really an extended period when business activity and retail sales and employment are weak or shrinking.

John Sparks
Now we also asked what people consider to be the most important concern for the economy, and we asked them about unemployment, the stock market, mortgage crisis, interest rates, inflation.  I’m just curious, of those items, what would you think would be their most important concern?

Michael Santoli
Well, the most concern I think for the average household should be the employment situation because it is going to continue to weaken.  It’s obviously… Really it’s a black and white issue for the most part.  If you have a job, you’re much more likely to be okay, be able to kind of cover your expenses than not. It sounds trite, but that’s’ really the defining definition of whether you’re in economic distress or not.  But more broadly, I actually think that the excess level of debt at the household level, at the corporate level, the government level is really what’s weighing all of us down.  So in some sense, it’s the credit crisis which reflects the excess of debt on everyone’s books that is the longer-term concern, and I think it’s the thing that’s going to keep the economy from really speeding up even as it recovers the way we’re familiar with. The recovery is more likely to be kind of muted, and consumers are likely to remain on the defensive.

John Sparks
I want to talk about the stock market for just a moment.  Late last week, the market had a pretty good couple of days.  Do you think that things will get worse before they get better, or do you think we’re beginning to see a turnaround that will continue?

Part 2:

Michael Santoli
Well the stock market’s only shown the tentative signs that maybe it’s in the process of bottoming.  As you mentioned, we had actually four strong weeks from the early March lows in the Dow.  We’re up more than 20% in four weeks, which is obviously a tremendous amount percentage-wise.  Not many people were able to catch it because it happened too fast, and there’s some tentative indications that maybe that low would be the ultimate low, but that doesn’t mean that we’re up, up, and away with the stock market because typically it kind of backs off, maybe even returns to those levels. The bottoming process is usually prolonged and kind of painful.  But with a market down 50% from its peak of 2007, it’s gone an awful long way into sort of building in a lot of the negatives that we all know about, so there is a decent chance that we’ve seen the bottom, but no guarantee.

John Sparks
Now we ask Americans to look at their own personal family finances and tell us if they expected in this next year, 2009, if they expected their personal family financial situation to get better, worse, or remain about the same.  Interestingly enough about 50% said about the same, the rest a little bit of an edge for those that said they expected it to get better. I’m just curious.  Does that seem to jive with what you think will happen?

Michael Santoli
It’s tough to say, although that’s not — it’s sort of interesting that that’s the breakdown, and I think that 50% that figures it’s going to stay the same, it sort of reflects that a tremendous percentage of people in this country have a very steady job and/or kind of retirement income and a very high percentage of homes in this country are actually paid off.  So it’s… even though you hear about the foreclosures and people strapped, it’s not necessarily the majority.  It’s just sort of a large minority.  I do think it’s plausible that things get better for a fair portion of people out there because home prices have come down so much that I do think that even if they just sort of flatten out after a few months here, it will be kind of considered a positive in people’s minds. The other thing to keep in mind is interest rates are so low that a lot of people are going to be able to improve their financial position by either refinancing a mortgage or just sort of swapping to sort of lower cost debt, and so I do think there’s some indicators for the luckier household that it could get better. The worst part, though, is going to be the housing market remains on the defensive. There are too many homes out there. It’s most people’s chief asset, if they have an actual hard asset, and that’s something that we’ve not finished the reckoning process with regard to home prices.

John Sparks
Now we asked people if they felt like things were going in the right direction right now or were things going in the wrong direction as far as ways to address the economic crisis, and not surprisingly 80% of the Democrats said, “We’re headed in the right direction.”  63% of the Republicans said, “No, we’re headed in the wrong direction,” and that brings me to the next question.  A lot, especially when we speak of the stock market, seems to fluctuate so much on emotion.  We all recall FDR saying, “The only thing we have to fear is fear itself.” I wanted to ask you:  Do you think our current president, do you think he can inspire self-confidence in the American public and in the market, and if not, is there anyone who can pull this off?

Part 3:



Michael Santoli
Well, I think he can in a sense that he can kind of deliver the proper messages, which is that this mix of we’re in serious trouble, but we see our way out of it.  It’s definitely plausible that he can get that across, and if he can’t, probably it’d be hard for anybody to do that.  But I do think that what we have to get beyond is this period of kind of improvised responses, and it’s by necessity that the Treasury Department, the Federal Reserve are basically kind of building new tools to try to attack this issue. I do think a big part of what a president has to do is not so much come up with the detailed solution, so to speak, but to kind of send the message and gestures that we’re on the case, things will return, just because the cycle always turns, and kind of to be there when it does improve with sort of a longer-term strategy that’s not just crisis management.  So it’s possible.  I understand why there’s frustration out there, and I do think that we’re in this period obviously of kind of recrimination and sort of who’s to blame for this mess.  A lot of that sentiment out there is understandable, but I think it’s a phase that we have to really get through.

John Sparks
Michael, finally the world has shrunk.  We certainly live in a global economy; and more than ever, there’s an interdependence on the economy of the United States with the markets in Asia, Europe, and the rest of the world.  So just how much do these foreign markets affect our economy, and are there some things that affect us adversely that are beyond our control?

Part 4:

Michael Santoli
Well there’s no doubt. I mean the one huge area of interplay between us and the rest of the world is many parts of the rest of the world lend us tremendous amount of money, meaning our governments and they subsidize our consumption.  Trillions of dollars of our government debt are owned by the Japanese, Chinese, Middle Eastern states.   It’s not necessarily a great position to be in.  For the time being, it’s in everybody’s interest to make sure they keep buying this up because they need to sell to us so… But it’s a tremendous risk down the road that that dynamic will break down, and that would mean higher interest rates and all kinds of bad things for us, like a dollar that goes down in value.  But in terms of other areas that are sort of a net positive, what we found during this crisis was that I think the United States consumption is, it was reminded to everybody in the rest of the world who export to us just how important our domestic economy is to sop up their goods, and I do think that that means that they will continue to do what’s necessary that we can continue to buy their stuff, which also helps keep inflation down here. That’s a kind of a… That’s kind of the positive part of the dynamic. For the time being, we’ve gotten a big tax break in the form of lower oil prices. They’ve been climbing back up a little bit.  They probably will accelerate if the world starts to recover relatively quickly before the United States does, and there’s some signs by the way that China and the emerging markets are already recovering. That could be a risk, too, because obviously geopolitics can also add tens of dollars to a barrel of oil, and we have to sort of be careful of that.  I think the biggest risk, plausible risk near-term, is that all these countries try to get a position of exporting their way out of this downturn, and that they start putting up trade barriers and all that and kind of spook the market.   That really did deepen the depression. The G-20 recently at the meeting kind of vowed that they wouldn’t do that, but that remains a risk in my mind.

John Sparks
Michael, I thank you for your time.  Is there anything that you’d like to add that you think might be pertinent for some of our readers that we haven’t talked about?

Michael Santoli
I think we pretty much hit all of it.  I do think we should sort of keep in mind that a lot of sort of fuel has been thrown at this economy in the way of the stimulus and low interest rates, almost free interest rates to banks, and that eventually will kick in.  We just have not seen that point at which it’s really hit the economy yet, so we have to be alert for the likelihood that we will in fact start pulling out of this thing before too long.

John Sparks
Michael, I really appreciate your time.  Thank you for spending the time with us.

Michael Santoli

Thanks very much. Appreciate it.

** The views and opinions expressed in this and other interviews found on this site are expressly those of the speakers or authors and do not necessarily reflect the views of The Marist Poll.

Michael Santoli

April 14, 2009 by  
Filed under Mike Santoli

Michael Santoli is an Associate Editor for Barron’s, The Dow Jones Business and Financial Weekly.  He writes the “Streetwise” column, offering a forward-looking take on the financial markets, illuminating market trends and identifying investment opportunities.

Mike Santoli

Mike Santoli

Mr. Santoli, who joined Barron’s in 1997, is a regular on-air contributor to several cable and broadcast networks. He is a 1992 graduate of Wesleyan University.