When John Fogerty wrote and released Proud Mary in 1969, the unemployment rate was 3.4%.
3.4%! Amazing. And that was back when the unemployment rate was measured more honestly, too. It was before the unemployment calculation was split into six different flavors.
Depending on where you set frictional unemployment, 3.4% is actually better than “full employment.” Let all that sink in for a moment before we dig into some culture and economic analysis.
The United States is a very angry, divided place today. It is certainly more angry and divided than at any point in my lifetime. But I’m not certain it is more angry and divided than at any point in my parents’ lifetime. Ma Concord was a flower child and had a front row seat during the counter-culture revolution. I never get tired of bouncing my Gen X perspectives off of her Boomer worldviews. It’s always useful and interesting. The rolling river of history is a fascinating thing.
But the 1960s were an angry and divided place for a set of completely opposite, complementary reasons. The economy was rocking back then and everybody who wanted a job had one. I think a lot of people in my generation are tickled by the idea of “not wanting a job,” especially now that we’re all in our 30’s and 40’s. For most of our lives, how many things have we wanted more than a satisfying, high-paying job?
Raise your hand if you had this poster hanging on your wall when you were a kid or in college.
I’m sure a lot of Gen X hands just went up!
We forget that it wasn’t always that way:
Left a good job in the city
Workin’ for the man ev’ry night and day
And I never lost one minute of sleepin’
Worryin’ ’bout the way things might have beenBig wheel keep on turnin’
Proud Mary keep on burnin’
Rollin’, rollin’, rollin’ on the river
Proud Mary would have been a classic regardless of when it was released. But it’s hard to imagine a song like it being recorded in any other era. Give it a listen. It would have been laughed straight out of the 1980’s.
Creedance Clearwater Revival has achieved timeless status now, of course. I still listen to them, and at some point, my kids probably will too.
But there aren’t many people down by the river today, and virtually no one is giving up their good jobs in the city.
In that sense, the economy is hanging in there. Preliminary unemployment data — the BLS’ jobless claims & ADP payrolls figures — are indicating stability in the labor market. The official jobs number tomorrow won’t be a ray of excitement, but nor will it suck. We’ve been talking about that for a while, of course. The labor market is just treading water, slowly, steadily drifting along while far more powerful economic currents carry it down the river.
One of those currents is consumption.
Consumption is hanging in there too. But unlike the labor market, which suggests zero indication of suddenly getting worse, consumption may be flashing signs of forthcoming deterioration.
FedEx Updates Guidance
I’m not sure if there’s a better bellwether for the U.S. economy than a company like FedEx or its counterpart, UPS. Earlier this week FedEx revised its guidance lower. When companies lower guidance, it’s important to note.
See, the way it works with analyst estimates is kinda broken. They’re always low — whether that’s because companies lowball their guidance or analysts intentionally under-forecast — so companies always beat earnings. At least during an expanding economy. Analyst estimates are never high enough on the way up (and never low enough on the way down).
So when companies lower their guidance or a company misses estimated earnings, it’s a big deal, a much bigger deal than when they beat earnings. Companies have beaten earnings this year at rate of something like 75-80%. I’m interested in the other 20%.
UPS has had similar struggles this year. They haven’t slashed their official forecasts, but the market has sort of done that for them:
UPS and FedEx are incredibly important companies. They’re economic bellwethers, but they’re also each an integral part in how the modern economy works. I know that economists have been talking about this trend since 1998, but every year consumers buy relatively less stuff from physical locations and relatively more of it from the internet. This is a secular shift and representative of a new paradigm. This trend isn’t going to reverse any time soon.
UPS and FedEx are the companies that make that all happen. For many retailers, it’s cheaper to not maintain a physical presence and instead just rely on UPS & FedEx to ship your wares to the people who want to own them. Or use these companies and this technology to reach customers you’ve never reached before.
For what it’s worth, these are probably good companies to acquire on a dip. I like to own systemically important companies. Neither one of these businesses are going to go away in the next decade. Both will legitimately strengthen alongside the economy. And I think both are businesses that grow at a rate greater than GDP for the foreseeable future. For long-term investors, those are the types of questions to be asking.
Today, FedEx is a little cheaper and has a slightly cleaner balance sheet. But UPS pays a 3% dividend. They correlate very closely, so pick the one that suits you better.
(FULL DISCLOSURE: I don’t own either one at present, nor does my firm.)
ISM Getting Weaker
Here’s another thing that I’m watching closely:
The ISM Purchasing Managers Index just posted its third straight month under 50. Readings under 50 indicate contraction in the manufacturing sector. Granted, those readings were 49.7, 49.8, and 49.6, not exactly extreme enough to shout “fire!” But those are the lowest post-2009 readings that we’ve seen. If you need evidence that the economy has completely flat-lined here in the third quarter, look no further.
The most concerning thing about that chart is the vector. After a surge at the end of last year, 2012 has been something of a freefall. I’ll admit, shortly after predicting that 2012 would be an ugly, slow one for the economy, I had a lot of second thoughts. But quarters two and three were indeed ugly and slow — uglier and slower than nearly every analyst on the street forecasted. And what about Q4, when uncertainty about next year’s fiscal policy reaches a peak? When confidence is low and nervousness is high? What will consumers do then? I’ve been wrong about consumers every step of the way, so perhaps it’s best to ignore me here!
Regardless of my misguided opinions, every analyst on the street has been revising their 3Q GDP estimates to include a 1- handle. 1% economic growth is functionally equivalent to an economic flatline.
Remember, analysts usually lag the market. If you want a more accurate read on the present or the future, you have to look elsewhere.
The Chicago Fed publishes a really cool economic indicator called the National Activity Index. Nobody follows it and it’s awesome. It’s probably one of the best real-time economic indicators out there. If you want to geek out about how it works, check out this white paper. Otherwise, all the rest of us need to know is that this index gathers data from 85 different economic indicators from 4 broad categories and has a really cool method for weighting them all.
The CFNAI shows the same cliff dive in 2012 that the ISM-PMI does. We’re certainly not at panic levels here, nor even levels that indicate that the economy has definitively slipped into recession. (Per the Chicago Fed, a -0.7 reading on the 3-month moving average is an important threshold.) But this is yet another data set that suggests that the economy may be at a critical juncture.
That may or may not make you feel slightly uncomfortable with the policy uncertainty that looms in 2013. Guys like me are obviously concerned about it. But is the average person on Main Street? I’m not sure. At 8.3% unemployment and slowly dwindling real median incomes, life on Main Street is far from awesome. But it’s not something that’s showing any signs of impending disaster. Main Street is simply going about its business, doing the best that it can.
In fact, that’s the undeniable bright spot in the economy right now. At least in relative terms. Consumers have been consuming! So far this year real personal consumption expenditures have grown at about a 2% annualized rate. That’s enough to hold the economy together.
You can see, though, that if consumption slows or stops this whole thing could completely fall apart.
And that’s part of the reason why the latest FedEx story has me a little concerned. When FedEx lowers its guidance, that’s an indicator that less stuff is moving around through their network. And when less stuff is moving through FedEx’s network, it means that consumers are pulling back and consuming less.
These are the worries I have today. Worries that nobody really had back in 1969.
Four Walls and Adobe Slats
Life is different now for us Gen Xers. We didn’t to live up to our potential and the great expectations our parents had for us. We became parents ourselves. We bought Toyotas. We got fired for economic reasons. Life has beaten us down and we’ve re-aligned our priorities. We chuckle at that old “Justification for a Higher Education” poster. Heck, a disproportionate number of my friends have PhDs and half of them are broke!
But I think the biggest difference between my generation and my parents’ is that we lack the optimism that they had during the meat of their careers in the 80’s and 90’s. They spent the majority of their lives always expecting things to get better, better for them and better for their children. Given the last decade and what we’re about to go through in the next, the hallmark psychology of my generation will surely be a lifelong worry that things will get worse. Not necessarily a pessimism. But rather a looming concern that we’ll lose even more of what we’ve already lost. The Baby Boomers are struggling with that too, of course, but it wasn’t what defined their career and consumption paths. And that’s to say nothing of all these Millennials, who are struggling to even enter the workplace.
None of this is without good reason. The environment is the way that it is because of who we are and we are who we are because of the the way that the environment is. This feedback loop is the mechanism that powers the cycles of history.
When Animal Collective recorded My Girls in 2009 — four full decades after Proud Mary – the unemployment rate was on its way towards peaking at 10.1%. U-6 was peaking over 17%.
Could any other song have possibly been a better fit to shoot straight to the top of the charts? The culture vultures at Pitchfork named it the #1 song of 2009:
I don’t mean to seem like I care about material things
Like our social stats
I just want four walls and adobe slats for my girlsThere isn’t much there if I’d need
A solid soul and the blood I bleed
With a little girl and by my spouse
I only want a proper house
This is the Gen X psychology of today. Gone are the dreamy posters of mansions and Ferraris. But so are the dreams of hanging out down by the river. Our path was different, and volatile in very different ways. But we finally made it to The Middle. All we want is four walls and a roof over head, enough for our family to get by.
Oh, and a relatively low risk investment that yields 5% would be nice too.