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We survey Lehigh Valley businesses on a quarterly basis, and collect around 700 observations per year. The Employment and
Purchasing Index for the Lehigh Valley shows the results of these surveys. In January 2011 we conducted our
48th survey of this series.
Local businesses grow sharply optimistic during the first few months of 2011. That optimism faded away by the summer
of 2011. However, in the last two observations, October 2011 and January 2012, the index has risen positively twice in a row.
Our survey of Lehigh Valley businesses indicated that they are continuing to hire more people than they have been laying off
in the last six months. An average participant in our survey has gained 0.6 employees in the last six months. While this is not
yet at the pre-recession hiring level, it is a far cry from 2009 when an average survey participant lost 0.8 employees.
While local businesses were not all that enthusiastic about their hiring plans for the next six months up to last October,
the January results indicate a spike in enthusiasm of local businesses for hiring more employees in the next six months.
It should be noted that local businesses were usually somewhat over-optimistic in their predictions of how many people they
were planning to hire. Hiring plans, started to closely resemble actual hiring for the last three quarters of 2011.
In January we observed the first significant improvement in plans for future hiring in more than a year. This spike in
plans for future hiring pushed expectations of future hiring significantly above the actual hirings.
Purchasing plans for the next six months is another indicator which has shown significant disassociation with the actual
expenditures of the previous six months. This indicator has been dropping for the last 4 quarters, while actual purchases
has been rising rapidly since July 2011. It should be noted that the "actual purchases" index represents "where the rubber
meets the road." Participants are telling us of the changes in their actual expenditures in the last 6 months as it compared
to its previous six months. An average company participating in our January 2011 survey reported 3.6% increase in their
expenditures in the last six months. This comes on the heels of 1.8% increase reported in October 2011. These are major
increases, considering that in the previous 4 quarters to these increases, the average increase was actually a decrease
of half a percent per quarter. Here again there is a disassociation between the actions of previous six months and the
plans for the future six months.
Prior to The Great Recession plans for future purchases and actual purchasing closely followed one another, halfway through
The Great Recession plans for future purchases became significantly more optimistic than the actual purchases. This dichotomy
continued through the first half of 2011. In the last six months however, plans for future purchases have dropped significantly
below actual purchases.
The Overall Index of Employment and Purchasing for the Lehigh Valley has been rising since October 2011, however the rate of
increase is at a relatively slow pace. It appears that, while businesses are increasing expenditure at a healthy rate, they are
uncertain of their own ability to continue that rate of growth in the future, thus future planned expenditures have dropped below
the actual expenditures. There are a number of explanations for this dichotomy, the one I would like to pick is that most local
businesses are underestimating the rate of the recovery and that's why their actual expenditures is growing faster than their
plans. And this could be very good news.
The economy appears to be doing better than what we think. My expectations are that Lehigh Valley's economic performance this year
would be measurably better than 2011. Local employment will increase throughout the year, and expenditures by local businesses will
show significant increases in 2012.
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The October 2011 Kamran Afshar-Greater Chamber Survey recorded a slight improvement in Lehigh Valley
business sentiments above its July 2011 level, this was achieved solely due to a significant
increase in participants` expenditures in the previous six months the other, indicators recorded
declines from their July levels.
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This is the second time, in the last 100 years that the US economy goes through such a long and devastating
economic downturn. The previous one was call the Great Depression, and this one is called the Great Recession.
During the first act of the Great Depression, for 43 months, from August 1929 through March 1933, the economy
crashed, banks failed across the country with people losing their life savings, banks foreclosed on hundreds
of thousands of farm properties, stock market (DJIA) dropped from a high of 386 to 41, and unemployment
skyrocketed to 25%. The second act of the Great Depression started after the Federal government announced
significant cut backs in expenditures associated with the "balanced budget act" of 1937. This one was a
13 monther starting May 1937 and ending in June 1938. It should immediately be noted that the current
economic situation's resemblances to the Great Depression is only at the emotional level. The economic
devastation back then was of a totally different order of magnitude.
Personal consumption expediters constitute 70% of total Gross Domestic Product of the United States. Historical data shows that
people spend money in relationship with their income and wealth, both current and the expected. While we all have expenditures
that we can't avoid, like food, mortgage (or rent), transportation expenses and a few other necessaries, the rest of our expenses
are more subject to personal decisions. It is this process of decision making which is most affected by current and expected
future income and wealth.
Forty-five months into this Great Recession, the number of people out of job is at historically high levels (higher than during
the Great Depression.) Another factor which is also devastating to the economy is that the average duration of unemployment has
now exceeded 40 weeks. A number which has not been seen, again, since the last time things got to be really bad. Just for
comparison purposes, looking at all the recessions since the Great Depression, the average duration of unemployment never
exceeded 21 weeks, about half of today's level. This outlook does not encourage a lot of discretionary expenditures.
The other leg of the triad, wealth has also been under fire. People of wealth hold most of their assets in the stock and bond
markets as well as real estate. The first two present no directional confidence and the third one, real estate, has wiped out
almost half of its investors wealth. Again, we haven't seen this level of trauma since the bad economic days of the 1930.
Expectation is the third leg of the triad, and that is being pummeled by our elected representatives' inability to do their job.
Low consumer expenditure means low demand for goods and services, low demand for goods and services means, businesses do not need to
hire more people. Fewer people with jobs means lower demand. This could become a vicious circle making the economy even worse than
it is now. Government expenditures, historically, have been used to break this vicious circle and kick start the economy. The
stimulus package only allocated 7.4% of its massive size to construction. Economists consider expenditure on construction of
roads, bridges and buildings the fastest way to create new jobs, this industry hires a lot more people for the same money and
has one of the highest multiplier and spread effects among all industries. A good 38% of the stimulus package went to tax
breaks, which are a lot less effective in stimulating the economy in the short-term and particularly when people and
corporations are experiencing economic losses. It should be emphasized that at times of economic emergency, like now, the
short-run should be the focus. So how effective was the stimulus package, the impact of its 7.4% was huge, but it was far too
small to create sufficient upward momentum toward a recovery. It should be noted that there are multitude of references in
historical data that show how effective expenditures on roads and construction have been in creating large number of jobs
during hard economic times.
We are in a strong economic slippage, and we have to focus on short-term solutions to get out of this, so that we have a chance
to then concentrate on long-term solutions for a sustainable economic growth and to prevent something like this from happening
again.
In 1936, with deficits annual reaching $4 billion (a huge number for that time), with no relief insight, the intuitive cry of
balancing the budget was loud and clear. The counterintuitive discussion about about a complex circular flow of money and income
and multiplier and spread effects, was hard to believe at the time. The intuitive "balance budget act" of 1937 opened the
second act of the Great Depression resulting in the unemployment rate to rise almost 5 percentage points and the economy to
slip back into the depression.
And of course, now with Washington in total gridlock, there is little chance of government being able to play a major financial
role before the next year's election.
The war over ideology appears to have taken over, at the time that we can least afford it, and our elected representatives are
offering simplistic and intuitive solutions to very complex problems, again not dissimilar to 1936. One can only hope that we
have learned from history and will not repeat the same mistakes again.
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Business Sentiment in the Valley dropped for the second quarter in a row. Businesses cut back on their expenditures
during the 6 months ending in July 2011. However, at the same time, local businesses hired more people than they laid off.
The July Purchasing and Employment Plans Index for Lehigh Valley dropped to 55.2 (adj) from 57.9 in April 2011. This is the
second drop in a row for the index. The index is now in a statistical tie with its July 2010 level; the first time since 2009
that the index has not exceeded its previous year's level.
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The DJIA was flirting with 13 thousand, in early May, only 9% shy of its highest close on October 9, 2007.
But the rest of the economy is nowhere close to 9% off its highs. Are Wall Street and Main Street in the
same universe? Or is Wall Street totally on its own and has nothing to do with the rest of the economy.
At the height of the previous boom, civilian employment was around 146 million in the US. Employment level started to drop from
6 months after the start of the Great Recession. By the end of 2009, civilian employment shrunk to 138 million, a loss of
8.6 million jobs. DJIA dove from its October 2007 peak of 14,164 to a low of 6,531 (March 5, 2009). For the balance of 2009,
DJIA rose, ending the year at 10,428, a gain of 60%. DJIA continued to grow through 2010 and also in 2011. As of this writing,
DJIA has dropped slightly below its post recession high of 12,928 which was achieved in May 2, 2011.
DJIA is currently around its 2006, early 2007 levels which was associated with employment level at 144 to 145 million
(close to the height for employment of 146 million.) But current employment level at 140 million, is barely above its lows
for this recession, and does not appear to show any upward momentum. It is rising at very slow rate of 115 thousand a month
in 2011. (At this rate it would take 50 months to get back to where it was in 2007.)
It is very clear that "Wall Street is not related to Main Street" is more than just a metaphor, Wall Street is in its own
universe separated from the rest of the economy. However, it appears that on the downside, Wall Street has a lot of dependence
on the rest of the economy. If it wasn't for direct interventions (bailouts, TARP, QE-1, QE-2, etc.), companies like, AIG,
GM and a number of major banks and a few of the brokerage houses would have not been around. It could be that all the bailouts
and financial easing has created an unrealistically high level of liquidity in the financial markets. And Wall Street is again
playing the high risk games which caused the financial crisis in the first place.
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The rate of inflation rose by 0.5% in May 2011, that is 6.0% at annual rates. And this was not the first,
second or the third high monthly inflation this year; inflation for the first 5 months of 2011 is 2.6% which
translates to 6.3% at annual rates. This is not unprecedented, the last time something like this happened was
in 1980. And that was also driven by a significant increase in oil prices. Hoping that oil prices will decline
a lot may not be the best policy; while $100- $110 oil may not stay around for long, the $70 oil is most
probably history. Thus the base price of oil will be higher than before, even if it drops significantly from
its current level. The FED, during 1980-82, in its attempt to control inflation, raised interest rates
rapidly and instituted tight monetary policy. The result was a sharp recession, and still, inflation for 1980,
ended up at 12.5%, it dropped to 8.9% by December of 1981 and it was December of 1982 when inflation rate
eventually got down to 3.8%. This is not an easy process, and what we are observing now is not unprecedented,
and at times the cure has been worse than the disease. It is a reasonably sure bet that the FED will not make
the same mistakes of 1980-82 period. So a rapid increase in interest rates and curtailment of bank credits
is extremely unlikely. However, the FED will fight inflation, but its tools are limited. The most probable
outcome of these events, despite of the economic slowdown, is a slow increase interest rates over the
next two quarters.
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The April 2011 survey of Lehigh Valley businesses shows a significant upward spike in net hiring in the
region over the last 6 months. For the complete report go to:
LV Purchasing Manager's Survey
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The following is the PowerPoint presentation for the 3/23/11 lecture on "Responding to the Financial Crisis."
PowerPoint
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Preliminary Report---The April-May 2010 survey of Lehigh Valley businesses shows that local businesses now believe that
the economic recovery has started and for the first time since July 2008, the number of people hired
locally is higher than those laid off.
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