Everett Dirksen (late Senator from Illinois) used to think $1 billion was a lot of money. "A billion here, a billion there and pretty soon you're talking about real money" he said in a famous hearing in the 1950's. (He also said "When a member of the House moves over to the Senate, he raises the IQ of both bodies.") It now seems a drop in the bucket when you think about a $787 billion stimulus package and a $1.8 trillion budget deficit.
But just the $1 billion spent so far on the cash for clunkers program has given reason for some to be raising their GDP forecasts for the second half.
Since many of the stimulus projects won't get started to near the end of the summer's construction season and even then will probably spill into the fall and winter when weather affects such projects, any near term help will be welcomed. Inventories were down $141 billion in the second quarter. $16 billion of that was from an auto drawdown. Auto inventories finished about 1.8 million units which is down 44% from last year and the lowest total on record.
Inventories are down 1.4 million units which is about $35 billion in value. If that could be reversed then the GDP swing would be noticeable. Eliminate the $16 billion drawdown and start to rebuild towards a more normal inventory level and the GDP impact could be an inventory swing of almost $50 billion which would be about 3/8 of a percent on the GDP account. Add that to the spur consumer spending would see to buy the cars and you're talking about a half a point or more in the second half of GDP.
It could be more when you realize that surveys of dealerships show that for every 100 clunkers traded in, it seems that 40 other cars are sold because dealership traffic is up. We are not likely to run out of clunkers because there are 85 million "light vehicles" on the road that are 12 years old or older. This is a record which would imply there is a pent up demand for cars to replace the aging fleet.
It seems that inventory levels in many industries have been drawn down significantly. Jeff Stein (Soleil/Stein Research), our retail analyst, reviewed his group the other day and said in reference to individual companies that their inventory levels were down. We have been saying the recovery would be muted but the inventory swing is starting to reveal itself. Looks like it could be a little more than a muted recovery.
But maybe not a lot more. Personal income was released the other day and it was down -1.3%, in line with expectations. We were expecting government transfer payments to be off ( -6%) but wages and salaries were also off -.4%.
Private industry salaries were off -6.5%.
Government salaries were up!
What is going on there?
That is the eighth month in a row of declines for total wages and salaries, and this number is off -4.7% annually from June 2008. Spending was up .4% so savings fell to 4.6%. Actually savings were never as bad as we thought. Adjustments that occur every now and then show savings in 2006 were 2.4%, not .7% as originally reported. 2007 was 1.7%, not .6%, and 2008 was 2.7% instead of the originally reported 1.8%. Be that as it may, I bet the savings rate will go to the high single digits which would temper consumer spending. The consumer is about 70% of economic activity.
Good news came from the "pending home " sales report. The number was a positive 3.6% and was the fourth monthly gain in a row. The Institute of Supply Management non manufacturing survey (service type jobs) slipped a bit to 46.4.
Not good news but very symptomatic of recoveries which see two steps forward and one back quite often. Recessions, like the one we are finishing, caused by financial crisis are often ended in a very ragged pattern. If this non manufacturing number continues to slip we have a problem, but time will tell.
Vincent Farrell, Jr.
is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.