Wednesday, December 05, 2007


US productivity just jumped at the annual rate of 6.3%!

US labor cost just fell at the annual rate of 2%!

Wages can rise 4.3% without adding to cost!

Job growth in November was estimated to be 189,000!


If you want to make a solid estimate about the coming economic growth, remember that more than 70% of the US economy is the wage and salary income of its people. If wages are rising and the number of jobs are rising, we know that the economy is growing. Those who have cried the blues about the recession are having a hard time holding their ground. The tendency is to note the recession in housing construction as the reason the whole economy is falling into recession. Housing has been reducing economic growth by about 1% on average for 8 quarters in a row, but growth in exports has more than off set the decline in housing. The personal income of Americans has been rising at the rate of about one half of one trillion dollars each year! This includes the deductions caused by the loss of construction jobs in the housing industry. In addition, the increase in business construction has off set much of the drop in residential housing. Furthermore, the housing fall is history. Housing construction is not going to fall a lot more from current levels.


On the other hand, we should all expect the "gadget boom" to continue. As more and more wireless Internet devices (everything from music servers to GPS to full blown computers, not to mention dual purpose cell telephones) are put into service, the more productive the people of the world become.


There is room for central bankers to lower short term interest rates as a result of lower unit labor costs. The central bank of Canada just cut a notch and my guess is that the Bank of England will cut a notch tomorrow. HIGHER INTEREST RATES, please note that my call for lower interest rates is a short term call. If you have a high margin variable rate mortgage, lower short rates should be a blessing but if your margin is more than 3.5% you should consider locking in a fixed rate loan. Please note that banks make big money by refinancing loans. You should not refinance on a whim. It often takes several years of lower payments to cover the fees involved in a refi.


The best of both worlds is coming soon to an oil market near you. The situation developing is that demand is being reduced while supply is being increased and while excess capacity is being added. Should inventories start to build after OPEC decided not to increase oil supplied, the fall in oil could reach accelerate. Some of the "big projects" do not come on line until 2009, 2010 and later but the oil is coming. Brazil, for example, will likely go from an oil importing country to among the top five oil exporters. Conoco Phillips is prepared to develop it deep water Gulf field, estimated to hold 15 billion barrels, should it appear that the prices will remain so high.


The discipline seen in the airline industry today is remarkable. Deregulation was passed in 1978 and it took 29 years for the mindsets of industry leaders to turn away from "market share at all costs". Delta, United, Southwest, American and others are reducing capacity to insure profitability. Analyst are underestimating 2008 earnings by a long shot. We know that in the year 2000, passengers were willing to pay $2,000 for flights that can currently be had for $400. With the industry refusing to fly just to hold market share, prices will go as high as they must to bring more return to the bottom line. Of the nine fare increases since Labor Day, 7 have at least partially stuck. Either fuel cost are going to come down over the next few years or fares are going to go up. Investors who buy and hold international airlines will do well over the next several years. This year has been a long one but conditions are ripe for great gains.