C.M.O. 5.3.2010

Credit Market Overview

May 3, 2010

While the Troubled Asset Relief Program (TARP) and the Term Asset Backed Securities Loan Facility (TALF) were designed to alleviate the severe stress in the financial markets as a result of the seven sigma event known as the Credit Crisis the American Recovery and Reinvestment Act which is not known by its acronym (which would be ARRA and sounds a lot like “error”) but is more commonly referred to as the Stimulus Package was supposed to be focused at Main Street and prompt businesses to climb out of their storm cellars and . . . well, do business.

That a good portion of said stimulus was actually transfer payments to the states so they could begin the Great Redistribution is not the point of today’s piece, that some of the money seems to have made it to where it was supposed to is; as various economic indicators have more plus signs in front of them often than minus signs these days.

President Obama held a press conference after the 1Q10 GDP number of +3.2% was released on Friday to say that “an important milepost on the road to economic recovery” had been reached.  Whatever milepost that was Larry Summers, the 8th Director of the National Economic Council, evidently thinks the road trip is going to take a bit longer than planned as he said on Friday that “joblessness is likely to be and enduring problem even as the economy grows”.

One of the few things that is as popular as placing blame for all that has occurred on someone or something has been making comparisons between this recession and the one’s that came before it.  Some folks believe the closest comparison is to the 1982 recession but if that is the case, the comparisons are not good.

The National Bureau of Economic Research (NBER) is formally tasked with dating when recessions begin and end.  That august body says that the ’82 recession ended in that year’s 4th quarter when GDP expanded by 0.3%.  The four quarters of 1983 saw growth of 5.1%, 9.3%, 8.1% and 8.5% respectively.

The NBER has not called an end to the current chaos but if we draw a line in the sand at the 3rd quarter of 2009 we have had GDP growth of 2.2%, 5.6% and 3.2% in the three quarters that followed.  Not sliding into a double dip but not roaring out of the hole either.

As we enter a week that will end with the release of April’s employment statistics it is worth keeping in mind that temporary help, an indicator that is believed by some to foretell permanent job growth, is not growing as fast as the people who run those businesses would like.  Keith Waddell, CFO of Robert Half International Inc. (RHI), said when reporting 1Q10 results recently that the pace of improvement “is a little uneven, it’s more measured than we would like.  RHI’s 1Q10 revenue was down by 10% and net income eased about 3%.

These results were countered by RHI’s main competitor, Manpower Inc. (MAN) which saw revenues climb 13% in the 1st quarter but MAN’s CEO, Jeffrey Joerres, said there is still a “sense of trepidation” among its clients”.

Scott Krenz, CFO of Heidrick & Struggles (HSII) joined the chorus noting his firm is “not alone in feeling some uncertainty about the scope and speed of this recovery”, going on to say that HSII was going to be “quite cautious and targeted in our hiring, in our investment plans and certainly in our view of 2010 growth”.

Mr. Krenz’s cautious outlook on growth does not bode well for Uncle Sam as the expansion in entitlements and other redistributive policies is coming at a time of lower tax receipts.  The $2.1TN hand the government had in our pockets last year was $400BN lower than 2008 and represented 15% of our GDP which was below the post WWII average of 18%.  Corporate taxes were 65% lower last year than they were before the GR in 2007.

As the saying goes: “when your outflow exceeds your inflow, your up keep becomes your down fall.”

Jim Delaney

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