Robert Johnson must read econ release The iPad Economy

http://www.istockanalyst.com/article/viewarticle/articleid/4430067

By Robert Johnson, CFA) The economic data this week are best characterized as mixed, and the S&P index reacted accordingly, falling 0.7% for the week. There's no denying that there was a lot of bad news this week, including poor initial unemployment claims data, housing data that continued to bump along the bottom, and some worrying signs out of a slowing manufacturing sector. But there was good news, too. Industrial production jumped over a percent, corporate spending and merger activity continued to accelerate, and banks appear to be slowly opening their purse strings according to a recent Federal Reserve report. Low rates and increased mortgage refinancings should also bode well for consumers. However, the positive data were largely ignored.
Based on the last couple of months of data, I have little choice but to reduce my GDP growth estimates for 2010 to the 2.5%-3% range from as high as 4.0%-4.5% as recently as March of 2010. I have been very bullish on the economy since the spring of 2009--a bit too bullish over the past six months. I am still bullish on the United States and world economies, but the short-term picture remains cloudy. With autos and housing operating so far below what I believe is the replacement/population growth demand level (autos at close to 12 million units versus a more typical 15 million-17 million units and housing starts at the half-million level versus Morningstar's natural demand forecast of 1.5 million units per year), it is shocking to me that we've gotten this far in the recovery without better news from these all-important sectors.


So Where Did I Blow It?
There is no one answer about how I missed, but miss I did. Perhaps my biggest error was underestimating the leakage in consumer spending to overseas economies (although exports did help jump-start the U.S. economy early on--live by the sword, die by the sword).
Once an economy gets rolling, consumers generally spend more, which leads to more production and more employment and incomes, leading in turn to more spending and production. This cycle generally continues until the economy pushes up against some kind of capacity limit or a major policy/geopolitical event intervenes.

This time, our system experienced a major leak. Frugal consumers opted for consumer electronics and apparel as their small splurges when they were feeling more optimistic. Unfortunately, the non-U.S. content in these items is high, meaning that more spending led to more production--just not in the U.S. Perhaps a bit dramatically, Capital Economics, a major economic forecasting service, recently noted that while GDP growth in the second quarter is likely to slow to 1.5% or so, imports are likely to a jump by more than 30%, both on an annualized basis. I, of all people, should have better grasped that the booming market in even simple electronic components such as capacitors was an early sign of potential import troubles. Even a couple of months ago, I hadn't fully grasped the implications of a consumer rebound driven largely by electronics.


The iPad Economy Is Slowing Growth; Services Hurting, Too
While the import problem and the "iPad economy" is finally gaining front page coverage, slow growth in the service economy isn't helping either, and that's something that isn't getting much recognition. Health care is still eking out some modest growth, but that growth is much lower now than it was during the worst months of the recession. Consumer spending on financial services is still shrinking.
The fact that health care and financial services are performing so slowly this far into a recession is unusual. Whether it's recent changes in the subsidization of health insurance for laid-off workers (COBRA) or just a tremendously lagging indicator (when layoffs start, people rush to the doctor before they lose coverage; when people get new jobs, they sometimes have to wait before coverage begins). Maybe even uncertainty around the new health-care legislation caused people to hold off on seeking medical attention.