Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
This is his most recent commentary:
So we now have some details regarding the Obama stimulus package. Over the weekend, the incoming administration released a document authored by Christina Romer and Jared Bernstein which outlines much of their thinking on a variety of stimulus related topics. To begin with, they now expect the package, which is going to be a bit more than $775 billion, to create about 3.7 million jobs and they do quite a bit of analysis on where and when these jobs will be created specifically noting that about 30% of the jobs they expect to create will be in construction and manufacturing. This is of course not surprising given the disproportionate number of jobs that have been lost in those areas.
As well, the 3.7 million jobs is arrived at by using a commonly accepted analysis that a 1% increase in GDP creates about 1 million jobs; thus, they believe they are going to increase GDP by about 3.7%. For the sake of this discussion though, they must accept the premise that no government crowding out will take place and that the 3.7 million jobs created will not deplete private sector resources in any way. That said, they believe this is particularly important (to create that many jobs) because they believe that as many as 4 million additional jobs could be lost in addition to the 2.6 million or so that have already been shed.
The specifics aside, there are a few broader takeaways from a thorough read through of the plan. First, there is considerable uncertainty throughout the report. Uncertainty as to the timing. Uncertainty as to the number of jobs created and perhaps most importantly, uncertainty regarding the multiplier effects of both spending programs and tax cuts.
This last point is one of crucial importance and has been something I have been speaking about quite frequently in recent days. The truth is that nobody knows exactly how a particular stimulus package, or aspects of it, will affect an economy and it is for that reason that I am encouraged, not dismayed, to see both supply side and demand driven aspects of the package. With that said, they do say that “The direct spending programs have the largest job bang for the buck.” This is no doubt related to the belief that some percentage of any tax cuts would be saved while money put in people’s pockets has a greater chance of being spent. Friedman’s permanent income hypothesis would certainly come into play there, but the general nervousness in the economy and the unstoppable rise in the savings rate as consumers address their debt burdens probably does reinforce the belief that a large percentage of any tax cuts, in the short term, would be saved.
Subsequently though, they note that “Tax cuts, though they have no direct jobs effect and generally affect consumer and firm spending only gradually, also have important job creation benefits by the end of the two-year window.” This is very important as one would believe that while government spending programs will help inject money into the economy in the short term, appropriately placed and implemented tax cuts will help lay the groundwork for private sector growth in the future.
Furthermore, those appropriately directed tax cuts don’t have the burden of any negative crowding out effects. Private sector resources are always directed more appropriately and it is for that reason that one hopes the tax cuts help lay the foundation for future, non government induced growth.
And lastly, an important takeaway from the report is that 2009 is effectively never mentioned. The majority of the jobs they believe they will be creating will not really occur until 2010 and 2011. When the plan addresses unemployed, they refer to Q4 2010 and even then they note that the unemployment rate will still be 7% as opposed to 8.8% without stimulus. To be entirely critical for a moment, do they really believe that the peak unemployment rate in this “worst crisis since the great depression” will be 8.8%? Unemployment was over 10% in the ’82 recession and I fail to see why one would estimate that we wont touch that level with no government stimulus.
Many people have been looking for a second half recovery (which, mind you, was supposed to materialize in the second half of 2008) but if that’s going to be the case, this report doesn’t seem to believe it.
As we know, Alcoa begins earnings season today when they report their 3rd quarter earnings (they were downgraded this morning). I have been of the belief for many, many, many months that earnings expectations were too high and that when those expectations came down to earth, stock prices would have to do so as well. As recently as the middle of September (for instance), expectations were for 41% growth in S&P earnings in the 4th quarter and then 28% and 39% growth in Q1 and Q2 of 2009. It was clear, even before September, that those expectations were ridiculous and so we now find ourselves in a situation where earnings are now expected to decline 15% in Q4 and then decline 15% and 12% in Q1 and Q2. These expectations are much more reasonable and one would hope that they represent a floor on expectations going forward. Should we have to have another round of downside earnings revisions, stocks clearly wont react favorably and neither will already shaken investors.
Equity Strategy Group
Miller Tabak + Co