Carpe Diem

Real Retail Sales Suggest Slowdown, Not Recession

The chart above shows the 6-month moving average of the series for real retail sales, adjusted for inflation by the St. Louis Federal Reserve using the CPI, through December 2007. Several comments on this recent CD post mentioned that retail sales were not adjusted for inflation, and the graph above is in response to those comments.

1. Note that the CPI for January won’t be released for another week, so it won’t be possible to adjust January retail sales until then. But the strong January increase in retail sales following a decline in December suggests that real retail sales in January will probably look good, unless inflation comes in much higher than expected.

2. Note also that real retail sales were negative during the last recession. Although real retail sales growth of +1% at the end of 2007 certainly suggests an economic slowdown, it wouldn’t signal a recession unless, and until real retail sales growth approaches zero or went negative.

Carpe Diem

Legal Process Outsourcing: Savings Up to 70%

Financial Post: Billable-hour rates for lawyers are skyrocketing.

One U.S. firm recently broke the sacrosanct $1,000-per-hour barrier and it can cost anywhere from $500 to $800 an hour for top Canadian legal talent. Salaries of associates and student interns — those who do the legal grunt work — are escalating, hitting $100,000 and up.

Solution? “Legal Process Outsourcing” (LPO) to India.

A 1,500-hour project would costs $375,000 if carried out in Canada or the U.S. by a $250-an-hour junior lawyer. In India, the same job would be $50 an hour for a total project cost of $75,000 –a savings of $300,000. Estimates of the savings from LPO range from 30% to 70%.

Common LPO activities in India include litigation and corporate commercial services including legal research, document review and drafting, contract management, lease abstracting, and due diligence. The 10-hour time difference means lawyers can leave their office at night and return to a finished memorandum the next morning.

Employment in LPOs is projected to grow to 32,000 next year, 40,000 by 2010, and 82,000 by 2015, according to a new survey.

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Trade Deficit Down, QIV GDP May Double to 1.1%

NEW YORK (CNNMoney.com) — The gap between the nation’s imports and exports narrowed in December, according to a government report today, leaving the gap for the year sharply lower and ending a five-year streak of record annual trade deficits (see chart above).

A weak dollar during the year lifted exports, which allowed the 2007 trade gap to narrow by 6.2% to $711.6 billion, even as imports continued to increase due to the record price for oil imports during the year.

WASHINGTON (AP) — Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that the smaller December trade deficit will help to boost overall economic growth from the final three months of last year from the initial estimate of a mere 0.6% expansion. He predicted trade and a better reading on inventory stockpiles would boost growth in the gross domestic product to 1.1% when the figure gets revised later this month.

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Stimulus Updates

Stimulating Nonsense by John Stossell: “The money that will allegedly be “injected” into the economy is already in the economy. So how can it be a stimulus?”

That ‘Stimulus’ Nonsense by Arthur Laffer: “All of the stimulative effects of the rebate to the recipients will be 100% offset by the destimulative effects of the increase in liabilities of the workers and producers who have to pay for the transfer of resources to the rebate recipients. There is no stimulus from a rebate, period.”

Economic Stimulus Math for Economy:

+$100 billion in economic stimulus + (-$100 billion in economic destimulus, higher taxes now or later) = $0 net effect on economy

Economic Stimulus Math for Politicians:

Political Stimulus Effect of Economic Stimulus Legislation > 0

Carpe Diem

Consumers Haven’t Given Up Just Yet

Feb. 13 (Bloomberg)Retail sales in the U.S. unexpectedly rose in January as Americans spent more on cars, clothes and gasoline, a sign that the biggest part of the economy is holding up even as the housing slump deepens.

The Commerce Department said total sales rose 0.3% in January, compared to a 0.4% decline in December. From January 2007 to January 2008, retail sales increased by 3.9%.

Economists surveyed by Briefing.com expected a 0.3% drop in retail sales for the month.
Comment: The chart above (click to enlarge) shows annual retail sales growth rates, from the same month in the previous year, and averaged over six months to smooth the data. Notice that the trend over the last 9 months is upward, and it looks nothing like the downward trend in 2001-2002 during and following the last recession (shaded in graph).
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Recession? What Recession?

FORBESAdvertising trends tend to forecast the temperature of the economy as a whole, but after Omnicom Group announced its fourth-quarter earnings it looks like the mercury is rising amidst a snowstorm.

Despite the recent economic downturn and talks of a recession, Omnicom Group (NYSE:OMC), the world’s largest advertising services company, announced a 13% increase in quarterly profit on Tuesday to $313.9 million, or 96 cents per share, as compared to $277.2 million, or 81 cents per share, the prior year. The company’s worldwide sales were up 12.7% to $3.6 billion from $3.2 billion in the fourth quarter of 2006. International sales grew faster than domestic, with foreign sales up 16.3%, to $1.7 billion, and U.S. sales up 9.5%, to $1.8 billion.

Communications spending often serves as a barometer of how well a company is doing, as firms often sacrifice marketing to cut costs. Omnicom and other major marketing holding companies, like Interpublic Group and WPP, are typically accurate economic indicators because they represent major brands like Pepsi, Anheuser-Busch, and AT&T.

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Would Julian Simon Have Won a Second Bet?

Source: Global Financial Data

George Mason economist Don Boudreaux, writing today (“
The Ultimate Scholar“) in honor of resource economist Julian Simon, on the 10th anniversary of his death, revisits the famous bet in 1980 (it even has its own Wikipedia listing: “The Simon-Ehrlich Wager“) between scientist Paul Ehrlich and economist Simon:

Stanford University’s Paul Ehrlich — author of “The Population Bomb,” foretelling disaster from population growth — found economist Julian Simon’s optimism about population growth to be so absurd that he famously accepted a bet from Simon in 1980.

The essence of Simon’s position in the bet was that, despite the population growth that was sure to occur during the 1980s, the effective supply of natural resources would increase during this decade because human beings would figure out how to find, extract and use such resources more efficiently.

And the surest measure of this increased supply would be lower inflation-adjusted prices of resources.

Convinced that higher population is a curse, Ehrlich accepted the $1,000 bet. He chose (for Simon gave Ehrlich the choice of which resources to bet on) a bundle of copper, chromium, nickel, tin and tungsten and bet Simon that the real price of this bundle of resources would be higher in 1990 than in 1980.

In 1990 the prices in September of that year were compared to the prices of these resources in September 1980. Simon won convincingly. The real price of each of these five resources had fallen over the course of that decade, indicating that their supplies had grown even though human population had also grown by more than 800 million during that same time.

Julian Simon wanted to enter into a second wager, based on either the same commodities, or a different group of commodities, but the terms of a proposed second wager were never agreed upon. Simon died in February 1998.

What if the original bet had been extended for another ten-year period, from 1990-2000? Simon would have won again (see chart above), since all of the metals declined in real price except for tungsten, and the average price decline of the 5-commodity group was -19%.

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Last 25 Yrs.: Most Stable Economy in U.S. History

Over the last 25 years, the U.S. economy has been in recession only 5.3% of the time, compared to the much higher frequencies of recessions in previous periods of comparable length (see graph above).

The U.S. economy has become increasingly more stable over time (see graph above). Since 1985, real GDP growth has fluctuated in a range between 0 and 5%. Despite a slowdown, or even a recession, we are fortunate to be living in the most economically stable period in U.S. history, with the lowest frequency of recessions in history.
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Oscar Odds

From Intrade, top picks for the 80th Academy Awards, w/odds:

Best Director: Coen Brothers, 71%

Best Supporting Actor: Javier Bardem, 88%

Best Supporting Actress: Kate Blanchett, 42%

Best Actress: Julie Christie, 62%

Best Actor: Daniel Day Lewis, 87%

Best Picture: No Country for Old Men, 71.3%