Economic Indicators / Analysis

Positive momentum for the shorter term leading economic indicators I follow all peaked at
points over the Feb. / Mar. 2011 period after rebounding sharply starting Sep. / Oct. 2010.
So, the slowdown of recovery momentum has been in effect now for a couple of months.
There have been no breaks of such consequence in any of the data sets to suggest a "dip" in
output. Pressure gauges to measure future inflation potential also peaked, but in Apr. '11
following a run up from mid 2010. The suggestion is clearly that slower gains in output and
inflation pressure continue to lie ahead.

For me, the major sticking points remain four: a continuing steep depression in the construction
trades, a banking system that only now is starting to advance credit to the private sector in a tentative
manner, and a business sector, which being hell bent on maximizing profits, is pressing hard to
derive strong productivity gains by underhiring and by overseeing low wage growth for the rank and
file. Finally, petrol sector prices have been rising rapidly, which is undercutting consumer
purchasing power. Naturally, a weak employment market undermines confidence and is in no
small measure contributing to the disaster that is the residential real estate market.

My economic power index (EPI) measures the combination of the yr/yr % changes in the real wage
and in civilian employment. In a more vibrant time, the EPI would run 4.0%. Before adjustments
such as a temporary payroll tax reduction, the EPI is running about -0.5%. This is not just dreary,
it keeps the recovery at risk and dependent on monetary and fiscal accomodation.

The recovery of earnings has been terrific, but the market p/e ratio has started to fade as investors
wonder whether the purchasing power can remain in place to support such a strong earnings trend.
In a different twist, a slow recovery, near zero short rates and modest inflation pressure keep the
bond market buoyant at a time in a more normal recovery when interest rates would be headed up.

There is intelligent speculation that the Japan quake / tsunami came just as a slowdown was
brewing and the resultant supply chain problems have deferred output gains until a little later
in the year. Let's hope so.