US Economy Recap

Let's review some indicators that coincide with the level of economic
activity. Real retail sales have accelerated to the downside over the
past 6 months and were down 9.8% yr/yr through December '08.
The weakness in industrial production is catching up, as it has
fallen 7.8% yr/yr. This would indicate there is more inventory
liquidation ahead. Civilian employment is down 2.0% yr/yr
through Dec. and is set to fall further as productivity has tumbled in
the wake of a sudden, rapid fall in output. Real earnings per worker
has risen sharply since mid-'08 as businesses have allowed wages to
continue rising while the CPI inflation rate has declined sharply. Total
payroll is trending down in growth reflecting shorter hours and the
3 million jobs lost over the past year. Overall, the composite of my
4 coincident indicators is a -4.0% yr/yr -- a deep drop.

The sharp decline in retail sales relative to the strength in real
earnings indicates clearly that consumers are continuing to hoard
liquidity or build savings during this downturn. Debt service ratios
for consumers are also now turning down cyclically.

US construction outlays remain in the dumper paced by a record
breaking decline in residential construction.

US trade is contracting rapidly, with both imports and exports
falling. Imports have the sharper downward tilt because of the blow
out of the oil price. As the trade deficit closes, the flow of dollars into
foreign coffers is shrinking which will pressure official reserve
positions.

My top down corporate profits indicators are off the most over
the past 12 months since the end of WW2.

The Business Strength Index -- a measure of operating rates
and business output levels-- stands at 106.0. This compares to
readings of 135.0 - 140.0 when the economy is in mid-expansion
mode. The 106.0 reading is the lowest in 27 years.

In the short run, the primary risk to the economy is the scramble
by consumers to hoard liquidity even with real earnings strong.
Without development of a better balance between consumption
and savings, the economy is likely to cycle down significantly
further, creating a far darker future.

On the brighter side, the weekly leading indicator sets have been
stabilizing at very low levels since the end of Nov.'08. I have my
fingers crossed.