Pent-Up Demand

2011 February 8
by SJ Leeds

By the title of this blog, you probably figure that this is going to be all about me and Jenny.  But no, it’s not.  I want to share a few quick ideas.


1. Particularly Strong GDP Number

Below, you will find a chart of GDP growth.  For the last six quarters (until Q4), I’ve complained that the GDP growth has been even weaker than reported.  One way to look at GDP growth is a combination of final sales and inventory adjustment.  In other words, if you’re looking at the value of all goods and services produced, you can look at what was produced and sold and how much was produced to re-stock inventories.  We all knew that the inventory re-stocking would eventually end.  It looks like it has.  The good news, however, is that final sales grew at a really high rate in Q4.




2. Great Chart Showing Bubbles

John C. Williams, the Director of Research of the San Francisco Fed gave a speech last week.  His first chart showed the ratio of Net Worth to Disposable Income.  It’s amazing to see the past sixty years and to realize that we’ve had two bubbles in the last 15 years.  There have been two tremendous drops of wealth.




3. Pent-Up Demand

Even with Cash-for-Clunkers, the demand for cars has been anemic over the past few years.  Williams showed the following chart, which argues for upcoming growth.




4. A Few Interesting Ideas From His Speech

In 1990, China accounted for only 1% of US exports and 3% of imports.  By 2009, US exports to China had risen to 7% of total exports and imports from China had risen to 19%.


He distinguished between the improving growth rate of the economy and the current level of the economy.  While the growth rate is getting better, we are operating at a very low level (we have significant excess capacity).  This was his defense to the argument that the Fed should end their ultra-stimulative policy.


Maybe the most significant / under-reported comment: “I believe a number of factors associated with the crisis and recession have temporarily boosted the natural rate [of unemployment] from its long-term trend of 5.25% to 6 – 6.5%.


5. A Great Story

On Tuesday, Dallas Fed President Richard Fisher gave a speech.  He told about meeting President Reagan and hearing the President tell the following story:


Paddy McCoy, an elderly Irish farmer, received a letter from the Department for Works and Pensions stating that he was suspected of not paying his employees the statutory minimum wages and that an inspector would be sent to the farm.


On the appointed day, the inspector turned up. “Tell me about your staff,” he asked of Paddy.


“Well,” said Paddy, “there is the farmhand. I pay him 240 a week and he has use of a free cottage.”


“That’s good,” said the inspector.


“Then there’s the housekeeper. She gets 190 a week, along with free board and lodging.”


“That sounds fine,” said the inspector.


Paddy went on. “There’s also the half-wit. He works a 16-hour day, does 90 percent of the work, nets about 25 pounds a week when all is said and done, but takes down a bottle of whiskey and, as a special treat, occasionally gets to sleep with my wife.”


“That’s disgraceful, Paddy,” said the inspector. “I need to interview the half-wit.”


“Well,” said Paddy, “you’re looking at him.”

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