If anyone needed reminding, nascent domestic economic recovery emphasizes the fact that folks seldom get the proverbial cake as well as the opportunity to eat it.

Consider unemployment, still historically higher at 9.7% (May).

According to John Williams, Executive vice president and director of research at the Federal Reserve Bank of San Francisco, “The labor market is turning around. Nonfarm payrolls have increased by over 570,000 jobs over the first four months of this year, with broad-based job gains in April. Nonetheless, the labor market still has a long way to go to get back to full strength. About 8.4 million jobs were lost over 2007–2009.” In his view about the economy in May, Williams said he the Federal Reserve expects unemployment rate to end the year at around 9.25% and then another 1% lower at the end of 2011.

Besides the fact so many are still without jobs, the unemployment level is capping wage growth of those who are working.

“…Broad measures of labor compensation rose between 1.75% and 2.25% over the past year, but remained well below levels seen just prior to the recession,” Williams explained.

On the cake side of the equation, though, low wage growth and high unemployment are helping to contain price inflation as well as interest rates.

In June Federal Reserve Chairman, Ben Bernanke, addressed the U.S. House of Representatives Committee on the Budget.

“Recent data continue to show a subdued rate of increase in consumer prices. For the three months ended in April, the price index for personal consumption expenditures rose at an annual rate of just 0.5%, as energy prices declined and the index, excluding food and energy, rose at an annual rate of about 1%,” he explained. “Over the past two years, overall consumer prices have fluctuated in response to large swings in energy and food prices. But aside from these volatile components, a moderation in inflation has been clear and broadly based over this period.”

Rather than the high inflation some had predicted a year ago, in light of the influx of stimulus money pumped into the economy by the government, the bigger risk appears to be deflation. As such, there is little indication that interest rates will or should increase from current low levels.

This is with a projected average increase in Gross Domestic Product (GDP) this year of 3.2%, then a touch faster in 2011. According to Bernanke, “This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued…

“Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity…Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions.”

Bottom line, key economic indicators (see Figure 1) continue to reflect recovery, albeit at a more sluggish rate than previous ones.

ECONOMIC BAROMETERS TO WATCH:

REAL GROSS DOMESTIC PRODUCT—the total value of goods and service produced within the U.S., regardless of who owns the assets. It’s the most comprehensive measure of U.S. economic performance. This quarterly report is issued by the U.S. Commerce Department Bureau of Economic Analysis.

CONSUMER PRICE INDEX—an index that measure the change in prices to consumers for a fixed market basket of goods and services, typical of an urban consumer. It provides insight to the rate of consumer price inflation or deflation. This report is issued monthly by the U.S. Department of Labor, Bureau of Labor Statistics.

NON-FARM PAYROLL EMPLOYMENT—the estimate of all non-farm payroll jobs, as well as jobs at government agencies. The report also details the number of hours worked and hourly wages. As such, it offers insight to current and future economic growth. This monthly report is available from the U.S. Department of Labor, Bureau of Labor Statistics.

HOUSING STARTS—an estimate of the number of housing units for which construction began, categorized by single and multi-family units. “Housing is perhaps the most interest-rate sensitive sector of the economy,” according to the Federal Reserve System. This monthly report is available from the U.S. Commerce Department, Bureau of the Census.

INDUSTRIAL PRODUCTION/CAPACITY UTILIZATION—this index measures changes in the output of the industrial sector. “…because changes in GDP are heavily concentrated in the industrial sector, changes in this index provide useful information on the current growth of GDP,” according to the Federal Reserve System. “The level of capacity utilization in the industrial sector provides information on the overall level of resource utilization in the economy, which may in turn provide information on the likely future course of inflation.” This monthly report is available from the Board of Governors of the Federal Reserve System.

RETAIL SALES—an estimate of the sale of all goods (not services) by U.S. retail establishments, presented in unadjusted dollars. Personal Consumption Expenditures (PCE) represents about two-thirds of GDP. This monthly report is available from the U.S. Commerce Department, Bureau of the Census.

BUSINESS SALES AND INVENTORIES—this is the total current-dollar sales and inventories for manufacturing, wholesale and retail. It offers insight to the rate of economic growth. “The rate of inventory accumulation plays a key role in determining the current pace of economic growth and often provides useful clues about the future pace of growth as well,” according to the Federal Reserve. This monthly report is available from the U.S. Commerce Department, Bureau of the Census.

ADVANCE DURABLE GOODS SHIPMENTS, NEW ORDERS AND UNFULFILLED ORDERS—expressed in current dollars, data for things such as primary metals, electric generating equipment and transportation equipment, including ships, planes and cars. It serves as an indicator of the strength of demand. This monthly report is available from the U.S. Commerce Department, Bureau of the Census.

LIGHTWEIGHT VEHICLE SALES—total unit sales and leases of domestic and imported cars and light trucks. Changes in the lightweight vehicle sector often account for a large part of quarter-to-quarter changes in the rate of growth of GDP. These reports are available monthly and for the first, second and third 10-day periods of each month from: Ward’s Automotive Reports and the American Automobile Manufacturers Association (not seasonally adjusted); U.S. Department of Commerce, Bureau of Economic Analysis (seasonal adjustment factors).

YIELD ON 10-YEAR-TREASURY BOND—current market interest rate or yield on U.S. Treasury Bonds maturing 10 years in the future. As a barometer of long-term interest rates, it provides insight to future changes in activity for interest-rate sensitive portions of the economy. This daily report is available from the Federal Reserve Board of Governors.

S&P 500 STOCK INDEX—an index measuring price changes in a wide array of stocks. It offers a measure of the current value of the nation’s stock of capital; also serving as a barometer of business and consumer confidence. This daily report can be found in most newspapers and at most stock market internet sites; it is compiled by Standard & Poors.

M2—this is the measure of the nation’s money supply: currency in circulation, demand deposits, travelers checks and other checkable deposits (M1) plus non-institutional money market funds and savings deposits. The weekly and monthly reports are available from the Federal Reserve Board of Governors.

Source: Adapted from Economic Indicators, Federal Reserve Bank of New York
http://www.newyorkfed.org/education/bythe.html#gdp

“Significant restraints on the pace of the recovery remain,” Bernanke said. “In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit. Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions. Meanwhile, pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending.”

Cattle-Agriculture Strongly Positioned
Closer to home, agriculture survived the Recession in stronger economic shape than most other industries (see Beyond Record Cattle Prices).

According to the USDA Economic Research Service (ERS), though farm debt levels rose sharply in recent years, growth in asset values are outpacing debt growth. Fewer farms ended last year with debt outstanding than in the past, with more debt concentrated in larger operations. Expectations were for debt repayment capacity to decline for 2009, but ERS analysts pointed out debt repayment capacity remains well above that in the late 1970’s and early 1980’s.

“The capital structure of U.S. farms has changed over the last two decades,” ERS analysts said in a December report. “Fewer farms have outstanding debts than in the past, but debt carried is concentrated among fewer and larger farms. Because debt is concentrated among larger farms, the aggregate loan repayment performance of agricultural credit is increasingly dependent on a smaller group of farm operations. If asset values or incomes falter, the burden of these declines will fall on fewer and larger producers and their creditors.”

RaboBank America’s Spring 2010 U.S. Farm & Ranch Survey indicated year-over-year income for U.S. farmers and ranchers improved significantly, compared to the previous two surveys.

“What’s happening on U.S. farms and ranches mirrors the global economy; we’re beginning to see improvement,” said John Ryan, President and Chief Executive Officer for Rabo AgriFinance. “That improvement translates into some encouraging, albeit patchy, signs of recovery.”

According to the Rabobank survey, U.S. producers reported that income improved 24% compared to the Fall of 2009. The distribution is unequal, though, with about half of survey respondents reporting their income was worse than the previous year (Fall).

A key measurement of this survey is the Rural Confidence Index (RCI), which is calculated as the percentage of producers who believe the ag economy will improve in the next year less the percentage who consider it will get worse.

Since the last survey in Fall 2009, the RCI improved slightly by 3%, standing at -34. While no significant differences are seen between types of farm, farm sizes or regions, the survey shows considerable differences in the confidence of various industry sectors. Beef producers (-19) are less optimistic than dairy producers (-14), for instance, but both are significantly more optimistic than row crop producers (-46).

Perhaps most telling, the survey indicates 2.5 times more producers intend to expand by renting or leasing new land in the coming year.

Intent to expand may be one reason why, in the central High Plains, anyway, the value of farm and ranch land is increasing. According to the Tenth Federal Reserve District, farmland values in that seven-state region grew during the first quarter of 2010 along with improved livestock income. According to that district’s of 262 bankers, “With rising farmland values and a slight dip in farm income, farm credit conditions generally held steady. Collateral required on non-real estate loans held steady, and district bankers states that the loan-to-value ratios for farm real estate purchases were at year-ago levels.” The sevens states include CO, KS, NE, OK, WY, northern NM, and western MO.

For perspective, average cropland value declined $110 per acre (3.2%) in 2009, according to USDA. The annual Agricultural Land Values and Cash Rents Annual Summary comes out in August. Average pasture value declined $20 per acre (1.8%) to $1,070/acre.

Looking for Bogeymen
These concrete signs of economic recovery stand in stark contrast to the picture painted with the broad, erratic brush strokes of daily financial markets. Just the worries over debt woes in member nations of the European Union (EU) have driven major financial indices to triple digit gains and losses within hours.

For folks wringing their hands over the possibilities of a sovereign debt crisis in EU nations fostering another global economic meltdown, Bernanke thinks not.

“The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability,” Bernanke said in his address to the U.S. House of Representatives Committee on the budget. “If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities.”

Keep in mind, everything described in this article is aimed at the state of the economy in the short term.

Bernanke also offered a warning to the Congressional committee regarding the sustainability of the federal budget under current policies.

“Even after economic and financial conditions have returned to normal, however, in the absence of further policy actions, the federal budget appears to be on an unsustainable path,” Bernanke said. “A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.”

One primary factor pressuring the deficit now and for years to come is the aging U.S. population. On the one hand, Bernanke pointed out there are currently 5 people aged 20 to 64 for every 1 person 65 or older. In other words, five folks paying into programs like Social Security and Medicare helping to support one person receiving those benefits. When the Boomers have all hit retirement age, though, there will only be 3 people aged 20-64 for every person aged 65 or older.

In the meantime, Bernanke pointed out health care costs continue to outpace economic inputs.

“To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges,” Bernanke said. “Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth.”