Forecast: Producers and manufacturers have not been producing for this pent-up demand

Forecast: Producers and manufacturers have not been producing for this pent-up demand [i] and will be caught by surprise when it hits them. They will not have enough workers or capacity and will panic (in reverse) to deliver their product to the market. It is like the proverbial tea pot that can't let off its steam gradually, so it eventually explodes.

Actual News as of 3/25/2011: WASHINGTON (Reuters) – The economy grew more quickly than previously estimated in the fourth quarter as businesses restocked shelves to meet rising demand and maintained fairly solid spending.[ii] Economists call this “demand pull”, as opposed, for example, to “supply push”.

What we see is the macro-economic trend, as we predicted, of businesses responding to pent-up demand. It was bound to happen eventually, but it should have happened in the first part of 2011 because, in spite of the remaining high unemployment (about 9%) and a double dip in many housing markets, it is like “Been down do long it looks like up to me” [iii]

Things have been so bad for so long, they have “lowered the bar”, allowing things to start to improve. This probably gets into “equilibrium” theory of economics. [iv]

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[i] FOOTNOTE # 3 - Pent-up demand will drive the economic recovery, and since this downturn was longer and deeper than a usual recession, the pent-up demand is greater, when it gets going.

"Capital items" are things that many people don't pay all cash for, i.e. that they take out loans to get because of their relative size.

Capital expenditures by consumers will drive businesses to make capital expenditures, in order or fulfill the demands on their products, as factories rise to higher usage. Factories can only go as high as about 90% usage before everybody is "falling all over each other" and then they have to expand, purchasing new capacity, land, buildings and equipment.

As the expansion goes forward, the job market will gradually tighten up. Jobs is a "lagging indicator". It follows the "leading indicators" into a recovery, just as it did when the economy turned down. Jobs were slower to contract than other areas of the economy.

With the credit markets, real estate and the stock market all starting to stabilize, business people will forget about being panicky about potential losses, and they will become panicky about missing the opportunities to make money in the recovery. That will, at some point, cause them to rush back into the markets. That, in turn, will then become a driving factory in the recovery.

Businesses will have to hire more people, and when they do that, we will have moved through most of the leading indicators and finally into the lagging indicators, and that will mean the recovery is in full swing.

Business people like stability more than anything else. That’s because they have to make business plans and carry them out. Plans are based on assumptions, and if the assumptions keep changing, they can't make reliable plans. So as the individual sub-markets stabilize, people will regain their confidence.

In fact, they will actually forget the recession and finally later in the recovery, begin to overspend in inflated and speculative markets, and begin the cause the next recession to occur.

The next recession, or downturn, should occur about eight years after the last one. Since the last one was around 2007. Real estate started falling in 2006 I think, and the stock market in 2007. And the stock market hit its interim low on March 9, 2009. So the next downturn should begin around ~2008 plus 8 years = 2016. You can bet on it (and everyone will be trying to do just that.

The problem with betting on the downturn is that everybody will be investing and optimistic, and all markets will be rising. But when everything seems to be to good to be true, that is when it will be too good to be true. Inflationary bubbles in the sub-markets, real estate, stock market, (some commodities are cyclical and some are counter-cyclical. Corn is cyclical and gold is counter-cyclical.)

It will primarily be the bursting speculative bubbles in the markets that will cause the next economic downturn. That is why, paradoxically it seems, that slower growth is better than rapid growth. Rapid growth spawns speculative bubbles and causes more inflation. Slower growth is usually thought to be 2 1/2 to 3 1/2 %. That is the rate at which experience has shown growth in the GDP (Gross Domestic Product) can sustain itself.

So it is strange now that everyone is desperate to get rapid growth. It seems either they are desperate for jobs, or we just ever learn from history. Short-term viewpoints drive decision makers, rather than the wisdom of longer term perspectives.

We are all extremely impatient to get our wages, profits and winnings now or in the very near future. We are not willing (or perhaps able) to hold out for longer term thinking and longer term plans, even if these might be wiser.

[ii] FOOTNOTE # 4 - Other data released on Friday showed consumer sentiment fell to its lowest level in more than a year in March, weighed down by high food and gasoline prices.

Gross domestic product growth in the final quarter of 2010 was revised up to an annualized rate of 3.1 percent, the Commerce Department said in its final estimate. That was close to its initial estimate of 3.2 percent published two months ago and up from its 2.8 percent reading in February.

"It is nice to see confirmation that the economy was improving. The data we've seen so far for the first quarter confirms that that strength is continuing," said Elizabeth Miller, president of Summit Place Financial Advisors in Summit, New Jersey.

The department also said corporate profits increased 3.3 percent in the fourth quarter after rising 0.2 percent in the prior quarter.

In another report, the Thomson Reuters/University of Michigan index on consumer sentiment fell to 67.5 this month, the lowest since November 2009, from 77.5 in February.

U.S. financial markets were little moved by the report.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.0 percent pace. The economy expanded at a 2.6 percent rate in the third quarter.

For all of 2010, the economy grew 2.9 percent, while corporate profits grew 20.4 percent, the most since 2004.

Data so far this year suggests the economy maintained this growth pace in the first quarter, but there are concerns that rising oil prices could crimp consumer spending and slow the recovery. The growth pace is still not strong enough to reduce high unemployment significantly.

RISKS LURKING

The pick-up in growth has been acknowledged by the Federal Reserve, which injected massive amounts of money into the economy to stimulate demand. The U.S. central bank is expected to conclude its $600 billion government bond-buying program at the end of June.

Atlanta Fed President Dennis Lockhart said on Friday the recovery is on solid ground, but there are still enough sources of weakness to justify keeping interest rates very low.

In the GDP report, the department raised fourth-quarter growth estimates to reflect stronger business spending and inventory accumulation than previously forecast.

Business investment rose at a 7.7 percent rate instead of 5.3 percent, lifted by spending on equipment and software, as well as on structures. Spending grew at a 10.0 percent pace in the third quarter.

Business spending on software and equipment increased at a 7.7 percent rate instead of 5.5 percent. Investment in structures rose at a solid 7.6 percent rate, the first increase since the second quarter of 2008.

Business inventories increased $16.2 billion instead of the $7.1 billion estimated last month.

The rise in inventories still marked a sharp slowdown from the third quarter's $121.4 billion and it subtracted a smaller 3.42 percentage points from GDP growth rather than the previously reported 3.70 percentage points drag.

Excluding inventories, the economy expanded at an unrevised 6.7 percent pace, the fastest increase in domestic and foreign demand since 1998. Domestic purchases grew at a 3.2 percent rate instead of 3.1 percent.

Consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- grew at a 4.0 percent rate in the final three months of 2010 instead of 4.1 percent. It was still the fastest since the last three months of 2006 and was an acceleration from the third quarter's 2.4 percent rate.

The growth in exports was not as strong as previously estimated, while imports were revised down a touch. Trade added 3.27 percentage points to GDP growth instead of 3.35 percentage points.

Government spending contracted at a 1.7 percent rate rather than 1.5 percent, due to weak state and local government outlays.

The GDP report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at a revised 1.7 percent rate in the fourth quarter instead of 1.8 percent. That compared with the third quarter's 0.8 percent increase.

But a "core" price index closely watched by the Fed advanced at a revised 0.4 percent rate instead of 0.5 percent. The increase was the smallest rise on record.

(Reporting by Lucia Mutikani; Additional Ryan Vlastelica in New York; Editing by Andrea Ricci and Dan Grebler)

[iii] FOOTNOTE # 5 -  Been Down So Long It Looks Like Up to Me is a novel by Richard Fariña. First published in the United States during 1966 the novel, based largely on Fariña's college experiences and travels, is a comic picaresque story that is set in the American West, in Cuba during the Cuban Revolution, and at an upstate New York university. The name of the protagonist is Gnossos Pappadopoulis. The book has become something of a cult classic among those who study 1960s or counterculture literature.

[iv] FOOTNOTE #6 - General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many markets, by seeking to prove that equilibrium prices for goods exist and that all prices are at equilibrium, hence general equilibrium, in contrast to partial equilibrium. As with all models, this is an abstraction from a real economy; it is proposed as being a useful model, both by considering equilibrium prices as long-term prices and by considering actual prices as deviations from equilibrium.

General equilibrium theory both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold. The theory dates to the 1870s, particularly the work of French economist Léon Walras.