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Thursday, February 15, 2007

Stall Speed?

A generally negative pattern to recent releases has me wondering. There are potential perturbations and shocks (such as a move to hold big investment firms more accountable, the subprime meltdown demonstrated by ABX-HE, and questions about corporate credit going forward) in the system, but the effect of those is indefinite.

The economic releases are definite.

January's manufacturing ISM showed mild negativity, which is supported by today's industrial production and capacity. For January, the index dropped .5, which leaves the four month result for Oct, Nov, Dec and Jan at -.3. The only category which increased was utilities, ie, the effect of the colder weather. Today's Empire State survey is up very strongly, but it is unclear what that means overall. The Philadelphia Fed survey didn't confirm it, and the Philly CEI didn't confirm it. Dallas leading looks somewhat flattish (see overall).

Unemployment is showing an early negative trend. Initial non-adjusted claims for the last three weeks have been somewhat consistent (Jan 27 - Feb 10): 359,959; 338,980; 361,198, and Feb 10 exceeds prior year's of 310,078. The effect of seasonal adjustments are waning, and the four-week moving average is up to 326,25. Total insured unemployment, both SA and unadusted is also up and up over a year ago, which suggests that unemployed workers are having a harder time finding jobs. The four week SA average for total insured unemployment has not yet exceeded year ago figures, though. Finally, the insured unemployment rates have increased to SA 2.0 and NSA 2.4. SA 2.0 matches the year prior period and NSA exceeds the year prior period.

There are a lot of illegals employed as construction workers, so the slowdown in residential building may be producing more actual unemployment than we know of.

Advance Retail sales for January:
1) Look at the cap-out effect.
Dec 2005: 350,494
Jan 2006: 362,135 MoM strong gain
Dec 2006: 370,447
Jan 2007: 370,418 MoM decline, but may be adjusted up?

2) Total increase from Jan 2006 was less than 2.3%, which of course places it below inflation.

3) There was such a huge drop in gas sales compared to Jan 2006 (34,095/ 35,106) that one would have expected more discretionary spending. But the same cap effect shows up in restaurants, and hobby/book/sports, etc. Consumers spent mostly for personal needs, as the electronics sales show. Clothing and once again the personal care/health number are the big gainers. Personal care/health is probably demographic plus lower prescription costs leading to good add on sales.

4) I'd say the consumer is indeed tapped out and blew the consumer's last wad on Christmas. Gas sales can be affected by less economic activity/switch to more efficient vehicles, but the category numbers show a shift in allocation from wants to needs. Unless there is a substantial revision the MEW theorists are having the last laugh.
5) The best lines to watch on this release for recessionary indicators are
722 (Bars and Restaurants)
Jan 2006: 35,302 - Jan 2007: 37,166
Dec 2005: 34,227 - Dec 2006: 37,441
If that goes negative YoY I take it as a recession confirmation under most circumstances. Note also that from Dec/Jan a year ago the spending rose, whereas for Dec/Jan this year spending dropped. That's a red flag and unlikely to have been produced by bad weather, so....

and 451 (hobby, music, books, sports)
Jan 2006: 7,359 - Jan 2007: 7,133
Dec 2005: 6,923 - Dec 2006: 7,096
451 is a good indicator of pressure because it is highly discretionary spending. In good times consumers buy presents for others in Nov/Dec, but buy themselves presents in Jan. The negative YoY and the very small MoM increase are pretty good indicators that the pain is being felt by more than illegals.

Please remember, these statistics are not adjusted for inflation! If prices rise, which they have over the past year for most categories, then an increase in sales may actually represent lower sales of items - and both fourth quarter PCE and the above show us that precisely that is likely to be occurring.

So this survey of CEO's should not surprise anyone, and it is notable that when asked about their own expectations they were more negative than when asked about their expectations for the economy as a whole:
Out of the 76 CEOs polled in January by the Business Council in collaboration with the Conference Board, 76.3 percent said they expected slower profit growth, with 19.7 percent predicting it would remain steady and just 1.3 percent expecting an acceleration.

In a preface to the study, Business Council Vice Chairman Kenneth Chenault wrote that while council members still expect moderate economic growth, their profit expectations have diminished since the last such survey in October.
GDP for the fourth quarter and productivity are widely expected to be revised downward later this year, with bickering on GDP settling somewhere in the 2.0-2.75 range. In short, what looked like a confusing range of numbers is generally settling down to relative consistency showing, at a minimum, very slow growth. That leaves us with the potential of self-reinforcing negative factors, i.e.
This places the housing slowdown in a very different context, because everyone expected employment weakness from that sector, but the argument made by the Fed and others was that other strong sectors of the economy would pick up the slack. Right now, it's hard to find that too convincing. Both unemployment rates and leading negative indicators are escalating.

Positive indicators: The Empire state survey. Growth in government employment (which, IMO, is both a positive and negative indicator).

If crude oil were to drop significantly and stay down, causing a real, consistent drop in gas prices, the effect on the economy would be a widespread stimulation which would support consumer sales and employment. Crude oil has risen since January but may drop now that economic expectations are being cut down. The Dallas big rig (scroll down) shows a flattening Big Rig, which might indicate that most of the internal stimulus from high oil prices is over.

I don't know where Bernanke got his optimism today from, because I don't see it in the data. Instead I see an emerging pattern of low or negative relative growth fundamentals.

"76.3 percent said they expected slower profit growth, with 19.7 percent predicting it would remain steady"...I wonder what on earth this actually *means*? If someone is in the 19.7%, does that mean that:

a)he expects profit to remain at the same level it was, or
b)he expects profit to *grow* (year/year? sequentially?) at the same rate it has been growing
They are CEO's - some of them might not know themselves. A lot of them are better at calculating returns from stock options than profits. Since it's growth, I am guessing it's rate.
I don't know where Bernanke got his optimism today from...

It's called Cheerleading.

If we all clap our hands really really loud, and just BE-LEEVE really really strong, Tinkerbell will live! And the economy will boom FOREVER!
Honest to God, Headless, I've seen a few regular commenters on economics sites that basically seem to hold that exact view.
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