Monday, April 30, 2007
Chained 2000 Dollars
Last year the theory was that business investment and consumer spending would keep this economy from contracting, and neither is currently hauling its weight. If you look at the report and scroll down to Table 7, which reports personal consumption expenditures in Chained 2000 Dollars, you see that real PCE dropped in March:
Aug06: -9.4; Sept06: 22.1; Oct06: 43.0; Nov06: 29.3; Dec06: 31.7; Jan07: 34.4;The change is large enough that it is unlikely to be revised away, even though this is an advance report. Spending on durable goods rose 1.4 billion; spending on non-durable goods fell (-2.8), and here's the kicker - spending for services fell (-13.2). August of 06 was the last time PCE in chained 2000 dollars fell, but it was much less and services increased that month. The reason why real expenditures matter is that they really forecast profits. Either people are buying less, or the businesses are sacrificing profits to raise volume in a dollar-competitive market. Capital markets may be awash with liquidity, but it's certainly not sloshing freely among the general population any more.
Feb07: 26.4; Mar07: -15.6
A drop in service spending forecasts restricted services employment growth.
The story is inflation - if you scroll down to Table 9 and look at the percent change for price indexes from the previous month, you can see the markets adjusting for the inability of the consumer to spend. Durable goods are not inflating, but nondurable goods are. If you look at PCE ex food and energy, the change is 0. But inflation for nondurable goods from February to March was a ripping 1.2%. That is for one month, rather than annualized. If this trend kept up, it would amount to more than 12% over a year. Needless to say, income increases for most of us are not going to support that. Market-based PCE (which excludes those funky "implicits", and is a better measure of consumer spending power):
Aug06: .2; Sept06: -.4; Oct06: -.3; Nov06: .0; Dec06: .4; Jan07: .2; Feb07: .4;The September and October drops were really from gas.
Table 1: From August 06 to March 07, the monthly negative savings rate reduced from -1.5 to -.8. Per capita disposable income in chained 2000 dollars really doesn't look that hot, moving only from 27,641 in August 06 to 28,280 in March 07. Keep in mind that the higher end group is getting most of these apparent increases.
Compare that to Table 7, which gives real personal consumption expenditures. In August 06 the total was 8,100.7, which increased to 8,272.0 in March 07. According to Table 7, real personal consumption spending dropped from 8,287.6 in February to 8,272.0 in March of this year. The difference between income and consumption is going to decrease the gap in savings, which seems to have arisen from borrowing in order to spend.
What this looks like on the ground is that housing seems generally on a downward trend, but the real change is what is happening in stores. The contrast between parking lots filled with very nice large vehicles and customers sifting carefully through aisles is quite remarkable. Food pricing, especially, seems to be bonking around like a ping-pong ball. This is a sign of very severe inflation moving through the system. No matter what happens, in normal times you just will not see prices for frozen food items doubling in a matter of a month or two, but that is what I saw in several stores. The best run seem to be trying to keep something on sale, and I noticed a real shift in brand shelving, especially on frozen items.
One of the big surprises was in Bucks County, PA, which borders Mercer County in NJ. In the slightly outlying portions of Bucks, a whole lot of small commercial property (storefronts and land) was on sale. A lot of empty stores. Closed or closing dealerships. Big price drops on services, such as labor at auto dealerships and office visits for some medical providers.
I have been concentrating on Bucks and Mercer for about a year, because I think NJ's housing woes are partly related to wildly disproportionate rises in property taxes, and Bucks should prosper from that. If you look at the traffic coming over the bridges into NJ in the morning, it certainly seems to have! Yet Bucks County now looks rather weak, and it is a wealthy place relatively. Particularly noticeable was light teller staffing at off hours in small banks in Bucks County. As you move away from the NJ border, quite a few homes seem to be for sale.
The Carolinas were another big surprise. The Raleigh-Durham Triangle area has a great economy with relatively affordable housing, but based on radio advertising and traffic, things are getting significantly softer there. It's still going great guns compared to most of the East Coast, but there is a perceptible weakness emerging.
Up and down the East Coast, restaurants seemed to be feeling the pressure. Fast food restaurants are definitely moving more towards more low-price options on menus. There is some competition emerging in gas prices at concentrations of gas stations. I talked to what looked like senior staff members when I could, and they confirmed that business wasn't great. At banks in off hours, you get kidnapped and dragged into offices if you walk in and ask a teller about CD rates! I started wondering if some of those branches had installed a silent alarm system for sales prospects. It's difficult to escape.
I usually try to buy a lot of the local newspapers. There's a lot of personal stuff for sale. More houses for sale, obviously. Less jobs, relatively. Construction equipment, trucks, boats, campers.
Georgia, aside from being on fire (literally, not metaphorically), seems to be relatively prosperous. There is an awful lot of building still going on in these southern states. When it will stop I don't know. It is possible that the relatively healthy looking Georgia might in part be due to a Florida exodus. Nonetheless, the car dealerships still look pushed. I drove around Valdosta (close to Florida border in central GA) this weekend, and wasn't all that surprised to see a 72 month 0% APR financing sign up on a Chevrolet dealership.
Overall, I was surprised to see more rural areas areas looking healthier than I suspected and more urban/wealthier areas looking more pressured than I expected. Is this a sign of extreme overleverage among the higher income brackets? I don't know, but I am beginning to suspect it.
The only sudden change I noticed was in the grocery stores and some of the restaurants. In the grocery stores, inflation is busting loose, with prices rising by 40 cents or so, being cut back in a week or two when customers apparently don't buy, and then busting up and out again a week or two later. The yoyo effect on a lot of items is not seasonal - it must be the effect of a system at capacity being punched by pricing pressures and not adapting well. Most notable are some price increases on the really cheap brands. I suspect that inflation in Asia and the declining dollar is going to place some additional pressure on the whole system.
I guess vacancies will have to wait, but the high metro home vacancy figure (4%? unbelievable!) might be related to the signs of pressure I saw in more built-up areas. Maybe the majority of mid-to-high wage earners spent until they can spend no more.
Sunday, April 29, 2007
Catching Up With Blogs
So, to cheer myself up, I made the rounds of the blogs. I love blogs. All different types. To me, bloggers are the modern day equivalent of the old coffee shops and corner stores in which an awful lot of discussion and consensus is reached.
These struck me (not that I'm even halfway through my blogroll):
Mamacita, who is now teaching adults, posts a compilation of spousal requirements and comments from a class assignment. If you have a remotely decent spouse, reading this will remind you of how lucky you are. A sense of gratitude for what you do have seems to me to be one of the basic prerequisites for happiness, so this one's a keeper.
Aldon Hynes at Orient Lodge is one of my quiet favorites. He's a very interesting man who is quite involved in politics in a resoundingly healthy way. He's also very interested in how things work - take a look, for example, at this map of which Dem candidates got the most funding in various states. There were quite a few surprises for me.
EU Referendum posted on the demise of Rantings of a Sandmonkey. I've read that blog along with other Egyptian blogs, and this made me sad indeed. To be intimidated out of blogging by this:
I no longer believe that my anonymity is kept, especially with State Secuirty agents lurking around my street and asking questions about me since that day. I ignore that, the same way I ignored all the clicking noises that my phones started to exhibit all of a sudden, or the law suit filed by Judge Mourad on my friends, and instead grew bolder and more reckless at a time where everybody else started being more cautious. It took me a while to take note of the fear that has been gripping our little blogsphere and comprehend what it really means. The prospects for improvment, to put it slightly, look pretty grim. I was the model of caution, and believing in my invincipility by managing not to get arrested for the past 2 and a half years, I've grown reckless. Stupid Monkey. Stupid!No, not stupid. Gutsy. He was no fool, as this post about the Turkish presidential election, or this on the French election, prove. Democratic freedoms are not something that we should take lightly. There is something awful about this man being constrained to stop posting on his blog because he lives in Egypt.
Big Pharoah may be back, and then again he may not. In his second to last post he referenced Abdel Kareem, who got four years. For writing.
Without the ability to speak freely, how does a country adapt and decide? Just reading Calculated Risk should make anyone understand how essential it is to have people of varying backgrounds discussing issues of the day. Sure, the details of what can and cannot be down with various MBS structures may sound like a boring, narrow topic, but actually these two posts address a reality that is probably going to affect more than a million American households, to varying degrees. This is the nuts and bolts of democracy. What is the situation, what are the possibilities, and how could we have a reasonable certainty of improving matters?
When I was in high school, there was a meme going around the NY Times and university crowd about our society becoming too technically complex for democracy. The theory was that average individuals were too uninformed to decide political matters, and that some sort of technocracy should be formed to do it. Uh-uh. Technical societies may become complex, but they also develop the means to deal with complexity. The range and depth of discussion going on at Calculated Risk demonstrates that average individuals often have much more to contribute to the discussion than some narrow subsegment, and that bringing together a range of people from different backgrounds to discuss a situation deepens and enhances understanding.
I'm not voting for McCain, because he doesn't get it, as McCain-Feingold proves. Oh, free speech means stupid speech, silly speech, ill-intended speech, and lies. But only free speech prevents stupid, silly and lying ideas from gaining the day.
What WILL Rosie Say?
A stretch of vital highway for San Francisco Bay area commuters collapsed on Sunday after a gas tanker truck crashed and ignited flames that shot more than 200 feet high, officials said.There are, obviously, pressing questions which will emanate from the poorly educated or those holding graduate degrees from certain departments of the University of Wisconsin: Cheney or Bush? Was the motive hatred of homosexuals, or a desperate attempt to shore up the theocracy by attacking homosexuals? Will this incident hasten our impending death from global warming? Will we have Congressional hearings? Or, alternatively, you could get a Christian Anarchist aerospace engineer's questions, which I couldn't dream of predicting. But I am very, very sure that they will be fascinatingly lunatic.
Flames on a lower ramp melted the upper deck of a highway on the Oakland/Emeryville side leading to the double-decker Bay Bridge that connects the heavily populated East Bay to San Francisco. As the steel structure weakened, a concrete slab fell onto the ramp below.
All joking aside, people started smelting iron a long time ago. The poor commuters in that area are going to have a miserable time of it. One good thing - the driver made it out alive and is reported to be in stable condition.
The story caught my attention because GA is pretty much on fire. The firefighters put them out and more crop up. Nothing new, because in these conditions we do have fires. We need rain.
Saturday, April 28, 2007
She now looks somewhat like a mastiff with English bulldog markings, but with eyes proportionally almost as large as a Boston bull's. The vet commented about her incredibly clean teeth. That is because she eats stuff like wood, corn and cob gleaned from the field (she goes out and picks them), and in general, a high fiber diet. I strongly suspect that in my absence she has begun going over and raiding the neighbors', because when I walked her by that border last night she hackled up and acted extremely strangely, and Rescue Dog looked very nervous. Rescue Dog tries to make her obey the rules, but she is a lot to handle even for Rescue Dog. She is exceedingly gentle, which is fortunate because she is also exceedingly strong and has the typical bulldog temperament.
In any case, while she languishes resentfully on the living room floor making big eyes at Chief No-Nag - imploring eyes, that make the point that the word "diet" contains the word "die", eyes that ask for ice cream for a starving lady.... let me get about my blogging catch-up rounds.
Mover Mike is asking for advice. He has prostate cancer and must make a treatment decision. If you have any experience, please go over there and contribute.
The Anchoress skewers rock concerts for global warming in an acerbically funny, but thoughtful post:
The stage…featured vidi walls, 36 video monitors, numerous television cameras, two separate mix positions, 26 on stage microphones, 176 speakers, and 11 elaborately painted Trabants, several of which were suspended over the stage with spotlights inserted into headlights, which all required 1 million watts of power to operate: enough to run 2,000 homes.One thing's for sure - if we want to cut fuel consumption, we are going to have curb excess consumption. I am pretty aggravated by hearing people who live in massive houses and jet around urge slapping higher taxes on gas taxes to curb consumption. It seems to me that they really want the parents who struggle just buying milk and decent food for their kids to be forced to cut back so that they can continue to preen under the klieg lights. I was raised as an environmentalist. I live as an environmentalist. This farm is being run as a wildlife preserve and at this time multiple species of endangered animals live here. I am tired of hearing the poseurs talk. I want a reality-based discussion on this one - but one thing's certain: a reality-based environmentalism must demand more conservation from those who consume more. This isn't going to get done with fake carbon credits.
Everyone's talking about the French election, but the election that really matters is the Turkish election IMO. I have been following the political drama over there for years, and this does not come as a surprise:
Turkey's prime minister met with his ministers Saturday after the country's military expressed deep concern over the presidential election in a statement analysts said was an ultimatum to the Islamic-rooted government.This is a complicated situation which may have real ramifications for Europe and Iraq. Nothing is simple in Turkey from an American's POV.
In a statement posted on its Web Site late Friday, the powerful pro-secular military said it was monitoring the election with concern and indicated it was willing to become more openly involved in the process.
A couple of economic footnotes:
An inverted yield curve on Treasuries is considered a sign of impending recession. That sign has been with us for a while, but recently short-term rates are peaked at 6 months, and decline from there until they start rising at seven years with a peak at 20 years. It's quite an interesting picture. Some commentary in this Bloomberg article.
Calculated Risk noted yesterday that the bright spot in the GDP report was that non-residential investment was rising a bit, which implies a rise in equipment and software investment. His post offers a good explanation of norms.
I posted earlier that I thought there was a bit of an uptick in March, mostly because of commercial paper. CF, who I take very seriously, thought it was because of payment problems. NACM CMI tended to prove his point, but if I am right, Commercial Paper Outstanding would now indicate that this uptick is fading out anyway:
I'll be first in line to see the CMI for April. Regardless of headline profits, higher input costs are putting pressure on a lot of firms.
Next up, road trip and home vacancies.
Friday, April 27, 2007
GDP - WHOA!!
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from residential fixed investment, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.Decliners on various exchanges have been outweighing the overachievers that make up the headline, so this is a crucial test of the run-up. Lately, no matter how bad the economic news has been stocks have gone up. We'll see if this can be sustained in light of the news above - a GDP that is extremely weak and making it only on state and local government spending plus consumer spending, both of which cannot be sustained:
The deceleration in real GDP growth in the first quarter primarily reflected a downturn in exports, an upturn in imports, a deceleration in PCE for nondurable goods, and a downturn in federal government spending that were partly offset by a smaller decrease in private inventory investment, an upturn in equipment and software, a smaller decrease in residential fixed investment, and an acceleration in PCE for durable goods.
Final sales of computers contributed 0.04 percentage point to the first-quarter growth in real GDP after contributing 0.22 percentage point to the fourth-quarter growth. Motor vehicle output contributed 0.09 percentage point to the first-quarter growth in real GDP after subtracting 1.18 percentage points from the fourth-quarter growth.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.6 percent in the first quarter....I have deep doubts about the accuracy of the price index, meaning that real PCE could be overstated. One perturbing matter is that although the dollar is dropping, exports are dropping:
Real personal consumption expenditures increased 3.8 percent in the first quarter, compared with an increase of 4.2 percent in the fourth.
Real exports of goods and services decreased 1.2 percent in the first quarter, in contrast to an increase of 10.6 percent in the fourth.One would have hoped to see the opposite. Imports also rose after having fallen in the fourth quarter.
This release will be revised substantially. Fourth quarter was revised up and then down and then up again to get the final of 2.5%.
The last four quarters of GDP growth:
Q206: 2.6 Q306: 2.0 Q406: 2.5 Q107: 1.3There is a trend.
Regarding unsustainability, let us proceed to Table 4, which is preceded by earnest warnings about not using the data in it. Naturally, it is one of the most usable and informative tables in the GDP release. Table 4 gives price indexes for various components (change from preceding period), and note the incredible changes from Q4 2006:
GDP; Q4 1.7; Q1 4.0The bottom line is that prices of consumer goods switched from favorable to consumption to broadly unfavorable over the two quarters, with the exception of durable goods. So if you have money it is a good time to buy the car or boat, but for those who are just trying to get along on needs expenses, the environment is tough. This is why personal consumption is not going to be sustainable. Recent releases show an acceleration of price increases for needs items (food, fuel, utilities), which means more than half of the population is getting it in the face this year.
Personal Consumption (PCE); Q4 -1.0; Q1 3.4
Components of PCE:
Durable Goods; Q4 -2.7; Q1 -1.8
Nondurables; Q4 -7.7; Q1 5.1
Services; Q4 2.9; Q1 3.5
As the Beige Book and Yellen noted, wage increases are concentrated in certain sectors. This may make inflation fanatics cheer up, but for the individual who is experiencing a real drop in buying power it is hardly good news. At the bottom of Table 10 you can find real disposable personal income:
Q406: 8,419.7This is personal income adjusted by the implicit price deflator expressed in chained 2000 dollars. On the face of it this number might look okay, but there are two caveats. First, inflation for "needs" goods - food and fuel - is skyrocketing, so lower income people who spend a much higher percentage of their incomes on such items are hurting. Second, the distribution of increased income is extremely unequal, so wages for lower income individuals are actually dropping in some areas (due largely to manufacturing and construction declines). In most cases, personal income is not keeping pace with inflation for the bottom 40%; in many cases, personal income is lagging inflation for the 41%-70% brackets.
The reason why I am so certain that we are headed into a recession (if we have not already landed in one) is that the broad mass of individual consumers have been financing a lot of spending from wealth increase rather than income. However, in the last year the wealth increase has shifted from real estate to the stock market. Only about 20% of the population really has much in the stock market, though, whereas home ownership reaches nearly 70% of the population. The result is that a Dow bubble has much less impact on the spending patterns of Americans than the real estate bubble.
I am still not sure whether we are actually in a recession or not. If we are not, we are close to it. If we are (remember, a quarter is quite a long time) in a recession, we are in the early stages and at this time it is mild. Either way, the disturbing aspect is that none of the factors that seem to have initiated this downturn, however you characterize it, seem to be ameliorating. The housing market is not recovering, and prices certainly will not recover until after 2010. Business investment still seems weak. Inflation is putting a further crimp in consumer spending on top of the MEW contraction.
IMO we seem to be at the beginning of a new cycle rather than at the end of one, as the Fed and most Street economists claim. Perhaps I am wrong. Perhaps I am right. Remember, my job is to try to help banks cope with conditions coming up in the future; I am strongly focused on conditions 3 and 4 quarters down the road. We cannot change the past but it is necessary to try to adapt to the future, so I really don't care about .5% here and there in current numbers. I care about conditions on the ground in their service area.
Based on recent economic information, and adjusted for the area income and industry components, I am warning bankers that they can expect to see much higher defaults on car, credit card and personal loans to lower income persons, will have to adjust their adjustable rate loans with high margins to prevent high default ratios, and that they will need to step up their collections and loss mitigation efforts. Money spent there will pay them back two or three-fold, because the early bird gets the disposable income.
Going forward, FICOs will mean much less than Debt-To-Income ratios. FNMA originations (which many of my banks do) will soar. Money spent on developing any sort of government guaranteed lending will have a high payback. Net interest margins will continue to be pressured; everyone is chasing the same relatively small group of consumers.
Debt consolidation and refinancing non-GSE mortgages and credit lines into GSE loans will be a big source of income for many of my banks going forward. They do this well. All of them will have problems with their CRA programs; they need to offload onto FNMA until FNMA tightens. They should do this quickly, because FNMA is going to have to tighten up on those >60% DTI MyCommunity loans.
For commercial lending, the dangers are mounting. Dealerships selling mid-level discretionary items to consumers (RVs, smaller boats, cars) are going to be under pressure. Many stock ag loans are going to be in trouble if not backed by some sort of government insurance program. Needless to say, builder and commercial construction loans must be vetted very carefully, and it is time to call in some chips there and be very careful about participation loans.
I cannot believe that I am all that different than many other persons in the same line of work, so I would say that these stats would amount to an inevitable credit tightening going forward. This is not a positive for the economy, and we seem to have a long way to go before debt loads, shoe sole inflation and employment trends are likely to shift for the better.
Regionally, Texas = Good, Florida = Bad, California and Oregon = Bad. Most rural states are slumping and mixed states such as PA will continue to generally slide a bit. Some recovery in housing markets in the NE. Good recovery for lower-bracket homes in lower central region.
Jumbo Alt-A mortgages = disaster across most of the nation.
Thursday, April 26, 2007
In Case You're Bored
What I have found is that abnormal times of temperature correlate very well with abnormal sun conditions. This is an archive listing solar events, and here is a SpaceWeather page where you can see current events. Note the lack of activity in the first part of April? Watching these events and following coronal mass ejections for a couple years was what changed my mind about the main climate driver.
Beautiful images, lots of data, an interesting video of the sunspot 930 flare - plenty to think about.
Very interesting indeed, and I'll write more later on it. I've never seen anything like this (economically).
Sorry for not posting an absence warning, but the internet was out at the home base when I left and in my experience, those wireless networks at hotels never work well enough to let me post.
Anyway, more later. For now, I'm enjoying home and companionship.
Friday, April 20, 2007
When All Else Fails
So, trucking and railroads.
We need one or two more weeks because of holiday discrepancies for really good current YoY comparisons, but AAR reports shipments are down so far this year:
Cumulative volume for the first 15 weeks of 2007 totaled 4,783,604 carloads, down 4.5 percent from 2006; 3,381,157 trailers or containers, off 0.5 percent; and total volume of an estimated 486.6 billion ton-miles, down 3.1 percent from last year.In general, high transport costs should be shifting a little volume to the rails (although diesel is little changed YoY). As for current, last week's volume report was down sharply YoY, but it included a holiday which would drive it down and makes the YoY figure worthless. This week's volume report was mixed, but the comparison is to a short week last year, which would tend to overstate this year's volume in comparison:
Carload freight was up but intermodal volume was down from last year on U.S. railroads during the week ended April 14, the Association of American Railroads (AAR) reported today. The comparison week from last year included Good Friday, which is a holiday on most U.S. railroads.So, one more week is needed to try to get an idea whether the downward trend this year is accelerating or seems somewhat steady. Because wood product and lumber product shipments are down from last year due to less building, you would want to see an accelerating pattern into the spring before extrapolating that to the wider economy. It is possible that the drop in building alone accounts for the drop in shipments for the first 15 weeks of 2007 when compared to the first fifteen weeks of 2006.
Intermodal volume totaled 223,126 trailers or containers, down 3.6 percent from last year, with container volume off 0.6 percent and trailer volume down 13.2 percent.
Carload freight, which doesn't include the intermodal data, totaled 338,550 cars for the week, up 0.5 percent from last year. Loadings were up 1.5 percent in the West but down 0.6 percent in the East. Total volume was estimated at 34.6 billion ton-miles, up 2.4 percent from last year.
Through March, volumes were reported down slightly more YoY:
For the first three months of 2007, total U.S. rail carloadings were down 4.9 percent (211,519 carloads) to 4,125,876 carloads, while intermodal traffic was up 0.2 percent (4,608 units) to 2,939,039 trailers and containers. Total volume was estimated at 419.2 billion ton-miles, down 3.6 percent from 2006.Not good, but if the rate of decline YoY is slowing, generally that would be viewed as an economic positive.
Stock markets can and do trend inversely to economic conditions at times, and also tend to top out right before recessions. Freight is a fundamental.
Bureau of Transportation Statistics (BTS) has a broader transportation index called the TSI and you can get those releases at this page. The latest release is for February. January's TSI fell 0.6 percent from December, and February's fell 0.3 percent from January. These are, however, considered preliminary figures subject to much revision. So far, the data doesn't support a recession forecast.
Table 3 gives a YoY comparison through February. Since 1998, the combined index dropped YoY through February in 2003 (-2.9%), 2006 (-1.0%) and 2007 (-0.8%). Again, the 2007 numbers are subject to revision - but this is another basic index to guage whether domestic economic activity seems to be picking up or slowing down relatively during the year.
The TSI includes freight and passenger traffic (this is also reported separately in different tables), including air, truck, rail, waterway and pipeline. For passenger traffic it includes airway, local rail/subway and intercity rail.
Thursday, April 19, 2007
Mortgage Apps And Unemployment Claims
The Refinance Index decreased 0.3 percent to 2008.4 from 2015 the previous week and the seasonally adjusted Purchase Index decreased 4.2 percent to 396.5 from 413.8 one week earlier. The seasonally adjusted Conventional Index decreased 2.3 percent to 931.3 from 953.5 the previous week, and the seasonally adjusted Government Index decreased 4.1 percent to 129.3 from 134.8 the previous week.Initial claims for unemployment are less likely to have been skewed by the holiday. It is true that Easter last year was on the 16th, while it was on the 8th this year. The jump in layoffs from long school spring breaks is unlikely to have changed much though, because long breaks would generally have crossed the same period last year.
The four week moving average for the seasonally adjusted Market Index is down 1.6 percent to 649.4 from 659.8. The four week moving average is down 0.9 percent to 406.1 from 409.6 for the Purchase Index, while this average is down 2.3 percent to 2079.8 from 2129.9 for the Refinance Index.
This week's release had SA initial claims at 339,000, while last week's initial claims were revised up slightly to 343,000.
Actual continuing claims continue to decrease, while SA continuing claims continue to increase. Both are now pushing the 100,000 increase mark compared to last year.
However, this is the week I would choose for comparison in 2006 (not the same as the comparison week used in the actual release). If you scroll down to the bottom, you see a long list of states reporting an increase of over 1000 in unemployment claims. If you compare that list to the current release, you see that a number of states this year reported layoffs in the service industry. There usually seems to be one week in April with a long list of state initial claims increases. This week's release had 20 states reporting an increase in layoffs of 1000 or more, whereas the previous year's release to which I am comparing had only 15. The NSA unemployment rate for this week also ticked up to 2.0.
All in all, the picture is certainly not dire, but it generally looks to be a very different trend from last year. Still, we are starting from a much better employment position this year, so even if the trend is somewhat negative, the overall effect on the economy may be roughly equivalent to last year's position.
This is the point at which that huge adjustment upward for base employment at the beginning of 2007 becomes such a quandary. It was made on the basis of UI payments to states which were considerably higher than employment in the household survey. The scope of it was unprecedented. One could speculate and suggest that these jobs are evaporating now (because many of them are thought to be due to construction), so that the real picture is much worse. One could also argue the opposite point of view with at least as much justification. Generally, revision patterns follow each other, so it is possible that when the UI quarterlies come in from the states through the first half of this year we will discover more unreported jobs. It may be that an increase in contract workers is more responsible for the large adjustment needed for 2006 than construction employment!
Because of all these possibilities, I am watching continuing claims with great attention this year. Logically, they should be more indicative of overall employment trends than the initial claims or perhaps even the reported unemployment rate. If a person is out of work they will look for work, and if they find it they will drop out of that statistic. If there are a large number of persons out of work who don't qualify for unemployment, they will still be competing with UI-receiving workers and will tend to drive up the continuing claims number.
And these continuing claim numbers, while relatively increasing this year, show just how good the employment picture was last year. For more perspective (using the weeks I have chosen for cross-year comparison on the basis of the pattern of state reports) ACTUAL continuing claims:
2005: 2,731,177(According to the official stats, the 2007/2006 comparison looks worse.) Based on these numbers, I wouldn't be recommending that anyone yell "fire" and run for the exit. Comparing 2007 seasonally adjusted continuing claims to where we started the year presents a picture of only moderate worsening:
2007 1/06: 2,472,000Building now seems to be actually decreasing at a relatively consistent pace, but whether we will pick up much of it in the unemployment claims is up in the air. As those layoffs continue though, we ought to see the effect on services. Jere are the state comments for the current week explaining increases in initial claims:
2007 4/07: 2,531,000
VA +1,015 Layoffs in the automobile, transportation, and manufacturing industries.As with almost everything else, the underlying economic shifts present one heck of a challenge in interpreting the data we get. Whatever else is true, we are in a period of significant economic change.
NV +1,123 No comment.
SC +1,128 Layoffs in the manufacturing industry.
MA +1,199 No comment.
AR +1,439 No comment.
OH +1,628 No comment.
MS +1,681 No comment.
GA +1,698 Layoffs in the finance industry.
NC +1,766 Layoffs in the transportation equipment, electronic equipment, apparel, and furniture industries.
MD +2,005 Layoffs in the apparel and manufacturing industries.
AZ +2,097 No comment.
TX +2,167 Layoffs in the trade, service, and manufacturing industries.
NJ +2,191 Layoffs in the transportation, warehousing, and service industries.
IL +2,243 Layoffs in the trade and manufacturing industries.
WA +2,739 No comment.
WI +3,141 Layoffs in the construction, trade, service, transportation, warehousing, and manufacturing industries.
FL +3,617 Layoffs in the construction, trade, service, and manufacturing industries.
NY +3,842 Layoffs in the transportation, service, and manufacturing industries.
PA +7,834 Layoffs in the construction, trade, and service industries.
CA +8,644 Layoffs in the service industry.
Wednesday, April 18, 2007
Sometimes They Do
I wrote a couple of years ago about my fourth grade teacher. She was quite a character. Never married, an older woman then (who remembered the Great Depression, and the teachers getting paid with scrip because there was no money), and the daughter of a fireman who used to teach the classes on fire safety with a few extra tips. For one thing, she would tell us that as a last resort, if we were trapped and couldn't get out and the fire was getting close, to stand up and breathe in the smoke. "It's a better death," she would say. She made us write a little essay about our home escape plans for a fire. If we were in a room upstairs, and there was only a staircase, we had to have a way to get out of our windows.
She also advised us that when we got older, we should read "Mein Kampf". "No one believed he would do it," she told us. "If people had read Hitler's book then and taken him seriously, millions of lives would have been saved. Something like this may happen again - when you are older, read the book, think about what could have been, and pay attention to the news. You can't assume they just won't. Sometimes they do."
It was obviously a very different era. Children were not so sheltered, and worries about the harshness of grading with red pen was the furthest thing from anyone's mind. It was taken for granted that people died and bad things happened, and it was also taken for granted that children had the resilience to deal with such matters. Adults of that age had been through a great deal and didn't doubt that very bad things would happen in the future, so they believed that it was as necessary to teach children about such matters as it was to teach reading, writing and arithematic.
I think the contrast between the then and now is haunting me with respect to the Virginia Tech shootings. There were nutcases like this back then, but I just don't believe that a group of Mrs. J's fourth graders who found themselves in college facing a deranged man with two pistols would have stood there to get shot and not tried to fight back. I think this is what Shrinkwrapped is saying - there's a change in us that makes us not believe in such things, and so we don't fight back. Because all the guy had was two handguns, and if four or five students had thrown books at him and then charged, more people would be alive today.
Isn't it ironic that one of the few functional responses was from a professor who was a Holocaust survivor? Because he believed, and acted, more people are alive today.
Dr. Sanity wrote about the media and the therapeutic frenzy, and I thought there was wisdom in what she had to say:
There is this strange belief among the intellectual elites; even among many psychiatrists and mental health professionals that feeling anguish and grief are wrong and must be avoided at all cost. Or if you must feel them, then they must be instantly transformed into a focus on this thing called "healing". Bring out the healing! Open those clinics! Stop those oh-so-negative emotions--before they have an impact on your life! Move forward!Sigmund Carl and Alfred finds some of the response a bit narcissistic. I don't know. I don't think we should wallow in the incident, but I do think we should take the victims' deaths seriously and ask what might have made a difference. Making ourselves feel better about it won't change a darned thing, in the past or in the future.
They say now that Cho had been involuntarily committed before, and that he stopped in between the first killings and the final massacre to mail a media package. Obviously he had been planning for some time to go out in a blaze of sick revenge upon people he didn't even know. There have always been people who succumb to the desire to destroy; the only thing left to society is to nurture the ability to defend itself. We aren't always going to catch them before they act. There was no prior warning like this in the case of the Amish shooter, for example.
As for gun control, that won't stop such incidents either. It is, after all, just as easy to set fires or bomb, or rent an SUV and drive it through a crowd. There is not always going to be a way to stop these people before lives are lost. We should remember that, and be ready to react.
Ace's reaction strikes me as completely functional; in anger at the media play the guy is getting, he asked for photoshops of Cho. Mock them, he writes, and let everyone understand that they will be remembered not with fear or awe, but with scorn.
I hesitated to write this because I feel so sorry for Cho's family and for the family and friends of those who were murdered and injured. It seems disrespectful to point out that the students should have acted differently, and a heaping of coals on Cho's family to photoshop him like this. But lives depend upon us not being patsies like this, and maybe it is time for us to be less concerned about hurt feelings and more concerned about dead bodies. I have the uneasy feeling that our reaction to this may be feeding unlovely ideas in a certain quarter.
If Mrs. J were still alive and teaching, I am quite sure she would be drilling her students in ways to react, given the various incidents. Acceptable responses would not be passive. Another way to state it is that it was not those who jumped from the World Trade towers (some already on fire) who were disfunctional; it was those standing on the ground screaming "don't jump" who weren't dealing with reality. Sometimes your best choice is a very bad one.
Btw, it was illegal for Cho to buy the weapons if he had been involuntarily committed, so the problem is that current law wasn't followed. Ironically, if the students or professors had been permitted to carry weapons with the appropriate permits (see this Confederate Yankee post), lives might have been saved.
Here is something else to think about: the worst US school massacre ever was an attack on an elementary school in Bath Township, Michigan, in 1927. It bears some surprising similarities to this incident as well - there was the first killing of an intimate followed by the planned attack on the school. Forty-five people were killed without guns. No simplistic answer for this type of thing will provide safety. There is no absolute safety to be had in life.
Tuesday, April 17, 2007
CPI And Retail For March
While I was listening to the radio reports on the killings with my mouth hanging open, yesterday the retail sales report (advance) for March was released. This morning the Consumer Price Index for March was released.
The market appeared to take strength on yesterday's retail sales, but in light of CPI today, it might not be so sanguine. The headline gain in retail sales was .7%, but the headline increase in CPI-U is .9%. The logical conclusion is that price-adjusted sales (real sales) declined from February to March. Gas sales and gas price increases support that theory strongly.
Retail sales for February were adjusted to .5% gain, but that really matches CPI for February. Based on these numbers alone, one would say that consumer spending is dropping, if anything.
HOWEVER, it's important to realize how big a margin of error these numbers really have. If you scroll down to the end of the retail sales report, you will see the CV for these numbers. The margin of error is such that in any one month, we rarely can be reasonably certain of whether retail sales increased or decreased. The quarterly figures are more reliable.
Annualized SA CPI for the three months ending in March (modified due to a change in the figures posted on the CPI website!)
- Total rose 4.7%
- Food & beverages rose 7.4%
- Transportation rose 8.3%
- Medical care rose 5.6%.
- The special index for energy rose 22.9%.
My intuition, based on early home sales patterns for March, is that the economy is taking a slight uptick. I don't think it will last long, but I believe that higher income people are taking advantage of declining asset values (houses, cars) to spend more. I've got just about no proof whatsoever for that theory!!
It's an educated guess formed from looking at home sales patterns in high income areas (better than last year for the upper-bracket homes) combined with the sales tax figures, which seem to show that spending is increasing in high-income states while it is dropping in lower-income states. It is a logical pattern of development, because many people are doing extremely well. Needs inflation weighs far, far less on the spending for higher-income households - indeed, asset deflation may be infusing higher income households with more spending power. If you can afford to buy many larger ticket items, your relative gains on those purchases may well be outweighing your higher costs for basics.
So my best guess is that we are in a phase in which spending for basic needs (fuel, food, etc) will be depressed, but spending for high end wants (autos, for example) will show more strength. The fate of the economy appears to rest upon the spending of the top 30% of the income bracket. What should unquestionably be hurt by this are lower-end restaurant chains, grocery stores, and discretionary spending on mass-market items like electronics, books, hobby items and sports equipment.
Based on CPI for three months and retail sales for three months, real purchases of items like fuel and food do seem to be dropping. That much is likely true. I'm sorry that I don't have the heart to post about these figures in more detail. Maybe tomorrow. It warrants a closer look.
The market will probably continue to throw itself a party, because those folks are not exactly close to the ground. However, whatever you do, stay away from homebuilders. Their pain has just begun. The combination of higher liabilities from high previous sales, high carrying costs on excess inventory, and lower sales is going to hurt their balance sheets badly over the next year and a half.
From the release itself:
The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.9 percent in March, before seasonal adjustment, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. The March
level of 205.352 (1982-84=100) was 2.8 percent higher than in March 2006.
The Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W) increased 1.0 percent in March, prior to seasonal adjustment. The
March level of 200.612 (1982-84=100) was 2.7 percent higher than in March
The Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
increased 0.8 percent in March on a not seasonally adjusted basis. The
March level of 118.953 (December 1999=100) was 2.5 percent higher than in
March 2006. Please note that the indexes for the post-2005 period are
subject to revision.
Sunday, April 15, 2007
Floods, Fiscal And Physical
As for fiscal floods, a discussion on Social Security broke out again on this post at Calculated Risk. I was somewhat surprised that anyone still believes in the trust fund's reality. It's true that there is a legally existent trust fund which has signed pieces of paper in it representing the excess Social Security taxes paid in by workers all these years. The problem is that the pieces of paper don't represent any solid asset. They are simply promises made by the American taxpayer, who already paid these taxes, to pay them yet again to the retirees.
It's not that one president or another spent the funds. I'm sure they'd like to, but presidents don't get to spend money unless Congress authorizes it. Congress has the Constitutional responsibility for spending, and it exercises that responsibility with great enthusiasm. The current plan started in 1983, and it was designed to work this way. Naturally enough, because Congress came up with this plan in a fully bipartisan agreement. Congress under any party management has a spending problem somewhat akin to Casey Serin's. Congress also seems to have a Serin-like inability to distinguish between money obtained by borrowing and actual income.
Those who think those "special" treasury bonds mean anything should ask themselves this question:
"What would change in Social Security funding if Congress passed a law tomorrow declaring those bonds unpayable?"
The answer, honest to God, is "nothing".
The way the current system is designed to work is this:
When current receipts aren't enough to pay benefits, the Social Security Administration will trot over to the General Fund, give it a piece of paper, and get money to send checks out to retirees that month. And if those bonds were eliminated, that's exactly what would happen anyway! Now Social Security taxes are being spent to keep income taxes low, and somewhere around 2016/2017, income taxes will be raised to pay Social Security benefits on top of everything they now pay. The Trust Fund is utterly irrelevant to the entire issue because it doesn't affect cash flow at all.
Medicare is already running a deficit, and this is how it is being funded. FDIC's economists figured that we hit the wall in 2013.
So the real issue is not those fictional bonds in the surreal trust fund. The real issue is whether the American taxpayer will be able to pay for all its current programs as well as Social Security and Medicare without paying double or triple the percentage in income taxes the American taxpayer is paying now. Because that is not going to happen. Forget all this jibber-jabber about moral issues. That is not going to mean a thing to the man earning the equivalent of $28,000 today in 2023 when he is asked to pay much more of that money so that some 67 year old with several millions of assets can get his or her scheduled Social Security benefits.
The 2007 Trustees' report has not been issued yet, but the 2006 report (gives status at end of 2005) addressed that issue (this chart is from the Summary):
If you look at this chart carefully, you can see that when we were running budget surpluses in the late 1990s, it was because there was a temporary dip in the GDP percentage for both of these programs (due to demographics/bubble), so we spent less proportionally on them. It didn't really have anything to do with Congress cutting spending. In 2000, we spent less than 6.5% of GDP on these programs. By 2025, we will be spending over 11% of projected GDP on them. By 2030, we will be spending close to 12.4% of GDP on them.
So the tax burden on that $28,000 a year worker (in 2007 dollars) would have to more than double to keep paying scheduled Social Security and Medicare benefits, and that would be a moral problem in and of itself.
This is what the overall tax rates for Social Security (OASDI) and Medicare(HI)look like. This chart shows income and receipts as percentages of taxable payroll. Keep in mind that right now the bottom 30% pays very little in net income taxes, but is heavily tax-burdened unless getting EIC when you take into account sales tax, SS & Medicare taxes:
What will happen is that higher income retirees will not get the benefits. You can't tax a 25 year old so heavily that he has to go to the food bank to eat in order to pay an older person to eat at good restaurants. It's not whether we care about old people - it's whether we care about old AND young people.
Those charts above mean that in 2005, the total cost for SS & Medicare was about 14% of taxable payroll. In order to keep from borrowing more money each year, by 2020 we would have to pay an additional 4% of taxable payroll, or 18% in total. By 2025, it would be 20% of taxable payroll. By 2030 (less than 15 years) the expected burden is about 24% of taxable payroll. These estimates could easily be off by several percent, but the reality is still unworkable.
You think today's deficit is bad? To keep from running higher deficits, we would have to raise income or SS/Medicare taxes. Remember, these amounts are JUST for these two programs. The total burden for other entitlement benefits and general government expenses, such as payroll, will be at least double that. So does anyone really believe that in 2030 the average tax on payroll (income and others) will be at 40-50%? Remember, that's average. To keep the same distribution as now, the top people would have to be paying about 90%. (My guess is that they would simply move to Canada or stop working.)
At the current time, about 60% of the federal budget goes to pay entitlement benefits of various kinds plus interest on the deficit. See this page with graphs of components from a few years back. This doesn't leave us room for large increases. This is a huge reversal; in the 1960's, only about 20% did. We are heading for the 80% mark rapidly, and that will not be sustainable.
And furthermore, Nancy Pelosi really is dumb as a rock financially. Everyone, left or right, who has looked at the situation honestly knows that we are not going to keep paying scheduled Social Security benefits to people with high assets and/or income. The idea that making all wages subject to Social Security will cure the problem is disproved by the above graph. You can see that the vast majority of earned wages already pays the tax (half employee, half employer, total 15.30%)
Another way to understand the scope of the unsustainability is by considering the cost of these two entitlement programs as a percentage of GDP. Currently, the federal government costs about 20% of GDP. Of that, in 2005 about 6.7% was spent on these two programs alone, not counting other entitlements. By 2025, the percentage of GDP spent on Social Security & Medicare is projected to be approximately 11.5%, and by 2030 it is projected to be around 12.6%:
Now think about what that means. If 12.6% of GDP is spent on these two programs by 2030, either the percentage of GDP the federal government gets would have to increase by a corresponding 6% to a total of 26%, or all other programs would have to be cut by 6%. People who think we can make up the difference by cutting funding for the armed forces are living in la-la land, because we have already done that:
We'd have to cut funding on other social programs, or raise taxes dramatically. The problem is that when you raise taxes you also cut spending, so you have to raise tax percentages more than the percentage you hope to gain. The problem will come to a head within the coming decade (This is from the Congressional Budget Office.)
PS: The reason the taxable payroll line in one of the charts above is mostly flat is because of demographics. At the same time that retirees are growing, the working population is projected to be almost stable. This is why we are letting so many people in - we are hoping the population will increase enough to make taxable payroll grow. The problem is that illegal immigrants working for very low wages are a net negative rather than a positive for the budget.
Friday, April 13, 2007
Yes, The Consumer Is Worried
Rounding out this explanation of why the American consumer is worried comes the early April U of Michigan consumer confidence survey, which dropped again. The headline number was 85.3, down from 88.4.
Current conditions: 102.4, down from 103.5
Expectations: 74.3, down from 78.7
Inflation projection was 3.3, up from 3.0.
This survey tends to move with gas prices, so don't look for an uptick anytime soon! TWIP said gasoline stocks fell again.
Update: Whoops! I forgot IBD/TIPP, which was published earlier. It dropped from 50.8 to 45.5. I've generally found it more useful. It is not fear causing this downturn in consumer confidence, as the article implies. It is significantly higher prices for basic goods which is translating to less spending money. The American consumer knows no fear whatsoever, that is, until the bills have to be paid.
PPI And Public Policy
The annualized rate of cost increase for finished foods for the quarter ended in March was 18.7.
The annualized rate of cost increase for "finished" energy goods for the quarter ended in March was 9.4.
Contrast that to the annualized rate of cost increase for finished goods less food and energy, which was 2.3.
It should be obvious that for the lower 60% of income households, these numbers dictate either increased borrowing or decreased spending. For the lower 30%, this represents a dire hit. My adjustment on groceries is going up to 8.1% annually for the next quarter. Before it was at 7.8%.
The cost of elitish lala environmentalism is lethal for the lower echelon of American households and it is not doing much for the environment either. A workable energy policy would offset this trend, but instead of doing that we launched into subsidized ethanol programs, which will substantially increase the cost of the most basic foods for consumers.
Is this good public policy? Should the welfare of American farmers really be more of a concern to the American taxpayer than the welfare of the average consumer shopping for dinner? Darn it! It's very kind of the American taxpayer to pay us like this for our corn field, but have you spent your money well?
These are the effects of this exercise in feel-good environmentalism:
- Costs for intermediate (inputs to finished) foods and feeds increased on an annualized basis of 27.5 for the quarter ended in March.
- Costs for intermediate (inputs to finished) energy goods increased on an annualized basis of 19.7 for the quarter ended in March.
Watch for additional mergers, buyouts and acquisitions in grocery chains. For industries that actually make basic need items and sell them to consumers, these numbers foretell a rough year in which profits will be squeezed For industries that sell discretionary items to consumers, these numbers foretell a rough year in which total sales are likely to fall.
I would also recommend watching the NACM CMI (Credit Managers' Index). March was not good for either services or manufacturing. Combined dollar collections fell 7.8%, which is a record drop. Accounts turned over to collections have gone below 50, which signals a contraction (for this one component only). The services sector is much larger than manufacturing and had been expanding while manufacturing looked weaker. Now it is following manufacturing on a slow downward trajectory.
Both of the CMI indices are still in positive territory, but compare YoY:
Manufacturing March 2006: 56.1
Manufacturing March 2007: 54.6
Services March 2006: 60.1
Services March 2007: 55.4
Combined March 2006: 58.1
Combined March 2007: 55.0
The trajectory for Combined:
01 2007: 57.2
02 2007: 56.6
03 2007: 55.0
In general, a weaker dollar is favorable for manufacturing. However, when input costs rise sharply and when quite a bit of the inputs are imported, the effect is diminished or perhaps even entirely negated for import-dependent industries.
Thursday, April 12, 2007
Unemployment and General Situation
Hmm. This is the actual report, if you want to read it. You can find a link that will allow you to pull years of data in the previous post.
Updating the continuing claims saga from yesterday:
03/24/2007-2,492,000 (advance) 2,489,000 (final)
03/31/2007-2,527,000 (advance - will probably be revised down slightly)
So SA continuing claims did rise from the beginning to the end of the first quarter, but not in the normal numbers that occur in a recession year. You generally see it rise by a couple hundred thousand from beginning to end of the first quarter. The jury is out on this one, although job growth for 2007 is not a helpful factor for the economy - that's clear.
The headline everyone's running on this report is that initial claims rose by 19,000, after rising by 13,000 the previous week. That's seasonally adjusted initial claims. Actual numbers for initial claims:
We'll wait one more week to see, but the explanation that the SA is being messed up by spring break doesn't look too likely - there really was a much larger increase in actual claims than the SA version that everyone uses, so the spring break rise is being taken into account. The weather has been poor, and that could account for some of this (where is global warming when you need it?).
One theory, which is supported by the fall-off in wire transfers to Mexico, is that a lot of newly unemployed people who were working in contracting aren't being picked up in these numbers. A lot of them are illegals who won't qualify for unemployment or who won't apply.
That theory is also generally supported by the fall-off in sales tax receipts - although an alternate explanation for that decline is that inflation is causing quite a bit of it. In some states food isn't subject to sales tax, and if people are spending more of their available income on the basics, less would be spent on taxable items. However, the reported drop in sales tax receipts is largest in the states that were building the most, so it's likely that building-related unemployment is contributing.
Tom asked in the comments for a simply stated explanation why I believe that there will be a recession this year. The answer is that we are already seeing a real decline in consumption for certain areas, and as job losses mount this decline will continue. The causes and second and third order effects of consumption declines in sequential order:
- A decline in cash-out refinances as home price appreciation stops and then reverses. This is well underway and was apparent in the fourth quarter of 2006. Confirmed by all reports; the extent is unknown. By some estimates, cash-outs were responsible for 4-5% of recent consumer spending. If this drops by only a quarter it will have a significant effect amounting to a 1% spending decline. See Calculated Risk on this issue.
- Inflation for basic consumer necessities (including gas) that outpaces wage increases. This is very apparent and appears to be accelerating - it is definitely causing a pull-back in some discretionary spending. Confirmed by retail reports; the effect is likely to be at least 1-2% if inflation continues at this pace. Consumer spending is often cited as being 70% of GDP. Let's call it 60%.
- Astronomically high consumer debt totals. I have written about this often, and cited a ton of reports showing just how much debt has increased. The only thing that has masked the effect of consumers having to repay the debt was the refinancing of mortgages and shifting the debt into lower interest rate and slower repayment schedules. That is now abating, and the result of inflation for basic needs and the need to repay debt from earnings will cause less spending over time. Lord only knows how much this will cost, but 30% default interest rates on credit cards can wreak havoc. With the average family having at least 8,000 in CC debt, I have to believe that this will result in a minimum 1% decline.
- A decline in building employment and spending. This appears to have begun and is most certainly going to accelerate. Confirmed by value of construction, permits and starts figures (although these show it is just beginning). Causes a drop in related industry employment, which is confirmed. This has already occurred in manufacturing and supply industries such as appliances, lumber, plumbing, lighting, windows and doors, as well as of course the individuals putting such items into place. Related declines and layoffs occur for mortgage brokers, realtors, and bank employees. Confirmed by multiple sources.
- A decline in government employment and spending in the worst-hit areas. This is now being confirmed in localities in Florida and California, and it will spread. I have seen several quotes of a 10% drop in anticipated revenue and corresponding budget cuts. Anecdotal confirmation.
- Extremely high local and state debt levels in many areas mean that government spending is going to be impacted rather severely by a decline in revenue. Confirmed.
- As consumption drops, forecasts for sales and profit for consumer discretionary items decline, and these companies cut costs, spending and employment. A drop in business investment is being widely discussed, and multiple electronic companies, such as Circuit City, Best Buy, Sprint, Motorola are planning layoffs to compensate.
- The wave of resets and rate adjustments is supposed to accelerate rapidly through 2007, and I expect it to peak in 2008. This is confirmed by rapid increases in defaults and Notices of Default which are escalating around the nation. Many of these homeowners will not lose their homes, but the lower refinancing rates reported by MBA show that tightening credit and declining home appreciation will force many homeowners to pay the higher amounts rather than refinancing. This will cut into spendable income and cause further consumption drops. Confirmed by all reports, although extent is unknown.
- A decline in retail and service employment. This is not confirmed but is strongly suggested by the last ISM report and by the Monster listings.
Let's add up what we can reasonably quantify. The estimate is that nationally building accounts for about 20% of GDP. I've seen it called 23%, but let's use 18%. If it drops by a tenth compared to last year (apparently now pretty much set in stone), this would account for about a 1.8% drop in GDP. Add to that 3-3.5% off consumer spending for the causes listed above, which would cause approximately an additional 1.7% drop in GDP. That's over 3% off GDP without taking into account the secondary effects!. The auto slump is not helping either, and as jobs are lost, we will see an additional impact on GDP. That's where the concept of "stall speed" comes in. When things slow enough, businesses pull back a bit, which pushes us into a recession.
I hope this was clear enough. Ironically, spending money to keep consumers in homes that they really cannot afford is likely to make the situation worse rather than improve economic circumstances. All of these people who got into mortgages amounting to over 4 X annual income are in danger of losing their homes, and even if they don't, they will need to cut back on spending. California, in particular, will have very hard times coming. And what's the point of getting some poor schmuck to pay just interest on a principal balance for 20 years to stay in a home if that principal balance is 5-8 times the annual household income, and if the underlying asset is declining? There are areas in CA in which that is the norm for purchasers in the last few years. There's an unbelievable fall-out coming as a result. Orange County in CA is toast, grilled to a crisp, DOA.
The only thing that could turn this around now is for home prices to start increasing. If anyone has a theory about how that can happen in these bubbly areas, I'd love to hear it. At the beginning of the year I thought a drop in gas prices might compensate for some of the effects listed above (and of course a drop in oil price would cut basic inflation for many other items as well). Now it's too late.
Wednesday, April 11, 2007
It looks to me as if the economy is picking up slightly right now. I doubt it has legs, but there are some good shorter-term indicators as well as negative ones.
Commercial paper outstanding has been going up for several weeks. Yes, it could be that companies are broke and floating paper to pay their bills, but I suspect it stems from an increase in business activity. The theory is that commercial RE credit should now begin to see the same type of pricing spreads based on risk as has occurred for consumer mortages. We will see. I am not convinced. I think supply and demand is just as active in credit markets as it is in any other economic activity.
Employment is so-so. It's not as good as the monthly release would normally make me think, because continuing claims are still running above this year's starting point:
The high was 2,624,000 on 2/17 and the four week running average is continuing to drop. Continuing claims over the first quarter seem to me to be a very good economic indicator. They are issued each week with the initial claims reports. (For March 31st, initial claims blipped up, but it was not significant - yet.) You can pull the entire series from this page, if you're interested. If you look at bad vs good years, you see a pattern in which the SA continuing claims rise from January to March significantly in the run-up to an official recession. What we are looking at now is intermediate. The numbers have only risen marginally instead of by a couple of hundred thousand, as they did in 2001 and 2003.
ISM Services came in as a dud. It showed marginal growth, but the details looked dim indeed. Particularly notable was a drop in the hospitality (restaurants, hotels, etc) sector. That is not a promising economic sign. Information also reported diminishing expectations.
Consumer credit was somewhat restrained in February. It will be a while until we have March! The February number did not look that exceptional, although it tends to give the lie to the idea that restraints on the wilder excesses in mortgage lending will be compensated for as consumers charge up their credit cards. My belief is that people were charging up their credit cards because they believed that they could pay it off by refinancing and rolling the CC debt into their new mortgage. Certainly the GSE stats showed this happening - last year most people were refinancing into a higher interest rate and a higher principal balance, and all through the year total homeowner equity percentage kept dropping.
Both ISM services and manufacturing showed very high increases in costs. The domestic reports were quite similar to JP Morgan's global reports overall. Inflation of such inputs tends to propagate through the wholesale/retail chain and end up in the consumers' laps. It does not seem that this type of inflation will stop any time soon.
I think inflation is the real factor putting the crimp into consumer spending. We have an interesting pattern of inflating needs prices (food, fuel, utilities), while pricing on a lot of bigger ticket items that fall into the discretionary purchase category have been dropping, including the ultimate discretionary purchase for most consumers - a home. I don't see this changing at all in the next few months. Advance retail and food sales for March is due out April 16th, and that will be interesting. When corrected for price increases, that report has been showing YoY declines for several months in several categories. In pure discretionary (hobby & books) there was an absolute YoY drop, but some of that could have been as a result to online shopping. I will be extremely curious to see what the 722 item (restaurants) shows for March.
Inflation can mask a recession to some extent, but stagflation is as unpleasant for the consumer as an outright recession. Nonetheless, I think I was wrong and that we are not in a recession right now. Instead we are in a period in which base-level inflation is soaring beyond wages, and that spending is constrained as a result. I don't see how this can end without a recession, because building and building employment has just begun its real decline, employment is soft-ish (but softening from a very good level), and there's not a darned thing that can happen for companies in this environment but to pull back and lay off workers.
The banking environment will be poor overall this year, and bank stocks are going to be weak as a class for some time to come.
What we are not seeing is a rise in long-term rates for credit to sound borrowers. If anything, we seem to be seeing a marginal drop in rates for these borrowers because everyone's scrabbling for them. So in that sense, we are not experiencing inflation at all. Needless to say, this is going to ameliorate the less-than-stellar economic situation.
So can the Fed cut to stimulate this economy? I say it cannot. A rise in long-term rates would precipate a further decline in the housing market and exacerbate the problem of the resetting adjustable rate mortgages. The Fed is doubtless afraid to look soft on inflation for fear of causing a rise in long rates. By doing so, they would run a risk of producing a really bad economy. A drop in fuel costs would greatly assist to quash the type of inflation that we are seeing, but the Fed can do nothing about that.
The situation is aggravated domestically by the stupid ethanol binge. There is more acreage under corn now than any time since 1944, and that means corn and other grain costs will rise more than one would expect from just the fuel and other input cost increases. Growing corn on marginal or less-worked lands is more expensive. A stupid energy policy has produced a very unfavorable situation for lower-income people.
Unless these conditions change, the Fed is more likely to raise rates than to increase them, but my belief is that they will sit on their hands and solemnly genuflect to the ability of the markets to compensate and adjust.
Monday, April 02, 2007
The index is at 50.9, which means a slight manufacturing expansion.
Manufacturing employment was negative at 48.7 - big surprise. It does look quite inflationary - prices shot up 6.5 to 65.5.
Some favorables - imports dropped and exports rose. Customer inventories dropped 5 to 48.
History Is Important
"In particular settings, teachers of history are unwilling to challenge highly contentious or charged versions of history in which pupils are steeped at home, in their community or in a place of worship."Of course all history is offensive. It's a sad tale of stupidity, woe, war, famine, more war, famine, failed states, injustices, etc. Isn't it all the more necessary to learn of all this? If you don't learn from your mistakes, doesn't each generation tend to repeat them?
The story did remind me of much of the delusional rhetoric on the housing and mortgage markets of the last few years. Exactly the same thing happened. Ignoring all long-term rules, everyone started pretending that the last two or three years of experience trumped 60 years of experience. The results are not pretty and continue to get worse.
Housing Wire carries a story that most are unwilling to address - the rising defaults in jumbo prime loans. Here are a few telling stats:
- Home equity loans now have a serious delinquency rate of 7.62% during the third quarter 2006.
- Prime jumbo (higher values than the FNMA limit, but otherwise conforming) serious delinquencies increased 16% for the fourth quarter YoY.
- Prime jumbo early delinquencies are increasing YoY too, in contrast to the last few years when they were dropping.
- Here's the killer - YoY, jumbo foreclosure rates rose 51%, and jumbo REO (lender owned after foreclosure) rose 85%.
No one wants to discuss it, but one of the measures of how overloaded borrowers are is that delinquencies are converting to foreclosures at more than double the historical rates. And we have more price drops to follow, meaning delinquencies and foreclosures are doomed to keep rising.
If Congress, banks, big financial companies or the federal and state regulators had pondered this historical truth of the mortgage market back in 2004, they could have moved fast enough to mitigate the whole situation. As it is, we have just begun to deal with an extremely unpleasant economic situation caused by ignoring reality. The effects are going to be felt by most of us. The environment we created is going to cause losses for a lot of borrowers who did not lie about their income, did not buy over their heads, got a fixed-rate mortgage but find themselves in trouble because of factors beyond their control. They won't be able to sell to avoid that trouble in most markets.
It's a real shame. It didn't have to happen.
Other things that didn't have to happen are our dependence on foreign oil. If we could have dealt with reality, we could have worked out a national energy policy which would have prevented our huge trade imbalance from developing, kept energy prices more stable, thus keeping more manufacturing jobs in the country, controlled pollution, boosted our economy with jobs and investment, and generally made all of our lives a lot better. Because we let ourselves be whipsawed by fanatics who don't understand what they rant about - just like the global warming nutcases - we didn't deal with reality and we didn't adapt to reality.
We should all keep firmly in our minds that the economic pangs of the next two years are our own fault. We didn't take care of business, and we are going to pay dearly for that. The citizens of a democracy have no one to blame but themselves for governmental incompetence.
And guess what? There is no Social Security trust fund. We haven't dealt with that either. In less than ten years, we will be funding Social Security checks with income taxes rather than the proceeds of Social Security taxes. We are already paying for Medicare with income taxes. The government pension and insurance scheduled payments aren't allocated for either, so the private sector earner is going to have to pay even more income tax to pick that up. Needless to say, the private income earner is going to rebel.
Don't think this is somehow going to go away. It won't. On the other hand, we can pull up our socks and start fixing it any time we want to cope with the real world. Any time! Any time at all! The only thing preventing us is our own capacity for societal self-delusion and a willingness to ignore history.