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Thursday, May 10, 2007

The Story Of The Day And Perspectives

Bloomberg has a good summary of the retail store chain reports for April:
``Consumer spending has slowed, and these numbers very much confirm it,'' said Michael Niemira, the International Council of Shopping Center's chief economist.

Sales at 51 U.S. retail chains fell a combined 2.3 percent, the ICSC said. The decline was ``ugly,'' the largest since the New York-based trade group started keeping records in 1970, said Niemira.
Note that these are non-price adjusted sales; real dollar sales were even lower. Anybody who lived through the 70's hates to see any mention of them in an economic article. Analysts are still blaming the weather:
Last month was the coldest April since 1997 in the U.S., the wettest in four years and the snowiest in more than 14 years, according to Weather Trends International, a Bethlehem, Pennsylvania-based firm. The Northeast and North Central states were especially hit by snow, the firm said.
I think Al Gore is going to get depressed if this keeps on much longer. We now have the competing press memes of the New Ice Age (economic press) and CO2-induced threats of meltdown (AGW lobby). I think both should be taken with some skepticism; taken literally they would indicate that we have a choice between shivering poverty a la Tiny Tim or roasting prosperity. My guess is that the real future will resemble neither of those two extremes. It is, however, an interesting fact that commercial weather records and trends now vary quite a bit from government ones. The answer may lie in these links, which point out that "adjustments" to actual temperature records may have produced an upward bias.

Notably, the New Ice Age did not affect shoppers at Sak's and Nordstrom's, both of which chains racked up nice gains. This trend has been consistent since February, and I first noticed a definite shift in consumer spending in January, which was a darned nice month, weather-wise. My guess is declining sales have a lot more to do with inflation than weather. Walmart's same-store sales were down, but sales at Sam's Club were up. Costco sales were up. People are just pressured by higher gas, heating and food prices and are stretching their dollar. We are seeing the signature of declining real incomes for a big segment of the population, and REAL inflation, rather than "core" inflation, is causing a lot of it. Needless to say, declining real incomes reduces consumer spending. Eventually, it will reduce employment (further reducing consumer spending) and business spending. It may be a idiosyncratic error in personal judgment, but I just cannot understand why so many economists expect an upward tick in GDP later in the year.

In other relevant news, the trade deficit rose rose unexpectedly in March (but was adjusted down from February). Most of the rise was probably related to fuel costs, however this means that the first quarter GDP is likely to be adjusted down from the current 1.3%:
"It indicates a downward revision in growth based on the early estimate for the first quarter," said Keith Hembre, chief economist with FAF Advisors.

High Frequency Economics now expects first quarter economic growth to be revised downward to about 0.5 percent from the 1.3 percent that the government initially estimated last month, said their chief U.S. economist Ian Shepherdson.
I don't think GDP will be revised down 0.5%. However, the bottom line is that if we were generating more of our fuel domestically, the economy would be considerably better. The form doesn't matter - wind, hydroelectric, solar, nuclear, oil, coal, and natural gas are some of the domestic production avenues. But rising imports of, and rising import prices for, fuel are going to prevent inflation from settling and our trade deficit from correcting. This is not good economic news. The ethanol push won't help this problem much and is inducing inflation all by itself. A workable energy policy ought to be a top US economic priority.

Trucking and Rail statistics are still showing substantial YoY declines. March TSI (note: this is a combined stat which also includes pipeline and passenger traffic) eked out a 0.1% increase YoY, but is still 1.0% down from its peak in May 2006. Freight alone looked worse:
The TSI for freight rose 1.3 percent in March from the February level, rising after two monthly declines. The rise was the largest monthly increase since May 2006 (Table 6). The March freight index of 109.1 was down 1.4 percent from its March 2006 level (Table 7), and down 3.3 percent from its peak of 112.8 first achieved in January 2005.
The most current railroad data (April):
U.S. railroads originated 1,324,502 carloads of freight in April 2007, down 29,861 carloads (2.2 percent) from April 2006. A total of 908,139 intermodal units were originated in April 2007, a decline of 40,110 trailers and containers (4.2 percent) over April 2006.
For the first four months of 2007, total U.S. rail carloads were down 241,380 carloads (4.2 percent) to 5,450,378 carloads, with the biggest declines coming in motor vehicles and equipment (down 44,135 carloads, or 11.4 percent); crushed stone, sand, and gravel (down 43,803 carloads, or 11.6 percent); and grain (down 29,536 carloads, or 7.5 percent).
U.S. intermodal traffic, which consists of trailers and containers on flat cars and is not included in carload figures, was down 35,502 trailers and containers (0.9 percent) for the first four months of 2007 to 3,847,178 units.
The recent intermodal drop is disconcerting; this is a change in trend. Most consumer goods come into the country on shipping, often get transferred by rail, and are distributed to retail chains by truck. Carload tend to be more industrial point-to-point. There are trains which carry carloads of coal to power plants, for example.

Trucking looked better in February and March (latest stats), but sounded a cautionary note:
The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index rose 1.2 percent in March, which was the second consecutive monthly gain. The index increased 1.6 percent in February.

On a seasonally adjusted basis, the tonnage index improved to 114.6 (2000 = 100) in March from 113.3 the previous month. The index grew 1.6 percent compared with a year earlier, marking the first year-over-year increase since June 2006 and the largest gain since December 2005.
ATA Chief Economist Bob Costello said the year-over-year improvement was a positive sign, but that the industry was not out of the woods just yet. “The latest increases, both monthly and year-over-year, bode well for the industry, although the year-over-year changes could still fall back into negative territory during some future months. Many motor carriers are telling us anecdotally that April has been filled with starts and stops.”
The April ISM reports for both manufacturing and services were strong, though, so maybe May will be better for both rail and truck. The see-saw pattern has been quite strong. To end on a brighter note:
Economic growth in the United States is sustainable throughout the remainder of 2007, say the nation's purchasing and supply executives in their spring 2007 Semiannual Economic Forecast. Expectations for the remainder of 2007 are encouraging in both the manufacturing and non-manufacturing sectors.
The forecast:
Manufacturing Growth Sustainable in 2007
Revenue to Increase 5.6%
Capital Investment to Increase 5.8%
Capacity Utilization at 82.8%
Non-Manufacturing Growth Sustainable in 2007
Revenue to Increase 2.1%
Capital Investment to Increase 5.6%
Capacity Utilization at 84.4%
Some recent surveys have showed lower hiring planned, but the ISM forecast quoted above is quite recent. ISM is also showing high inflation on cost inputs.

The initial claims in the weekly unemployment release was good, but the gap between the continuing claims YoY is not, and the direction of continuing claims is upward (SA, NSA, four-week average). No real weakness yet, but we could easily veer into it. The last monthly employment release showed somewhat weak job creation and rises in marginals like economically induced part-time employment and teen unemployment that usually presage worse employment figures. So while employment is still healthy, the direction of leading indicators does not show strength.

If you want some perspective as to why I think we are probably now in a recession, this paper might help (scroll down to download it in the format of your choice). You don't have to deal with the math if you hate it; the graphs are quite explanatory.

I do not believe that economic shocks usually cause recessions. In a healthy economy, economic shocks sometimes stimulate growth! I believe that recessions only develop when enough downward cycles coincide on top of an underlying, somewhat subliminal weakness that constrains rapid compensation. That weakness can take many forms, and in this case the real precipitating factor is an overload of unstable consumer debt, which will force more constriction in consumer spending than would otherwise be seen. To combat that weakness we would need a strongly diffused economic stimulus, and we don't seem to have that in the cards. We dealt all those cards already.

However, I think there are emerging economic patterns which presage a later boom, if we could reverse some of our public policy which has suppressed domestic investment and growth. These patterns include:

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