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Thursday, January 17, 2008

Still Crunching

I'm still calculating, but I'm pretty sure that the main driving force for this slowdown is the decline in income purchasing power for most Americans.

A couple of quick notes:
The headline number on the weekly initial claims report is very misleading. The headline number is the SA number, and the seasonal adjustment gets a bit funky around this time of year. NSA claims were still rising. But what really has an impact is the ever-rising continuing claims, which seem to be indicating that people are getting off unemployment at a much lower rate than even this summer. It does not look good at all. Even using NSA iniitial claims, the continuing claims are rising way too fast, indicating a sharply slowing job market. The level of insured unemployment seems to point to about a 5.2% unemployment rate in January. Another interesting piece of data is that the overall employment level rose much less in the last few months than in recent years, also indicating a sharp slowing in the job market.

Philly Fed. The decline here gave the markets the twitch. Calculated Risk has a great post up about it. Nice graph.

CPI/PPI. I will try to get a post up about this next week, but the bottom line is that producer prices are rising at a much faster rate than CPI, indicating recessionary types of pressures at the retail and wholesale level. Therefore, the Fed has little incentive not to cut rates. The anti-inflationary pressures are already evident. Jobs, tax receipts and other data show that the Fed should be more concerned about collapsing growth along with a decline in profits. The rise in base prices is really evident only for must-have items, and central banks cannot control those types of price increases with monetary policy very well.

My guess is that the Fed will cut 75 bps. They are running out of time to make a real difference. If they do 50 they'll have to come back and do another 50 very quickly, and the market wouldn't be shocked by 75.

Collapsing second liens are the driving force for the collapse in home financing, which has produced the collapse in home sales, which is producing the collapse in construction and in home prices. The Fed can alter the likely outcome for marginal second liens by cutting rates sharply. This will allow the hapless servicers more room to knock rates down to a workable level to avoid defaults. Some of the purchase seconds are IO varying on prime. The other extremely direct effect this has is on HELOCs. A big majority of these are variable based on WSJ prime, which is generally 3% (300 bps) above bank prime. Therefore the Fed would be directly injecting purchasing power into the economy by cutting, and since the main driving force in the economy is the decline of consumer purchasing power, it should take this opportunity.

PS: This has an antic humor to it. An individual appraiser is suing Washington Mutual, basically alleging that WaMu did to her exactly what NY's lawsuit alleges WaMu did. I'm wondering to myself whether Countrywide's fake but accurate docs and its 300 PA bankruptcy cases or WaMu's position is harder to defend. Where is Johnny Cochran when the banks need him?

Comments:
I am becoming convinced that almost all of our problems today stem from the wage deflation we've had over the last thirty years or so. Health insurance? We could afford it if we made decent money. Saving for retirement? At lot easier to do at a decent salary. Paying your mortgage? Helps if you earn enough to make the payments.

Henry Ford way back when understood that his employees could not afford to buy cars unless he paid them enough. When you flatten wages down so that skilled workers make a few bucks above minimum wage, at some point they won't be able to afford the things above. Paying for it with taxes is not the answer. We need to motivate corporations to stop the outsourcing drain, possibly by changes in the accounting rules. I know that it's silly to think that we can compete against the wages that China and India pay. What they need to realize is that the only way we can compete with that is to match their standard of living. That doesn't bode well for corporate profits either.
 
Teri - I'd say you're right. It is driving the current cycle.
 
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