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Friday, February 01, 2008

Whoops, Someone Greased The Slide

NACM. Since July, both services and manufacturing have established an ugly trend:

Manufacturing sales dropped a whopping, incredible 8.9 points. It moved down 61.9 to 53. Manufacturing accounts sent for collection and dollar amount over terms were quite negative, so financial stress is hitting.
On a seasonally adjusted basis, the combined Credit Manager’s Index has fallen 5.0 points to 51.4. The manufacturing sector index has fallen 4.9 points and the service sector index has fallen 5.1 points. “In all three indexes, all of the 10 components have fallen, giving a very clear signal that the indexes are in a strong and pervasive downtrend,” said North.
I'll say. January 07 was not exactly a blazing economic high point, either. This is the first indicator I have seen of a much sharper downward trend now beginning to take hold. I place a lot of reliance on this report because this is where the pedal hits the metal, or doesn't. NACM tracks not activity but credit. Without credit there ain't no activity; this would be a very leading indicator. Manufacturing in this survey tends to lead services for a month or two, so next month we are very likely to see another downturn in services.

December's and January's NACM were the lowest since the inception in 2003.

Combining NACM (which I found surprisingly bad) and Chicago PMI is enough to make anyone flinch. If you want to look at the gory details, the link will bring up a pdf document with a lot of detail. Bottom line is that leading is off more than coincident, and leading are pretty much in the contraction zone. The sole factor that could be considered somewhat favorable in Chicago PMI is slow deliveries, and for that I go back to NACM, which tells me that businesses are short cash, pressed by costs, and waiting to get cash in to spend. So I consider that unfavorable in this instance.

I would say that we have (by classical standards) been in a slow mild recession for a bit, and now we are moving into the next phase in which rolling cutbacks spark a much faster downward spiral. It's not a mid-cycle downturn because of the negative YoY gross private domestic investment. And it's not stabilizing.

The oddity about this is that it appears to have been going on for some time but very slowly - far more slowly than typical for a recession.
One factor is that the leading edge of the downturn was felt by a sector - construction - which has a concentration of recent immigrants who spend relatively little in the domestic economy, are almost invisible in most economic measures because many of them are illegals living in the shadows, pay little in the way of income taxes, and send a big chunk of their earned income out of the country. Another factor is that there is still a lot of "equity" being liberated from housing; i.e. the monetary effects of the credit bubble are still persisting in the economic atmosphere.

However, the more you tap credit in a bubble, the worse a downturn you provoke. The debt drags long, long after the money's been spent, and cuts the effect of every favorable economic development.

We now come to the point at which the impact of the real, underlying downturn shows up in the mainstream.

Returning to Treasury tax receipts:
FUT for January actually looked pretty good. It is lower than FUT for the previous year, but that's been so for a while. And not only that - FUT in recent weeks has showed a trend upward according to daily receipts. Thus, I believe that ADP's report is more representative of actual trend than January's employment report.

HOWEVER, using the same FUT indicator, BLS has still missed a whole bunch of lost jobs for a long while now. If one looks at the recent trends in WIET, one sees that YoY growth stopped and that income and employment tax withholdings are now following FUT downwards. This is hardly a surprise, because the collapse in state tax receipts in the third quarter shown by Rockefeller Institute was indeed borne out by treasury corporate income tax receipts. These have gone down to such an extent that it is impossible for many corporations not to be seeking to cut costs wherever possible.

Another way to look at it is what I have been writing about for a long while - that freight volumes simply cannot drop as they have for as long as they have without employment losses. Employment follows volume rather than some bogus measure of economic growth generated by ignoring real inflation.

Indeed, looking at all the data, I would say that Donna, Teri and Vader (credited in alphabetical order) have been phenomenally accurate in describing the trends dominating the economy. Experienced workers are being shuffled off and replaced by cheaper workers, which accounts for rising FUT and falling WIET; consumers are breaking and collections across the board are slowing, which accounts for the bad cash position of businesses, and the end to rapid development money is leading to sharp regional downturns which are concentrated on the East Coast.

But now the West is rapidly folding, beginning in the more rural areas. The Midwest, which has been relatively weak, is less affected.


There's a lot there to think about. One is the "mixed" nature of the recent data, like ISM corresponding to 3% growth and truck tonnage turning up. Another is the fact that 4q MEW appears to have been robust. So many crosscurrents that direction looks clear (down), but pace is anyone's guess.

I call this a strip mall recession. Its more dependent on the direction of the savings rate than anything else (like the inventory levels ECRI keeps harping on). The consumer managed to not save by drawing on MEW in 4q. Will saving now turn up in 1q? If so, the pace of the downturn will quicken and we'll see the impact on SERVICE, not manufacturing, employment. This week's ISM services will be telling. My understanding is January was a terrible month for retail, and that prices have also been rising faster for processed food and other commodity-heavy non-durables (tissues, etc.).
David - but rail tonnage is rising too, however it is doing so in commodities (grains and scrap, for example), and clearly still dropping in the added value products of retail. Yellow Freight's dropping for-hire fleet business is another symptom.

I saw your designation of the "strip mall recession" over at Calculated Risk and immediately thought that it was apt.

There is another piece to this which we should not forget. Understated CPI has suppressed retirement incomes, and real wages for a big chunk of the population are declining also. Therefore we have the sharp growth of credit as an outcome of a real slackening of the ability to consume. However credit expansions have their logical limits, and this one appears over as rising defaults roll through not just mortgages but autos and CC debt.

I don't expect MEW to slacken hugely, but I think it will now be more concentrated among the older homeowners who have real equity, and that MEW will be spent at grocery stores, doctor's offices, for utilities and heating, and at the pharmacy. It is not suddenly going to show up at the strip malls.

Therefore, I'd say retail is on hard times (which the freight data shows) and will continue to be under pressure until the overhang of consumer debt is exhausted and real incomes recover. That will take a while; therefore, falling retail and service business profits will cause additional job cuts, so the self-reinforcing cycle is in place.

The excess credit in the system will cause a long drag. I am not sure that it would not be better for the overall economy just to let the bankruptcies and foreclosures roll through the system. The quicker it's gone, the sooner the recovery.
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