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Thursday, March 06, 2008

Stop Digging Bunkers!

The employment picture is definitely weakening. Today's claims release shows that. A few NSA graphs:


It's less the number of initial claims than the fact that the initial claims are "sticking" in continuing claims at too high a rate. I want to reiterate that the above graphs use the NSA numbers, which are better for YoY comparisons over time. NSA continuing claims are also now rising when they shouldn't be:
Feb 09: 3,315,409
Feb 16: 3,298,362
Feb 23: 3,383,128
Given the poor service indistry indexes and the continued drop in corporate income tax receipts at the Treasury, this is not really surprising, but it doesn't provide much hope on the consumer front to lift the economy. For consumer credit, the forecast for 2008 is increasing defaults due to employment slackness.

We are in a recession. It's a rather peculiar one, because a lot of the fundamental slumps one sees in the real economy during recessions almost seem to have bottomed out (except for consumer spending). Here is some other very real data:
Trucking:


Rail:
Sharp gains in loadings of grain, coal and metallic ores helped lead to a gain in overall rail freight traffic on U.S. railroads during the week ended February 23 in comparison with the corresponding week last year, the Association of American Railroads (AAR) reported today.

Carload freight totaled 324,868 cars, up 1.1 percent from last year. Volume was up 2.6 percent in the West but down 0.8 percent in the East. Intermodal volume, which is not included in the carload data, totaled 225,088 trailers or containers, down 3.0 percent from a year ago. Container volume fell 2.1 percent while trailer volume was off 5.8 percent.
...
Cumulative volume for the first eight weeks of 2008 totaled 2,527,679 carloads, up 1.4 percent from 2007; 1,738,760 trailers or containers, down 3.0 percent; and total volume of an estimated 261.2 billion ton-miles, up 2.5 percent from last year.
Intermodal (containers and trailers) accounts for a lot of retail distribution, so the consumer end of the economy is dropping off while fundamental production is heading into the early stages of a rebound, probably due to the weaker dollar. Consumer spending accounts for far more than half of GDP, so this year we will see the GDP effects of underlying trends in the real economy which have been persistent for several years.

The more I look at the data, the more I think that we have managed to split a recession into two halves. We've already done the real economy recession piece. If it weren't for the bad credit, I'd feel sure that this would be a mild recession. However the effects of granting lunatic loans previously will stretch out for years to come and impair consumer spending.

The task before the Fed is to try to ensure that the flow of capital into fundamental production, especially investment, does not get impaired by the credit debacle. Spending on manufacturing construction is up. It has risen sharply over the last year. There are multiple indicators that show manufacturing should be rebounding and that the effect should kick in the second half of 2008.

I would much prefer to be dealing with all of this in the States. Europe is faced with both a consumer decline and an unfavorable manufacturing environment. That is a true problem.

Anyway, I do not believe that the American population will find itself picking through the nightmarish wasteland, fighting over canned goods, etc, as some of the economic blog contingents believe. We have real pain ahead, but the underlying trends are not all down.

We really need to invest more in domestic energy production. We urgently need new nuclear power plants to support reindustrialization. France did very well for itself in manufacturing for quite a while off the strength of its nuclear power-fed factories in the 70s and 80s. It has not yet become a glowing nuclear wasteland dominated by Godzilla and Mothra, and I do believe we can pull off the same trick.

Comments:
M.O.M.

Ignore the grim numbers for the moment. Nobody knows what we "really need." Whatever it is, an unfettered free market is probably the best mechanism to meet our actual desires and needs. We got here because of a perceived need to "grow "the numbers. All the phony inducements and measurements are a failure imo.

We have enough quantity, except for time and peace of mind that is. Perhaps it's time to scrap the GDP grade inflation model. Or at least run a parallel system which trys to gauge intangibles. How can anybody feel good about GDP growth that has become overwhelmingly based on nothing more than people & gov't borrowing/promising their futures beyond their actual ability to deliver. How can anybody feel good about GDP growth that is reliant upon huge portions of the population to be so indebted that both parents have no free time. At his point, I believe GDP is a poor measure of actual growth, not to mention quality of life.

Personally, I don't want or need a 4th Home Depot in my 10 mile radius! Or a 29th bank! Is the end result of excess Home Depots and banks nuclear power plants? I'll take a neighborhood softball game over those choices anyday.

Consider, if I dig a hole and then fill it back up, GDP is unaffected. If I pay you to dig my hole and then fill it up, we supposedly get richer. Absurd!

At this point, we have too many people digging and filling holes. Better mouse traps? Sure. More mouse traps? Why bother?

Growth for the sake of growth is useless. Mr. Market is trying to tell us this. We should listen to what he has to say. It's for our own good.
 
Yeah, I find it interesting that the folks that think that we are all going to be dumpster diving and are opposed to nuke plants never seem to do anything to reduce their own electical consumption. From what I've read, they basically want civilization to collapse because they feel so guilty about living the good life.
 
MAB - it's about reflecting and assessing true costs, and I agree with your point that GDP is now a poor measure of fruitful market activity. All the consumer debt is really just a forward shift of consumption costs. It's stupid.

I'm not suggesting that the government should build nuclear plants. I'm suggesting that the government shouldn't block them, although it darned well should regulate them. The government funded this ethanol binge, and it worked out very, very poorly. That is a classic case of futzing with the market which demonstrates your point. I can assure you that plenty of people in GA would be happy to have a nuclear plant if they could get the energy benefits, jobs and industry to go with it.

Teri, I couldn't agree more. That's it precisely.
 
M.O.M.

With excess credit, we create a telecom & internet boom which collapses as do all things built on mud.

To prevent a decline in measured growth, we artificially create conditions for a housing boom. As expected, a housing boom ensues which leads to a MEW boom, which leads to a banking boom, which leads to a retail boom, which leads to an SUV boom which leads to an oil boom, which leads to an ethanol boom, which leads to calls for a nuclear boom. When the lastest boom is nuclear, it's time to slow down.

With so many booms, we have no idea what we need. Perhaps if we scapped our crude ideas about a healthy economy, we would be less worried about crude oil.
 
MAB, one clear constraint we do have is energy.

We have blocked out new coal because of pollution concerns.

We have blocked new hydro because of concerns about disrupting waterway environments. Indeed, we've even dismantled a few.

We have active campaigns and constraints against wind power. Even though wind power is necessarily undependable, it's still a good supplement.

We have blocked all sorts of new oil fields.

We have blocked just about every source of power except for nuclear and burning plants, because I'll be Bernanke if burning corn is any different than burning trees.

We can either go nuclear or forget about it. To have manufacturing you have to have a stable source of electricity, and that is nuclear.
 
M.O.M.

I'm not for or against nuclear energy. I once lived and worked near the Salem nuke plants in NJ. Never lost a minute of sleep.

My point, is that we would likely not have 5000 sf homes, multiple SUV's per family and a huge excess of retail space absent excessive government sponsored credit creation. 6% nominal growth should not be a sacred number.

Maybe we need more efficient cars, better light bulbs, or cost effective solar panels. I don't think we'll ever get them as long as so much effort is wasted on creating inflation on one hand while the other hand is fighting inflation to remain whole.

What I see spooks me though. Growth for the sake of growth is probably not the best way to create wealth. The same for excessive debt. Just think, our housing boom is now a foreclosure boom. Why is there so much servitude in a land of supposed abundance?

My vote is for quality of life over quantity of stuff.

BTW, you are NOT average.
 
from your link:

ATA Chief Economist Bob Costello said January’s strength is a good sign. But he stopped short of saying that truck tonnage is on the road to recovery. "The economy is either in a mild recession or on the brink of one, and we are hearing anecdotal reports that freight volumes slowed in February," he said.

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/01/AR2008030100644.html

MOM

how do u square the data with these observations?
 
MAB - extreme pricing pressures. I often read Logistics Management - everyone, from rail to trucking to ocean freight, is trying to cut costs. They are starting to try to share ocean freight, for example.

The plight of the independent trucker is really awful. This last rise in diesel just knocked them flat. They were already hurting badly before last fall.

I'm not denying that we're in a recession. I'm not denying that it is going to get worse. I'm just saying that we are beginning to see the first signs of better investment following a total plague of malinvestment.

We have built a fearful heaping wall of bad debt in the interim. It's a lot to climb over. There is the possibility that unless the Fed works very hard at keeping money available for businesses that this could be somewhat short-circuited.

I don't believe the government can create wealth by creating booms. I don't believe it's possible. I think what they did was take trend growth early which means below trend growth later. The cost of the earlier growth is the debt, which we now have to deal with.

Personally, I believe trend growth in the US is being driven by demographics and is much lower than I ever see anyone discuss, and now it is going to be impacted by all this bad debt.

I really blame the federal government. They allowed (BOTH PARTIES DID IT) the large financials to play this extremely speculative game.

You cannot let banks use the power of all the government-backed stuff and run wild like this. The banking market is not a "free" market. The FHLB, FDIC insurance, discount window etc are all big benefits. Combining those benefits with the freedom to jump out of the safety and soundness boat was lunatic.

However once you have let them do this, you have got to let them fail.
 
MAB..."With excess credit, we create a telecom & internet boom which collapses as do all things built on mud"...a lot of people lost money in these booms (which for the most part were probably built more on equity than on credit) but considerable value was also created, such as whatever infrastructure you are using to read & comment at MOM, and lots of things that have very clear productivity value. There's a pretty good analogy with the railroad booms of the 19th century...a lot of track got laid in inappropriate places, and a lot of people lost money, but we got a national rail network out of it.

It's not as clear to me that there were major positives in the housing boom. Obviously people need housing, but a lot of the stuff that was built was probably too large to be realistically economical.
 
One observation on the January 'bounce' in the ATA index, it is down 1.5% YoY (from the ATA press release).

So the 'rebound' may be a bit thinner than the monthly comparison might suggest...just sayin'.
 
There is a very large disadvantage to the housing boom that no one seems to be talking about. All that development ate up farmland. Around Sacramento, it sucked up rice fields. Around Hood River, OR, where I work, it turned apple and pear orchards into houses for those rich enough to have a summer home. And gee, now food prices are spiking up. When you put unneeded houses on farmland (which is truly valuable stuff), it's going to hurt.
 
Wanted to post this link: link

It's about how government restrictions are actually preventing us from having food grown closer to home. Just something to think about.
 
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