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Thursday, April 24, 2008

Night Of The Undead US Economy

Needless to say, New Home Sales are now tanking in a gloriously expectable manner. The reason is that there is enough foreclosure inventory on the market in some of these areas at very low prices to undercut new home sales. It's most unpleasant to be sitting trying to sell new units when a block over there are four REOs for sale, and the prices on those REOs are getting cut 5% a month.

The only region still generating a lot of sales is the south. Out of the 526,000 units sold in March, the south accounted for 312,000 of them. Therefore - this is important - the median and average prices on these reports are not at all comparable to prior years' pricing, and should be completely disregarded.

Not that prices are rising! Reported supply is now dropping, even if we take into account all of those hidden, recycled units that are never reported. Over the year on an SA basis, homes for sale at the end of the period dropped from 548,000 to 468,000. However this is still not good enough to reduce months of supply, which rose over the year from 8.3 to 11 months. Ouch. Further builder bankruptcies to follow.

What about the hidden, recyled inventory for all those cancellations that Census does not track? Well, one of the measures I am using to guesstimate when that supply starts to fall are Completed homes for sale at the end of the period. Over the year that number rose from 181,000 to 189,000. Permits, starts and completions are beginning to fall, though, so sometime this year inventory actually should start decreasing. I feel pretty sure that we have not reached that point yet. Another inductive metric I am using to guesstimate the turn in real supply is the median months for sale figure. Over the year that rose from 5.5 to 7.5 months, and it has risen in each of the recent months.

So why is this a tale of the Undead US economy rather than the Dead US Economy? Well, the housing market in general is in a deep recession, financials are in deep doodoo, and autos are in a recession. But there's more to the US economy than that.

Initial Unemployment Claims
: On an NSA basis they dropped about 40,000, and on an SA basis they dropped about 33,000. Better yet, both NSA and SA continuing claims are falling. The unemployment picture is worse than last year's, but it is improving slightly.

So what can account for the better UI trend? Well, manufacturing really is doing better than last year.

Advance Durable goods came in decent - not great - but decent. This indicates significant strength in some sectors, because cars are horrendous. Ex-transportation, the shipment/inventory ratio YTD is 3.5/2.5, and new orders are up 3.0. Not bad at all! The weaker dollar does appear to be producing some insourcing. Primary metals shipment/inventory ratio YTD is 7.4/1.0! Fabricated metals look different at 0.6./1.7, but on the month the ratio is 0.8/0.1. YTD Capital good shipment/inventory ratio is 6.4/10.8. The monthly on that is 1.7/1.7. Not bad, and much better than last year's YTD 0.5/7.9 and monthly of 0.5/0.6.

Almost anything to do with the consumer side of the economy is weak or depressed, but production has a much bigger relative pass-through to economy overall. So we are in the odd position of having rail and trucking volumes rising this year even as the overall economy is weakening.

Because the Fed has achieved what they had to do, I expect that the Fed is about done with cutting. Eventually the weakness in the rest of the world is going to roll back and make further production gains in the US difficult, and then the Fed will cut again. However, taking the hit in building and autos now will slowly build up some latent impetus for later.

The rest of the world will not escape, and when it really begins to slacken we need to have some of our tragedies behind us.


I was wondering what you thought of Shadowstats.com and John Williams preaching about a hyper inflationary depression for the US. Do you think extreme opinions like this are really just pumped by investors trying to push up the value of gold?
Thanks MoM,it is nice to see some less than dismal news.Here in sonoma county it looks very rough.We have an economy based on Tourism,Wine Grapes and Construction (plus a black economy I can't quantify of pot growers and meth labs).A colder than average spring is causing losses to the growers and $120 oil is causing rising input costs.$4 gas is hurting Tourism,and construction,ouch.The March YoY numbers are a 47% decline in home sales,A 20% drop in median prices,and a 472% increase in foreclosures.The foreclosure increase is,of course skewed by the abnormally low numbers the last few years,but the rate of increase is breathtaking and it shows no signs of abating for a year or two.The affect the increase in foreclosures is having on the popular perception is substantial and is exagerrated by our local paper (Press Democrat)which competes with the SF Chronicle.The PD says "Foreclosures are up" but the market is good.The Chronicle has a front page graph showing a county by county percent increase in foreclosures for the Bay Area.472% gets peoples attention,and when the local media glosses over it,trust diminishes (with good reason).The lack of trust in our Government and press is likely to have substantial adverse social consequences IMO.

One thing to note is that nominal #'s that feed into real GDP will all look marginally better than they really are, for obvious reasons. The question is whether the "deflator" makes any sense. Australia and Europe have similar inflation rates to ours, yet we are the ones with a very weak currency. How could this be? Seems like we are really understating inflation.

If the economy stagnates rather than falls apart, inflation will likely rise from here. Bond yields are not priced for anything close to that. Imagine if the economy actually grew in the second half -- what would mortgage rates be like then? And what would be the associated likelihood of a double dip?

Anything to do with bonds is clouded by China of course. And the key to Chinese T-bond purchases, of course, is the price of rice in China. So the ideal scenario is for the world economy to weaken ever so slowly, global inflation to come in, and the Chinese to keep recycling dollars into Treasuries. This is a tall order, but its one the market seems to believe in at the moment.
Nmoerbeek, rightly or wrongly, I do not personally see the use of gold. Gold is good when money is loose. The overall trend is to tight money.

Tom, the places that bubbled are taking a fearful hit! It's almost as if I am looking at a negative of the economy of the last few years (except for Michigan). What was bright before is dull now, and vice versa.

David, my belief has been and still is that the bubble is real, huge, and nearly global. I think Asia overall will suffer far worse than we will.

The key to avoiding something similar to a global depression is to let the air out slowly, stay away from carbon trade initiatives and anything that even smells like a tariff, and try to let economies rebalance.

The problem for economies in Africa and most of Asia is that their workforces and often their production are dependent on subsidized fuel and food. The current situation cannot continue without grossly weakening those currencies. If the governments stop subsidies, the governments may fall and if they don't the growing consumer segments of those economies disappear. If the governments keep subsidizing, the end result will be equivalent to hugely magnifying public debt. I don't even know how much in hidden energy co bonds the Indian govt has out there. It's not just the overt subsidies - it's the hidden subsidies.

If you look at the actual fundamentals of the US economy, we have imbalances but not as severe as most of these other economies. I cannot for the life of me see what India will do. It is going to have to cut other social programs like medical and education to sustain the subsidies.

I expect to see steady buying into the USD zone because of that. People just are not being realistic about what these economies can sustain.

Mind you, there is absolutely no way that food and fuel inflation can adjust as long as these subsidies continue. I hope that people will get a grip on the biofuel issue, but there is a much bigger world economic problem. If you subsidize the entire cost of food and fuel, it allows you to keep your labor costs and costs of production low, and for a long while that worked for these economies. The gain in outside investment paid for the cost of the subsidies. But it's not a trajectory that can continue forever; as with house prices, one reaches a point at which energy and food costs outweigh the increased money flowing in. There is not a quiet, safe downward adjustment path available. They have been doing something similar to OA mortgages, and it looks like it is going to rock back hard.

Try to imagine a government that essentially has to cover 50% of the living costs for one-third to one-half of its population - year after year after year. Then add to that a massive fuel subsidy for production businesses.

Everyone knows, because the US talks about, the demographic issues we face with our upcoming bulge of retirees. All these other countries in Asia face something similar with a different cause.

Almost anything to do with the consumer side of the economy is weak or depressed, but production has a much bigger relative pass-through to economy overall. So we are in the odd position of having rail and trucking volumes rising this year even as the overall economy is weakening.

Rail and trucking prices are rising, but I'm not so sure about the volumes part. I just did some new charts of inbound Los Angeles and Long Beach container traffic and posted them on my blog. In that same post I also link to several rail and trucking articles.

Undead economy for sure though! Very undead!

David, my belief has been and still is that the bubble is real, huge, and nearly global. I think Asia overall will suffer far worse than we will.

I'm 100% in your camp. I can't believe apparel is actually still deflating (I bought a LOT of cheap clothing in the past few months as an inflation hedge, go figure). How does a foreign worker make less money producing cheap t-shirts, paid in a currency that's in the toilet (our US dollar), and still somehow manage to pay for rice that has doubled (if not tripled) in price?
Mark,have you considered "forever stamps" as an inflation hedge? Terry Pratchett's book "making money" mentions a similar idea.Tom Stone

I have considered forever stamps. I just wonder how much I'll need them in 5 years. I seem to be sending a lot less physical mail in recent years. For example, Legacy Treasury Direct uses snail mail. Treasury Direct is online only (no mail at all). Legacy Treasury Direct is clearly going away at some point.

By the way, I-Bonds pay 1.2% over the CPI still and are tax deferred for up to 30 years. That rate changes on May 1st and it seems very unlikely to me that it will be going up.

I-Bonds and TIPS directly from the government are my preferred inflation hedges these days, although I did hold gold and silver from 2004 to 2006 which treated me quite well.

For what it is worth, I also like toilet paper in this environmnent. It is either super cheap compared to gold and/or gold is super expensive compared to toilet paper. In any event, it is something I know I will always need and has a long shelf life.
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