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Friday, May 30, 2008

Personal Income And Outlays

BEA released today. This is what caught my eye:
Goods-producing industries' payrolls decreased $11.4 billion, in contrast to an increase of $4.5 billion; manufacturing payrolls decreased $5.1 billion, in contrast to an increase of $2.5 billion. Services-producing industries' payrolls decreased $6.8 billion, in contrast to an increase of $22.4 billion. Government wage and salary disbursements increased $3.7 billion, compared with an increase of $3.4 billion.
Proprietors' income decreased $0.9 billion in April, compared with a decrease of $4.9 billion in March. Farm proprietors' income was unchanged in April; farm proprietors' income decreased $4.9 billion in March. Nonfarm proprietors' income decreased $1.0 billion in April; nonfarm proprietors' was unchanged in March.
As for incomes, on a YoY basis the growth in WIET tax receipts has continued to decline pretty steadily this year, and it appears that we are approaching the no-growth range.

Real disposable income and real personal consumption are also flattening in this report. However the nominal figures are showing some growth that I think may be a bit unrealistic. Either way, consumer spending will be constrained even if it weren't for the pressures involved in basic needs inflation. It's not a catastrophic collapse - there are upward vectors - but overall the picture is of continued and broadening decline.

All the European consumer confidence surveys show significant drops in consumer confidence. Well, we can certainly sympathize. The UK was the latest, and it is not good for Brown's government. Confidence was about at the level at which Thatcher exited stage right.

The USD continued its rise against the Euro, but crude took back some of yesterday's fall.

I continue to spend most of my time trying to get a grip on the Asian situation, especially India. There are entirely different reading skills needed for other cultures. Here's a clue in this article about India's 8.1% inflation:
"Prices of commodities produced in India are certainly moderating, but prices of anything that is globally traded and we import are not declining... All I can say is food prices may moderate, it is very difficult to hazard a guess whether non-food prices will moderate," he said.
Unless, non-food prices actually decline, it is very difficult to hazard a guess about decline in overall inflation, he said.

Referring to "relentless rise" in global crude oil prices, that is trading around 126 dollars a barrel on Friday, Chidambaram said unless there is some relief on crude oil prices, it would be difficult to say whether headline inflation would decline or not.
But the measures, we have taken, have contained inflation. We are confident that we will gain mastery over this inflation and inflation will be contained over time," he said.

However, moderation in inflation depends on global crude oil and commodity prices, he said, adding, "Surely, we are still in full control over the situation."
Here is your international reading quiz. What is the minister saying?
A. The Indian government is in full control of inflation and will lower it.
B. The Indian government has little control over remaining inflation, although it has been successful at pushing down prices of domestically-produced commodities.
C. The Indian government has no control over inflation,, and doesn't see any way it can control inflation, and expects inflation to continue rising because the measures to control inflation it has implemented can only be temporarily effective.

If you invest in emerging markets, the ability to get the correct answer is important! Answer in comments.

Update: Back to the US. Chicago PMI for May was released, showing marginal improvement and essentially a three month flat result. Under the circumstances this is darned good:

C. They have lost control of the situation entirely. The poor guy is being completely honest.

The decision to do something to address the energy companies' operational deficits is supposed to be due this weekend. Any raise in rates will raise inflation.

Regarding the Chicago PMI, what's unusual in the report is the divergence between prices paid and the overall index.

Here's the chart:

It only goes back to '92, but as you can see, this has not happened in the past 16 years. What's the message of the chart?

-it shows the impact of rising import prices.
-we should expect inflation to accelerate in the coming months.
-the Fed can either accommodate the price increases and prop up the PMI, or it can fight them and watch the PMI collapse. It can't do both.

We still live in a nominal world: the market thinks the Fed is done cutting, but in real terms Fed Funds is falling as inflation rises. The Fed is falling more and more behind the curve.
David - yes, I looked at it. But this is part of the overall syndrome worldwide.

And you can't have a global cause without having a global effect. Inflation will retract - as far as I can see, it is already backing up on the consumer level in the US, as demand falls.

And demand will fall this summer unless I am somehow getting a totally skewed picture, but I don't think I can be. These costs will bleed through and are already causing retractions in consumption on the business and personal level across a wide range of economies.

Car sales in Spain, for example, are down by 18% YoY.

That's why I say the commodity run up, which is composed of demand and speculative elements, is due to hit a wall.
C. He lists of a zillion things that the government can't control (food, energy, imports) that will overwhelmingly determine inflation. Domestic price controls aside.

Here's a more straightforward article


" NEW DELHI: The government's administrative and fiscal measures failed to have the desired effect on soaring prices as inflation for the week ended May 17 moved up sharply to 8.1 per cent.

Announcing the figure on Friday, Finance Minister P Chidambaram expressed confidence that the government would be able to soon rein the inflation in."
Yep. That's exactly what a lot of Asians do.

Indians tend to be very honest, IMO. But they can easily confuse Americans because they will describe the situation exactly and accurately while expressing their contradictory hope as their conclusion. They aren't lying at all.

This shows up in all sorts of circumstances.

Per capita Indian income rose to slightly over $800. That's a great gain, but the gains in income are slowing and appear not likely to outpace the inflation rate at current trends.

The problem relating to food and fuel prices is extremely serious on the world stage. I'm very devastated that both apparent presidential candidates are discussing a carbon cap and trade system that would operate as a tariff against these goods. It appears to me that idealistic rhetoric is being used to cloak a very serious policy gaffe.

There's real demand, and there's nominal. The latter is the one thing the Fed can control.

In other words, the Fed can accommodate rising prices, and it has obviously done so. Okay, maybe they'll pause for awhile, but the lagged effect of 325bp of accommodation is now being felt. Moreover, as inflation rises, Fed Funds become MORE accommodative even if they stand still. The result is an increase in nominal aggregate demand as prices rise.

Real aggregate demand, of course, is another story, and there's plenty of evidence that its suffering and will continue to do so.

So what happens to commodity prices as real demand falls? One can make the case that commodity prices are a function of nominal demand, and so it simply does not matter that real demand is falling.

Someday, the Fed will have to squash down nominal demand. I suspect its far off into the future, particularly given the rising borrowing needs of the Federal AND state governments.
I just saw a report on Seattle ports that they can't get enough freight containers to ship goods out to Asia because inbound shipments from China and Japan are way down. Goods are piling up on the docks waiting for shipping containers. Guess that shows decreasing domestic demand.

I also saw an opinion by an economist (Name escapes me.) that the level of the dollar is just about right. He claims that the low dollar is resulting in fewer imports and more exports. (That seems to verify the Seattle ports story.)

He also claims that the Saudis, UAE, and other ME sovereign funds are buying and holding oil contracts, thus drying up the supply and driving prices higher. The oil producers have nothing to lose. If the contract expires they can easily take delivery of the oil. This is an aspect of the huge rise in oil prices I don't think many have examined. He claims that the CTFC is looking into this and could put a stop to it if it is happening.

Just some anecdotal evidence you might find interesting.
David - that is a good point, but in many cases the Fed doesn't have control of nominal demand. The only time it does is for resources produced domestically or for which US consumption makes up a very large portion of global demand.

There are other forces at work creating demand and nominal demand in the world than the Fed. Now I grant you that they have thrown buckets of money at the situation, and even thrown buckets of money to other CBs such as Switzerland, the ECB and Canada.

I would describe oil prices as a function of a complex equation. The Fed's activities have a lot to do with it, as do the activities of speculators and the Asian subsidies.

But where is demand growing, David? It's in the countries which are providing the subsidies, not in the developed countries. That's a fact that monetary theory cannot explain. There is no price signal and thus no adjustment.

Another thing - the destruction of capital in the financial institutions has been so great that I doubt the Fed's activities have even succeeded in sustaining the real money supply domestically. Money is in effect created by the market, especially with securitized debt, because there is little restraint when selling such debt to investors that need no risk reserves. The classic statements about money supply have been superseded by other means of creation of money, given electronic money, the issuance of debt securities, and international flows of capital.
Jimmy - no question that what you describe is happening. One can see it in the intermodal freight figures too.

The US population has constrained consumption of just about anything except food, fuel, medicine and utilities, and I suspect that we've really cut down on the medicine if you measured quantities.
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