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Thursday, May 15, 2008

US Domestic

Empire State Index stalled out:

The general business conditions index fell below zero, to -3.2. The new orders index remained close to zero, and the shipments index, while positive, declined markedly. The prices paid index exceeded its earlier record high by a wide margin, reaching 69.6, while the prices received index dipped several points.
Expectations by firms were that they would be raising prices considerably more than last year in 2008. Input cost increases were not recovered in the earlier period, and some of that should show up this year. Expectations were for input costs to continue to rise.

Initial Claims, while not dire, are still increasing on a seasonally adjusted (SA) basis. On an NSA basis they continue to decline. The same pattern holds true for continuing claims, which dropped over 123,000 for May 3rd (continuing claims run a week behind initial claims). The level of claims is consistent with recession. To understand the impact, compare May 3rd's continuing claims this year (
2,833,473 NSA) to the comparable week in 2007 (2,290,364), or a YoY increase of 23.7%. Needless to say this does not help the economy. It equates to an NSA insured employment increase of 0.4%, which is significant.

One of the weaknesses of measuring insured employment is that after six months unemployed individuals drop off the rolls.

Although May treasury receipts could recover, the deposit pattern for FUT (Federal Unemployment Tax) compared to May 2007 is markedly worse. I did expect to see this, but not quite as emphatically. As we move into the spring and summer months building is at its height and therefore the change in employment indicators should be emphasized for this period.

April G.17
: Industrial production dropped 0.7, and the numbers look very similar to February. Of most concern is the 1.1% drop in business equipment. That is a very bad sign, and markedly worse than February. Based on that figure, one might suspect that Q2 GDP will be negative. On a YoY basis, industrial production has managed to climb 0.2%. Hardly strong. The positive subcategories on a YoY basis are business equipment (3.0), materials (1.3), mining (3.1), and utilities (.8). And for April the changes were business equipment (-1.1), materials (-.7), mining (-.8), and utilities (+.3).

Capacity utilization dropped to 79.7. Compare that to the lows for the previous two recessions, which were 78.6 for 91 and 73.6 for 01 (with the bottoms occurring later in those cycles). So the technical economic description of this report should be "piss-poor". April was quite cold, which would have driven up the demand for utilities.

Philly Fed: (the theme is great expectations; note the 2001 pattern)


The effect of the rebate checks on the general economy will probably be muted. I expect utility companies and credit card companies to see better payment patterns and lower delinquencies. I would expect some benefit to the Walmarts of the retailing world, as people who have been avoiding spending on clothing go in and spend on jeans and the like. But consumer psychology is not going to change at these gas and food price levels, so very few will spend most of it in the stores, and continued increases in food and gas prices indicate that the essentials will suck up this money from Washington for the majority of the recipients.

The major story for the US consumer economy over the next six months will be high prices for essentials and much more conservative spending by consumers. Also, the major impact of the home price debacle is due to hit this year. Refinance money usually provides at least a one year cushion for consumer spending, and the restrictions on HELOCs and home equity loans are quite recent. The major tightening on CC standards dates to last fall. Thus we are moving into the period in which 80% of the consumer credit restrictions are due to show up in economic numbers. The Wall Street layoffs are also moving some of the economic impact to a previously immune area with high incomes.

On gas consumption: I have seen estimates of the current drop YoY between 5.8% and 6.0%. However the pattern will accentuate through the year because of the marked drop in construction activity. Also, service businesses aimed at consumers such as home remodeling and lawn maintenance are due to have a tough season. Construction workers drive trucks and transport a lot of materials, so consumption falls should accelerate. The vehicle replacement effect is cumulative over time and will keep building.

One little-discussed aspect of the US economy, especially with respect to employment, is the impact of replacement of illegal workers. I suppose it is simply too politically incorrect to discuss.

The US economic numbers would look much worse and consumer consumption would be much worse if it were not for a very strong replacement of illegal workers by legal workers that is taking place. Because many illegal workers were trying to send money to foreign countries to support families, the consumption effect of illegal employment is very low, and may in fact be overbalanced by consumption of social services. This has some offsets for the US economy, which are preventing more dire numbers at this time.

It is almost certain that the relative impact of replacement of illegal workers with legal workers is providing more impetus to the US economy than the stimulus checks. Also, it will continue for longer. It is not just the replacement of workers, but the effect of removing underbidding for labor. A US worker simply cannot compete by bidding for wages sufficient to support him- or herself along with dependents in this country compared to an individual who is supporting dependents in a country with much lower living costs.

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