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Friday, September 12, 2008

And Only The Economists Are Surprised!

It is true that the economists were predicting a rise in retail sales in August. Why, I cannot tell; retail sales include gas, and although gas prices had dropped somewhat, that just moves spending from one place to another at this point. Those rebate checks had been spent by August!

Anyway, the result will surprise no one who is more of a consumer than an economist. I often wonder how some of these economists provide for their own needs, because they don't seem to spend much time in the stores. Perhaps spouses or housekeepers do the bulk of their shopping?

July's sales were revised down to -0.5%, and August came in at -0.3%. Spending on gas dropped 2.5% in the August survey. What most people did with the gas savings is spend more at grocery stores, where spending rose 0.7% in August compared to 0.4% in July. That's pretty much the cycle we are in - if most consumers get a break in one area of necessities, they'll spend that money on another area of necessities. With winter fuel bills beginning to kick in over the next couple of months, things aren't going to be very rosy going forward.

For the 12 months ending in July, total retail sales rose 2.1%. For the 12 months ending in August, total retail sales rose 1.6%. This is a trend which is doomed to continue. As I have written before, the next leg of the US recession is upon us. The first one was the production side, which hit trough last year. This is the larger half of the recession - the consumer side. It's going to be more painful by far.

It is strange to have a split recession like this, but that is what we have.

The US economy is going to want to come off its trough beginning around May of 2009. Whether it can or not will partly depend on the world economy. The world economy is not looking very good. Car sales are falling in India and air traffic is falling, and with wholesale price inflation "moderating" to 12.1%, one should not be surprised. India does need to phase out some aspects of its fuel subsidies, but it is having trouble doing so:
For example, the government control on fuel prices has rendered diesel cheaper than industrial fuels such as naphtha and furnace oils. This has led to subsidized diesel being diverted to industrial use, a group not intended to be subsidized, pushing up demand by 18-22% in recent times.
No kidding, but it is hard to reverse such a subsidy when you are desperately trying to suppress consumer inflation. So there is a big adjustment left in many industrialized Asian economies, and a big inflation surge left in the world economy due to it.

The decline in crude prices is impressive, but producer margins had been cut so heavily that less is going to come through in end goods than most economists seem to be expecting. Just look at the difference in PPI between crude, intermediate and finished goods in the US. In August, the numbers ran respectively -11.9, -1.0 and 9.6. We will see about half of that travel through as the previous goods get through the pipeline, but production was struggling to cope and needs to retain a good portion of the drop in order to restore margins.

Japan's Q2 growth was revised downward to -3.0% annualized, and there's a good bit left to go:
Business spending slid 0.5 percent, more than twice the pace of the 0.2 percent drop reported last month. The revision reflected Finance Ministry figures last week that showed capital spending fell for a fifth quarter.

Consumers also reduced spending 0.5 percent, deterred by prices that rose faster than wages. Compensation adjusted for inflation fell 0.4 percent as higher fuel and food prices ate into paychecks.
There's a tightly coiled and correlated set of forces shoving the global economy down. There is no more convincing way I can think to convey this than by following shipping indicators. Let's try this for starters:
The cost of shipping Middle East crude to Asia, the world's busiest route for supertankers, may drop for a fifth day because oil companies have hired most of the vessels for September with ships left spare.

Oil companies need to hire five to 10 more very large crude carriers, or VLCCs, to load in September, less than a third of the 36 carriers that could reach the Middle East by the end of the month, according to data from Paris-based shipbroker, Barry Rogliano salles.
I really would not expect crude prices to move up.

And how about the Baltic Dry index?

US rail numbers are still decent, but showing the next wave down:
Both carload and intermodal freight were down slightly during August on U.S. railroads, in comparison with the same month last year, the Association of American Railroads (AAR) reported today.

U.S. railroads originated 1,340,387 carloads of freight during the month, down 6,125 carloads (0.5 percent) from August 2007. U.S. railroads also originated 941,500 intermodal trailers and containers in August 2008, 16,040 units (1.7 percent) fewer than August 2007, the AAR said.
For the first half of the year, carloads especially were strong. The correlation between rail and trucking is very strong:

We're going to see this head down now for months. This all adds up to a very, very bad time for toy and shoe manufacturers in China. Believe me, there is more to come there. China should sustain decent growth, but it is going to have to spend a lot of government cash to do so. They are probably going to start working their currency down to help their consumer exporters, which are doubly impacted by current trends and the slide in the Indian rupee.

If you look at all the $150K jobs posted on employment sites, youd think this was a boom time...


There are some seriously attractive jobs out there for people if they know where to look.
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