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Friday, December 12, 2008

Anatomy Of A Rather Severe Recession

Take a look at this:

The base data is available from here. The graph shows the YoY time series for US retail sales (total) for August, September, October and November since 1997.

You should be able to click on the graph to see a larger version.

That fan arrangement shows a sharp negative and steepening trend. A lot of this is motor vehicles, but in November most spending categories are well down, with food, drugstores and general stores (read WalMart) being up YoY. In other words, McDonald's and WalMart are doing well, grocery stores are still pressured, and the larger and more discretionary the spending category, the more likely it is to drop.

In terms of YoY USD changes (the figures I am citing are retail sales by month, adjusted for seasonal and trading days, but not for inflation), on a YoY basis retail sales in November showed a drop of 28.4 million dollars. This is actually not as bad as it looks, because in part we are still seeing the effect of this summer's energy prices. Due to high costs, some consumers that normally pay on a budget basis much earlier in the cycle didn't, and so now spending is being impacted. That pulse will wear off in about 3-4 months.

However consumers compensated in part for stagnant incomes and recently, soaring inflation, with credit. Some of this was in revolving credit, and some was in the form of shifting short-term debt into home loans (MEW). Trends in revolving credit (this release by the FRB does NOT include RE-secured revolving):

There is almost always a good correlation between the Q3 rate of growth and Q4's. So consumers aren't going to be charging up a storm. (The 04 hump represents MEW-induced improvements.)

However, see M1. In the last 3 months, M1 has grown 36.9%. In non-bankerese, M1 is the money supply as measured by currency outside of banks, traveler's checks, demand deposits and other transaction accounts (such as NOWs). It does not include savings, which is measured by M2 and has grown only 13.8% in the last three months.

There is some cash out there; how much of it is in consumers' hands is the question. My guess is that a lot of it is sitting in the hands of the financial conservatives. They may give it away to charities, they may eventually buy stuff they need, they may use it to help out family and friends who are in a pinch, but they aren't suddenly going to go out and buy big-ticket items out of an abundance of high spirits.

The last bit of data is that current consumer sentiment is improving, surprising, apparently, all economists. The rest of the country knows why - the drop in gas prices is allowing people to improve their day-to-day finances. But six-month outlook is negative, which supports my contention that people will spend less until they feel more secure.

There are other positives that should start to pay off aside from energy. One is the fact that old-fashioned adjustable rate mortgages, and even most HELOCs, are resetting to lower interest rates. This helps the consumer picture a little. Producer prices are crashing (finished goods YoY fell from 8.2% in Sept to 0.4% in November). Import prices are falling (the YoY change for November was -4.4%).

The negatives are very negative indeed. Unemployment is rising rapidly:

That will be somewhat mitigated by extended unemployment and by older people taking early retirement, but still, that unemployment rise correlates to expected drops in consumer spending, and so do basic population demographics. The over-16 employment/population ratio is in part the function of an aging workforce:

Next up, we'll look at the 2007 Consumer Expenditure tables to see where we can get some money back for additional spending. It appears we need to find about 10 mil a month, and it's going to be hard to find that just lying around!

Oh - I forgot. US rail freight for November:
U.S. railroads originated 1,189,472 carloads of freight in November 2008, down 133,504 carloads (10.1 percent) from November 2007. U.S. railroads also originated 851,517 intermodal units in November 2008, a decrease of 72,978 trailers and containers (7.9 percent) from November 2007, the Association of American Railroads (AAR) reported today.
Once we get the lightbulbs moving, that'll clear up right quickly.

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