Thursday, February 12, 2009
The Old Tried And True
Retail Sales. There are several significant things about January. First, the weather was not favorable, and anyone who remembers the recent spate of weakening retail sales which were all attributed to snow and ice will get a chuckle out of the fact that retail sales rose this January. It appears that consumers are no longer as frightened of snow and/or the wrong color walls.
Second, auto sales increased, and dealer auto sales increased. Third, the SA retail total increased from December, although it is still 9% lower than Jan 09. Fourth, electronics picked up, clothing picked up, general merchandising picked up, and restaurants & bars picked up. The general pattern is one of recession, but the end to the steep fall in consumer spending. Half to 2/3rds of this is driven by the fall in gas and heating oil prices. The rest is due to the fact that things wear out and the financial conservatives are beginning to spend a bit. Between the two, employed people have a little more money each week in their pockets and they may not be willing to spend recklessly, but they are spending for things that are useful and needed.
The fact that retail sales are stabilizing strongly indicates that we are way further toward the low point of this recession than to the beginning. See this graph of historical retail sales (at the bottom, you might want to click on the extra-large option) and notice the pattern. Retail sales don't have to fall sharply in a recession, but when they do, the end to that pattern means that we are most of the way through. This is the graph of the current series, but it doesn't include today's retail sales report.
Auto dealer reports over the last 6-7 weeks have been basically favorable, showing the stabilizing trend that popped up in this report. We will slowly work through auto inventory and sometime in the second half of this year, auto manufacturers will stop being a downward vector.
Unemployment continues to rise after the trough, so from a consumer perspective, the trough will seem somewhat later. However, as retail stabilizes one big source of layoffs will drop.
Also, a quick look at Treasury receipts shows that the decline in corporate profits is beginning to level out, which of course is correlated to layoffs. This means that the rapid decline sequence (lower sales, lower profits, layoffs, lower sales, etc) is beginning to shade towards its natural end.
Jan 09 CIT: 9,718In part this reflects changes in composition (January includes quarterly payments for smaller companies). However, smaller companies often lead the end of the recession. The monthly comparison interval is unfavorable to 09, because the last day was January 30th in 09 compared to Jan 31st in 08. Fiscal year 09 began in October.
Jan 08 CIT: 10,146
YoY Chg %: -4.2%
FYTD 09C: 74,908
FYTD 08C: 113,854
FYTD YoY: -34.2%
Household debt is beginning to stabilize, and that is a necessary prerequisite for recovery.
Debt has to stop growing and people have to put a little money aside to generate a meaningful recovery. Any Main Street banker could have told you that, which is one of the big problems with the Congress Critters who are pounding on banks to lend, and our Turbo-Tax challenged Supreme Economic Dictator Geithner, who doesn't seem to understand that the problem is not a dearth of credit, but a dearth of borrowers who can pay it back. Casey Serin is willing to apply for loans all day, but that doesn't mean a bank is going to improve the economy by lending to him. That, in a nutshell, is how we got here. Too many banks stopped asking the question "Can this loan be paid back by the borrower from income?" and started asking the question "What do we believe the assets securing this loan will be worth 3 years from now?"
I can hardly believe that Obama found someone more clueless than Paulson. I would have sworn Paulson was the worst that could be dug up, but no, we have an even more clueless Treasury Secretary, who is too dumb to know the difference between throwing money away and lending it. I was going to seek therapy to help me deal with the shock, but it turns out all the sane shrinks are still attempting to cope themselves. They know insanity when they see it. All the economist are twitching from the sheer, clueless idiocy of the Geithner plan, and all sane economists look at Congress' efforts for the "American Recovery" and observe that the near-term stimulus will be very little, and the debt will hang around. The Congressional Budget Office isn't the only outfit that thinks this will worsen the economy in 10 years. We'd be better off doing NOTHING.
The bottom line is that consumers built up too much debt. It has to be written off or paid down before consumers can spend on bigger items. That's the bottom line, which is why that $13 bucks a week the "rescue" bill is going to generate won't do much.
As I have explained before, we are in the second leg of this recession. The first was generated by a business slowdown, which was corrected for by Fed policy (weaker dollar, etc). The second is the consumer drawdown.
It is absolutely urgent to get the consumer part to stop falling before the business sector starts to be meaningfully impacted by the next leg of the global financial crisis, which is going to come from European banks. It's a very frightening mess. The US has little direct exposure to that debt, but US manfacturers are somewhat impacted by world circumstances. (See Rebecca Wilder for an explanation.) A stable/slightly growing consumer sector will be absolutely necessary to prevent the US economy from sliding into another downturn which would take this recession mostly through 2010.
China is contracting hard and fast, so the entire world needs the US to recover a bit.