Thursday, March 12, 2009
First, The Economics
Michigan (7.7 percent), Oregon (7.4), Idaho (7.2), Wisconsin (6.7), Rhode Island (6.5), Pennsylvania (6.3), Nevada (6.2), Montana (5.9), Alaska (5.7), Indiana (5.7), Massachusetts (5.7), New Jersey (5.7), and Vermont (5.7)However this is no surprise; unemployment is a lagging indicator.
February retail sales show continued improvement overall. Looking at table 2A (percentage change, seasonally adjusted):
- Overall change was -0.1% from January, but January was revised up to be +1.8% from December.
- The weakness in February compared to January was in automobile dealers (-4.9%).
- Most of the discretionary leading indicators in February were quite positive: furniture (+0.7%), electronics & appliances (+1.2%), clothing (+2.8%), sport & hobby (+0.2%), miscellaneous store (+2.2%).
- Note that the improvements in furniture and electronics & appliances are probably somewhat associated with the YoY boom in home sales in the West. As prices drop, those properties become cash-flowing for investors, and this generates a wave of refurbishing and refitting which helps retailers as the homes are prepped for rental.
- Grocery stores dropped 1%. This is a sign that bottom-level inflation is coming through to the consumers, given how tight grocery spending has been. (When food costs were rising at 9% annually, no way could you see this.)
Consumer credit (G.19),which came out a few days ago, showed a strongly positive trend. The SA numbers are highly misleading in times of major change. The relevant number is that in Q3, total consumer credit outstanding was 2592.3 billion, and in January, outstanding consumer credit was 2588.5 billion. Normally consumer credit rises through the end of the year, and then consumers spend the first quarter slowly paying that off. Revolving credit showed the same pattern. At the end of Q3 it was 975.8 billion, and at the end of January it was estimated to be 973.6 billion. Because consumers have to shed debt before they can begin to spend, this is a healthy development.
WalMart reported a 5.1% gain in same store sales for February. One of the reasons why recessions are self-limiting is that consumer spending is constrained in part through caution during the first part of the recession. Consumers tend to build cash, pay down debt, and halt discretionary purchases, fearing unemployment and wage cuts, etc. Although unemployment generally keeps rising after the trough (the minimum level of economic activity), consumer needs also accumulate. Eventually, the cautious but employed and financially stable consumers have to buy that new refrigerator, car, etc.
There are several more shocks coming. One (the increase in fuel costs) is already moving along. This is in part due to OPEC, but more probably due to some of that extra trillion in cash being used to hold oil to profit off the futures market, and also due to changed expectations due to Obama's moves in terminating the oil shale leases and reinstituting the ban in off-shore drilling. Because fuel costs are so intimately woven into food prices, this will limit the the recovery in real incomes.
The second shock is inflation expectations, which influence the price at which investors are willing to lend money. Personally, I reviewed the budget and spending plans, and decided that I am going to hold on to my inflation stuff longer than I had previously expected. There is so much that is ill-founded in these plans, and more that is overtly inflationary. Therefore my 5-year returns need to be higher than I had previously thought; if I cannot get them on the market right now (and I can't), I will just sit on my money. Others will do likewise.
The third shock are the well-intentioned but basically crazy plan to stuff Fannie and Freddie with bad, high-risk, cheap mortgages. That means investors aren't going to buy the stuff, and so Treasury is going to have to guarantee it or buy it, which is a pretty severe economic disruption in and of itself.
The fourth shock comes in the muni market, as the ugly truth of muni defaults sinks in. Around the nation, many local governments are going to have to cut back.
These are just domestic shocks and meantime, the European banking crisis is going to inflict further international damage.