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Thursday, May 28, 2009

Rosy Headlines And Few Read the Data

We are certainly past the point at which the rate of contraction in the US economy must slow, but near to the end of the recession? Are people crazy?

Take the chipper headline about durables
Durable-Goods Orders in U.S. Increase More Than Forecast on Autos, Defense. The article appropriately points out that the decline is not even bottoming (i.e. private business investment is sure to keep slowing).

Here is the durables advance report. From my perspective, we have a long way to go to get back to zero. I place most weight not on new orders, but on the shipment/inventory ratios. Those are uniformly negative, such as fabricated metals. YoY YTD shipments have dropped 11.7%, whereas inventories have only dropped 5.9%. That's not as bad as primary metals. Computers and electronic products - shipments have dropped 18.7%, and inventories have only decreased 0.7%. Transportation equipment - shipments have dropped 19.7%, and inventories have increased 9.2%. Motor vehicles and parts - shipments have dropped 31%, and inventories have dropped 18.6%. No sign of improvement in new orders, which have also dropped 31%.

As I read through the April advance, I figure we've got months and months to go before we hit bottom. Machinery shipments are down 18.7%. Inventories have only decreased 1.6%. How about capital goods? Ouch! Shipments down 11.7%, inventories up 5.9%.

All right. Let's just hunt for green shoots in a different place. How about the weekly unemployment report? Nice headline there Initial U.S. Jobless Claims Fall in Signal Biggest Rounds of Firings Over. So what does that mean? Looking at the last three weekly reports, one sees that NSA initial claims have run 537,xxx, 570,xxx, 536,xxx, and oh, gee, 536,xxx this week. That is hardly an improvement, especially since the numbers from the previous week are revised up each week (first two numbers are the upwardly revised versions, the last two are the original). On an SA basis, continuing claims keep growing rapidly, having increased over 100,000 last week. On an SA basis, continuing claims are now double last year's. Insured unemployment rates have risen to 4.6% (NSA) and 5.1% (SA).

This time in May is the strongest point for employment in an off year. Schools have not yet let out, whatever construction oomph is going to happen has happened, and the summer graduates are not yet beating the bushes.

The chirpy article:
Fewer job losses reduce the risk that consumer spending, the biggest part of the economy, will falter, delaying the economic recovery projected for later this year. Still, companies will be reluctant to add workers and increase production until sales show sustained gains.

“The pace of job declines is lessening,” Mickey Levy, chief economist at Bank of America Corp. in New York, said in an interview with Bloomberg Television. “This along with some other indicators points to a trough in the recession.”
No one seems to be worrying about the impact from the Chrysler/GM summer shutdowns, but believe me, they will be there. Unemployment is still escalating pretty rapidly. I strongly suspect that we are near to another "shelf", in which another round of retail layoffs will take place this summer as stores give up the ghost, malls empty out and lose traffic builders, and seasonal hiring and traffic for vacation/summer recreational travel and spending just doesn't happen at the expected levels. Durations in recessions matter, as organizations struggle to stay afloat and exhaust their credit resources to do so.

And consumer confidence? Yesterday we were all bright and chipper about a consumer confidence report that was not very encouraging. The present situation index remains extremely low at 28.9:
Consumers' overall assessment of current-day conditions improved again. Those claiming business conditions are "good" increased to 8.7 percent from 7.9 percent. However, those claiming conditions are "bad" increased to 45.3 percent from 44.9 percent. Consumers' appraisal of the job market was also more favorable. Those claiming jobs are "hard to get" decreased to 44.7 percent from 46.6 percent in April. Those saying jobs are "plentiful" edged up to 5.7 percent from 4.9 percent.

Consumers' short-term outlook improved significantly in May. Those expecting business conditions will improve over the next six months increased to 23.1 percent from 15.7 percent, while those anticipating conditions will worsen declined to 17.8 percent from 24.4 percent in April.

The employment outlook was also less pessimistic. The percentage of consumers expecting more jobs in the months ahead increased to 20.0 percent from 14.2 percent, while those anticipating fewer jobs decreased to 25.2 percent from 32.5 percent. The proportion of consumers anticipating an increase in their incomes edged up to 10.2 percent from 8.3 percent.
Did you catch that? The number of people expecting the job situation to worsen is still above the number of people expecting the job situation to improve. Consumers are probably more hopeful because they are reading a bunch of hopeful headlines, but where it comes closest to their pocketbooks, they remain net negative.

As far as I am concerned, we crossed a Rubicon when Costco same store sales fell so sharply in the quarter ending May 10th (-7%). Things weren't improving at the end of the quarter either, because April same store sales were down 8%. This demographic comprises a group of people who do have money to spend on a discretionary basis, and have decided not to spend it. Small businesses aren't spending either, as the Staples results show.

My guess is that the Costco demographic has decided to pay off its credit cards, and that they are diverting several hundred dollars a month to that purpose. The implication is that summer vacation and recreation spending will be substantially constrained.

I am guessing this will start to turn when about another 100 billion falls off the consumer credit outstanding. Hopefully, that will happen this year, so I have the earliest positive month currently at November. That would have to come from consumers - there is no other place.

Every time another retail outfit shuts down, another load of surplus supply rolls off onto the market. Much of that surplus will be recycled back into the stores-still-standing and small business markets, further deferring an improvement in gross private domestic investment.

However, if fuel prices increase much more, there will be a big problem come the cooling season as consumers contemplate their expected heating costs for the winter and adjust their spending accordingly.

By the middle of next summer, I would say that consumers would have paid off enough consumer debt to begin spending. So I have the real turn under close-to-current conditions (excluding further federal tax increases) between 11/09 and 6/10. It won't be epic when it starts, either.

Further substantial negatives for the US economy:
1) Cars. The dealer massacres and the summer shutdowns are going to hurt some communities very badly.
2) Banks. We are nearing the point at which bank failures will really pick up, which means that local bank lending pullbacks will start to inflict a negative shock on small businesses. Until now, they have been a positive, but higher FDIC insurance rates, growing commercial/retail defaults, and higher and intractable consumer defaults will begin to cut into their ability to lend.
3) Fuel and utilities, but I don't know just yet how negative it will be.
4) Local and state tax increases. Inevitable, but badly timed.
5) Q1 09 shock as some consumers discover that their tax credits were overcounted, and they owe more to the IRS than expected.
6) Generally higher consumer interest rates. We are past our low for this cycle, and it is merely a question of how high they will go.

Internationally, the European bank situation is still a big deal and a decisive downward vector, and worries over the US dollar are real and growing.

PS: From the comments on CR's post on today's unemployment release, this observation from RockyR:
Moving on, recent conversations with CEOs of SMBs have turned from ones of "sales are turning the corner" to "oh my god, my credit facility just got yanked!". The unemployment story isn't over.

Nice post MOM, and I see the negative sde but can u see anything postiive out there. I mean this is really starting to get depressing.

At another time and under an administration that was business friendly I would say that it is always darkest just before the dawn. However, this administration's policies are so business unfriendly that I see little or no rebound off the bottom. It appears we may be entering a low level of economic stagnation similar to what Japan has experienced.

Of course there is always hope that more business friendly Senators and Reps will be elected in 2010. If that could happen I would believe there is some hope of reviving this economy in two or three years. If the Dems stay in charge - fagettaboutit!
KMan, would you settle for some good news and bad news?

First, the bad news. Oil is rising in an apparent attempt to find the new breaking point of the global economy.

Now, the good news. I strongly suspect that we won't have to wait until $140 or more this time around. If nothing else, the global economy is already broken!

Best I could do. Sorry.
Kman - I'm trying to look at the positive!

For one thing, if the US consumer gets serious about paying down debt, that is something under our control which will have long term positive effects. You can count on that.

As for the depressing nature of things, believe me, I censored the really depressing stuff. I wasn't kidding when I commented a while ago that I found it very hard to continue writing this blog. It's like going to a funeral 4 times a week. It gets you down.
Hard to get serious about paying down debt when you're not working.

Total unemployment is rising, so it's no surprise that banks are writing down more CC debt.

It took 15, 16 years to create the bubble, and the federal government does everything it can to make sure it takes 15,16 years for the bubble to completely burst.
Thanks very much for the analysis, MOM. I'm beginning to learn a lot about the dynamics you are modeling.

May I ask what your assumptions were about tax withholdings and interest rates? Presumably, tax withholding will increase for top-bracket earners starting Jan 2010. It also seems that interest rates will rise due to fears of inflation or US Treasury default.

Also, do your projections include any assumptions about Cap'n Trade? Or is this left as an exercise for the reader?
Costo (had) plenty of small business buying supplies.
Oil price is another attempt to create an commodity bubble, just a guess much of the FED dollars are being used for financial speculation.

Thanks MOM your information gets right to the core!
Neil - current policy. Who knows what will eventually happen with health care and US energy policy.

The White Paint brigade is still quite active, so I do expect something to happen.

Interestingly, CHI PMI today brought a Kingsbury prediction of recession ending in December. I am having trouble seeing that exactly, but it's close enough to make me wonder.

Ronald - thanks very much for the Costco/Small Business tip. I really hadn't considered that much, but I bet you're right.
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