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Thursday, June 04, 2009

Thoughtful Thursday?

More bright and chipper headlines on the weekly unemployment report. Once again, I don't see the justification. Last week's claims were revised up, so the real drop in this week's claims was 2,000 (623,000 to 621,000). The four week moving average for initial claims increased this week, which I wouldn't consider a positive sign, as did the four week moving average for continued claims.

But truthfully, until we know what the impact of the car bankruptcies is, any speculation about employment is premature.

Also, this is the time when the closing of schools, colleges and universities for summer break causes heavier than normal seasonal adjustments, and introduces high volatility into the weekly unemployment reports, because small changes in calendar mess up the standard seasonal adjustments. By the end of June we'll know more. Monster's index is moving down a bit. The Conference Board's online index rose in May (see pdf report here), although job postings remained down 25% YoY.

Treasury FUT reported for May was just awful - an adjusted 190 vs last May's 235. April was much better, which may indicate more stability in small business employment. However this week's ADP data shows that small businesses are still shedding jobs, which is worrisome. I know big businesses are!

The retail data coming in is mostly pretty poor. Walmart is still good. Costco -7% on same store sales. CNN headlines May retail sales as "soggy". Isn't it supposed to be "April showers make May flowers?" The article notes that reports of higher consumer confidence are not translating into sales at stores:
The jump in consumer confidence numbers in May had raised hopes of a much-need rebound in consumer spending, which is responsible for fueling two-thirds of the nation's economy.

But that did not materialize.
Sales tracker Thomson Reuters, which tracks monthly same-sales for 30 retail chains, said overall May sales for the group fell a worse-than-expected 4.8%, compared to a gain of 1.1% last year.
Well, as I noted in an earlier post, the rise in consumer confidence was due to hopes for the future, rather than due to a change in current conditions. Did this set of survey results ever justify an expectation that retail sales would rebound?
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.
I think we must be more realistic. When at least 30% of the consumers feel that current conditions are improving, we can hope for better retail data. Right now more consumers believe hiring will worsen in the near future than believe that hiring will improve in the near future. Then too, rising gas prices are going to be inducing conservative spending attitudes in lower-income consumers. That's a crunch they feel immediately, and it certainly is going to worry them over the summer:

Tomorrow we get the May employment report, plus consumer credit in the afternoon. I'm very curious about consumer credit.

For your amusement, an article about the CA automobile emissions requirements:
California’s requirement for plug-ins and zero-pollution models applies only to companies that sell at least 60,000 vehicles a year in the state. General Motors Corp. and Chrysler LLC’s bankruptcies may cut their sales in the state, reducing the costs of compliance.

“The targets of the rule initially would have been GM, Ford and Chrysler because of all their trucks, not Honda and Toyota, which are kind of the environmental darlings,” said Jim Hossack, an analyst at consulting firm AutoPacific Inc. in Tustin, California. “It’s ironic those two companies could take the biggest hit.”
Toyota this month said U.S. demand for plug-ins may be much smaller than advocates suggest. Bill Reinert, Toyota’s U.S. national manager for advanced technology, told a National Academy of Sciences panel in Washington May 18 that a market for such vehicles may be 50,000 units a year at most and as few as 3,500.
The projected cost of most of these zero-emissions vehicles I have seen so far are upwards of 40K. That's going to be a hard sell for everything except governments. But wait! Does anyone think that CA governments won't still be cash-strapped when 2012 rolls around?

I would think the best possibility is in very small electric urban commuting vehicles. We'll see. Right now consumer spending in the US is heavily linked with gasoline prices. You have to put very high mileage indeed on a vehicle to recover 20K in capital cost on the difference between miles powered by electricity vs miles powered by gasoline. If gas costs $3 per gallon, the cost to run a mile in a gas-powered vehicle with 30 mpg is 10 cents. Let's assume the all-electric car costs you 0 cents per mile (which is not quite true). To recover 20K over the lifetime of the car, you have to run it 200,000 miles. However, you are paying the capital cost of that efficiency up front. Suppose you put 40K miles on the vehicle per year - it will take you 5 years to recover your initial investment. .

But you really aren't even breaking even, because if you had that 20K in a CD for 5 years at 3%, you'd still wind up more than 3K richer after 5 years with the conventional vehicle. Alternatively, if you finance the extra 20K at 5% over 5 years, the payment would be around $377.00 monthly. To break even each month, you'd have to run the car 3,770 miles a month, or 45,240 miles a year. In addition, there would be a higher insurance cost. It's very difficult right now to make an all-electric vehicle pay, although I think the hybrids do show a profit as taxis.

California gets stranger every month due to its numerically-impaired politics. It's a special state running in the special state bankruptcy Olympics.

But then the feds really aren't much better when it comes to numbers.

In 2007, according to Pew, the adult Muslim population of the US was around 1.4 million, which surely makes the total population less than 2 million. But I woke up in 2009 in a US, according to our president, which is one of the largest Muslim countries in the world. It's all so special.

I like Obama as a person, and I think he has high ideals. But when Friedman writes a column quoting this Obama statement:
“We have a joke around the White House,” the president said. “We’re just going to keep on telling the truth until it stops working — and nowhere is truth-telling more important than the Middle East.”
But Obama has a great truth to tell about Muslims in the US, and that great truth doesn't need to rely on a falsehood. The US Constitution entirely protects Muslims. It protects their right to follow their religion and customs. There aren't unwritten social barriers to Muslims either - as the Pew study noted, Muslims in the US have similar incomes as the general population, and similar educational levels. The high degree of assimilation and advancement in the US is very dissimilar to trends in most European countries.

So why does he have to trip himself up with a falsehood? I don't think he meant to do it, but this is an administration (Congress and the Executive) that seems to have a fragile relationship with facts. I am not sure that Obama believes facts are important. He believes the narrative structures the future. I do not. If the narrative structured the future, the average US homeowner would be a millionaire by now.

"California’s requirement for plug-ins and zero-pollution models applies only to companies that sell at least 60,000 vehicles a year in the state."

Right there is the key to our economic future, if we are to have one. I am losing hope that Washington (or Sacramento) can be dissuaded from imposing destructive regulations on medium-to-large corporations.

However, public opinion seems to be vehemently protective of small business. The result is that only small businesses retain any sort of flexibility. If Obama is true to his word (I know, I know, but let's pretend), small businesses will also enjoy investment and capital gains tax breaks.

The obvious tack for a businessman to take is to utilize web-based communities to identify, organize, and provide capital to an "ecosystem" of small companies providing services around a standardized platform. That way, the end-user products remains fresh and responsive to customer needs, while the capitalist can largely fly under Washington's radar to get things done.

It may or may not be efficient, but if not I suspect Americans will simply work harder in order to make it successful. In the end, Washington will simply become irrelevant to most people most of the time.

The adjustment is gonna be a b***h, though.
Neil - some things require a great deal of capital and are simply not suited to small companies. The economies of scale should make it impossible for truly small auto companies to function.

There are some assemblies that simply must be made on a large scale. Internal combustion engines, mechanical transmissions, tires, power electronic devices, seating, passenger restraints, and structural steel components for example. However, final assembly and some major assemblies (like interior fittings and electronics) can be profitably undertaken with a fairly low capital cost. I've seen it done at custom shops. A company with 30 employees can do a surprising amount of assembly work with fairly standard equipment. With modern machine tools and rapid-prototyping equipment, more and more components can be made profitably on a small scale.

The "ecosystem" of small "assembly" companies end up depending on the large "component" companies for the standards and platforms that they build on. The component companies can hide behind publicly sympathetic "small businesses". If the regulators decide to attack big component makers, they can point to the regular folks who use their components to make a living.

Small-time toy-makers and children's clothing manufacturers have served this function in tying enforcement of the CPSIA law up in knots. They're not even going to consider enforcing that law until a year after it was supposed to go into effect, and Henry Waxman is trying to figure out how to climb down from strict enforcement without losing face.

It may not be the most efficient way, and the price of the car will certainly be higher than a Honda, but there will also be more customization available which will compensate in part.

I didn't say it was the best way. But I suspect it's a profitable way.
"Small-time toy-makers and children's clothing manufacturers have served this function in tying enforcement of the CPSIA law up in knots"....really? That's not the impression I get at all...on the contrary, these small businesses sound to me like they're pretty much in despair about getting Congress to pay any attention to them. Hundreds of millions if not billions of dollars of inventory have already been thrown out.

I think larger businesses actually probably have a political advantage over smaller ones, because (a)they can afford extensive lobbying effort and, more importantly, (b) the kind of people that the Obama administration is bringing into power are much more comfortable working with those they consider to be fellow members of the elite.
On CPSIA, believe me we're anxious. It's a sword hanging over our heads. But Waxman, et. al., were scared enough to request that the Consumer Products Safety Commission find some way of giving out blanket "exceptions" like candy. The CPSC sent a letter back to Congress saying, in effect, "the law ties our hands" and they delayed enforcement of the CPSIA until February of next year.

It's fairly straightforward to comply with the lead and pthalate limits in the law, it's just that the ridiculous testing and record-keeping standards would make many small businesses nonviable.

Stores throwing out books, toys, and clothes are doing so because they are technically in violation of the law, but manufacturers have been told that for the time being they just need to comply with the limits, not the testing standards.

Reading the tea leaves, Congress realizes they stuck their heads in a hornet's nest and will come up with some kind of small-company exemption. I hope. My wife's new business depends on it.
Neil - I hope you are correct, but I have seen little indication that Congress is prepared to take CPSIA back up.

The idea of Congress asking the executive branch not to enforce a law Congress passed should tell you that.

Regarding cars, I did see a notice about a small company saying it was prepared to go manufacture electric cars in a year or so. I felt skeptical - perhaps it is really a conversion kit.

One of the problems for a small car manufacturer are the testing and certification processes to comply with US auto safety standards.
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