Wednesday, July 01, 2009
An Information Rich Environment
Retail sales - Redbook and ICSC. Summary: Bad consumer! Bad Consumer!. Consumer shouldn't pee on our same-store sales! That's a no-no! (Sound of newspaper thwapping consumer noses is heard in background.) In part the problem here is gas prices, weather may have played a part, but another big part is that in May and June some consumers were out shopping for cars at the dealers-in-line-to-be-executed, and were not at the retail stores. One generally doesn't do both unless one is a confirmed shopoholic, and recent trends in credit cards are cutting off the lifeblood of many confirmed shopoholics.
Still, it is not a pretty, optimistic, green-shooty type of thing. In May seniors got their feeble $250 stimulus checks and the last of the pension withholding cuts ran through. Because of recent movements in the dollar, most of that might have gone straight to medication and groceries. Over the last 10 days I noticed a feeble move toward hope in the staffing levels at grocery stores, which might indicate that they are eking out a bit more of a profit margin. I also noticed another huge roll into brandswitching and a shift toward economy-sensitive packaging of canned vegetables, etc.
Oil: There is nothing in this report to support current oil prices, and I would be amazed if that game didn't collapse soon. China is increasing energy prices, and US inventories show several interesting trends. Gasoline usage four-week continues to be up 0.9% YoY. This suggests to me that a bottom is forming in employment and may take hold over the next five months. Gas usage increases are probably related to the near stabilization seen in temporary jobs this spring according to the recent employment reports. However that trend in gasoline usage is not a support for current crude price levels, because YTD year over year usage is still down over 6% in the US, product inventories are high and generally increasing, four week YoY import levels are now down 790 thousand barrels a day, crude oil inventories are up 18.3% YoY, total stocks are up 13.4% YoY, distillate usage is down 9.4% YoY, and distillate inventories are still up 29.5% YoY. The diesel stocks are so high that there are bargains in heating oil out there. My brother in PA told me he got offered a winter contract at $2.29 - about half the cost of last year. One strategy for dealing with this is to move the heating oil out of storage into the consumer's/distributor's tanks.
Both diesel trends and gas trends are consistent with a tiny step up in the economy relative to the first part of the year, but that step up is at best levelling out. Because economic activity is so low still, that "step" is probably not the sign of a growing economy. Gasoline usage rises rapidly at the later stage of recessions as some people begin to get jobs (especially temp jobs), but have to travel much further to get them. We are not seeing that yet.
ADP Employment: While this improved from May's report, the total loss of jobs was 473,000. Combined with new graduates coming on the market, the employment expectation for the rest of the year looks grim. We could easily see unemployment rise to around 11% early next year. Jobs lost generally inflict more damage on banks, because most of the mortgage defaults, for example, are related to jobs lost rather than entrants into the market who can't get jobs. But unfortunately, the trend of financing college degrees with credit cards has risen over the last decade, and there will be more credit card defaults to come from these students over the next year. Small business job losses were reported at 177,000, which is off the peak but way too high to indicate a stabilizing economy. When that number drops to around 100,000 monthly my confidence level will rise.
Comparing the ADP report and ISM Manufacturing is an interesting exercise. According to ADP there was almost no change in job losses for manufacturing from the prior month. According to ISM, manufacturers are hiring. ISM at 44.8 shows a decent gain from the previous month. I think this report is over-optimistic. Shipments of metals and so forth have not increased enough according to rail data to support it. However this may be an accurate indicator of conditions in the next few months.
Value of Construction for May: This pinpoints one of the decisive drags on the US economy. If one were to listen to a certain GA senator, one would get the idea that all we had to do is to pay people to buy houses in order to enter a new and glorious world of joyous economic growth. But in fact, in terms of current construction value, residential construction is only a bit more than 1/3rd of all construction. Commercial and public construction provided a very nice cushion to the decline in residential construction over later 07 and all of 08. Thus (go to the last page of the linked report), value of total construction dropped only 6.8% from 07 to 08, whereas so far this year we have racked up an 11.7% decline NSA YTD from 08. How we managed to allocate 787 billion to get to a situation in which YoY NSA highway and street construction has dropped 1.9% (see page 3) is worthy of a Congressional investigation.
The knock-on effect from increases and decreases in construction have a disproportionate relationship to:
- material production (i.e. concrete, steel, crushed stone),
- male employment in the lower income/education brackets,
- truck and construction parts,
- monetary velocity
Speaking of residential construction, MBA purchase apps dropped 4.5% last week. Purchase apps have generally trended flat to down for the last few months when you adjust for the big fallouts in pendings. In the last few weeks a move to blame independent appraisals for the fallout in pending sales converting to sales has formed, which is entertainingly idiotic. See Calculated Risk for more on the MBA data and a nice graph. Pendings for May racked up a minimal SA month to month increase of 0.1%, and a 6.7% over last year. But comparisons of existing home sales have not shown the sales increase in the following months that would have been expected from pendings, and in part that is due to funding/appraisal problems. Given that appraisals remained generously in the hands of the loan officers or mortgage brokers last year, this should not surprise anyone. As fear has returned to the market, appraisals are due to seem disappointing. Actual mortgage lending remains amazingly loose to a degree that will generate a lot of foreclosures over the next 5 years on the last 12 months of home sales. We are creating losses that will just keep mounting.
There is, btw, no point at all in trying to support home prices. The reason is entirely due to the combination of the escalated home sales of the last few years on loans that were never going to be paid in combination with the demographics of the next generation of homebuyers. As you will see from the Census table at the end of my previous post, the upcoming cohort of 15-24 year olds is only about 1.6 million more than the 25-34 year old cohort. That cohort benefited from the extremely lax underwriting conditions to buy far more than their income-qualified share of homes. In addition the younger 20s are starting their working careers at a time of very severe recession, which will depress their earnings for years to come. In addition, the US is slated for very substantial tax hikes which will restrict this cohort's ability to accumulate downpayments. Effectively, the 15-24 year old cohort is going to be about 1/3rd lower in terms of buying homes than the previous cohort over the next decade.
Further, the marked rise in the buying of second homes among the older cohort will be a source of additional housing supply for over a decade. Higher taxation rates will actually afflict this cohort more than the younger cohort, and they will have to shed some expenses to live.
The last Daily Treasury Statement for June will be posted tonight. I am very curious as to how corporate income taxes do. It looks like CIT receipts are going to be about 1/3rd lower YoY. Federal Unemployment Tax receipts continue to be drastically off those of 2008. Before postulating recovery corporate income taxes must at least be entering a zone of stabilization.
And see this Bloomberg article about diesel supplies and manufacturing:
Supplies of diesel, the fuel that powers heavy trucks used to move goods across the U.S., rose to the highest in at least 16 years this month, as manufacturing inventories climbed, signaling a need for fewer deliveries.Also, see NACM's June report, which is generally consistent with a contracting economy that is close to finding a floor. The discussion of risks to this projected trend:
“Inventories are bloated,” said Tavio Headley, an economist with the American Trucking Associations in Arlington, Virginia. “Businesses are not taking many new deliveries, and that has a huge effect on tonnage volumes. The significant drop in tonnage volumes is also having a huge impact on domestic diesel demand.”
The data reinforces the sense that has been dominating most economic analysis for the past few months. “The discussion started to shift from how much worse the economy would become to how fast it would recover,” said Kuehl. “The balance now is delicate, as growth that is too sharp will result in a serious inflation jump, while growth that is too slow will keep the economy in the doldrums too long. The fact that the CMI is stable for the last three months is a good sign as far as inflation threats are concerned. If there was an imminent danger of too much liquidity, it would be reflected in a sharp rise in the index. This has not manifested itself thus far.”Many service businesses have state contracts, and what used to be a stable, at least bread-and-butter type of thing is now a counterparty risk. To convey the extent of the problem, a one-month block in payments (or payments by IOU) from California would cut off at least 10% of the cash flow to some significant businesses. The businesses could probably tolerate one month, but two would push many to seek additional credit, and three would cause loan defaults. There are slow payment problems with multiple state and local governments.
The growth areas are showing some truly positive signs. The biggest gains came from the favorable factors. Sales and new credit applications are both up dramatically, there has been a significant increase in credit granted and dollar collections are up. In unfavorable factors, there were fewer bankruptcies and fewer disputes. These are all signs of business returning to some semblance of normal activity. The businesses that have survived the recession are looking to return to this normalcy and are paying their bills, buying product and gaining access to capital again.
Now, the primary questions are whether this trend accelerates and what will be the source of the threats. The most serious concern now is with state governments. The sharp drops in revenue have thrust most of the states into a budget crisis and they have reacted with program cuts. These programs and projects provided a great deal of private business expansion and there will be a reaction to this decline. Some of this is showing up among survey respondents who have noted that governments are becoming less reliable in paying their bills. This is perhaps the most significant shoe to fall in recent months and solving the problem will take longer than dealing
with private sector issues.
MoM, you are the only blogger who seems to have figured this out.
Everyone else says "consumers have changed their habits". No they haven't, they've simply been cut off.
I've been wondering about this. Energy taxes and upside-down mortgages ought to have a depressing effect on initial unemployment recovery. As in, jobs become available, but some people can't afford to take them.
That's just a mind-twisting dynamic to think through.
Thanks for the analysis, MOM.
Between unemployment, investment income losses, the effects of previous inflation on lower/fixed income recipients, and of course the exploding mortgages, it seems to me that many consumers have been cut off.
And then the credit card reform bill really didn't help. Some of it was good, such as prohibiting charging for electronic payments, but the provisions that affect changes in interest rates are going to shove up the rest of the rates.
If you're carrying 10K in CC debt and paying on it, well and good. But no one wants to be caught with current rates when interest rates rise, and most of those types will be paying on that debt for a long, long time. So everyone's going to go to variable interest. That shouldn't matter, but apparently it is really upsetting some CC users. I guess they have been fooling themselves that their current rates will stay low forever.
Obviously commuting an hour isn't that attractive at current gas costs.
Women in the workforce have presented problems too. With a two income couple, the odds that one of them is going to end up with pretty remote income from their home in the wake of a recession like this are significant.
There hasn't been anything in the reports to support prices for at least three months. Absolute insanity.
I do note the futures collapsing today as a possible indicator.
You're right, MOM, and it may well collapse. But oil is merely tracking gold. Brent Crude closed today at roughly 13.7 barrels/ounce of gold. Some of us oldsters (don't let the picture fool you -- it's really old) recall that it has historically tried to sell for 12 barrels/ounce.
Though demand doesn't justify the price, inflation-jitters would see speculators (and Saudi Arabians) happy to see it around $80.
It is a lot easier to store gold than oil.
Looking at prices of diesel and heating oil, I think we are at the point at which refiners are struggling to make a profit.
Rob - even the normal players are too embarrassed to come out and talk oil up much, and there have been several reports in the last few days that have pointed up the demand problem.
Given that the U.S. trade deficit MUST narrow in the next 10 years, if not turn positive, that equates to an economic calamity baked into the law, no matter how efficient we can become.
Yes, but that does not take into account ICE, which is c unregulated. IMO, the Saudis and other oil producers (sovereign wealth funds) could be pushing the price higher by unlimited buying of futures at ever higher prices. Until ICE is brought under control (not easy, as it's in London), I think oil prices will be subject to manipulation.
The Cap and Tax Bill seeks to regulate speculation in oil futures here in the U.S. Won't do a much, however, unless ICE becomes regulated too. And, of course, the regulation they want here will distort our markets because they intend to eliminate speculators and only allow "legitimate hedgers" to buy futures. Every market needs speculators, but every market needs to be regulated in such a way as to keep huge sovereign wealth funds from manipulating prices. Between oil manipulators and the Waxman-Markey we are so screwed.
Write your Congress critters. It's not too late to head this off at the pass.
However, the net effect will be to raise goods prices on consumers, which will produce a net high inflation rate on the basics. That will include stuff like medicine, clothing and food.
The mere prospect is making China twitch in agony. Believe me, there is a lot of corporate maneuvering behind this.
Yes, but that doesn't do much to assist U.S. companies that export to other countries. This will make U.S. exports less competitive.
What do you do when the countries that haven't passed carbon restrictions are also the only countries willing to buy your debt?
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