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Thursday, September 03, 2009

Sideways Like A Scorpion

I think that John is right, and that we only leveled out, and that underlying weakness and a decline in real earnings is beginning to erode what was the beginning of a recovery.

Some data: NACM. Current. July. (and I'm taking your comment to heart, Dennis - this is the National Association of Credit Managers. They track business to business credit, and it is a very helpful index that picks up gaps in other widely-used surveys. Most especially, it is excellent because it is polling at a lower level than the executives, and is thus a more accurate reflection of current trends). NACM had been issuing very positive commentary on trends this summer.Their August survey is less optimistic. In July they thought that this month the survey would cross over into expansion territory, and it did not:
After six months of solid gains, the Credit Managers’ Index showed slower progress and registered declines inkey indicators. There was still some positive movement in the Index as a whole, but there are obvious weaknesses showing up in terms of credit availability, credit applications and sales. There were also areas of concern in terms of dollar exposure, disputes and other negatives. There was a sense that bigger economic issues began to overtake the sector, slowing down some of the progress noted in the last few months. The Index showed a dramatic decline from the levels in July, but overall the Index gained and moved a little closer to the magic number of 50, climbing from July’s combined index score of 48 to the August score of 48.3.
The concern over the favorable indicators is well-founded. This report shows that August doesn't predict much in the way of positive growth immediately. The combined (manufacturing and services) amount of credit, sales, and dollar collections dropped slightly, and there was a very significant drop in new credit applications.

The NACM report should predict some aspects of the ISM reports, but if the two contradict, NACM will likely be the more accurate. That is because it tracks the actual dollar transactions rather than expectations.

RBC CASH (Consumer Attitudes and Spending by Household - a bank-oriented survey that should be considered in conjunction with other consumer surveys):
Although consumers' hopes for their local economies and personal finances improved in the past month, the most recent results of the RBC CASH (Consumer Attitudes and Spending by Household) Index rose by only 2.5 points to stand at 40.0 -- up from a 37.5 reading in August. While the Index reached its highest level since May, a close reading of the results finds consumers remaining cautious about economic recovery.

"The top-line RBC Index continues to rise, but consumers clearly remain cautious," said RBC Capital Markets U.S. economist Tom Porcelli. "The headline received a boost from expectations about the future, but the here-and-now 'current conditions' index fell yet again. Given the strong relationship that exists between the current conditions index and consumer spending, this is not an encouraging signal, as the rise in the overall RBC Index should be taken with a grain of salt."
The reason why actual consumer spending is not moving in the way it has more usually moved over the last few decades in conjunction with consumer confidence surveys is simple. Credit. The overuse of credit, the need to save and pay off credit, and the increased difficulty in obtaining new credit. If you have plenty of casual credit available, a change in your six-month expectations may well cause you to buy on credit. If you are already trying to pay down your debt, only a change in your current circumstances is likely to induce you to increase spending - either in the form of more income, increased stability, or necessity.

This is one aspect of the situation that many economists missed this spring. How they did that I don't know, because it was obvious from H.8 (Bank Assets and Liabilities) and from G.19 (Outstanding Consumer Credit) that consumers were responding to uncertainty, lower payoffs from savings and investment, and much higher credit card rate by paying down their credit. If a consumer has rolling credit card debt in the thousands and the available cash to pay it down, a drop in savings returns combined with a hefty hike in interest rates is going to cause the consumer to pay down the debt - unless, of course, the consumer is very uncertain about his or her job. But in that case, the consumer won't buy incidentals in stores on credit, but will cut spending and increase savings accounts, theorizing that his or her credit may well be cut in the case of job loss. Which, believe me, it will be.

Initial Unemployment Claims
- they are not dropping as they should be. The seasonal adjustment on the continued claims will be a bit off due to the late Labor Day's effect on school calendars, but it doesn't have much effect on initial claims. The four-week moving average for seasonally adjusted initial claims rose back over 570,000 this week. You can talk all you want about recovery, but this is not a favorable indicator. I very much fear that we are seeing the impact of small businesses giving up the ghost. That is the major factor that is likely to put us into another downturn, because big businesses will not be hiring substantially for a while, and we are still dropping in construction. Once people stop losing jobs heavily, it still takes a long time for hiring to pick up enough to reduce the unemployment rates. Initial claims over 525,000 probably indicate that we are nearing the 11% unemployment level next year. I'm worried.

The question of incomes is complicated, and I want to get to that in another post. However what I see in retail trends is both encouraging and discouraging. Some retail is beginning to hire again. But profit margins are so low and renewed traffic is so concentrated on discounters and economy-type spending that I see little prospect of expansion. So we will get some boost out of this, but not enough to offset the small business decline.

I don't have time today to bang out a really good explanation of consumer spending and what we can reasonably expect, but a look at the Gallup survey on spending and knowledge of one fact - that 70% of consumer spending was concentrated in high-income households, and that over 25% of those households are in a real financial bind - pretty much implies the rest.

The small business situation is pretty bad. The August NFIB survey showed a further decline, and a net negative 45% negative profit trend. Because this segment accounts for so many jobs and so much spending, state governments are going to be in an even deeper hole next year. The next NFIB survey will be out shortly, and I am very curious to see what it says. This survey was rosily predicting a recovery a few months ago, and shifted to concern over the summer. Here are some of the August survey's (covered July) comments (copyright National
Optimism faded a bit for consumers and business owners over the past few months, primarily due to weaker expectations about economic growth.This is a bit unexpected in light of the increasing frequency of reportedgood signs about the economy and the stock market.
(unexpected to them, not to me) ...
Consumer spending fell in the second quarter, after posting a small gain in the first quarter, important because consumption accounts for 70 percent of gross domestic product. Half of all consumer spending is accounted for by the top 20 percent of the income distribution. The Reuters/University of Michigan survey found that these consumers reported an unusually high level of personal financial distress. On top of that, they are the target of new tax increases that would further erode their financial well being. Reports of outright declines in income reached 27 percent, eclipsing the prior record of 17 percent in 1982, the last serious recession. In 2006, 44 percent thought their savings insured an adequate retirement compared to only 10 percent earlier this year. Rebuilding wealth (more saving and less consumption) is holding the spending recovery back.
A better woman than I am would just remain silent, but here's my comment - No Shit, Sherlock. This is the trickle-up recession, and it has legs for those with high levels of debt.

If you are wondering about my disgruntled tone, here's an explanation of why in an excerpt from the July survey:
The economy is bouncing along the bottom and reorganizing itself to restart the growth process. Many indicators, including NFIB’s, are now headed up. They are still in “negative” territory, but will soon break the surface and become positive. The labor market indicators seem to be finding a foothold, even if a bit slippery. Based on the June numbers, the unemployment rate is expected to head down to 8.8 percent over the next three months, consistent with a return to growth in the third quarter (as predicted last year).
They went back and rethought. We can only dream about an 8.8% unemployment rate. All the NFIB Small Business Economic Trends reports are copyright NFIB Research Foundation, which does some of the most credible research out there. Failure to keep up with small business trends will produce agony on the part of the economic forecaster who is not paid to come up with plausible lies, because small businesses are a dominant force in the US.

They were, however, correct for Germany. The reason is that German consumers are not loaded down with debt (and also that the German government is playing games with the unemployment rate). NFIB has been doing its surveys since the 1970s, and in general the NFIB Research Foundation produces some of the most accurate and predictive economic information available. You can access their recent research here.

The reason why NFIB was a bit off here was that two fundamental and sudden changes have affected US economic trends. The first is consumer credit (NOT small business credit, which as they have consistently documented, is not currently a drag on small businesses) and the second is the dire squeeze placed on state and local government spending by demographically-induced higher expenditures and collapsing revenue.

Another incredible source of valuable (free!) economic macro trends is the Levy Economics Institute of Bard College. Their last Strategic Analysis of December 08 is still pertinent - and note that they predicted unemployment of around 10% then. I also highly recommend their working papers. If you are at all interested in macroeconomics, their August 09 working paper 569 gives an outline of big hunks of their macroeconomic model. For the record, I use a substantially different approach.

So why does the title refer to scorpions? Because the accumulating weight of necessary adjustments means that we cannot move sideways for any length of time. We either have to get our haunches under us and spring up, or we are dragged down.

There is, also, an upward bias in much recent currency-denominated data, because the beginning of higher price trends means that an erroneous positive trend is being generated.


Thank you for your consideration. It seems that most of your readers are far more "tapped in" to the minutia that constitute your complex field. It's kind of you to help out a beginner.
Dennis - my time's not that valuable. I spend a considerable amount of it wandering around (electronically or physically) and just looking at what is going on. And I am often asking people in businesses what is happening. Economics is (or should be) a derivative of what is actually happening, which generally makes the non-economists the experts and the economists always the beginners at understanding what's going on.

Also, let's not avoid a painful truth: Given the abysmal performance of many economists over the last four years, our "complex field" may need a dose of simplicity and humility. There was a time when carpenters and truckers knew more about what was going on and what would happen than commercial economists, so I think as a whole economists need some constructive criticism rather than any pats on the back. A few kicks in the can by carpenters or truckers might sharpen our focus.

My goal in writing this sort of thing is to get across to the average reader several points, including:
A) The field really isn't that complex.
B) Keep your eyes open and use your own noggin. The results will probably be very good. Lama, who used to comment over at CR and may still, wrote last year that the average convenience store clerk probably knew more about the economy than the Fed, and Lama was right!
C) When what you are reading in the news about economics sounds impossible, it probably is.

Obviously I am failing on several levels, but I will keep trying and I do thank you for your comments.
"I think that John is right"

Who is John?
MOM- This post particularly was a crystal-clear look ahead. Thanks for your diligence in providing links and definitions. Thanks, too, for the Levy and NFIB recommendations. I've got lots of reading to do now.

Dennis- for what it's worth, I was just running to Google for every acronym. You were the bright kid in class who asked the question we were all thinking.
John = WSJ aka Who Struck John. My fingers, they are all worn out from typing! See his comments on the prior posts.

One of the reasons I am concentrating on trends in grocery stores so much is that everyone eats, and it is a good reality check. Given high debt levels at some of the higher income levels, we expect to see a hefty drop at stores like Saks. But the economy doesn't need those people to pick up - it just needs the average joe to be able to drop a few hundred more a year in stores. It's down to the bottom half now for recovery.

I hate to ascribe a narrative to gold price moves, but I can't resist.

So why is gold going up now? Maybe because of that great ISM print. It tells us the stimulus -- and cash for clunkers -- worked like a charm! Only now, well, its starting wear off, isn't it (I've seen figures that show the monthly run rate peaking in August)? So how do we make sure we get another 53 reading on the ISM? More stimulus, of course.

The $11tr debt growth projections bake in a normal recovery and a falling stimulus throughout 2010. If, instead, its years and years of dependence on Federal spending, the number is much bigger, and so is the need for Fed monetization, devaluation, etc.

So, my theory: gold is going up because the stimulus worked! You see, if we could only have some more...
Gold is a fear index. There's a lot of fear right now, so gold is riding high. This too shall pass away. Short term, we may get another spike when Mr. Market figures out that there is no up side to the V recession (that it's actually a lazy W: two down legs and two plateaus). Long term, look for gold to return to trend in 5 years.
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