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Thursday, October 01, 2009


I can't say that most of the reports are favorable. ISM manufacturing this morning tracked Chicago PMI pretty well, showing declines overall, in new orders, in production, etc.

HOWEVER, take a look at NACM's September report. Services finally rolled over positive (50.1) and both sales and dollar collections picked up. Manufacturing improved also, but there the sales component was not so impressive. There is an element of build here if you trust this report, and I do. When the money starts flowing, things start happening. It's weak, but there.

Charles asked why this was a recovery and not stimulus. I assume he is wondering if this isn't a temporary effect. A recovery is characterized by positive feedback effects, whereas a stimulus might help, but when it goes, only the positive feedback effects remain. And the answer to Charles' question is seen in NACM, in the Monster report showing that blue collar employment seems to be shoring up, in retail services for groceries, etc. This is the NACM report for September activity.

I expect the housing tax credit dingus to fade out without having any long term benefit to the economy whatsoever. In the annals of stimulus, this has to be one of the nuttiest programs in history. But CARS did get some money moving within the economy. Alone it wouldn't have done anything, but low-end retail was moving up already, and I think CARS did genuinely help things along.

Is it a "real" recovery? Not yet, IMO. The positive feedback effects are too isolated and too small a portion of the whole economy to battle the tide of falling incomes. It's not that rare in long recessions to get a bit of growth in the middle as a couple of segments hit bottom and recoup. I had the first indications in May, in traffic. Then in June, domestic freight picked up quite broadly although very minimally. And it has been slowly building over the summer. Most of the growth appears to be in low-end retail for necessities, and that is where many of the jobs are being gained. If you look at manufacturing NACM, you see that although there was improvement in September relative to August, the July peak for amount of credit extended and new credit apps hasn't been exceeded. However, dollar collections are coming up, and new credit apps crept up. This has been a very anemic improvement.

Treasury releases the final day of tax receipts for September this evening, and after that we can look at tax data and what it says about economic potential.

ISM Manufacturing
showed a strong rise in all commodity prices, with electronic components in short supply. Order backlogs and inventories were slightly more positive than Chicago PMI, but employment was slightly more negative.

Initial claims still show little sign of backing down. If they could just get down into the 400s it would be encouraging, although hardly a sign of dropping unemployment. But this mid 500 stuff does not make one want to celebrate.

Recessions are just economic adjustments. It is perfectly possible to have one segment of the economy reach trough and begin to rebound in the middle of severe recession, but it doesn't mean that the recession is over. See the links at the bottom of the last post.

One thing different about this recession is that it comes on the heels of a massive two-decade expansion in household credit, and at the end of a decade of basically stagnant real incomes. These two things do not go together to form a sustainable economy. Then there is another hunk of this - the demographic adjustment of the baby boomers. That one is front-loaded for the states, which are now facing significant and continuing constrictions of revenue even while their payouts for retirees must steadily escalate. I expect years of downward adjustments on the state and local spending side of the ledger. I do not believe that most of the states and localities have even begun to deal with their problems. There are major adjustments pending there.

But see this article on auto sales. Note that Hyundai turned in a nice September YoY gain. CARS still has a toe out, and like the general economy, all the life is turning up on the low end of the economy. Of course, that is the end with the least credit correlation!

Recessions are just economic adjustments

Haha! Reminds me of the line about the guy who jumped to his death. The Death Certificate read "Deceleration trauma".
As I understand the NACM, it's based upon a comparison to last month. So if last month was horrible, and this month is no better, then the index is at 50.

This is just a collection of random thoughts, but here goes. Treasury yields have plummeted. I believe that's because there's no loan demand, and no willingness to lend when there is demand. Consumer consumption patterns have changed fundamentally. For example; I'm my case we've been largely unhurt during the recent financial crisis (In large part due to this blog). The wife has not planned the annual family holiday trip in December. I asked her why and she said the economy is bad and would rather save the money (That said there's a new Prada bag just turned up). My youngest daughter didn't want to go to the school dance because the ticket was "Too much money". I don't believe current Business management is prepared for such an unusual shift in Consumer Behavior.

Unfortunately it feels like we're in the well below trend growth for several years to come.

One of the trends you have been highlighting was in evidence today. Real disposable personal income declined for the second month in a row. So, for those lucky enough to be employed, we can segment the post-Lehman recession into two parts:

Part I -- falling nominal incomes, rising real incomes. Scary for Bernanke, but not so bad for the employed. Deflation can sometimes be helpful to consumers in the short run. Thanks for all that cheap gas!

Part II -- rising nominal incomes, falling real incomes. Less scary for Bernanke, but consumers will not love it. In fact, given the zero rate on savings, it may just motivate them to save some more.

Its interesting that Part I coincided with the meat of tax cuts. Now, consumers don't have much help (unless you believe in gov't spending multipliers) in dealing with higher gas prices -- much higher -- than they experienced the last recession.

So, Bernanke, is this the way you want it to go? Because it might not turn out like you planned...
CF - Thx for kind words. I look at Treasury yields, and I see doom.

But in part, I think it is rates themselves that are the problem. You see, I can't find too much fault with Mark's reasoning on toilet paper, and this just can't say much for the economy.

Consumer consumption patterns have changed, but I think for the bulk of the population it is due to changes in income, changes in credit, and huge changes in future expectations. It is true that there are some families, like yours, that are largely unscathed, but the reality is that the unscathed are those that are financially savvy anyway, and that think much longer term. And therefore they are essentially financial conservatives. If they lend or invest money, they want a reasonable certainty of getting it back with at least a marginal real return. Risk will be accepted only on terms that allow a reasonable averaged return.

Let's be honest about this - the actions of the Fed have been successful in pushing down yields. However, yields are so low that they present a complete disincentive to invest, and in my opinion are dragging velocity down. This leaves only Keynes as an alternative, and with our debt that is not a good place to be. Further, the prospect of significantly higher taxes cuts the real returns of many asset types to the degree that almost no risk is tolerable, which brings us back to Treasury yields and people buying investment houses for cash. People are hell-bent on trying to control their own risks and get their financial futures back under their control. So are companies.

Walmart's latest filing on Euro bonds makes me want to laugh and cry simultaneously.
PS: - CF, I still stick to it that real trend is under 2% given the demographics, so where the heck does "under trend" leave us?
David - I very much fear that Part II is going to play out as a nightmarish scenario in which the bulk of the top 40% of households by income will see flat to declining nominal incomes from wages, little rise in investment dividends off from the current level, higher taxes, and significantly lower real incomes. At least a quarter of the top group in salaries were way overextended in credit, so that isn't going to help.

To be honest, I think the above is baked in. And that is why we have to return to the bottom for any real growth in the economy. Now if you let inflation erupt, the bottom 40% are (to use some very technical financial terms) SOL and then DOA.

Walmart filed its financials, and comparable store sales ex Sam's for the quarter ended in July were -1%. They have gained market share and lost revenue. I am expecting that trend to reverse in this quarter, but we'll see. The bottom line is that spending is shifting hard toward necessities.

I look at the Treasury Daily Statements with my eyes bugged out. Every month they get worse. I noticed the BEA income figures, but I still think BEA's figures are way too optimistic. It's extremely difficult to tell much right now about exact conditions on the ground, but I have a hard time finding people who aren't seeing local fees/taxes/utility raises.

I am watching bank deposits with great fear, because if I just do a straight-line model, it tells me that the growth in bank deposits is going to start dropping hard. Far too many won't have the money left over to put in the bank.
MOM & All,

"You see, I can't find too much fault with Mark's reasoning on toilet paper, and this just can't say much for the economy."

What does it say about our economy if I say I'm willing to hoard aluminum foil? Before you answer, please recall that aluminum is a whopping 8% of the earth's crust.

I'm not sure if I should be hoarding the aluminum foil for future use or making hats out of it to wear it in the present, lol.

A question for you: Let's assume that the Federal govt is going to try raising taxes next year. Maybe they'll even change the tax structure so as to really capture more revenue (like, say, with a VAT). Will they actually be able to increase aggregate local, state, and federal tax revenue?

My own sense of things is that they can't. If the Feds manage to raise revenue, they'll do it at the cost of depressing activities that provide state revenue, and vice-versa. For example, if we get a national VAT, it'll depress consumption and trash state sales tax revenues. Given the precarious condition of state budgets, the Feds will just end up using the increased revenue to bail out the states. It will aggregate more power to Washington, but will not actually ease Washington's budget issues.

Any other politically feasible policy that I can come up with that might actually increase tax revenues (as opposed to ineffectually raising tax rates) has similar effects, I think.

The only policy I can see that stands a chance of salvaging the Federal budget while not wrecking the economy is a flat income tax, if deductions were kept to a bare minimum. It's not really my favorite option, and I can't believe it would actually be politically feasible.

However, "eliminate the impossible...."

"Maybe they'll even change the tax structure so as to really capture more revenue (like, say, with a VAT)."

You bring up yet another pro-hoarding topic... taxes. Here in Washington State, sales taxes only seem to go up (currently 9.5%). Hoarding future needs ahead of the increases has therefore been yet another way I've been rewarded (or in this case, punished less).

The biggest problem I see with the government forcing savers to spend is its inability to force what we spend it on. I'm a saver. Forcing me to spend simply makes me hoard (which is really just another form of savings). Hoarding is not good for the economy long-term though, which was fairly clear to all when oil pushed $140 and there was a global rice shortage.

The temporary rice shortage also reinforced my behavior by the way. I had 20+ pounds on hand when it hit and was thankful that I did. I now keep 40+ pounds on hand. Not sure Bernanke would approve. Once again, it really isn't shortages that drive my hoarding though. It's just a minor side topic at best.

And lastly, if there was just one blog allowed on the Internet, I'd cast my vote for this one. Good data AND great thought provoking opinions here.
I still stick to it that real trend is under 2% given the demographics, so where the heck does "under trend" leave us?

You know where it leaves us.

I have been advocating eliminating the payroll tax
for quite a while now, and increasing the gas tax.
Putting more money in peoples pockets and giving
everyone and incentive to conserve. This should also
keep more dollars circulating here.
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