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Thursday, January 14, 2010

But Economically Speaking, All Is Not So Wonderful

There's nothing surprising in today's primary reports - retail sales for December and initial claims for January 9th. But retail sales fell marginally from November (-0.3%) and seasonally adjusted initial claims rose 11,000 from last week.

On a YoY basis:
Initial claims are still improving. SA claims were 535,000 a year ago, versus this year's 444,000. NSA claims were 956,791 a year ago, versus this year's 801,086. However both insured employment numbers rose from a year ago. SA rose from 3.4% to 3.5%, and NSA rose from 4.4% to 4.6%.

Retail sales unadjusted for inflation continue to show a big hike over last year's numbers. Table 2A gives the seasonal/trading day version, which has December's retail sales up 5.4% YoY. Table 2B is the unadjusted version, which has retail sales up 5.5% YoY. Of course, when you adjust for inflation the rise is going to be very muted. YoY gasoline sales were up 33.4%, which is mostly inflation. The YoY gross gain was almost 18 billion, and adjusting for price increases in gasoline subtracts a bit over 9 billion according to the figures I have. Also a good hunk of the gain in pharmacies disappears, and so on.

The implications are that spending per capita is still falling, which should not surprise any of us when we contemplate the much higher unemployment rate. Per capita incomes are still falling.

Things ain't gonna look so good in retail for a while:
In 2009 retail spending rose some in the early months of the year, engendered largely by lower fuel costs. In 2010 the trend is different, and rises in gasoline YoY are turning negative. So the YoY comparisons aren't going to look brilliant for the next few months.

What it seems to mean for the economy:
Overall the US economy continues to turn in slow incremental gains, but the pace of gain appears to be falling. The reason is that almost all of the ex-government spending gain has been coming from two sources - pent up consumer spending for needs (cars and clothing, for example, are just wearing out), and inventory clearance and restocking.

The big impulse in recession recoveries usually comes from people who are working, pull back from spending during the worst phase of a recession, and then find themselves spending on needs plus later when they really start to need things, hit the stores, and buy needs plus stuff they really have wanted. The patterns of category spending seem to show that this impulse is very limited in this recovery. Electronics, furniture, and bars and restaurants are all turning in real declines. Grocery stores, department stores, gasoline stations and pharmacies are turning in gains.

And the slim-to-none increase in real retail spending, combined with higher base-level costs and higher producer prices seem to indicate that a strong business expansion in the first half of 2010 is not in the cards.

There is no better way to intuitively understand where we are than by looking at two graphs from the December Rail Indicators report which is published by AAR.

Carloads are most related to industrial and basic needs activity, such as ag, building, utilities and manufacturing.

A look at the multi-year trend shows that we are almost, but not quite, stabilized at a lower level after having fallen down one huge step. But growth is not there - we are just trying to bounce around and hang in on the current step.

Intermodal is most related to retail, because it is strongly related to imports.

Note that we have crossed the low part and are now turning in YoY gains. Again, we are on a lower step. We show no sign of stepping up a level. The big hump in the fall is related to clearance and restocking, but real retail sales are such that we are not really seeing a building trend - just a consolidation trend.

The real hope for 2010 has to be that we hang in there and ratchet up production enough so that we can start to build business investment. Anything - anything at all - that Congress does to kick the slats out from under consumers or businesses in the form of higher costs or increased uncertainties is going to injure the probability of doing so.

Some retail chains can begin to expand. Some retail chains are still cutting. Small businesses are still folding, and big businesses have mostly launched another round of cost-cutting. The outlook for commercial real estate is extremely poor in 2010 and little better in 2011. The outlook for housing is extremely poor; I doubt the Fed will be able to exit the MBS market in 2010.

Defaults on debt on all levels are still inflicting heavy damage on asset valuations; consumers still need to pay off debt or default on it; many businesses are in the same position.

State and local governments are facing the Year of Fiscal Reckoning. In 2010 they have to find a way to balance their budgets long term. Most of them can't do it, because most of them have built up ridiculous levels of necessary spending on public employees, especially public employee retirements.

Update: This is real retail sales through November, and you can see that it shows a slight build:

We're not out of the demand woods yet; the grocery stores look pretty bad. Pricing power is not there and the consumer is acutely price sensitive. The uptick seen in this graph is largely the result of increased needs spending by those who have money and secure income flows.

The natural course of affairs given current energy pricing is for retail spending to be diverted back into basic needs over the next couple of months. We'll get a hop from Census jobs, which will put a nice chunk of money back into the economy over the first half, and from there we are dependent on underlying recovery.

Second ditch to the left, and straight on until congressional midterm elections!
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