Thursday, February 18, 2010
I Hear The Fat Lady Caterwauling In The Distance
Singapore's tourism is up, but its January exports dropped 8.9%.
Crude oil prices are back up to about $78. This is pretty delusional, but it kind of guarantees a world-wide drag. The drag would not be sufficient to knock things out of recovery if it were not for the fact that mean, mean persons are beginning to wonder if governments can possibly pay their debt, so a lot of government stimulus is ending of necessity. In the US, states are short about 180 billion in the next budget, which is about 10% of their Q4 spending. With pension costs continuing to escalate sharply, that implies that they have to cut spending by about 120 billion to have a hope.
But still that wouldn't do it, except for this one ugly fact: January producer prices showed the danger signal. The 12 month change in crude goods is + 25.2%; the 12 month change in intermediate goods is +4.6%, and the 12 month change in finished goods is +4.6%. A few months ago (Oct), the 12 month change in crude goods was -14.1%. In November, it rose to +4.7%. In December, it rose to +12.3%. That's a "Mene, Mene, Tekel" right there.
As the full inventory replacement cycle moves to its natural end, the carrying wave will consist of end sales, and producers are going to have to raise prices to accommodate current costs. I have already seen the nasty signs in the last few weeks of groceries - stuff like pasta is inching up, but the non-essential stuff is being flogged for about nothing. There is a shortage of consumer dollars to cover those producer costs; the result is further compression of margins and further compression of end sales. That means that many companies will be cutting costs further. We are going to have some incredible bargains in commercial space for years to come.... And hiring ain't gonna be very hot either.
So I was a bit surprised to see that the rise in initial claims was "unexpected" (4-week MA at 467,500); and I laughed out loud at Walmart's "surprising" comparable store sales drop of 1.6% in Q4. Walmart also observes that the first quarter will be "more challenging". How that could surprise anyone is beyond me, because a Mene, Mene was flashing above January advance retail sales:
Here you have to look at the YoY. Table 1B gives you the unadjusted which are the best for a YoY, and here we go Jan 2010/Jan 2009 (figures are in millions):
Total: 323,688/ 313,593 (+10,095). This doesn't seem so bad, but when we look at the categories the weakness appears:
Gasoline: 31,515/ 24,681 (+6,834) We've got only 3,261 of our nominal increase left.
Pharmacies: 21,132/ 20,664 (+468) We've got 2,793 nominal increase.
At this point, the need to replace clothing and buy new or fix cars is becoming ever more pressing. So we are seeing the result of the diversion in spending in major YoY falls in sales for categories like electronics (-7.6%), furnishings (-6.4%), and building supplies (-9.9%). Some of that is shifted to non-store retailers (partly due to sales tax), but most of it is just coming out in the form of either reduced prices or reduced sales.
I believe we can discount the possibility that consumers are suddenly going to start charging a lot of "wants" stuff on their credit cards. That means that we are seeing a shift back toward spending only on essentials.
Wholesale inflation in India is running well over 8%, and their central bank will have to act.
We still have some temporary boost in the US domestic economy due to Census jobs this year. Those will tail out this summer, but even if we figure a million of them, we have about 5 million people due to lose unemployment benefits through the summer. Today is February 18th. As of the 28th, every person whose current tier of unemployment benefits expires will be told to walk the plank.
After the first 26 weeks of unemployment, there were four additional tiers (workers in every state weren't eligible for all):
Tier 1 - 20 more weeks
Tier 2 - 14 more weeks
Tier 3 - 13 more weeks (available in states with unemployment 6%)
Tier 4 - 6 more weeks. (available in states with unemployment 8.5%)
As of the 28th of February, no one gets to go to the next tier under current law. There are currently about 5.5 million people on regular unemployment and about 5.8 million on EUC tiers 1-4. According to BLS there were 14.8 million unemployed in January. My most optimistic estimate is that if Congress were not to extend, there would be about six million people losing benefits without getting jobs or being able to go to early retirement by July. What is the effect?
Assuming a month of 4 weeks and an average benefit of $290 weekly, the average monthly benefit lost would be $1,160. Multiply that by six million; 6,960,000,000 a month. Somewhere around -7 billion a month, comparable to the effect of the increased gas prices in January. Walmart is not worried about a "more challenging" sales environment. Walmart is pissing its corporate pants, but of course it cannot say that in a press release. There would be offsets, of course, but the offsets (like food stamps) will be offset by other offsets.
So there are millions of people looking at a sharp drop in income in the next few months, and right now they can't plan at all. The longer Congress waits the more anxious people will get, and the more conservative they will be in their spending. This spreads out in families; with unemployment rates so high, parents are concerned about children losing unemployment benefits, spouses about spouses, etc. It also takes time for the states to implement and the checks to get out there once Congress does act, so waiting for dramatic effect is not going help the retail environment.
This uncertainty is going to have an economic effect on consumer spending, as will fuel prices. It will also have an effect on corporate spending.
PPI is noisy. Especially now after last years commodities cliff dive and rebound.
I didn't find the PPI numbers alarming and I don't think Bernanke will either.
Consider: Over the past four years (through Jan. 2010), PPI for finished goods is up ~ 2.9% annually and PPI for crude goods is only up 1.7% annually.
And since July 2008 (the peak for PPI), PPI for final goods is down ~ 2.2% and PPI for crude goods is down a whopping ~ 31%.
I'm not saying this is good news. It's not. We're seeing rising prices for many items against a backdrop of weak demand, stagnant wages and high unemployment. I just think this month's somewhat high PPI print distorts the bigger picture.
It's eCONomic misery! At least for the non-wall st. majority. And the misery is going to be will be with us for years and years. **sigh**
And all this because of whole sale bailouts instead of a "good bank; bad bank" break up, allowing the economy to pick the pieces up.
It's a disgrace.
Your attention to the effect of fuel prices on the economy is refreshing. Knowledgeable folks are predicting crude may hit $100 per barrel by summer, but no one is saying it will end the recovery or worse. What's wrong with them?!
Wonderful things in your other posts, and I am glad to have visited the site.
I leave it to you to figure out why Congress is dallying on this - my guess is that they'll leave it till the last moment and then throw in another round of corporate welfare.
As of now a lot of people will see an interruption in their unemployment checks. With unemployment over 10% in many states, and many areas with over 13% unemployment, there is no feasible alternative.
You can't have lower PPI with higher inflation of basics. I already see the result in the grocery stores.
In a lot of ways, this has been created by policy. Governments have followed the "neutron bomb" strategy in this global downturn. They let the assets die but kept the money standing, which means that as demand collapsed, money shifted into remaining assets, which were necessities.