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Wednesday, March 31, 2010

Economics Reports End Of March

Today starts a rain of significant economics reports for the next week. See running updates below.

First up: ADP Employment: For March, projects a decline of 23,000 jobs in nonfarm private employment. As ADP points out in the narrative, the expectation is that government hiring of Census workers will produce a much more positive BLS report on Friday. BLS is reporting Census jobs when it reports.

ADP also revised down the Jan-Feb loss to 24,000, which gives us a monthly improvement (still losing, but losing more slowly). Services gained jobs for the second month (+28,000) while goods-producing lost jobs (-51,000). Small businesses continued to drop jobs at -12,000 overall. However small service businesses accounted for most the new service jobs at +15,000.

ADP did not see a snow effect in February, and I don't think there was much of one on retail sales net or jobs. It is true that much snow in high-density population areas has an effect, but the effects usually balance each other out. People don't go casually shopping as much, but they do buy a lot more at groceries and perhaps online. They buy extra stuff at grocery stores (rock salt) and at home improvement stores/centers (salt, snow shovels, snow blowers, etc. Also sales of hats, gloves and boots go up.). And some private businesses suspend and construction work may be halted, but there is always a strong temporary bulge of work in snow removal, which impacts the same working segment as construction. So it is usually a wash or a slight net gain, because there is forced spending.

The notable trend is that job losses continue to slowly decline - we are still on the improving trend. If I am right and June was the first month of recovery, we are 10 months in. The next two months are crucial.

The one-month extension of unemployment benefits runs out in the first week of April. I am hoping Congress can get on the ball and work out a new program. I think they will, but it is not going to help spending if unemployed people are sitting around with no money and no jobs. Unfortunately, in most of the country there simply are no jobs for the vast majority of the unemployed right now. Construction (except for public) isn't going to take up the slack this summer.

Chicago PMI. Note that all numbers I am citing are seasonally adjusted.

While still solidly in growth territory, this report notched up a pretty good drop from February to March (62.6 > 58.8, which takes us about back to December levels.). Production fell (Jan 66.6; Feb 65.2; Mar 60.5). Employment was about steady. Order backlogs fell, but only back to January's level. Inventories rose (42.4 > 52.4).

All in all, this report shows that the surge from the inventory cycle is just tailing off. You can't tell where we'll be in a few months. We could be happily plugging along in growth territory, or we could be kind of scraping along hanging steady. New orders were strong enough at 61.8 that it is hard to see possible contraction territory before late summer. The comments at the end were very mixed. The production and new orders indicators are very closely aligned, which suggests that no one is running wild with optimism. To me that makes this month's report look better; if everyone is still being conservative there's some slices left in the growth pie. This is also pretty consistent with ADP's report.

We also got the full report on February's manufacturers' shipments, inventories and orders.
The reason I am concentrating on shipments is that growth in manufacturing and freight over the May- December period is going to depend on sustained growth in final demand.

The notable thing about this one are YoY metals shipment ratios. Primary metals are way up at 17.2%; fabricated are still down at -3.1%. The value of unfilled orders 2010/2009 (Jan + Feb) shows why. Primary metals are up 3.6%; fabricated metals -9.2%. Fabricated metals are the leading edge for primary, so fabricated metals are the index to watch over the next two months.

We are also turning over some small recovery rocks in the worst hit segments. While shipments for the broad category of machinery are still down 6.8% YoY, new orders are up 5.8%. But the value of unfilled orders is still dropping YoY at -6.3%.

In consumer goods, the story is somewhat different. Food shipments are up 3.5% YoY. Apparel shipments are down 6.9%. Paper is close to even at -0.3%. This is the other side of the Titanic graph - consumer spending appears to be marked by a mood of intense sobriety. Pharmaceutical shipments are down 5.8%. That is not really a strong consumer indicator. Beverages and tobacco shipments are down 4.9%.

We still have growth in computers (+12.8%), but almost all of that growth is in semiconductors and storage devices. Durable goods shipments in aggregate have dropped for two months and are up only 1.8% YoY.

Crude Oil Inventories:
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.9 million barrels from the previous week. At 354.2 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 0.3 million barrels last week, and are above the upper limit of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 1.1 million barrels, and are above the upper boundary of the average range for this time of year. Propane/propylene inventories increased by 0.5 million barrels last week and are in the lower half of the average range. Total commercial petroleum inventories increased by 3.2 million barrels last week, and are above the upper limit of the average range for this time of year.
Even propane is now recovering as it is used less for heating. Inventories are very high indeed compared to usage. Over the last four weeks YoY net imports have dropped 10.2%. Product supplied has risen 2.9%, but this is slightly misleading because of ethanols and NG equivalents. I think diesel usage is up, but home heating oil usage is down, which would account for the -1.0% 4 week average YoY drop in distillates. Trucking tonnage in February dropped, but I thought that was mostly due to snow and would spring back in March. Maybe I'm wrong!

Related on the oil issue is this Bloomberg article about the rush to sell refineries. Oil consumption in the developed countries has peaked and is expected to decline. In Japan gasoline consumption dropped with demographics, and it is expected to follow suit in the US and Europe. Refineries have not generally been profitable for months. China is building massive refinery capacity. Now it just needs oil.

The one-month extension of unemployment benefits runs out in the first week of April. I am hoping Congress can get on the ball and work out a new program.

I suppose this is the upside of Obamacare. The short-term increase in tax revenue can be used to pay for unemployment or jobs programs. But how long can they keep it going? What if the unemployment rate doesn't drop?
Neil - the unemployment rate can be misleading. It is better to look at total wages and salaries private sector.

When the job situation begins to improve, more people start looking for work and the unemployment rate can rise. You might both have more people working and a higher unemployment rate.

So really it's total wages and salaries. We crossed the first third of the economic Rubicon when we got to YoY increases on corporate income tax. Now we have to cross the second third which is to ramp economic activity up enough to start creating net jobs.
Then we have to cross the last third, which is to start lowering unemployment.
M_O_M, makes sense. I should have said "What if job creation doesn't kick up sufficiently to reduce government payouts?" That's more precise.

That metric is a function of the private sector's willingness to put capital to work. But the banks are pumping as much capital as possible into Treasuries, and corporations are hoarding cash against the financial implications of expected government policies.

So, I don't see where the job creation comes from, at least until 2011. The upside I see is that if somebody in Washington were to get serious about reducing the government overhang on capital, all these reserves would get put to use in a big ol' bang!
We crossed the first third of the economic Rubicon when we got to YoY increases on corporate income tax.


I don't think corporate taxes can be trusted here. I suspect a shed load of the increase stems from mark to fantasy accounting and a boost from low rates that won't be repeated. And those distortions arguably make the situation worse as they allow for further siphoning of real wealth by financial parasites.

S&P 500 total sales were up ~ 3% yoy and that's with a big kicker from financial companies.

So far anyway, this "job loss" recovery doesn't have any traction. It's not surprising either. We've wasted so much time, effort and money trying to preserve the value of financial fraud. The bill for that free lunch is coming due.

Japan if we are lucky.
This post is off topic, but I have been wanting to hear your perspective on this for a while.

When I listen to some media sources, I hear that the housing mess started with unregulated and unaccountable predatory lenders made loans to the innocent and then packaged them as CDO's that were then shorted at large profits. I may have left out some details, but those elements seem to be in one version of the narrative.

Other news sources talk about the Community Reinvestment Act and innocent banks being forced to lend by malicious community organizers who stormed house hearings on the CRA and then sued banks who did not lend enough to the right people.

Both narratives seem to include the words "cheap money" and "Alan Greenspan".

What do you say? Maybe someday when you have free time (?) you could post your take on why we are where we are.

Angry Saver - I don't think we'll be Japan because I think that, despite all promises, most people will default on the majority of any wacky consumer debt they have. That includes mortgages.

But I have several kind of depressing posts coming up about swaps, speculation, non-written down debt, and financial/non-financial profit ratios. Just not this week. Next week.

I can't say that I disagree with your overall take. We are going to have to dump a lot more debt before we can put more oars in the water.

But really, doesn't the fact that durable goods shipments are only up 1.8% YoY kind of tell the tale? The comparison period is Jan/Feb 2009, which was in the abyss. I see these headlines about manufacturing leading us out, and I mentally blink and stagger.

Housing won't lead us out. Consumer spending won't lead us out. Manufacturing is undergoing a technical rebound, but it is hard to claim there is a leading edge there. Fostering another round of financial speculation won't lead us out.

The only alternative remaining is for us all to link hands and claw our way forward.
Matt - how about I post an outline and then fill in the details. It is a good question, but any reasonable answer has a lot of moving parts.
Matt - my own take is that both narratives are only partially correct. Neither narrative, you'll notice, puts any of the blame on the people who borrowed the money. They leave out the moral responsibilities of the house flippers and of the fools who were using their home equity as an ATM.

I'd rate the first narrative as closer to correct, but CRA does introduce a problem if you can't find enough credit-worthy borrowers in a particular community to lend to.

Hmmm. Given the precedent of health care, can a requirement to buy a house be far behind (joking)?
MoM,I would like to thank you for the quality of your posts and the civility displayed by the comments.It is refreshing.
Don't joke WSJ, although I know it seems a stretch. They've apparently got the power to make commercial transactions mandatory, and keeping both the housing market and construction employment up is probably a requirement for keeping incumbents in their seats. Don't give them any ideas.
IMO, the best thing that the government could do to help stabilize the housing market is to drop cap gains on real estate investments to 10% for eight years. There is vulture money out there ready to start buying foreclosures to turn into rentals when the market looks like it has hit bottom. Encouraging extra profits would give an incentive to take a little more risk. But it will never happen. Someone might make some profits off the deal and that is a dirty word to this administration.
Thanks for an insightful post MoM.
I have a question:
It seems that the resurrection in Corporate taxes is on the back of profits founded on unprecedented productivity gains.
That in itself is a dampener on consumer spending I'd imagine.
More importantly, are conditions such as to encourage corporates to engage in investment on the back of these profits?
I'd appreciate a post that clarifies these issues.
Thanks again.
That would be greatly appreciated. I look forward to hearing what you have to say.
I agree that there are more culprits than victims in this whole debacle. Surely we would not have seen the fast rise in housing (of which I made myself a victim by buying my first home in mid 2006) if it were not for the flippers and speculators, but would they have been able to make the profit they did were it not for a new pool of buyers with a legally guaranteed access to credit? Borrowers should also be responsible for reading the words above their signature on loan documents and telling the truth in the income claims they make, but could one of the causes of low FICO score be an economic retardation that makes comprehension of these documents impossible? Mortgage companies should not be deceitful in the products they offer, but if you have to make the loans to people who can't afford it you have to include gimmicks to get them in the door. I think the question is how much of each of these groups contribution to the mess was just making rational decisions in light of new groundrules? I don't have the background to pick out the numbers that show how much each of these groups contributed, and right now there are so few honest brokers in the world of information that any analysis by a mainstream (left or right) source is suspect. For example, the first two articles the NYT wrote about subprime mortgage lending in the late 90's praise the undertaking as a way of getting deserving people into homes, but now that the whole system has imploded they have changed their whole tune.
In the end, the numbers tell the story. Problem is finding an unbiased source.
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