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Thursday, April 15, 2010

Note On Initial Claims April 15th Release

Initial claims seasonal adjustments become more volatile around the Easter/Passover holiday every year due to calendar changes and seasonal adjustments. A lot of universities and school systems shut down for multiple weeks, but the timing shifts.

However if the high initial claims figure for this release (SA 484,000) is due to mistaken SA calibration, it is likely that earlier weeks were off too. The last two weeks of April should give us a better indication of where we are.

Actual initial claims for the week ending April 10th were 514,742, compared to the prior year's 610,522. Until state detail comes in next week it will be hard to figure this one - but my guess is that there were logjams in claims processing that shifted earlier weeks lower. In any case the four-week moving average should be more reliable, and that is only 457,750. The previous week's actual claims were 415,012, so it's hard not to see this week's number as reflecting spring break.

However, having written that, there is something very squirrelly here. Normally the pre-spring break low to the spring break high shift in actual claims would be more like 40-50K. So I am guessing that CA didn't get its claims processed again, and that threw the last two weeks of numbers off.

As an afterthought, I am including the industrial production report for March here, because it may shed some light on matters. As I have noted before, the inventory cycle has about cleared, and from here on out it will be more difficult to turn in strong economic growth numbers, because those numbers will depend on final demand.

In March, the total index increased by only .1%. You can see the inventory cycle swing in the October-March numbers:
October: +0.2
November: +0.7
December: +0.7
January: +1.0
February: +0.3
March: +0.1
There is a decent chance March will be revised up a bit (February was). However and more to the point, over the year utility production has not managed to increase at all. It is still posting a YoY decline, although I am expecting to see that swing positive in April or May. Production of both consumer goods and non-industrial supplies has been declining for two months.

It's also worth reading this part of the commentary for capacity utilization:
Capacity utilization rates in March at industries grouped by stage of process were as follows: At the crude stage, utilization increased 1.1 percentage points to 87.4 percent, a rate 0.9 percentage point above its average for the period from 1972 to 2009; at the primary and semifinished stages, utilization slipped 0.5 percentage point to 69.5 percent, a rate 12.1 percentage points below its long-run average; while at the finished stage, utilization moved up 0.6 percentage point to 71.8 percent, a rate 5.7 percentage points below its long-run average.
This relates to the earlier posts I made on manufacturing orders.

Very tentatively, given the grocery store index, which is raking new lows in an astonishing manner, I would guess that the end of this expansion cycle will come in the June/July period, and a very slow contraction cycle will begin this summer. In the initial stages, I expect GDP to remain positive.

However the bald fact is that our economy appears now completely dependent on growth in government transfer payments. The unpleasant corollary is that taxes are already rising at the state and local levels to support government spending, and will have to rise at the federal level in 2011 to support this spending.

If employment and total wages can't begin to pick up soon, the waning effect of the stimulus, erosion in unemployment benefits, the continued state and local fiscal crisis, the end of the Census stimulus, and the effect of higher production costs will inflict another slow round of economic sapping. The bottom line is that I don't think there can be much more left in the profit margin paring for consumer needs, so at some point the pricing has to rise. But it can't rise, which would imply that production spending will fall net, which would be bad indeed.

I have been discounting the kind of astonishing stuff I am seeing in grocery pricing as somewhat induced by the threat of higher Walmart competition. But still, Walmart is doing what it is doing for a reason, and that reason is that it is hoping to boost volume.

FHA raised its upfront insurance rate effective April 5th to 2.25% for purchases and refis. We won't know the effect of this move for a few weeks, because of course last week's huge dropoff was really due to everyone running the week before to get all their pending apps through before the increase.

But the purchase tax credit is about to expire, and FHA is also going to Congress to ask for the ability to hike up the ongoing insurance rates (those charged with each payment). The current rate is 50-55 bps (0.50 or 0.55% annually). Hope for Homeowners borrowers pay 75 bps. The current hike increases the net mortgage, and an annual rate increase will also do so. Therefore I do not expect mortgages to be hopping later this year, and I strongly suspect a new round of price declines will set in this summer.

Comments:
The unemployment claims confirm what small business is experiencing and that corporate profit is based on cutting overhead the trend seems firmly in place.
 
SP - the contrast between the very strong rebound in all corporate taxes and the continuing declines in self and small strongly suggests that we will be dependent on large corporations to fuel the expansion.

And that would be fine, but the last few decades have demonstrated that large corporations are not expanding US operations due to costs, regulatory and other business-related reasons.

In any case, the logical course now would be to stimulate by cutting corporate taxes. If the small businesses can't expand, and the large corporations won't expand, the US is in a very Japanese-like fix. We could see a decade of decline.

In this regard, it is worth noting that US corporate taxes are the second-highest in the developed world. Only Japan beats us.

Over the last decade, European countries have generally cut corporate tax rates to boost corporate advancement. Take Germany.
 
If the small businesses can't expand, and the large corporations won't expand, the US is in a very Japanese-like fix. We could see a decade of decline.

Meanwhile...

Uh Oh
 
The only way to increase demand is to provide private sector jobs. The only way to do this is tariffs. Make
foreign goods more expensive than American goods.
This should increase demand for American workers.
The time to do this is now, while we still have a middle class.
Sporkfed
 
Can you say "double-dip"?

That said, my fear is that the right leg of the W will be a very low-degree slope.
 
Corporate business has been cutting overhead (people) for a number of years and replacing them with machines or space on a server. This trend has been firmly in place and is only expanding with internet availability. My wife's company is in the process of using ISO and PDF technology process to cut office staff over the next 36 months by over 60% or more, all based on internet.
 
Been a longtime shadow reader MOM. Thanks for the economic commentary. I've come to depend on your independent insight instead of those talking-head private sectors economists trying to maneuver their book.
 
Stagflation Mark wrote:

If the small businesses can't expand, and the large corporations won't expand, the US is in a very Japanese-like fix. We could see a decade of decline.

Meanwhile...

Uh Oh


Haha, thanks for the laugh Mark. I'll be the first one to welcome an improving economic picture back with open arms. But we're ALONG way from doing that, and in fact sewing the seeds of bigger cataclysm.
 
The only way to increase demand is to provide private sector jobs. The only way to do this is tariffs. Make
foreign goods more expensive than American goods.
This should increase demand for American workers.
The time to do this is now, while we still have a middle class.
Sporkfed


Doesn't make much sense, really.

Tariffs will only make foreign goods more expensive HERE and nowhere else. Overall domestic demand will decline with the higher costs. Not only will there be next to no shift in production locations because of one market, existing U.S. exports would be affected by retaliatory tariffs. Your idea does absolutely nothing to reduce the cost of doing business domestically.

Your proposal is essentially what Kim Jong-Il and Robert Mugabe have been doing, and will have similar results. You can't solve a problem of excessive taxation and excessive spending/borrowing with even more taxation and spending/borrowing.
 
Meanwhile...

Uh Oh


It would be scary if anyone under the age of 60 actually read Newsweek outside of waiting rooms.
 
Uh oh....

Talk about having drunk the Kool-Aid! Sure, we're going to tax and regulate our way to world domination by feeding billions to rent-seekers who've already tapped out Europe.
 
Perhaps "America's Back" is a Freudian slip? Think how much different the article could be if "back" was actually a noun?

Who Has America's Back?

Now that's an article I'd like to read. I'm pretty sure it isn't the Chinese or the Middle East, lol.

America's Back Pain

We've been suffering for a decade so far.

The Straw that Broke America's Back

Ouch. That one might be hitting too close to home. "Broke" is like the elephant in the room. Probably best not to mention it.
 
Charles,

This country used tariffs successfully for most of its
history to protect manufacturers. You would rather sacrifice American workers to protect the right to import cheaper goods from China with borrowed money ? Does not China peg its currency ? You don't
think that factories wouldn't move here to avoid the tariffs. i would rather pay a higher price for goods than pax higher payroll taxes for unemployment.
Ross Perot was right .
Sporkfed
 
Sorry for the spelling mistakes. The cellphone is hard to type on.
Sporkfed
 
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