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Thursday, July 08, 2010

A Better Week

Initial claims dropped finally to 454,000, but last week's claims were revised up to 475,000, so the four week moving average hardly changed, sticking at 466,000 from last week's initially reported 466,500. It would be nice to get away from the seemingly endless series of upward revisions on initial claims.

Still, the economic news this week has to add up better than last week's, because hey, it really couldn't have gotten any worse. Retail sales are still decent.

Seasonal adjustments play a pretty big role during June for claims. The next real blip I expect will come at the end of August and into September. That is the point at which school systems open back up. I think we are going to see some impact from state and local budget cuts, i.e. employees who won't be coming back to work. Those won't be reported as initial claims, but a lot of employees get temporary unemployment benefits during the summer, and this year some will unfortunately be still be drawing benefits during the fall. Therefore I am expecting at least some blip in continued claims and insured unemployment rates if the cuts are as big as claimed. I'm not sure they are!

Consumer credit is supposed to be published this afternoon. That will be interesting.

I have a severe case of double economic vision. Many of the most reliable indicators I watch vigilantly seem to signal that we have a much stronger base and that we can carry through the rest of this year in moderate growth mode. These indicators include freight, deposits at banks, and commercial paper:

Look at the nonfinancial growth. That is a recovery indicator.

For the most part, industries seem to have been cautious and therefore should continue some expansion even if the pace drops off.

I have seen one blip that indicates an overrun, and that is apparently in retail stocking.

I am judging by the rail intermodal figures, which may be overstating the case. But those figures seem to show that retailers outran themselves in stocking and will be pulling back in ordering unless retail sales are very strong the rest of the year. This, however, probably is more of a problem for China, Taiwan and India than for US manufacturers.

I'm working on a long post, but I'll update with some more figures in the afternoon on this interim post.

Regardless, jobs growth will mostly depend on the small businesses, and there uncertainties really are weighing. You can see a video that is some sort of clip from Fox News posted on the NFIB website. The reality is that states are auditing and raising taxes, and the healthcare bill really will impose a lot of extra costs on smaller businesses. And who needs it? Right now businesses are still staggering forward trying to get their feet under them. Note that in the video the VAT comes up. All these regulations, most especially the 1099 for all vendors deal, are a nightmare and a real additional cost for businesses. They are overburdened and uncertain, but sure that they are going to face much higher compliance costs.

I have started a compilation for SuperDoc, but I am very afraid that when I finally do broach the subject he will just give up and close the doors of his practice. One thing for sure, this is not going to lower medical costs!

Update: Retail chain stores sales for June were not great, and imply that the retail sales report for June will be less than brilliant:
Chain-store sales were soft in June pointing to a second straight decline for the Commerce Department's ex-auto ex-gas category. Light traffic is a common theme in today's reports along with continued consumer caution. Sales trends are nearly even with May which remember was a disappointing month. Even if ex-auto ex-gas sales manage to match May's total, they will be well below April which more and more looks to have been a peak for the retail sector.
Still, it's a heck of a lot better than the insane crash days.

Further Update:
Consumer credit is out. This is for May. April was revised to -7.3% annualized. May initial is -4.5%. In those two months revolving (generally CC) debt dropped 11.8% and 10.5% respectively.

And this is hardly a surprise, because credit card rates are still averaging at 14%, and 24 month personal loans at 11%. Nor, given the economy and widespread defaults, can that come down very much. Of course it is a mix - some "gold" customers are getting much better rates, and other customers are getting hosed. New car loans at six and a quarter. Non-revolving, which is disproportionately car loans (no real estate in this report) balance has dropped to about 2007. We generally do need autos more than CC bling.

In those same two months, other deposits (from H.8) grew 3.2% and 9.4% annualized. We don't have the final for June, but through the June 23rd week other deposits were up at a healthy pace (about 50 billion seasonally adjusted).

It looks decent to me. People just aren't going to borrow blindly at these rates, nor should they, nor is it all that feasible for most consumers to borrow very cheaply due to the risks in the economy.

For what it's worth, the seasonally adjusted revolving credit balance is about down to 2005 levels.

PS: And if you think banks can do much better on most of these rates, you'd better look at delinquencies and chargeoffs. A 10% charge-off rate on credit cards doesn't leave much room to drop rates no matter HOW low your cost of funds is, and an 11.29% delinquency rate on residential mortgages means that FHA and Fannie are going to cost the taxpayers a WHOLE lot of money. It's not nearly so much fun to holler about greedy bankers when it turns out that the taxpayers are the "greedy" bankers.

PPS: Something about the consumer credit report brings out the dementia in analysts and/or reporters. Take this Bloomberg article:
Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.
“Consumers are loathe to take out additional credit as the tight labor market is making it hard to get a job or maybe even keep one,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report.
Oh, could we put down the bong and try to focus our eyes on reality for a change? The numbers in the article are good, but this wacky interpretation perturbs me.

Consumers who have no money coming in are more than willing to run up their credit cards to buy groceries and keep the lights on - most of them won't be paying it back. But consumers who do have money coming in, but are getting 1% at best on their money in the bank, aren't going to be paying 10% to borrow. They'll wait a few months and pay cash, and this is by far the best financial return they can get - by NOT borrowing. The old "leveraging your way to wealth" meme is pretty well busted.

So we have a situation where the desperate impecunious will borrow, but the financially solvent and provident won't unless in extreme emergency, and then they are going to buckle down and pay it back as quickly as they can. They'll borrow for car loans, but not the casual stuff. This does make it hard for banks to improve their overall loan portfolios, but consumers should be looking after their own interests and not worrying about bank profitability.

And then, there are still some people who would like to refinance their homes but need to bring a little money to the table to do so. For many of them, it's a wise idea to save and refinance at current rates (taxpayer subsidized rates, but hey).

M_O_M, that's great news that non-financial paper is up.

As a data point, I've been getting lots of headhunter calls, and have had good positive responses when I make sales calls for my consulting work. (This is for R&D consulting in a technology that is currently considered "the next big thing".) My clients and contacts seem to have money for development again, and there's positions going unfilled--engineering schools have de-emphasized this area for so long that it's going to take some time to catch up with the demand for talent.
Neil - I just don't see the Krugman hypothesis in the base numbers.

The problem is that we are just bootstrapping ourselves up, and probably can't afford to raise taxes very much. So who knows what 2011 holds?

Cap and trade, some of this healthcare stuff, the projected income tax increases - we just can't carry it all. We have to rebuild.

I think we should extend (really extend) unemployment benefits, even if at a lower level, for many of the workers caught in the high unemployment areas.
Which Krugman hypothesis? Great Depression 2.0, or that everything would be fine if only the government would really crank up the printing presses?

Who knows about 2011, indeed. We're just 4.5 months away from the angriest bunch of lame ducks America has ever seen.
It's really one hypothesis, Neil - that we are in a depression and that therefore we should print and spend.

I think the poor guy is just losing his marbles over the fact that the Dems are losing in the polls.
And elsewhere, outside of Obama's rule, Canada created 95,000 new jobs in June.

That would be the equivalent of 950,000 new American jobs.

Different policies, different outcomes.
Different economies, Fred. The Canadian economy is a remarkably balanced combo of natural resource production (oil, food, mining, etc), manufacturing and services. They also have a very favorable social/legal/cultural bias that promotes foreign investment.

But still, their household debt is too high. They are going to start seeing some drag from that over the next few years.

The US attempt to get all fancy ignores the lessons of the Canadian economy - basics really count most. If you take care of those, things will go forward. If you don't, Crash-O-Rama.

It is worth looking at Canadian tax policy link.

Canada has much higher sales taxes (its tax policy is somewhat regressive) but lower top marginal rates for income taxes and corporate income taxes.

Thank you, Fred. I think I will do a post on the Canadian tax system.
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