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Tuesday, March 01, 2011

NACM And ,,, Carnage?

It is rare that the word "carnage" appears in an economic report. It is worth reading NACM this month just for the experience. The "carnage" appeared in manufacturing unfavorables. For both services and manufacturing, the favorables (credit sales) are jacking up impressively.

But what's happening is that the companies with lowest margins are getting hit by input costs and beginning to fail; bankruptcies on the manufacturing side are ramping up again. This is a manifestation of the poker rules for businesses. At this stage a lot of companies can get overextended. The NACM report has an excellent discussion of the business cycle at this stage in a recovery from a recession; the normally difficult stage is now compounded by very rapid inflation of basic inputs. If you look at the manufacturing segment of the report, you see disputes and bankruptcies are going to very low levels (low = bad) compared to the past year.

You'll see that ISM Manufacturing shows similar positives (very high). One of the defects of the ISM reports is that they miss the underlying difficulties with margins, financing and profits (if there are significant difficulties). Inflation always makes these reports look good; a rise in costs is reliably shown as rises in sales. But profits are quite another question! So I like to read the ISM reports in conjunction with credit indicators and also NFIB, which has other measures including profit trends.

I do not mean by this to suggest that we are about to tip over. As far as I can tell, there is no chance of tipping over this year. However I do not see the type of job growth many are assuming, which means that risks of a later contraction keep growing. We're not going to get much help from construction this year. Same store sales for the lower half of the population income brackets are poor to declining.

It's obvious why governments are so constrained; their tax flows are improving but not nearly enough to compensate for higher levels of social benefits and the retirement crunch is just throwing a huge spanner in the works. So where do we get the strong expansion in jobs? Larger companies are carrying this expansion as are autos, and there are limits to their capacity.

"As far as I can tell, there is no chance of tipping over this year."

I can't believe you wrote the statement above. But I will let it slide to "enthusiasm", as you write so much quality stuff. My largest supplier used to increase prices every Jan of each year. Last year they increased 1/10, 4/10, 8/10, 1/11 and we were just informed of another increase in April (primarily a steel based product). Our new product sales are already very tough, with people looking for the absolute cheapest they can buy. Service on old product is increasing strongly, up almost 45% YOY. Slightly used is the new "New". When REAL (adj for inflation) PCE (personal consumption expenditures) are negative, such as now, generally the economy is is process of rolling over.

Another anecdote, found out another Fortune 500 company laid off an entire layer of upper mgmt. They had laid so many staff off, that their pyramid structure was more like the Empire State Blding. But the guys they wacked were making 7 figures. Stunned a lot of people, but REAL sales increases are very tough.

Keep up your fine writing, and continued good health to you and Chief.
Anon - I know steel is going through the roof, but it is everywhere. China and India, everywhere.

Maybe I am overoptimistic. Normally I wouldn't be accused of that, but to be honest I am as sick of this economic situation as anyone else and therefore very vulnerable to glimmers of light wherever they may be.

What I see is that the groundwork has been laid for another contraction which I expect to take hold in 2012.

From the POV of many businesses, I wouldn't be surprised if many aren't on the precipice right now. Seemingly that's what NACM is showing us, and many of the business reports that are closest to the ground are showing very poor profit fundamentals. I don't think there's much room for businesses to cut to maintain reasonable margins, either.

If I were in charge, I'd just whack corporate tax rates down to 20% for a decade, and add expensing provisions for a percentage of gross sales. Without a sustained expansion in businesses, we won't generate the jobs and we won't generate the personal taxes.

Oddly enough, the reason that I have a long slow reaction figured is that companies have already cut to run tightly, so there isn't the normal room for the cycle of cost-cutting>lower profits at more businesses>more cost-cutting>lower profits that normally starts a business-led contraction.

If over the next few months the commercial paper, NACM unfavorables and C&I show a sustained drop, then I'll be proven a dreamy-eyed optimist.

In that case, there would be no hope for me except to find government employment....
PS: I absolutely agree that real PCE is the problem. But PCE is going to be somewhat sustained this year(if narrowly) by the very big FICA tax cut granted to a small cohort of the population - those with large wages. They'll spend it!
We are following the same Japanese policies, why should we expect a different outcome. There are differences, but we chose the Japanese disease instead of the Iceland solution.

I don't want to squash your optimism, but we are spending $1.5 TRILLION more than we bring in. Our consumers are still leveraged to the gills, HOPING for a housing recovery. I think it is going to take 5 years just to come out of the denial stage. I teach me people to remember that DEBT=increased current consumption in EXCHANGE for decreased future consumption. How long can this go on?

Just look how much we spend on the Dept of Energy,(frigging billions since the 1970's and we still have no clue to an energy independence policy).

While I agree the upper incomes can spend, how long can you toast the lower income strata before you get to the upper income? You posted Walmart sales. It is only going to get worse.

I don't have much hope until we get an energy policy and/or we completely overhaul the income tax code. Ours is slanted to consumption, and puts a high price on our labor (lot of taxes and rules) and it lowers price of capital goods. So it incents me to buy a new phone system that makes the operator obsolete.

There is still a lot of room to cut employees. A company can hire 2 programmers in India for the price of 1 in US (Used to be a 3:1 ratio). As attrition happens, the operations go overseas. It used to be only IT, now it is IT, accounting, call centers etc.

It is labor arbitrage and it will continue until the standards of living are roughly comparable everywhere. It sucks but we have to get past denial and start thinking about real solutions.

The scariest thing for me is that with all the Mid East carnage, the US$ went no where. Silver and Gold soared. This is screaming that the dollar is about to go. Our only hope is that the Euro goes first.

Sorry to ramble but you are one smart cookie and I value your opinions.
They'll spend it!

Whether they want to or not. (I live in IL.)
Just look how much we spend on the Dept of Energy,(frigging billions since the 1970's and we still have no clue to an energy independence policy).

My father did nuclear reactor research at a federal lab for 35 years - the Department of Energy did not exist the first 22 of those years. The Dept. of Energy had and still has only one purpose - to present the illusion that the government is on top of things by making energy more expensive. They succeed mightily at that purpose.

When I read the following quote I immediately thought of you and that maybe you could use a good laugh.

30-Year TIPS

China’s Treasury holdings underscore the government’s confidence in President Barack Obama’s stewardship of the U.S. economy.
It occurred to me this weekend a large of GDP growth last year has been inventory building, I think driven by the same inflation fear as seen everywhere. I suspect the Princeton types are perfectly OK with that, inventory build causes GEP growth then hiring then consumption.

However, what if the hiring doesn't happen, and the final demand isn't there. Suddenly all the inventory is sitting there with no buyers. While the Fortune 500 types can get finance their inventory at the Fed for little to nothing, the small and mid sized businesses aren't so lucky. Plus even the big companies (ahem, GM)can't keep building their inventories forever.

Given your post here, I'm wondering if that could be an impetuous for a contraction sooner and deeper than anticipated by both the Princeton types and even yourself, MoM? (sorry to lump you in with the Princeton types, I mean no offense.)
We are propping up asset prices
when we should have been protecting
jobs. The cheaper dollar is costing as
many jobs as it saves and is straining
the safety net.
I agree about the outsourcing, but just wanted to point out that not all call centers get outsourced to India (or even outside the US). Outsourcing to other companies even in the US can save money. There are companies that don't consider customer service to be an expense and realize that people hate dealing with Indian call centers.

(If you need examples, I know that Verizon wireless and TMobile outsource in the US.)
Allan - no offense.

One would suspect that the odd Q4 GDP means that inventory isn't overloaded, and Chicago PMI plus the ISM reports show the same.

NFIB seemed to show that small businesses weren't loading up for the most part.

I think you're right, though. Finances permitting, prices increases of this magnitude with the assurance of further upward movement would tend to create forward buying.
We are propping up asset prices
when we should have been protecting

We have been disallowing price discovery in many sectors for decades. I'll also note that there has been a concerted effort to protect government jobs for just as long, and moreso of late.

Because of the desire to protect government jobs, which are paid for in taxes, asset prices have to be cajoled to remain high. The telltale sign was the concerted effort to create an ownership society (aka a debtorship society) - encouraging people to go into debt to pay more for housing pretty much forced people to buy cheaper products and services from the low-cost suppliers.

I can think of no time in history where a society sustained a Cadillac government while also having most of its private sector sustaining a Cadillac lifestyle. The largest empires in history were mostly populated with serfs.
Toto the Red States job sites and tell me those
Employees are over paid even with benefits. Not
every public employee works in New York or
California. Go to Mississippi's state job listings.
You will be shocked at how low the salaries are.
The media has been bought off and apparrently
Public Employees are the new whipping boys.
Anything to forget about bank and coporate

Asset prices have been pumped higher to save the
banks and Wall Street, not Government jobs.
The State and Federal jobs number are at their historical averages. What has changed is the deterioration of private sector compensation when
measured against productivity. In short, competition
with the world is screwing American workers even
though they have made productivity gains. That's ok
,defend free trade.
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