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Thursday, April 14, 2011

Red Headline Day?

Whenever Drudge Report has a red headline about economic news it says something about the mood of the consumer.

I think the reaction is a bit overblown. I had expected to see initial claims rise by anywhere to 25-40K in April due to the Japanese supply disruptions. So 27K+ seasonally adjusted for April 9th isn't that intimidating, and it's very possible that it could go higher in the next couple of weeks. Overall the Japanese supply disruptions should not result in too much extended unemployment in manufacturing, but it probably will cause an extended shift in the trend for services employment.

It's quite difficult to separate out the spring break related claims from the carrying wave, so we'll all have to wait till the end of April for more definitive numbers. Still, NSA claims rose almost 90K. Over the last four weeks, there has been a shift in gasoline consumption that doesn't bode well. There is one caveat; we may not see rises in initial claims as we normally would, because it is quite possible that many do not qualify for benefits and will not file a claim. In that case, May's monthly employment report could be a substantially negative surprise. I don't think it will be, but the best way to tell until then is to watch gasoline consumption.

PPI showed about what I expected, which was more transfer through to finished and intermediate goods. Nothing can be done about this; producers need the money. In fact, you can clearly see the compression in margins by tracking how much of the rise in crude goods has traveled through to finished goods. The various wholesale and business reports have showed a bit of a lag in non-durables; people are pushed enough to slow purchases a bit.

Services have seen considerable financial effect from the consumer squeeze already. You might want to look at NFIB's March survey and NACM's March survey. NACM showed the services index taking a terrific whack from the current unfavorables relating to collections. It's a cash flow problem. NFIB confirmed that reading:
Index was driven by weaker expectations for real sales gains and business conditions and a marked deterioration in profit trends. The decline in the percent of owners expecting higher real sales and better business conditions in six months alone account for 76 percent of the decline in the Index.
My impression is that in March the US economy shifted to a tightening pattern. A tightening is not a contraction; it is a shift in trend. It generally takes a minimum six months for employment to show the result of such a pattern (if sustained) in the broader economy. This is not true of manufacturing, which shows immediate hours impacts of inventory builds or drops in final sales, but most employment in the US economy is not manufacturing-based.

I had originally thought that the upswing effects of emerging from a recession (services still basically short-staffed; small businesses extremely lean) would carry us through past the end of the year before we got into the negative cycle.

Now I cannot be sure. Even assuming the Fed bites the bullet, there is so much inflation in the system that the cost increases can't be absorbed by the median household. They will start cutting spending and have already done so. A huge amount depends on how deeply the Japanese production backlogs impair manufacturing hours in North America. The result of the Japanese quake will be some additional inflation, and China is banging along with very high inflation. We have a lot left to run in this cycle, and US consumers are going to be flogged by it.

The quickest way to assess this is going to be utility outputs in Industrial Production and the weekly Crude Inventories reports. Rail is still expanding, but the February/March YoY carload results showed a drop in expansion trend for carloads that I would consider significant:

What really matters here is the average distance between the 2010 and the 2011 carloads, and that distance is decreasing.

I don't expect March's rail figures to have shown the impact of the Japanese quake yet. I do expect them to start showing a bit in April.

February's weather was bad enough that I discounted carloads, but March did not deliver.

Canadians are having more of a problem than the US:

The Canadian economy isn't doing well, but unlike the US their intermodal and carloads are pretty much aligned.

As for crude inventories, here's a snapshot of the 4-week product supplied YoY for 2011:
Jan 20th:
Gasoline +2.0%
Diesel +1.8%
Jet fuel +4.6%

Feb 16th:
Gasoline even
Diesel +2.7%
Jet Fuel +1.4%
(there was a substantial weather effect dragging down consumption & deliveries - so basically average this one and the next one to get a Feb/March figure)

March 16th:
Gasoline +1.4%
Diesel +3.8%
Jet Fuel +4.5%

April 8th:
Gasoline -1,6%
Diesel +1.4%
Jet Fuel -1.6%
Now, nothing in all this tells me that we can't have a slight shift to the better in second half (the way I calculate the numbers, which is not pure GDP). But the picture is considerably less certain than it was just a few months ago.

If CF is right, and unfortunately he generally is, the Fed will keep pushing. I don't know what will happen.

This could hit a wall with frightening speed because there's no strong transmission yet into small business, and larger services businesses are all scrabbling desperately for sales and profits. They may make it through okay, or they may not. They are trying very hard to open up new revenue avenues. All of a sudden Amazon is besieging me with grocery offers. I can't regard this as a positive sign. Insurance companies are trying to open up virtual malls and so are the darned communications companies. Cleaner sales in supermarkets are popping up like daffodils.
My brain hurts. I feel a dislocation in the force. It's not a good feeling; it's akin to being a mile out from shore ice-fishing on the lake and hearing the ice start cracking and popping under your feet.

If I am wrong and I missed on the optimistic side, then we might have a very interesting October. Paradoxically, that may mean that Congress and the President decide to drop all this responsibility nonsense and send everyone 2K checks. 2012 is an election year. Anything could happen.

However if they succumb to their baser political instincts, we might miss a short contraction (maybe as short as four months) and slam into a rate wall. In that case, what the Fed and a remarkably inept national government would have created would be to reproduce the 70/80 cycle, and by 2018 it would be 1982 all over again, squared. I would truly hate for that to happen.

Yikes, lots to think about here. I might have to print this post out and stick it to the wall for a few months. Or at least bookmark it.

inept national government would...reproduce the 70/80 cycle...

Except this time the Boomers will be retiring instead of just entering the productive portion of their lives. As Prof. Reynolds likes to say, Carter is the best-case outcome and I don't expect it to be nearly so good this time.

M_O_M, out of curiosity, why carloads and not intermodal?
Intermodal is much more strongly correlated with retail sales of consumer goods. Especially container.

Container gets loaded on a ship in China, unloaded at a port (probably in CA), onto truck, transhipped to KS or Madison mostly by rail, truck again to WH, truck to store.
As Prof. Reynolds likes to say, Carter is the best-case outcome and I don't expect it to be nearly so good this time.

I tend to agree. I was a teenager in 1980 and had no trouble getting a job. My teenage relatives today cannot find work, period.

But the headline numbers have been manipulated so much since 1980 that people doing base comparisons between then and now think it was worse then. It isn't.
Thank you for all that information. There's much to ponder...lol. I was wondering and I hope you can shed some light on this. When I saw the rail numbers you mention declined (I read somewhere it was due to weather), I was wondering if that was what was boosting the trucking index (I think UCLA puts that out, are you familiar with it?). I seem to recall reading they interpreted that as a sign of improving growth. So I guess I am trying to figure out if I should discount them. I trust your methods more...lol...since you compare your models with reality and I'm not sure they do. Thank you again :)
So, let's say that Chinese stockpiling of raw materials (using their dollar trade surplus) is the primary mechanism for commodity inflation.

If that were the case, would this article claiming the Beijing housing market has crashed have any bearing on things?
Don't forget that a lot of money gets drained out of circulation this month. January and February tax filers
get money back which goosed hiring and spending.
I think retailers are going to get hit hard once higher
gas prices are figured in. My guess is China is thinking QE3 is a done deal so they are buying commodities with dollars hoping to sell the finished goods back to the world perhaps for Euros instead.

Neil - one of the reasons that I have been so sure that inflation is not controlled for consumers is that China is going to get to the damned-if point this year, and they'll do some things. I don't know what.

In China there have been several rounds of minimum wage increases since last year. They'll shove it if they can.

I would hesitate to put too much weight on March's Beijing numbers. There seems to be an early spring bobble there and then a pickup in sales.

However I do believe that the first signs of the shift have been there for months. Take a look at Commercial Buildings 2010 and look at the East. The housing should follow the same pattern.

The whole China thing is deep. That needs a series of posts in and of itself.
Anon - I use the ATA tonnage index backed by distillate figures from the petroleum reports. If trucks are running they WILL be using diesel.

In February ATA was down 2.9%, but it was still up over 4% YoY. It was quite similar to rail.

I discounted that due to weather, but the distillate figures I cited above seem to show that we have maybe a more persistent trend. Generally, when fuel goes up so much there is some shift from trucking to rail.

Railroads are still doing very well; in March they were putting on more cars, engines and workers.

The rail report is completely free and has beautiful levels of detail.

Diesel consumption should be slightly more sensitive than the ATA tonnage index. When fuel is expensive the ladings are more careful.

Regarding distillate, I have to buy heating oil for one northern house. On a hunch I called the supplier in early April when the wholesale figures were really high, and I got quoted a cheaper price than earlier in the year when wholesale prices were lower. So I think something's happening.

I may have completely screwed up and been wildly overoptimistic. I really may have. You can get all the historic Crude Inventory reports here.

Now if you go back and look at fourth quarter 2007....

What happened right at the end of the year 2007 is that gas didn't quite go negative YoY, but jet fuel took the sudden collapse, and diesel was still up YoY. By late January 2008 jet fuel had fallen hard again, gas was still up, and diesel had gone about flat.

A significant and sustained drop in jet fuel is really bad news. It generally means a cut in business travel.

CR always tracks the hotels - that's another good index.
Spork - you may be right. There was something pretty odd about trade balances.

Also there has been some spec buying in food and PPI just showed that.

Given what I saw in supermarkets the last six weeks there is not much consumer margin at all. We could be at 70% decline in real incomes.
This week i cancelled the gym membership, downgraded the dsl, and I'm looking at other
budget items with a knife. With the benefit cuts
coming down the pike on my job and rising
inflation, I'm looking at around a $250 monthly
income hit. The lower standard of living is here.

Hi Mom it's pondering Anon, thank you for the additional information regarding the fuel prices, more to ponder...how do you find the time? There aren't enough hours in the day...lol. Anecdotally, I've always known business trips are the first expense cut and I saw the airlines total available seat miles slow down (I apologize in advance, I don't know if it's okay to refer another website, and I'm betting you have better info but if you're curious...), I was looking at the site: http://www.bts.gov/xml/air_traffic/src/index.xml#CustomizeTable) I saw the slowing and I assumed it was because of the impact of oil prices in all their myriad ways on top of the mostly sluggish economy. I've been heartened by your assessments and have been hoping we could still mostly overcome the speed-bumps thrown in our path by Washington. My fingers are crossed. I'm hoping the politicians get off the TV for a while, spring fever and its accompanying animal spirits take hold and a month or two from now, things will be looking much improved. Thank you again, sincerely, PA
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