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Thursday, May 19, 2011

The Day's Helping Of Humble Pie

A) Initial claims: SA 409,000, four week moving average increased to 439,000. Last week's initial claims were revised up to 438,000. After next week, the four week moving average should drop because the one high week falls off the radar, but it is not clear how much it will drop. Initial claims at these levels remain worrisome. One of the clues as to how much trouble we are in will be continuing claims, so in two weeks I'll start watching that. We already have a problem with long-term unemployment; watching the shorter-term unemployment rise again would be very dispiriting.

More later.

While we're waiting: Asian production and inflation is impacted by the Japanese disaster on several levels. The first is that the supply of some high-quality products, like steel, alloys, resins, and some parts is gone or highly impacted, and this slows building and construction of high-end products. The second is that Japan has now to rely on more fossil fuel as it runs its own thermal plants and as it relies on the power from the thermal plants operated by private manufacturers this summer. (It is still not clear how deeply nuclear power will be impacted longer-term, radiation alarms at Fukushima Daiichi went off BEFORE the tsunami. The most likely source would be ruptures in the piping and structures used to hold contaminated water. After the 2007 K-K NPS quake, there was considerable plant damage. So it is not just tsunamis.)

China is also having problems with energy supply. The price of coal is quite high; China controls the price of power. This has led to electricity shortages over the winter as utilities stop producing power that costs more to produce than they can charge, but this year electricity shortages are going to continue this summer. China's current plan is to charge superrates on some businesses that use too much electricity in some areas. We'll have to see how this works out. Japan's need for more coal is not helping prices.

Bullard's Q&A made news: Not the speech - that was boring, but during the Q&A he said he thought that the Fed should follow the lead of various foreign central banks and set an inflation target based on a broader price index, and that he worried about commodities as an asset class. This is the first really realistic note about Fed policy from one of TPTB, so it is big news.

Bloomberg's Consumer Comfort Index is in the pits. This is hardly news.

Existing Home Sales. More unexpected who'd a thunkage. Down marginally on the month, down over 12% on the year. On a YoY NSA basis, home sales dropped a stunning 14.9% nationally. I do not intend to wallow in the US home market, as I have said before. I am sure Calculated Risk will provide very good coverage for those with stronger stomachs. There was a strong element of delusion in expectations for this report - analysts expected prices to strengthen a bit, whereas of course they fell, and months of supply were expected to decrease, whereas of course they rose from 8.3% to 9.2%. It appears that economists are still working off an overdose of sexpectation, although I must say that CR isn't.

In driving around, I can only report that I have never, never seen this many higher-end homes for sale. The glut has moved into higher-end homes, and it is clear that a whole new range of mortgage chargeoffs impend.

Philly Fed - still in positive territory, like Empire, but it fell from 18.5 to 3.9. Strong deceleration, not crash. Shipments still positive but the shipments index fell 23 points.

The cause of all the unexpectedness (sound track by Mark - never, never let a physicist do economics if you have no sense of humor):

Growth in real retail sales has about topped out. Barring Congress throwing money at consumers (they are supposed to retract money from consumers at the end of the year), this graph indicates stormy weather ahead.

Retail sales are deflated using the CPI-U, when retail sales skew to necessities a better choice would be CPI-W.

The FICA rebate skewed very greatly toward high earners, which is obscuring the real movement. However we fell below the give-back point at which most households can cover their ongoing expenses and make discretionary purchases. Now they are once again in the territory of either cutting debt or earning more or decreasing discretionary purchases. The highest earners (about 85K household income and up) are not impacted severely yet for the most part, but below 125K they are being considerably more cautious than economists had hoped. (See the problem with the HENRYs.) This segregates US retail growth into less than 30% of households, which is generally an ironclad indication of recession within a year, because it leads to marginal losses of employment, which lead to further losses in lower end retail, which sets up the slow down-the-drain cycle.

Commodities moved up not on economic good news, but on a series of indications that central banks would continue easy money policies this week. (BoE, ECB, FOMC, BoJ, RBA.) Thus Bullard's comment about commodities and asset prices is dead on; central banks have blown a bubble, but it looks like the bubble has gotten large enough that the global economy's growth rate is being dragged down.

Since the only way the Fed can avoid a recession within a year is to have Congress rebate 3% of FICA next year, I suspect the Fed will let its balance sheet run off over the second half of this year. What happens next is dependent on actions in a number of countries. They may have to tighten further.

"Existing Home Sales. More unexpected who'd a thunkage."

Economist continue to miss what is occurring in the RE market because they are locked into projecting from past data, such as inventory,jobs,credit etc. They should like you get out of the office and away from the computer screen and go out and look around!!
My guess is that RE prices in reality will reflect price-rent ratio's, the question will be what those ratio's will be for specific sections of the country. Here in Calif this will have a profound shock on the market!!!
Ron - Yes, price-to-rents have always been the gold standard.

Another way of looking at this is that we are going to see the property market return to area fundamentals next year. The problem is that area fundamentals vary widely. Some areas with decent recovery are going to do well. Some areas with high cost fundamentals (like high property taxes) will do poorly.

Demographics, household incomes, vacancies and local fiscal balances will all push markets in different directions.

In some areas there is still a huge overstock of higher-priced shadow inventory. A lot of lender losses!

More moderately-priced housing actually is doing well in many areas.
What happens to Treasuries when the Fed tightens?
The Public is risk adverse and with good reason.
If you don't know the value of your labor, how can
you make long term plans such as buying a house,
or changing jobs ? Good luck when your government
Favors multinational corporations over citizens.
Charles - it honestly depends. All other things being equal, if the Fed stops buying Treasuries the supply should increase, prices should drop and yields should rise.

However, if the Fed stops buying and stops rolling over the proceeds from the stuff that pays off, what actually will happen will depend on the circumstances at the time.

For example, if people are very worried about bank stability in Europe and if a bunch of people are looking to plunk commodity and stock gains somewhere, you may not see rates rise.

Mortgage activity is quite low, so mortgage rates won't bounce much.

"Growth in real retail sales has about topped out."

I'm amazed we even made it as far as we did.

Real Retail and Food Services Sales per Civilian Employed
It is welcome news any time the number of new claims falls. But, we have been down this road a number of times in recent months, with the same theory that we "might be turning the corner" tossed into the mix. The fact is that the number of new claims has been unexpectedly high for the past month, and today's number is simply getting us back down to where we were a couple of months ago. Causing continuing concern is that the number is still above the threshold of 400,000 that indicates a troubled economy. With the continuing high cost of fuel, there is no certainty at all that this is the beginning of a turnaround in our jobs picture. Instead of wishing for success, we need to see both our political parties working to provide job creation programs and taking steps to lower the costs of those fuels which are threatening our recovery. You do not get results with the economy by simply hoping for them.
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