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Thursday, July 07, 2011

Remarkably Consistent, and Remarkably Intimidating

Initial claims are moving in a very tight range. This week's number is 418,000, but last week's was revised up to 432,000, so the four week moving average is 424,750. This is about as steady as this series ever gets. At this level, prospects for significant employment gains in the near term are slim indeed.

Tomorrow we get the monthly employment report.

I was watching for Ward's light vehicle inventory summary for June. There is little evidence in this that auto sales were hugely constrained by supply issues, and end of month inventories aren't that bad for most manufacturers. GM and Chrysler have plenty of inventory, but some of that is in trucks that aren't selling too well. Looking at inventory makes me think that the rapid rise in car prices has something to do with the disappointing sales, and that as inventory shortages tend to clear, we are not going to see the rebound that many are expecting.

It is true that auto sales have been deeply suppressed over the last few years, and that one would expect a rebound. But many people are retiring or close to it, and there also seems to be a substitution effect, in which consumers are switching to cheaper vehicles.

I list these two things together, because I am expecting some distortion in July claims due to the auto supply crunch. We will shortly get this week's crude inventories report and the monthly rail report. Auto shipments don't appear to be doing that well and it is going to show up in rail.

To me it still appears that the US economy is slowing. From stall speed we appear to be stalling, and the mechanism is consumer financial stress. The retail trend is pretty firmed up on the declining band ex inflation, but production stats and employment are masked a bit by the Japanese supply shortage and the June rebound, which was real.

ADP's employment report looked good. It wasn't that far off from what I was expecting in the monthly establishment survey (rebound to about 90K), but I am expecting some further weakness in the household survey. ADP's numbers contrast sharply with NFIB's June prediction of very bad results, but I would expect this. The areas in which I see growing employment weakness are less likely to be represented in the ADP customer base. NFIB does see hopeful signs over the summer.

From my perspective, we have lost almost all growth trends in the economy and income trends cannot support further growth, so within six months we enter recession territory. Congress could decide to throw money, although how that would fit into the great debt debate I do not know. It's anyone's guess as to whether the FICA payroll tax cut will be extended into next year, which would change inflection points. From the point of view of those who wish inflation controlled, the best thing for the US economy would be to let it expire and restore something like the MWP tax credit, which was far healthier for the economy.

I am anxiously waiting for the Q2 Charge-Off and Delinquency rates for banks. Delinquency rates in Q1 were quite disappointing, and a lot depends on how that trend progresses. Inflation is imposing severe financial stress on a whole cohort of households, and it is going to show up in lending and servicing stats.

Judging by trends in H.8, June and July should be pretty good relatively for home sales, but it seems likely that retail sales are going to be bad. There's too much money in other deposits, although some of it is being rolled out of large CD's. Unless there is a major shift in the next two weeks, H.8 deposit trends show that the consumer has gone on a consuming vacation, and that recession is foreordained, and that it is coming much more quickly than anyone expects. My first reaction in looking at the last week's numbers was an instinctive assertion that these numbers were WRONG, but if they aren't, there will be a very rapid pull back in retail and services employment to compensate for the trend, which will produce a catastrophic drop in small business spending, which will hurl the US into a contraction.

When I look at Other Deposits in H.8, and I refer back to May's retail report, and the remarkable lack of spending at grocery stores and pharmacies, I think we are on a greased slide to disaster. The slide is greased by inflation cutting consumer real incomes (much more sharply for the huge percentage of households with moderate to low incomes, adjusted by area), and consumer inflation has not peaked yet. The May retail results and the current Other Deposits numbers in June ARE consistent, so those H.8 numbers are probably right.

Crude Inventories, July 1st.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.9 million barrels from the previous week. At 358.6 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 0.6 million barrels last week and are in the lower limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 0.2 million barrels last week and are near the upper limit of the average range for this time of year. Propane/propylene inventories increased by 2.3 million barrels last week and are below the lower limit of the average range. Total commercial petroleum inventories increased by 0.5 million barrels last week.

Total products supplied over the last four-week period have averaged nearly 19.0 million barrels per day, down by 1.8 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 9.3 million barrels per day, down by 0.6 percent from the same period last year. Distillate fuel product supplied has averaged close to 3.6 million barrels per day over the last four weeks, down by 5.4 percent from the same period last year. Jet fuel product supplied is 4.5 percent higher over the last four weeks compared to the same four-week period last year.
At some point a person just has to give up and throw in the towel - Diesel demand isn't going anywhere, and it is the best economic predictor around. It looks like the economy fairy has left for a long vacation. The economic engines are coughing and we are losing altitude.

PS: I am still at a loss as to why people believe in supply problems. YTD in the US, net petroleum/product imports are down by about 900,000 barrels a day compared to 2010. See data tables. There is a change in product mix which is driving up the relative cost of refining gasoline, for example. But there is no actual world shortage; I have seen nothing to indicate that the world is short of oil right now. The swap in US demand alone goes a long way toward closing any gap caused by the Libyan drop in output. And the Saudis and others are also raising output. This is the reason why Iranians are so furious with the Saudis:
An increase in Saudi output combined with prices cuts could lead to a "price war" with other producers if it isn't matching demand, a top Iranian oil official said Thursday, as the Islamic Republic sharpened its criticism of the world's largest oil exporter.

The remarks come after Saudi Arabia and other Gulf producers cut some of their official prices this week after pledging to hike output to meet mounting demand.

I look at local used car inventories. Trucks about the same for a year, maybe a tick up. Cars down from a year ago, up a little from a couple months ago.

Was at a home improvement store twice over the weekend. Parking lot full, but most of the customers in line only had one or two items - very few had a cart full of stuff.
Recent observations

1. Dannon yogurt that used to be $.50 at Walmart is now $.66.

2. Childrens 3T clothing for summer items was 2 for $13; fall items are now 2 for $15.

3. My business had a 5% increase on 1/1, 4/1, and now have another increase of 5% effective 7/1. All related to steel pricing. Service sales are now flat with last year but excluding price increase effects. New sales were strong in April, down severely in May, but June was strong again. You could almost tell the price of gasoline based on the amount of floor traffic. It has started to soften again as gasoline prices increase.

4. All this inflation has to reduce consumption as wages increases are very limited. I am considering not passing the last 5% increase through but realize I can't absorb that hit. Lose-lose situation.

5. Now that we are only 6 months away from the FICA 2% cut expiring, I look for Obama to try something to boost the economy short term but I can't think of anything that he hasn't already tried.

Learner - just wait until I start writing about chained CPI and Social Security.

It really is about distribution of money - people only have so much, and as you note, their supply is not increasing very quickly in most cases.
I have been urging changes in the tax code since I
have been coming to this blog. Eliminating the payroll
tax and replacing it with a consumption tax would help
the middle and lower classes. It should also reduce the trade deficit and strengthen the dollar, lowering oil prices.
Without disposable income the economy will not recover.

"From stall speed we appear to be stalling, and the mechanism is consumer financial stress."

Meanwhile on planet mainstream media...

The recovery is "too young to die".
Anyone read the Malpass/Moore article in the Journal earlier this week? Capital inflows to the US are way down. Seems the foreigners are a little bit terrified of the US economy. Could it be they have noticed we have $ 1 trillion Federal deficits as far as the eye can see, and a President who wants to address it by increasing taxes on corporations, and other class enemies?
Anon @ 2:27 - Ya know, that just might be the case. Certainly American corporations are continuing to invest abroad.

In a few short years, we'll be up the creek without a paddle.
Mom - I would like your take on the import of c/o and delinquency rates of banks wrt to other variables. I was in this business ( cc ) a few years ago, and we considered delinquency rates as easy to understand as a bucking bronco- their connection to other variables seemed loose, and the transformation irregular. At best, just another lagging indicator.
Mark, QE2 has done a pretty good job of giving the recovery a retroactive abortion.
Who Struck John,

QE3 is the most critical issue of our time.
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