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Tuesday, December 13, 2011

US - Fundamentals 2012.

The story of this economy is basically summed up by this sales graph from NFIB's monthly report from December:

It's improving, but still damaged.

The NFIB optimism index improved, but is still significantly below where it was in January (94.1 -> 92.1), which just about sums up what a skipping recession is all about.

You go through a
series of ups and downs, and you just hope that the longer trend down is so gradual that life takes over. It usually does.

One notable stat in the NFIB Small Business Outlook report is that in October and November, employment at small businesses moved into non-negative (0, 2; see page 11) for the first time since January 2008.

However this doesn't mean that the US economy is in a strong expansion - it really isn't. NFIB shows that the outlook for small business conditions six months from now remains in double digit negatives (see page 7), having been there for six months! It is improving, but it is 22 points less than January and 28 points less than November 2010. There are constraints to this system. NFIB almost always is about six months to the future of the general economy - what this is telling us is that we are about to enter a second downturn, hopefully ending in April.

I am encouraged by the relative improvement in November to -12, but a series of double digit negatives in NFIB means significant trouble for the US economy. In November of 2007 we moved into double digit negative territory, which continued with some abatement until July of 2008. From there it shifted briefly into positive territory (drop in inflation), and then jumped sharply negative in December of 2008. Sorrow ensued, but by the spring of 2009, it clambered back into positive territory, where, with some fluctuations, it remained until summer of 2010. That dip, which was short, predicted the relative weakness in the first half of 2011.

This dip is telling us something, so don't get overconfident. We are still trying to haul coal to Newcastle, and while there is some life in this system, it will be quite some time before this will be a truly profitable venture:

The US economy is clearly cash-on-hand constrained. It has to fund its economic growth mostly from earnings, and the Fed's great misadventure in the glorious land of QE2 threw one heck of a spanner into the gears of commerce.

Small businesses really do not have the earnings to expand safely and profitably, and demand is far too constrained for them to borrow the money to do it. Small business spending is one of the huge determinants of US economic strength, and they can't really push the train along up the incline right now. The train is chugging and puffing up the hill, but it isn't going to really accelerate for quite some time yet. The strength in the Household Survey for the November Employment report was real, and shows up in the NFIB employment stat. But it is not a sustained surge.

US conditions aren't too bad, although they are still constrained by the cash/debt ratios in small businesses and households. Those ratios have improved (on average) a lot over the last two years. It will take years more to truly work off the errors of the past.

There is more life in the small business sector than it appears, but large services are still trending down. The last ISM services report showed a decline in employment, which is correct for their sample. So what we now have are off-phase trends:
- Large services, declining.
- Small services, mixed.
- Manufacturing still trending up, but cycling with spending.
- Government sector, still declining.
Of these sectors, the large services is by far the largest net in the economy. The deciding factor for next year should be the relative boost imparted by a cautious climb off the bottom in housing. Most of the life and action will occur at the bottom level in smaller firms.

Retail is not bad - December's report shows money being spent on autos and general discretionary, but off-balanced by constraints at groceries, pharmacies and restaurants as consumers pinched pennies to pay for holiday purchases. Consumers seem to be spending cash, not credit, and one suspects this will continue:

To be continued - we need to get to rail, taxes and the like.

The QE programs did not on the whole, reach Main Street
where it may have done some good. It instead went into
speculation which raised costs for Main St. If Europe doesn't loosen monetary policy, it makes it harder for the
Fed to do so.
The only "QE" that would help Main Street is closing down insolvent banks and making the depositors whole. Bailing out banks does absolutely nothing for Main Street.

Loosening monetary policy to save banks comes at the expense of Main Street. That is because it is merely robbing the prudent to assist the imprudent. There are no prudent on Wall Street (nor DC for that matter), the only prudent that remain are on Main Street.

Germany main bail out Commerzbank, but the wealth required to bail them out has to come from somewhere, and it's not going to be bond or equity holders.
Spork - all monetary policy lies in increasing lending. It works if it increases lending, and it doesn't if it doesn't. You can throw tremendous amounts of money into a system, but if the system won't support increased lending it just goes into the ground - into commodities, literal real estate, that sort of thing. And then it is grossly inflationary.

In theory the increased lending to European banks is QE, but it is hard to see how it can increase lending, so therefore the only possible thing that can be accomplished is to prevent a coordinated economic crash caused by a credit contraction on Main Euro Street.

You are both wrong about bailing out banks. In such circumstances, you have to push money back into banks because otherwise banks will be forced to withdraw credit, which will cause total havoc on Main Street.

But you are also both right. Bailing out banks in economies that have over-borrowed to a huge extent doesn't produce life on Main Street. It only prevents massive casualties on Main Street.

Charles, you are a smart guy, but read about 1873 and 1893.
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