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Tuesday, May 31, 2011

Mene, Mene, Tekel?

I did not expect Chicago PMI to come in quite this low. Release. Production at 56 has dropped to a bit lower than the 40 year median and mean levels. In February it was almost at the 40-year MAX. This is a hit-the-wall type of deceleration; some of it should even out a bit, but still...

This index seems to have a lot to do with central activity, some of which is quite ag-related. Thus, I have the option to believe that cold temperatures and flooding of farmland have shown up here, and that this is both a combination of deceleration and a "blip". However, when one starts describing every report as a "blip", one should immediately go here, and realize that you are the guy lip-syncing. While others may admire your passion for the lyrics, they are unlikely to share it, and without that leavening factor, you appear foolish at best.

Reasons why one might not want to be the fat guy include: peak in February (one month off carload peak), order backlogs down to 51.7 from their high of 69.6 in March, and inventories having risen from 53.5 to 61.6 in one month. The combination of declining backlogs and rising inventories is something that rarely bodes well for future growth. Prices paid are still accelerating, which is hardly surprising but which presents us with a somewhat dire third quarter picture and a nine-month drag at best.

The Japanese supply line problems unequivocally showed up here, but they should have had less of a relative impact on May than on April, and comments showed that the margin crunch is settling in. Mr. Packaging Guy is on the sidelines for the duration, which puts a definite upper limit to the growth momentum. There may be some marginal growth momentum in manufacturing at this point, but not much for the US and it is dependent on global growth, which is not that hot.

As I said before, the other potential growth edge for the economy this year (home-building) just never had a chance. S&P Case-Shiller released its data for Q1; it is pretty much an economic snuff film, so once again I am not going to dwell on it. CR will, so go there if you like gore. There is no prime any more - we could see upper end home prices in many areas go down an additional 20% over five years. Lower priced housing will do the best if it is in a decent neighborhood and if local property taxes are restrained. I could write a lot about the future of home prices, but I am waiting very impatiently for Census income data. The entire Fed seems to be singing along with the fat guy on this topic; there's no recognition of the underlying fundamentals.

The only consolation here is that Goldman Sachs apparently draped itself over the barrel on oil; oil speculators are just about to find out what it is like to be the Hunt brothers.

In Q1 Denmark crossed over into two declining quarters. We are seeing a global deceleration; in economies dependent on consumer spending it turns to retraction and contraction. Inevitably manufacturing will start its downshift now, and we will see a slow drag from that on growth in manufacturing-dependent economies.

Of course, we must have our "unexpectedly" headline, so we'll round this out with consumer confidence. On Friday we get the unexpected party with employment.

Note: When I say "hit-the-wall", I mean HIT THE WALL, as in like fall of 2008 hit the wall. It's time to drag your butt to safety. Anything could happen except to have stronger growth in the third quarter than in the second.

Friday, May 27, 2011


That's me, working my anxieties and frustrations out on the woodpile.

Brief summary of what I am watching:
A) Waiting for Census data, which continues to dribble out. Nothing at the level of detail I need for incomes yet, but homeownership came out at 65.1% for 2010, which is far more credible than the official number, which is why I have been ignoring the official number. I expect homeownership to go below 65%, but that number is bad anyway - it's less than it was in 2000. The CES (Consumer Expenditures Survey) numbers released last year never did balance out for me, so I am waiting for this year's Census 2010 to be able to rebalance all my tables. After that, I can make a stab at some more detailed calculations, but right now I really can't. So no new fried egg graphs for a while. Work faster, Census!!

B) Rail and Truck freight: This week's carloads were better at +2.3% YoY, still hanging in YTD +3.3%. I hope, I hope. Intermodal is just pacing along at exactly the same levels. April ATA Truck Tonnage was down -0.7%, but it had been up 1.9% in March. This is not an awful number, considering what had happened with auto production (strongly linked to the Japanese disaster).

C) Personal Income and Outlays: Today's release has the normal revisions, which have something to do with why GDP was reported lower than expected. Feb-through-April DPI in chained 2005 dollars is now reported as -0.1, 0.0, 0.0. We'll see. DPI is calculated by taking income estimates and subtracting taxes; the resulting number has little to do with how a household experiences its disposable income (after bills and fixed expenses). Also, the tax figure is not as accurate as it could be, because local and state taxes are poorly reported.

D) H.8 Commercial Bank Liabilities and Assets: Consumer lending still down for April; bank lending is reported up, but that was basically in treasuries, because loans and leases are still dropping. April other deposits up strongly at 7% annualized, and that is really because households have increasing concerns about covering basic expenses and so are trying to reserve cash. If you are seeing your utility, fuel and food costs go up rapidly, most middle income households will respond by pulling back on discretionary income and trying to have more cash on hand. Remember, last year's holiday spending was mostly cash. Some households are still paying off winter heating, and those households will want to have cash to cover next year's expected expenses before blinging on anything. Real estate loans were down 12.5% annualized; consumer loans were down 1.8% annualized, revolving was down 0.4% annualized. This is probably from gas purchases; I don't think consumers are running up their cards, but the rolling impact of weekly gas and food price increases should tend to increase outstanding balances each week for a while.

E) Q1 Chargeoffs and delinquencies at commercial banks. This should be the temporary low for many categories of lending, because to put it bluntly, households with moderate incomes should start defaulting on their obligations again. Supermarkets look ugly even in areas that should be good. It would appear that many middle income households can't feed themselves the way they used to; living standards for many moderate income households appear to be plummeting. It looks like we are going to 50s standards of living, which were pretty constrained.

Seasonally adjusted residential mortgage delinquencies increased slightly. Total loans and leases delinquencies barely dropped (6.33% -> 6.16%). C&I delinquencies are way down - their peak was 4.30% in the second half of 2009, and they are currently 2.48%. Chargeoffs are still dropping, but are historically very high. I keep reading complaints or gentle hints from Fed govs about banks needing to loosen up on the lending. Well, do we really need more bankrupt banks? The lending atmosphere is getting a little more difficult on some segments right now, so I don't see that happening!

F) Pending Home Sales for April. I include this for the sake of completeness, but I wouldn't read it if I were you. Some of the sheer grisly horror of it should be related to technical revisions designed to make it more accurate; most has to do with the FHA insurance premium increase that took effect in April, which shifted sales to new homes with immediate sales so that buyers could lock in the lower premiums before the increase. The only reason to read this thing is if you believe that the New Home sales report meant that housing was improving. It isn't. On a non-seasonally adjusted basis, pendings were down over 25% YoY. On an SA basis, pendings were down over 25% YoY. The west is still the best region, but some of that is due to the larger number of new homes out there. Housing will not help the US economy in 2011, and that's all there is to it.

Sometime after we get Census data I will sit down and go through the likely effects of the FHA problem for the future, because that is an important policy issue. But I may need large doses of painkillers to do it, because we have a major, major problem.

Thursday, May 26, 2011

Life In The Land Of The Unexpected

Ya know, at some point perhaps we should begin to expect the unexpected? Is it unexpectedness or a slow-learning problem amongst the economists?

Initial claims back to 424,000, last week's number revised from 409,000 to 414,000, four week MA 438,500. In a couple of more weeks we'll dump the one big number, but unfortunately the pace is remaining well above 400,000, and at this point this must be regarded as a threat to economic growth.

As for GDP, I get a chance to mock myself, because I expected Q1 second estimate to come in at least 2%, and instead it remains unexpectedly (to me and to others) at 1.8%. Highlights in html. Full release in pdf. This issue includes the first estimate of corporate profits, and (as expected by me), there was a minor technical margin problem:
Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $21.9 billion in the first quarter, compared with an increase of $38.2 billion in the fourth quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $11.0 billion in the first quarter, in contrast to an increase of $36.9 billion in the fourth.
See, this is why Mr. Packaging Guy ain't expanding, and this is why we are seeing some of this "unexpectedness", as well as some weakness in capital spending and durable orders. Less cash for businesses, less business, screaming on Capitol Hill about why greedy businesses are making so much money but not hiring, and proposals to raise their taxes to improve the economy. Bank loans get repaid from cash flow, so bankers who want to live have "Cash Flow" tattooed on their hearts.

Needless to say, the abrupt margin drop (-47.9 billion in one quarter) translates to increasing prices, which translates to a consumer cash flow problem. While Fed People are still wandering the nation talking about no signs of a wage-price spiral, we are most definitely seeing those signs. And consumer credit card lenders are already upping their risk assessments and cutting credit limits for some consumers. Gross Private Domestic Investment, the real driver of the economy, is really financed through cash flow, so don't expect GPDI to soar.

Ben, the aptly named Illusion of Prosperity has a song for you, and here is my comment:

PS: The very strong 5-year Treasury auction yesterday was not a good economic sign:
Demand for Treasuries is rising following an exceptionally strong $35 billion 5-year note auction where coverage of 3.20 is the best in 10 years of available data. At 1.813 percent, the auction stopped out two basis points below the one o'clock bid. A low dealer share of 44 percent offers confirmation of customer demand. These results will raise expectations for strength in tomorrow's $29 billion auction of 7-year notes.
However it does indicate that the market kind of likes the fact that Congress is not simply rolling over and adding another 2 trillion to the debt limit. Fight on, Congressional cutters! You are our last, faint hope.

Wednesday, May 25, 2011

It COULD be Doom Day

Let's see. No surprise, FHFA housing price index showed steady price declines. This has major implications for FHA's unfortunate risk exposures, and FHA's risk exposures have major implications for home sales in 2012 and 2013 in the US. Guys, the annual FHA insurance tariff is up to 1.10% and 1.15% for 30 year mortgages, and if mortgage rates were to increase very much, FHA loan affordability would be very poor. We are chasing a receding target.

Crude inventories. AIIEEEIIIAIAEEEE. And you can quote that!
Total products supplied over the last four-week period has averaged nearly 18.5 million barrels per day, down by 5.3 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 9.0 million barrels per day, down by 2.1 percent from the same period last year. Distillate fuel product supplied has averaged 3.8 million barrels per day over the last four weeks, down by 3.9 percent from the same period last year. Jet fuel product supplied is 0.9 percent lower over the last four weeks compared to the same four-week period last year.
There should be some blippage from the flooding and so forth, but in general, when diesel YoY goes negative, we are in a recession. The only doubt here is because of the flooding, which should have disrupted transport. But the trend was declining before this.

For comparison purposes, at the end of December 2007, four week diesel was still up 5.7% YoY, but it fell off very rapidly and by the end of March 2008 had collapsed to a drop of 4%. So don't call me Shirley!!!

I'm very close to calling this. The peak was in March and it looks like the recession may have started in April. But that's preliminary. I thought for sure that it couldn't happen until June (two years, exactly), but it appears the Japanese events were enough to precipitate the collapse of the Fed's sand pile.

Btw, the Fed did this. It had help from Congress, but the Fed constructed this one all on its very own. Trying to help. Please, Mr. Fed Banker, stop trying to help.

PS: A question asked in another place caused me to realize that I really don't explain myself very well sometimes, nor justify some of the stuff I put in here.

Historically there is a very strong correlation between oil supplied and Non Ag Wage and Salary Workers (employed):

That graph combines US product supplied with LNS12032187 (Seasonally adjusted non-agriculture wage and salary workers). In order to show how tight the correlation is, I have normed employment numbers to oil.

US product supplied goes only through February at the current time. However by following crude inventories in the weekly reports, and most especially the 4 week running averages, you can generally project very accurately how employment is moving if it is moving significantly.

Here is the same graph with the scale changed to show more detail:
It really is a tightly fitted curve.

So when I said that last month's establishment report was off somewhat because of the gas, this is what I was referring to.

Note that over time the US economy has become more oil efficient; the gap between the two has narrowed over time. However, if we shift back to manufacturing, which we will, we will consume more oil for each job.

Should you wish to play with this (I guess this means you, Mark of the graphs), oil here; Table A historical series here (I use A-8). You will notice that the oil trend changes precede the employment trend changes. In climate science that would mean that fewer employees driving caused oil demand to drop. However this is not climate science, so shifts in oil consumption transfer through to the general economy, not the other way around.

Last, here is the detail of the 2004-2009 series:

We actually shifted into recession territory in the late summer of 2007, but the first part of the cycle is generally so slow people don't notice it. It snowballs and gains force.

Oh, yeah, and here's the third horseman of the apocalypse:
Venezuela’s largest Jewish advocacy group has protested to the government a state-run radio broadcast that positively referenced the anti-Semitic "Protocols of the Elders of Zion."

In a formal complaint filed this week with the Public Ministry, the Venezuelan Confederation of Israelite Associations denounced the broadcast in which journalist Cristina Gonzalez read the infamous text and suggested that listeners also should read it.
Because it is so very, very credible. See, we really can't have fun and games until we beat up the Jews, now can we?

Speaking of Doom

Ah, yes, I am the MoMstress of Disaster.

Regarding that Fukushima Daiichi incident - I was castigated the week after the disaster by a commenter who apparently thought I didn't know what I was writing about. Well, I can't say that I did know, but years ago when I had to work on business continuity plans for banks with nuclear plant exposures, I realized that nothing out there was adequate. So at that time I sat down and read through a bunch of NRC studies, figuring that NRC DID know.

So my comments were really based on NRC work, and as it turns out, NRC is quite good at what they do. I find this somewhat reassuring, although I wish we didn't have the proof. The evidence of which can be found in TEPCO's last analysis of the reactor states, which can be found at JAIF. Here is the latest one, which contains:
The operator of the troubled Fukushima Daiichi nuclear power plant says data analyses suggest that damage to its reactors may have caused holes inside them of up to 10 centimeters across.

Reactors 1 through 3 at the plant suffered nuclear fuel meltdowns after the March 11th earthquake and tsunami. This is likely to have created holes and cracks at the bottom of the pressure vessels protecting the reactor cores and damaged the containment vessels.

Massive amounts of highly radioactive water also leaked from the structures. Tokyo Electric Power Company analyzed the changes in pressure levels inside the pressure and containment vessels after the quake to gauge the scope of the damage.

TEPCO said the analyses show that a hole 3 centimeters across may have been created at the containment vessel of the Number One reactor 18 hours after the quake. It added that a hole as large as 7 centimeters across is also likely to have been created at least 50 hours after the quake.

It also said a hole about 10 centimeters across may have been created in the containment vessel of the Number 2 reactor about 21 hours after the quake. It said that after the sound of an explosion was heard from the suppression pool of the Number 2 reactor on March 15th, a hole as large as 10 centimeters across may have been created there.

TEPCO said these results were obtained through data calculations, and that it has yet to confirm whether such holes actually exist.
I sat down about a week ago with the records of water injection rates, and calculated some rough aperture estimates myself. I came out somewhat lower, but I am pretty sure that these are the data calculations TEPCO is relying on.

Their plan to fix reactor 2 includes digging up the suppression chamber and grouting all around it. They are testing a compound in their lab.

Another fact which has emerged is that SPEEDI did a very good job indeed of predicting radiation dispersion.

Is This Doom Day?

I do not know. I find I don't want to see crude oil inventories today. There is a real possibility that over the next four weeks, one day I'm going to find myself staring at a report and say to myself "That's it, we've tipped over, no way to haul out of this now." That will be Doom Day, because it will mean that we have entered into a Japanese-like cycle of grit-in-the-gears oscillations between growth and contraction.

Durable goods this morning - inventories, order and shipments ratios are troubling. Inventories too high, shipments too low and new orders fell.

Yesterday New Home sales were up (see the above link to Census Economic Indicators), but everyone forgot that FHA increased insurance premiums in April, so that jacked up quick contract rates. Thus it was probably a blip, and not a very encouraging blip at that:

FHA deserves a whole long post of its own - the worst threat to housing prices is the FHA situation, because it cuts into new home buying for the future.

API said that gas inventories are building in the US, and Mastercard said that gas purchases were down YoY, so the odds of the crude inventories report looking good are pretty poor. Oil is really trading inverse to the dollar as everyone tries to cushion risk.

Tuesday, May 24, 2011

Hoenig Made An Important Speech Today

The speech in pdf is here. The white paper behind it is here. I recommend reading both, but a short article about this speech is up at Bloomberg:
The proposal by Hoenig, 64, the longest-serving current Fed policy maker, is in line with his previous calls for the breakup of large financial firms and for tougher bank regulations than officials such as Chairman Ben S. Bernanke have publicly supported. Hoenig, who retires Oct. 1, said last month that international capital requirements are too lax to prevent another U.S. banking crisis.
Asked by an audience member why his views were in the minority at the central bank, Hoenig said that it’s “hard to know” and that his outlook is shaped by his experiences over three decades and multiple banking crises.
Haha! They did not report the rest of his comment, because it was uttered in a mysterious banking dialect.
Ifway eythay ewknay omethingsay aboutway ankingbay, ey'dthay owknay omethingsay aboutway iskray. Iway avehay onay ideaway ywhay urportedpay inancialfay expertsway ouldway inkthay ouyay ouldcay urecay ethay amageday oneday ybay away assivemay ubblebay ybay yingtray otay eatecray away ewnay oneway.
Unfortunately, Hoenig will retire this year. Here's the type of contrarian voice he's been.

Monday, May 23, 2011

Monday, Yet Again

Overnight it was reported that the HSBC PMI survey (flash) for China fell to 51.1 from April's last reading of 51,8.

The European willies are ruling the western roost. S&P changed Italy to a negative outlook last week. Italy said it would respond promptly. This is a big deal. The failure to address the reality of Greek default is making everyone twitchier than hell. Trichet does not want Greek debt restructured; the main creditors don't want to give Greece more money so the debt doesn't have to be restructured, since it just increases the size of the eventual default. So the theory is that the Greeks will sell assets?

Spain's Socialist government was slaughtered in this round of elections, which is not surprising given unemployment over 21%. This raises real questions about whether an Italian government can do what S&P wants it to do without being tossed out on its butt. There is no need to bring up Ireland, but the cost of insuring government credit for many of these countries is escalating rapidly.

Jens Weidmann was recently appointed head of the Bundesbank (it's an 8 year term) to replace Weber. Weidmann promptly (May 13th) dumped cold water on the Q1 GDP report, which was really terrific at 1.5% on the quarter. It looks as if the Bundesbank's "no irrational exuberance" under Weidmann will be, if anything, strengthened. The better things get the more the more Bundesbank officials run in circles demanding that public finances should be kept under control. There is a real reason for Bundesbank angst, given Germany's demographics. It is clear that Germany will not loosen its purse strings to take up the austerity slack in flailing European economies.

CFNAI in US for April collapsed to -.45 from +0.32 in March. In March, production increases added +0.31, and production decreases were the big factor in April's decline. A great deal of the decline, although not all, was related to the Japanese supply problems, and Japanese supply problems should be affecting production and exports in China also. Experience suggests that this is an exogenous problem which may contribute to the downward pressure high oil prices are having on global economies, so at this point it is not safe to simply toss this off as a blip.

Germany's change of course with regard to nuclear power has the potential to inflict a bit of economic havoc there. I don't think it will this year, but Germany is a strong production economy, and Germany needs power to maintain its growth rate. Fortunately France and Czechoslovakia aren't going to do anything with their nukes, so Germany is now importing a heck of a lot of electricity from those countries. This is highly abnormal for Germany.

In the US, despite what many pundits would have us believe, the pace of inflation is just about to escalate rapidly and is now going to start hammering company profits. Despite the blip of Japanese supply line problems, the multi-year trend is for the US to add production, and this should be strengthened by the Japanese supply problems and ongoing power problems. But it is coming at a cost, and that cost is deflating production wages.

It is great to see 1,000 new production jobs opening up, but it is terrifying to realize that starting wages of $7.50 and probably eventual averages at $8.70 are the tradeoff. The US is in a long term deflationary domestic cycle a la Japan, and inflation in the prices of basics are lethal to such economies, because they destroy buying power and service jobs. The US economy still has a tremendous restructuring to accomplish, and the higher oil and food prices go, the greater the necessary destruction.

As money rolls back into Treasuries and German bonds, this time there will be no way to recirculate it. Most of the money injected into the economy just goes straight into commodities. Oil prices will stay at a level not justified by fundamentals, but justified by increasingly negative returns on other asset classes. The money that has been inserted will now correct itself quite without the Fed's help as the real economy destroys it.

June and July should be a fascinating demonstration of real-world constraints on monetary theories!

One of the factors not currently recognized is that US credit card policies are due to tighten again. The mechanism is that declining real wages for moderate income earners expose credit card portfolios to considerably increased loss potentials. To control that potential, review of credit card balances will be heightened, and companies will be lowering credit limits on cardholders who appear to be just holding their own or raising their balances. Expect to see other deposits try to rise faster, and watch the charge-off rates on CCs for quick indicator of how well the economy is coping with the price environment.

Right now the rail data doesn't support the theory that the US production economy is in big trouble, but the YTD carload pace has dropped to +3.3%, and that is a big decline from first quarter. If it can stabilize at 2%, that's one thing. If it keeps falling, the end of the summer could look pretty rough. Production is the growth edge of our economy currently, and the service economy in the second half is the real immediate concern. A lot of retailers are in for a rough patch.

Oh, and I have been meaning to post about the current drive to stop 401k loans. This is insanity; lower income savers who most need to take advantage of 401ks are the most likely to need the loans. If you stop the loans, you stop their ability to save in 401ks. In effect, this is a policy that will make it harder for lower income savers to use tax-advantaged savings programs. As public policy measures go, this is one of the more destructive. This segment is already paying a disproportionate amount of the tariff for our various asset bailout programs. "Hit the mule again until it's dead" is not going to produce retirees with more assets.

Saturday, May 21, 2011

The Transgressivism Of Mamet

Very worth a read, not really for the political spin put upon it, but for the concept behind it:
“I wondered, How did the system function so well? Because it does—the system functions beautifully.” How did the happiest, freest, and most prosperous country in history sprout from the Hobbesian jungle?

“I realized it was because of this thing, this miracle, this U.S. Constitution.” The separation of powers, the guarantee of property, the freedoms of speech and religion meant that self-interested citizens had a system in which they could hammer out their differences without killing each other. Everyone who wanted to could get ahead. The Founders had accepted the tragic view of life and, as it were, made it pay. It’s a happy paradox: The gloomier one’s view of human nature—and Mamet’s was gloomy—the deeper one’s appreciation of the American miracle.
This I would like to talk about, and I think I want to read his book.

I do not accept this as being a "conversion" experience - I think Mamet's view of life has not changed at all. I think that in his "cruel neutrality" (to borrow a phrase from Ann Althouse), that he is merely staying in the functional middle.

Dr. Sanity has often written on the problem with Marxism - that it does not understand human nature, and so is doomed to fail. Mamet is a ferociously perceptive observer of human reality, and so it is not surprising that he has reached the same conclusion.

Note: there are already good comments, but after reading Rick's I wondered if he had a pyschic tap into my anxieties?

If the above topic is too depressing for you, I recommend that you start with transgressivism in cooking shows. Read the recipe for peas, then read the comments. They should keep you howling with laughter for quite some time. After that you can maybe return to the heavy stuff.

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.

Wednesday, May 18, 2011

Japan - GDP

There are two kickers here. The first is that the contraction in the fourth quarter of 2010 was originally reported to be slight - 0.3 on a quarterly basis, or about -1.1% annualized - but was revised down to -3.0%.

First quarter 2011 is being reported at -3.7% annualized, or -0.9 quarterly, which is quake affected. However it appears quite likely that second quarter will contract another 3%. You will note that economists expected a considerably better result.

Close To Caving In

Ya know, folks, my forecast for a second half strengthening isn't looking very wise.

Crude inventories:
Total products supplied over the last four-week period has averaged about 18.7 million barrels per day, down by 2.9 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 9.0 million barrels per day, down by 2.3 percent from the same period last year. Distillate fuel product supplied has averaged about 3.8 million barrels per day over the last four weeks, down by 2.9 percent from the same period last year. Jet fuel product supplied is 2.1 percent higher over the last four weeks compared to the same four-week period last year.
Oh, she does not like that diesel number. She does not. She is whimpering and groaning and holding her head. There is pain, there is suffering, there is grief and worry and sorrow.

This syndrome is somewhat alleviated by knowing that a bunch of oil speculators are about to get their financial skulls crushed, but only somewhat. For every bruise they get, someone is sitting hungry and cold in the dark. Ah, some levels of stupidity are truly sinful. Refinery utilization was up to 83.7%.

Over the last ten days I have seen some signs of real stress in groceries. We only have about four more weeks before the game is over; if we can't pull out before the third week of June, there may not be enough left to get us through into the second half.

Right now, second quarter GDP is looking grim. Really grim! There should be some blippage from the impact of the flooding, but we are on very, very, VERY thin economic ice.

If you are in a good mood, you might want to read this hilariously stupid NY Times article. They think the gas/FICA tax cuts just even out. Even for the NY Times, this is stupid. It could not be more stupid; they have ascended the apex of stupidity.

Tuesday, May 17, 2011

Hopefully May Will Be The Worst

As I pointed out before, there is no clear downward limit on oil above the lower 70s, but if we don't drop considerably pretty quickly, we could be looking at the 60s. This isn't getting any better.

Let's review:
First, we have poetry contributed by Jimmy J:
There was a wise man named the Bernank
Who was the head of our national bank.
When deflation became a great risk
He used the printing presses quite brisk.
But our economy continued to tank
And many decided his solution stank.

Never fear said he,
We'll go on a spending spree,
And use the instrument of inflation.
All to save this great nation.

So investors and bond vigilantes
They all upped their antes
In commodities and gold
As inflation hedges most bold.

This sad tale is not yet come to an end.
When it does will we have anything spend?
As an econopundit, Jimmy does pretty well. It might be something about experience (wars, the GD, not flying planes into the ground), or perhaps it is having to live off his investments. In any case, he's head and shoulders above Ken Fisher, as helpfully demonstrated by Snarky Mark (who also lives off his investments).

So right there we detect a division between those who sell investments for a living and those who invest to live off the gains. Draw your own conclusions.

And then we have the day's ration of "Unexpectedly". Things have been terribly unexpected since the subprime mortgages went south (not a problem, according to Ken Fisher and Mishkin) and consequently oil went north (not a problem, according to Siegel and Fisher). But still, the blizzard of unexpectedness continues:

HP: Somehow, consumers just aren't spending as much as we hoped. We're cutting costs. Minimizing hiring. (Part of this should be tablet competition.)

Walmart: US same-store sales down 1.1% last quarter; foreign sales increase 6.2%. One suspects less US investment on net, although the newer policy of building smaller stores continues. Sooner or later they will be shutting down some stores in areas with big overlaps.

Industrial Production for April: Zip, zero, nada increase. That, although "unexpected", does not seem so bad, except the details are bit more worrisome: Capacity utilization overall dropped 0.1 over the year, and manufacturing capacity utilization dropped 0.6 over the year.

Some of that was autos and had a lot to do with the Japanese tragedy, because I was following plant hours quite vigilantly in April. However not quite all! There's more to this. When we look at April production categories, we see that utilities rose 1.7%, mining was up, but final products dropped 0.5, consumer goods dropped 0.7, business equipment dropped 0.4, after having dropped 0.5 in March, and construction inched down 0.1.

Nonindustrial supplies rose 0.4 and materials rose 0.3. Here I quote from the report itself:
The production of consumer goods decreased 0.7 percent in April because of weakness in the output of consumer durable goods. The index for consumer durable goods fell 4.4 percent, while the index for consumer nondurables rose 0.3 percent. Within the durables category, the output of automotive products dropped 7.0 percent, and the output of appliances, furniture, and carpeting fell 4.2 percent. The index for miscellaneous consumer durables recorded a decrease of 0.2 percent, while the index for home electronics increased 0.7 percent. The output of non-energy nondurable goods rose 0.6 percent, with gains in all of its main components. The output of consumer energy products declined 0.5 percent.
New residential construction: (Get your "unexpected" headline here.)
I haven't been writing much about this report, because it is uniformly disgusting. While I refuse to Ken Fisher it, I also figure "Why wallow?"

In April it is still disgusting, and since what really counts for the economy is the "under construction number":
April 2009: 677
April 2010: 489
April 2011: 418
There were claims by econopundits earlier in the year that multi-unit construction would compensate for the decline in single-family, but on the year, multi-units under construction were down 7.6%. So no dice. Those were the SA numbers; NSA numbers don't look any better.

Nor can you really hold out hope that the leading edge looks better; YTD authorizations are down 14.1% YoY. The pundits' earlier optimism was based on the fact that multi-unit authorizations were up, however they kind of missed the fact that multi-unit authorized-but-not-yet-started are still trending DOWN by over 15% YoY, so again, no dice. This is why one should read the reports. All the way through. Even if it takes time away from the poetry. It is better to produce one well-informed stanza of bad verse than an epic poem of nonsense.

So, to sum up: As predicted by carloadings, the US lost its growth edge in April. Carloadings were -0.3, 0.0 the last two weeks of April. The first week of May carloadings were considerably worse, but I hope that was something of a blip so we will not flagellate ourselves with that number yet. Yet.

Unfortunately, all of the problems with industrial production are clearly not tied to autos - carloadings had started a worrisome trend downwards long before the Japanese quake/tsunami occurred.

However intermodal rail traffic is still very good YoY. This leads to an interesting sequence of cogitation. Either consumers will be able to keep up the spending trend or they will not. Since Walmart is reporting one set of results, and since Macy's/Saks are reporting another set of results, and since there has been a pronounced jump in initial claims, and since the Household Survey backed by April Treasury HI receipts showed a weakening trend in employment, one tends to suspect that increases in retail sales are already highly segmented into the groups with rapidly gaining incomes. These groups would include investors, bubblizers, stock-floggers, and households with wage incomes far above the US median or average, who are still up on the year in real income due to the FICA wage tax cut.

Anyway, that really brings me to another post.

Monday, May 16, 2011

My Foray Into Bad Poetry...

...was partly prompted by the spectacle of various people who are supposed to be authorities running around claiming that the sky is going to fall if Congress doesn't extend the debt limit.

In particular, Geithner's remarks about a double dip recession (we are out of double dip territory, for one thing) struck me as a remarkable piece of CYA. Another contraction will be triggered by rising costs, not by Congress sitting around and debating this through mid-July.

We reached the debt limit today; Treasuries responded by going lower, and the sky is hardly falling. Mortage rates are going to drop a bit because of this, and it will be a welcome relief for the extremely stagnant housing market.

Round The World In Three Hours

At this stage in the game, I get up at the crack of dawn and spend three hours reading news reports from around the world, with a high preponderance of manufacturing.

Posting and poetry is doomed to suffer.

A brief review: My theory in the last half of last year was that the US, and by extension a big hunk of the world, was going to hit a softer patch in the first half of this year. I thought then that things would unbend somewhat in the US economy and that we would strengthen up a bit in the summer, but that we were doomed to go into another short contraction next year (2012), unless Congress went crazy and dumped more money into the domestic economy by extending the FICA tax cuts and That would not be a cure, though. That would just produce a longer, deeper downturn somewhat later.

So far matters have unfolded pretty much as I expected, but I am getting more dubious about the strength of the second half uptick. Thus the endless reading regimen. Anyway, as I resolve these points I'll post about them.

Currently I am watching:
Asian Edge: For indicators I always like Australia and Singapore. The quality of the economic statistics in both countries is very high, and both countries have economies that are Asia-dependent. Singapore is showing the April weakness I expected, but it is not serious yet. Australia was hurt by the the spring flooding, which hit coal and crops. There is a bigger concern emerging in Australia's domestic economy related to housing. Non-resident mortgage lending is rising while resident mortgage lending is slipping a bit. This trend, if continued, is going to cause Australia's central bank some considerable angst, and I would expect them to move more conservatively over the summer than otherwise. In other words, the space available for inflation control measures is less.

It is worth watching the Singapore exports to South Korea; I did not expect the poor April performance there.

Brazil and India: I do not usually group these two economies, but for this cycle I will. Both have similar problems this go round. High inflation dictates tightness; some weakness in exports vs domestic demand threatens current account balances, and fiscal deficits could be problematic. Brazil exports a great deal to China; when Chinese imports drop a bit Brazil feels it. India's ongoing problem is inflation and the need to combat inflation, a persistent fiscal deficit, and a persistent current account deficit (but not nearly as bad as that of the US!) While its economy is growing the growth/inflation/pricing indicators are converging in a way that indicates some difficulty for companies this year.

However India could do pretty well if the rains come in at 80% or over; India gets a strong ag push when things work out. So far the monsoon looks to be at 80-90%. India succumbed to the inevitable and raised diesel prices over the weekend; this is going to push inflation a little higher. The central bank of India (RBI) has jacked reverse repo rates to 6.25% already. Public deposit rates are 4%; the repo rate is 7.25%. It should be obvious that India cannot fix its trade imbalance this way; the small saver can only buy gold and silver.

Europe: The entire zeitgeist has switched to a hunkered-down wariness. Everyone's now scanning the horizon for risks. Inflation keeps moving higher, but the bigger issues are the problems of years past which have just been papered over. We still have the foreign currency loans in eastern Europe. We have the impending Greek default. Ireland is going to give Europe the finger sooner or later. Portugal is not that likely to be able to pay up. Ackermann of Deutsche Bank's modern day Lady Godiva schtick just can't inspire confidence. In this situation, the problems of certain IMF bank chiefs are big news. The lamentable failure of the last round of European bank stress tests, the habit of disrobing and either running screaming through the streets over restructuring of debt everyone knows will default, or running nude around your hotel suite chasing screaming maids - these sorts of behaviors indicate an underlying anxiety involving banks. And loans. Loans being carried on balance sheets at valuations that are not real!

On the other hand, the actual European economy isn't doing that badly. Oil prices are hitting consumers, but German exporters could use a few more nude, hysterical banking bigwigs legging it through Geneva. Every time a banking chief screams and runs, the Euro drops, and German manufacturers quaff a satisfying lager. Furthermore, the Japanese nuclear incident has unexpectedly (don't we all love that word?) created an opportunity for diffusing a bit of that German manufacturing mojo to France in the form of nuclear-generated electricity. The Germans panicked and shut down some of their nuclear plants, and France is now exporting electricity to Germany. Over the longer term, the demands of German manufacturers and Scotland (wind, it's not what it's cracked up to be) are going to create overreliance on those French nukes, but in the meantime it is something of a help to the French economy, which has high public debt, a demanding public and a trade imbalance. So all is not lost. A lower Euro would help Italy as well if their power problem could be fixed. It might be time for them to do nuclear power - when all else fails, one can always try something that works. They could hire some Germans to run them; Italians are fond of their vacations.

Friday, May 13, 2011


Blogger just doesn't know whether it is a go or not, and Blogger apparently does not like the snarku.

In a weird turn of events, apparently the Althouse blog has been taken down by Google, rather than just disappearing into the Blogger vortex like all the rest of us.

But here she is again, so I would recommend reading her even if you don't read her. There seems to be some kerfuffle about a post in which a gay man commented about a law school candidate dean's tits, thus displaying the "terrifying cesspool of misogyny and homophobia" that so concerned this law professor. He is apparently the only person in the United States who does not know that the charmed circle of credentialed PCism that dominates in legal academia is viewed as hysterically funny, at best, by all the rest of us.

Thursday, May 12, 2011

Chickens -> Home -> Roost

Fukushima reactor 1 rods entirely exposed - or they were until they melted and ended up at the bottom of the reactor vessel. TEPCO will not be filling the containment vessel with water after all. Shall we say that there are integrity doubts? The real question is whether all of that fuel is still inside the reactor vessel or whether some of it is in the containment vessel. Before filling the containment vessel with tons of water, it would be nice to know what shape it is in.

The whole cool-down, clean-up process is going to take a tad longer than recently announced. But, on the bright side, they made it inside the reactor building to fix the gauge, which is how they know there's no water on the fuel rod assembly. There are other problems also. Chubu Electric is supposed to start shutting down its Hamaoka reactors at the end of this week. Japan's electricity shortage will get worse.

And then, we have initial claims to look forward to in a few short hours.

Maybe it would be best if we could get a lot of the bad news out of the way and then start looking for good news, but there is so much deferred bad news to confront!

After a lovely sea of red ink in Asia, Europe opens down. This will shock you intensely, but for some reason, silver is selling off in overnight trading. And copper, but mostly silver. And corn, and wheat, and stuff like that. There appears to be some nervousness about the Euro.

Draghi gets the ECB on All Hallow's Eve. Draghi is the one who has to deal with Greek, Irish and Portuguese default.

Eh. PPI kind of nasty: 12 month change in Finished Goods = 6.8%; Intermediate Goods 9.4%; Crude Goods 23.7%. On the month: Finished Total 0.8%; Finished ex food and energy: 0.3%. Annualized that would be about 10% and 3.6%, respectively. Cumulative increase YTD for Finished Goods is about 4.1%, Finished Foods about 4.3%, Finished Energy about 11.7%. Multiply by 3 for approximate annual pace! I'd say that the Fed has managed to exceed its four percent limit. Of course it does not take any responsibility for events, and it is not in control of them either.

There is no way businesses can absorb these increases without passing them on. But, as evidenced by the retail report for April, it appears that consumers cannot pay the price increases:
Total SA April sales: 389,355
Total SA March sales: 387,371
Nominal Increase: 1,984
Gasoline Increase: 1,211
Grocery Increase: 615
Game over, the increase in initial claims is explained as more discretionary types of spending get curtailed.

And what were initial claims this week? The four week moving average was 436,750 and the week's number was 434,000. We just reached parameter limits.

PS: Nor is it just us: March European industrial production fell by 0.2/0.3 (EU27). The big news however, is that industrial production of non-durable consumer goods fell by 0.7/0.8, i.e., consumers crumpling. This is hardly surprising, because retail trade dropped 1% in March, as earlier noted on this blog.

Although US news is not good, currency fluctuations are driving some of the pricing as people shift money from one currency to the other ASAP. So the relatively bad retail news drops the dollar and increases commodities slightly. We have a long, slow drive down to the real growth zone. I can hardly see it from here.

Wednesday, May 11, 2011

How To Poison Banking For Good

Read it, weep, think and vote.

For what it's worth, these small banks were the only chance we had of pulling out, but I think the causists in this administration, as with Boeing, will destroy our chances.

Oh, and in case you were wondering....
The number of full-time jobs declined by 49,100 in April, and part-time employment rose by 26,900, today’s report showed. Australia’s participation rate, which measures the labor force as a percentage of the population over 15 years old, fell to 65.6 percent in April from 65.8 percent a month earlier, it showed.
Australian retail sales unexpectedly fell in March for the first time in five months, a report showed last week.
Everything's unexpected, these days.

Treasury Receipts Confirm Household Employment Survey

That is, they confirm the bad numbers of the Household Employment Survey vs the good numbers of the Establishment Employment survey. I couldn't call this good news, but it is always better to know than to wander around in a deluded fog.

April 2010. April 2011. You are looking for HI receipts for April on page 6.

There was a YoY gain of 2.2%, but that is quite shocking when compared to March's YoY gain of over 5% YoY. I can only view this as indication that the rapidly rising initial claims numbers indicate rising unemployment, which was shown by the Household Survey ( -190,000 jobs ) last week.

It also seems very likely, looking at the "self" vs "wage" figures for March and April, that the havoc lies in small businesses that are being beaten down by cost increases. They're probably just giving up. I usually use the "self" returns as a proxy for small businesses. In this case, small service businesses.

This is a very large sample size of 100%, so I would take it seriously and start moving your assets to high ground. I do not think the good establishment survey figures for April jobs now hold any credibility - the net B/D adjustment NSA was 175,000. Additionally, it is hard to reconcile the gas supply(consumption) figures with growing employment.


Crude Inventories: 4 week gasoline demand down by 2.4%; diesel still up YoY (+4.5%). If you look at the tables, year to date US oil imports are down 8.5% from last year, when they were down from the year prior.

Reality sinks in: "We have a tremendous glut."

$93.76 is March price of oil from the International Trade report. See exhibit 17.

That's pretty much the number that matters, although knowing that oil import prices rose in April and will rise in May is useful too.

It might also be relevant to know that in March of 2008 (see historical prices) the import price was 89.93. Meeting and exceeding all possible expectations! We're just overachievers!

The massive Mississippi floods will have an adverse impact on May's economic performance. The tornado destruction is still in there kicking us in the 'nads.

The Arthurian is harping on 1974. What changed? Here's a hint - between 1973 and 1974 the import price of oil way more than doubled, and it never stepped down again. If you look at oil historical prices, the rise and fall of oil corresponds well with what the average worker remembers as relatively good and bad economic times.

Countdown for world economy crumple 5, 4, 3, 2, ....

It turns out that the Mayan calendar was really predicting the price of oil! But at least we can reassure ourselves that we've fixed all those nasty financial instabilities in the system. Oh, wait....

Tuesday, May 10, 2011

After All These Years

In grade school, Weekly Reader promised us jetpacks. Now we've got 'em. This is a big relief to those of us who have been feeling wretchedly deprived all these years but were to lazy to sue Weekly Reader for pain and suffering induced by false promises.

There appear to be a few minor flaws in the jetpack technology which bar immediate widespread adaptation:
Still, it is clear that jetpack commuting could spark a "fast" economic boom.

After thinking this over carefully (ahem), I have decided that the NYC financial district should be the first target market. The denizens often commute, they make enough to pay for the fuel, they have high buildings for takeoffs, and I personally would pay decent money to see the jetpack chute people landing on top of the bikers in the Bloomberg bike lanes. It would make a fun cable offering, wouldn't it?

Admittedly, the home takeoffs would be a problem for commuters, but I can't see why it couldn't become promptly fashionable for Greenwich, CT homes to install giant slingshots to hurl people into the sky.

Now what if Greenwich fails to pick up the ball and fly with it? In that case, it is almost certain that southern rednecks and Iowans will, which will further lead to the decline of the NYC image. The moment I saw the picture of the guy with the jetpack, I flashed to an image of a very happy GA guy with the jetpack. It would be painted different colors, the weird getup would be jeans and a leather jacket, and the guy would have a beer in his hand.

A lot of people in GA near where I live (the boonies) have kit planes. You can take off with a very short dirt runway (we all have at least enough property for that), and they are incredibly fun. So we really might get into the jetpack craze (we could convert our watermelon guns to jetpack launchers), and after that, all the really fun people would move south and into the heartland - because let's face it, everyone really wants a jetpack. We always did.

City people just don't know how to have fun:

(For the slightly less adventurous, there's always some Israeli gadget. I really wish the Israelis would work harder on jetpacks.) The future does not look too bright for murderous jihadists; the Israelis are going to spend A BILLION on expanding Iron Dome.

Constraints And Circumstance

If Jane Austen were a modern day economist, I do believe she'd write a white paper with the above title. One of the aspects of Austen's writing that has always engrossed me is the solid balance displayed. The woman who skewered the cult of sensibility in Sense And Sensibility and lampooned the Gothic romances in Northanger Abbey with such skill could bring considerable vim and vigor to our current economic cults.

But, sense we no longer have Jane Austen with us, and since we have lost our Tanta (a modern day Austen of mortgages), we are left to stagger on by ourselves, with a soundtrack of fable-blathering politicians. It would not hurt so much if their political tunes and lyrics were not written by professional economists.

I'd like to direct your attention to Mauldin's current Does Unreal GDP Drive Our Policy Choices?

My response, on seeing the title, was "Of course it does!" The current letter is a white paper by Rob Arnott which discusses why the longer-term trend that matters is the private economy. I don't want to steal any of the work, but I do think it's an important read. The basic points:
As I have often written before, the measure that determines future growth of the economy is Gross Private Domestic Investment (GPDI). Over the longer term, the rise and fall of GPDI shifts the economy from contraction to expansion and back again.

It's obvious that at some levels of debt, the ability to spark a meaningful increase in the private economy through more government debt is very limited. You can spark an increase in current consumption very easily - just send everyone checks or cut taxes. But if the cut or the subsidy is temporary, then the effect in the private economy is temporary also. And that's why it is not real growth.

If you spend money on structural improvements that have a longer term effect (cheaper power, power where none existed, public medicine that reduces disease rates - anything that adds usable potential to the economy) then you can get a longer term payoff. If you make structural changes in the economy that reduce potential or efficiency (like any measure that increases energy costs) then your spending has a negative net multiplier; you would have been far better off not spending anything.

Unfortunately, significant chunks of the "stimulus" money spent were in the negative net multiplier category, and most of the rest may have been in the temporary category, because it does appear that we are going to have to constrict spending on social welfare very sharply.

Most of the spending on housing, especially the purchase-money tax credit, was a negative net multiplier.

Tomorrow we get the Treasury budget, and I am working on some graphs for you. Probably tomorrow night I'll have those up.

Monday, May 09, 2011

I'm Sure This Is A Character Defect

But I have fallen in love with Portlandia.

Assistant Village Idiot started me on my dark, desperate slide into the hell of addiction. He's got a great one, but I think this clip is great!
It pains me to imagine you not knowing her journey!

If You Are Playing In Commodities

It's time to take the sucker unload.

Carloads April (May Rail Time indicators report):

April was about the peak, I think. It usually is about peak for year. In a good year, there is a second peak at the end of the summer.

We are a long, long way from recovering from the last recession, but energy prices appear to be taking the growth right out of the economy.

This isn't going to be an epic crash, but it is going to fold up very firmly.

This also, was a touch worse than I had expected.

April carloads shows some impact from the Japanese disaster, but the Japanese disaster is going to transform into a longer crunch and will be with us for a bit. (Due to Hamaoka NPS being shut down.)

Canadian rail isn't showing much in the way of growth either. There is another yea verily graph:

It sure looks like we just lost our growth edge! Services are just going to flatten out (in total) because of pressured consumers.

And you are probably thinking some sort of econobabble about the new economy blah, blah, blah, but all the new economy really is, is bubbles. And bubbles only last as long as buyers do, and buyers run out of money when they are buying commodities, because eventually someone does have to sell that commodity to someone, and then the jig is up.

If you don't understand why I think this is definitive, read The New Arthurian Economics on capacity utilization.

New Arthurian Economics blog - a lot of graphs. It's like Mark without the Snark.

Start with this post, which includes the following graph:

Monetary Base relative to Actual-Price Output:

Sunday, May 08, 2011

There Were Probably Women And Song Involved Also

Sinopec scandal: The popular outrage in China is really because of the price of gas, but this is hardly the austere management of the people's resources that Friedman seems to believe dominates:
At a time of rising public anger over high gas prices, Chinese Web sites and even some official media have bubbled with fury over Sinopec’s spendthrift ways and mocked the company’s claim that a lone, wayward executive is to blame — and has now coughed up for wine already drunk.

Saturday, May 07, 2011

Kan Requests Chubu Electric Shut Down Hamaoka

Technically this is a request and not an order. If the nuclear plants at Hamaoka are shut down, they probably will be restarted in a couple of years. But who knows. Bloomberg article.

Atomic Power Review. The situation is fluid.

Up until this point, the planning for power in Japan this summer was about -15% from peak last summer. It is not clear what the net effect of Kan's request will be.

In other big news, Yomiuri reports that TEPCO started the ventilation/air purification system at Fukushima Daichi. This system will pull air out of reactor building 1 and filter radioactive particles. The goal is to knock down radiation levels enough to let workers safely install the internal couplings for a water exchange system. In another big step, TEPCO's plan to flood the reactor with water has been approved. This has been controversial due to fears that it could make the containment more vulnerable to aftershocks.

Friday, May 06, 2011

Oh, Lord, That's Not Good

Unemployment rate rises to 9.0%; Household survey shows 190,000 lost jobs in April, participation rate stays at 64.2%; employment/pop ratio drops .1 to 58.4%.

In the distance, I hear violins for commodities.

Not-in-labor-force grew by 131,000.

The establishment survey shows growth by 244,000; it is not reliable. One of the puzzles has been why gas consumption should be down if payrolls are rising; that puzzle is now solved. Rising initial claims, gas consumption and what I've been hearing from small businesses confirm that there was a notable change in behavior in April.

This is a negative surprise for me; I expected it to be better.

The Household survey is the one to look at right now; the establishment survey doesn't ever pick up sudden turns in the economy well, and in this case, because it is a sudden turn, it really misses. Next month the establishment survey will pick up far more than this, but it will lag what is actually happening for months.

There is effectively no floor on oil before $80 in the near term, $70 in the longer run. The tide just went out.

I will write more in a few days; I am scheduled to go to SuperDoc's and work on his computers. It is a beautiful, sunny day on which to listen to the low agonized wails of the silver traders begging for morphine.

PS: What happened is what the NACM surveys have been hinting for a couple of months; almost all of this is in small service businesses. And NFIB's recent employment flash shows that more small businesses cut employment than hired in April - that's how you get these numbers. See CR's post on the NFIB flash. The bottom line is that gas prices just got to the tipping point; in late March my aisle count at grocery/lower end retail showed the impact, but I didn't expect it to show up this quickly in the surveys. The lower margin and the smaller the business, the worse shape they are in and the bigger the impact now.

The small low-margin businesses are always undercounted in ADP and establishment surveys in a turn. Establishment gets a lot of its numbers from imputation, which works very well indeed in stable circumstances. In either a sudden uptick or a sudden downturn, the imputations are all wrong and then the survey can be way, way off.

To make Euro life even more special, the Greek kaka is hitting the fan.

Thursday, May 05, 2011

Because Nothing Screams "Recovery" Like This

There are no words....

Or, this is what Gordon's beloved fried egg chart looks like in rate terms.

Radioactive sushi, anyone?

Well, There It Is - Bomba!

Initial claims 474K (Advance April 30th), last week's revised up to 431K. That takes the four week moving average to 431,250, into recession territory. The four-week average for initial claims last year was only 465,750, so this truly ain't good. Initial claims this week were higher than the prior year's comparable week. Not a good sign!!!

I still believe that part of this is related to Japanese supply-line problems, but not all. Oh, no, not all. I could go up to 40K, but not past that.

Ah, yes. Such is the life of a non-WS elf. Here's a wild guess - Treasuries will do well today and oil will not, and frankly, if you were playing with silver you need painkillers.

Because we are seeing a sudden pulse, tomorrow's employment report will be pretty good, but the outlook for May's is looking pretty negative. We're coming up on survey week.

I would not have the guts to be playing with oil - I think the fall will be hard and fast. German manufacturing orders also were reported down today.

Oil would have to retract to something near $70, given the price of food and the further price increases in the pipeline, to give this much of a strong push up. And even as oil falls, you are not going to see big falls in diesel/gas prices, so this is going to be a squeaker. Groceries have been so price-constrained that although wholesale prices are falling on certain items, retail prices aren't falling in tandem.

I hesitate to write this, but I am really more worried about Europe than I am about NA. Next week's initial claims should drop, but to what? I guess I am going to be waiting tensely until then.

A further explanation: It is true that this week's initial claims were affected by some unusual factors, but unadjusted claims were higher than last year's, and some of these factors just move claims from one place to another, i.e., they show up now, but should have shown up a couple of weeks before, so the movement doesn't change the four week average much.

Next week and the week after we have to deal with the onslaught of tornado claims! So the question is how much this week's moving average will drop over the next couple of week's, and it may not drop much. The Oregon extension resulted in over 22K extra claims, all of which did not show up in this week's numbers. That is a one-time pulse spread over April.

The impact of the tornadoes will extend for several months but should produce a short, sharp boost in claims. My rule is that if the building is gone, the paycheck is gone. It is not clear how quickly the Japanese supply-chain problems will be redressed, and there should be a further boost related to that issue.

After that, by the fall there will be more unemployed schoolteachers, which will drive up unemployment numbers later in the year. I don't think that should change initial claims that much until August, and perhaps not much even then.

The tornadoes will have more impact than most now realize, the Japanese supply issues are ongoing, and most of all, service businesses around the nation are going to see real pain as long as these gas prices remain high. The issue really is how much of a whack we take altogether on this. Unfortunately the economy is vulnerable.

So anything can happen at the Fed. If they do QE3 gas doesn't fall and commodities could go higher; if they don't we sit and wait to see what is going to happen. In many ways it would be

I'd lay odds that Congress extends the FICA cut at the end of this year; that will make Republican protestations of fiscal conservatism very laughable indeed.

In the meantime, because we have high structural unemployment in many areas, and because Congress didn't extend unemployment benefits past the 99 weeks, a lot of people are losing unemployment benefits without getting jobs. This doesn't help. The stimulus this year was very frontloaded, the further we get to the end of the year the less impact it has.

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