Friday, January 27, 2012
Hah, An Inventory Build
What we have so far is that personal consumption increased by 47.8 billion compared to the prior quarter's 40.8. Almost all of that was in durables (44.9 billion). Cars up 28.6 billion. Recreational goods and vehicles up 12.3 billion. Furniture and durable household goods up 5.7 billion. Non-durables were only up 8.5 billion, SA. These are all supposed to be price-adjusted numbers.
Gross private domestic investment increased 83.2 billion compared to the prior quarter's 5.8 billion. Unfortunately most of the difference was in inventory build (+58 billion compared to the prior quarter's -41.1 billion).
Net exports of goods and services was a subtraction at -3 billion compared to the prior quarter's +13.6 billion. There was almost no change in exports; imports, however, increased 23.6 billion compared to the prior quarter's increase of 6.5 billion.
Government spending plummeted at -29.1, compared to the prior quarter's -0.6 billion. The bulk of the change was in defense spending, which fell 23.5 billion. Federal non-defense expenditures rose 3.6 billion. State and local expenditures continued to decline, falling 9.7 billion. In the prior quarter it fell only 5.7 billion.
The best thing about this report was the equipment and software portion of Gross Private Domestic Investment, which increased 14.6 billion. This was significantly lower than the prior two quarters (+104.7; +42.2) but it was positive.
How you feel about Q1 has something to do with the inventory build. That is likely to slow; a lot of it is probably cars and trucks, which was mostly rebound from depressed production levels, largely because of the Japanese disaster and its effects. Ward's is projecting an improvement, but not a huge improvement in production levels:
Assuming this is true, quarter by quarter wouldn't necessarily show big increases. However most manufacturers are pretty upbeat in their outlook, and inventory levels didn't rise. Article.
I do have some hesitancy about the situation, because it seems as if auto dealers are focusing advertising on finance, as in finance for those who are having trouble paying for a new car. The supply of the marginals tends to exhaust quickly. I have been most unimpressed by the evolution of the auto loan portfolio at Compucredit. Despite hugely whittling down the portfolio, their delinquent/current ratios are barely improving. (See page 14 in this document, and then go to the next page and look at the unrecovereds.)
On the brighter side, deposit levels at banks are excellent and consumer credit is pretty stable, with some increases on car loans. But then I look at stats on food purchases, and I realize that the average consumer still must be very tight indeed. Just how tight?
Two variables describe the economic experience of most of the US population, and those are Food at Home and Gas & Energy (lines 9 & 11) from Table 2.3.3 at BEA:
That's hard to see. Here's the same graph with just the "both" categories:
Open these two graphs up and take a good look at them.
Most of the country is in recession, and that's occurring even though we have huge food stamp supplementation on the food.
Mind you, per capita consumption is dropping faster. This is absolute, but price-adjusted. What you are looking at are US households falling into increasing levels of economic distress.
Japan's energy and industrial policy that has been in place since the oil crisis of the early 1970's has been overturned.
Reuters reported the other day that Japan's first trade deficit since 1980 raises debt doubts:
"Japan runs trade deficit of $32 bln in 2011
Dec exports -8.0 pct yr/yr, imports +8.1 pct"
A key is the problem of increased reliance on fuel imports due to the loss of nuclear power. Only four of the country's 54 nuclear power reactors are operating.
To make up the energy gap, Japan increased fossil fuel imports 25.2%, almost one third of Japan's total overseas spending. Imports of oil, gas and coal all increased. Alternatives to fossil fuel will take years, if not decades to implement. These facts suggest that Japanese demand will add significant support to global hydrocarbon prices.
Another issue is offshoring; Businessweek reports that:
"Manufacturers from Panasonic and Honda to Sony Corp. and Toyota Motor Corp., which helped fuel three decades of trade surpluses, are moving output overseas as the yen trades near a postwar high, making exports less profitable."
A declining population also provides incentive for offshoring simply to find workers to staff manufacturing operations. Moving the work offshore also avoids cultural complications from the possible alternative strategy of allowing foreign workers to immigrate.
How is the BoJ going to get the yen to depreciate?
The yen is strong because people believe that it is strong, not because it is.
You're absolutely right about Japanese energy. Japan cannot run its economy on renewables, and it does not have the internal resources to generate power from fossil fuels.
Further, the internal financing of debt is going to become very difficult as an aging population now begins to draw on its resources to live in retirement, and the younger, smaller generation cannot generate the savings to compensate for their withdrawals.
Without the energy, the businesses can't stay and the jobs won't be there. The domestic economy is doomed to shrink and Japan will just tip.
We're not dead, but we're very weak. This mild winter may save us from the worst.
What matters is that income curve by March.
November domestic natural gas consumption (my domecile): 20 percent compared to 2010. For December, 60 percent. For January, 50 percent.
It's 44 degrees now. One winter thaw of a few days is not abnormal. But we're going to be 10 degrees or more above the average for over a week, and even then we'll still be above the average.
Over 100 freezing deaths reported over there, mostly in Eastern Europe.
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