Saturday, March 31, 2012
More EPA Slapdowns/Recants
In an about-face, the Environmental Protection Agency on Friday withdrew its 15-month-old emergency order against Range Resources that had blamed the Fort Worth-based drilling company for methane contamination in water wells and demanded that it supply safe drinking water to two Parker County homes.The SC whacked them, the Fifth Circuit just gave EPA the raspberry for being arbitrary, capricious, and acting without legal authority, and we all know that the Sackett case will have a long tail. The fracking controversy will not go away, but the EPA's proceedings there have not withstood independent scrutiny.
Friday, March 30, 2012
January contained a bunch of offsetting stuff, such as increases in SS checks of 3.6%, increases in unemployment taxes (lowering incomes for businesses), increases in military pay checks, blah, blah, blah. February and March usually include additional spending from income tax refunds. March retail should be increased this year due to an early Easter.
Chicago PMI is very good. Inventories had been contracting last month, so one would expect so, but there are plenty of orders. Prices paid went to 70.1 SA, 72.2 NSA, which should suggest that Lacker is not all wet. In general the manufacturing surveys were good this month, with relatively high input prices. We are neither near deflation or epic inflation, at the moment.
NACM. A minimal increase for manufacturing, which has had some strong months. A larger increase for services, which tends to lag manufacturing a bit. Dollar collections fell pretty hard in March for services, but looking at the general improvement in negative factors for services suggests that it due to higher pace of activity. The commentary on the report is quite optimistic. The YoY improvement for negative factors on services is now in "substantial improvement" territory. That can come from folding of weaker players.
Manufacturing indices show degradation YoY still, but if you think about it, we should get a relative bounce by April because of the absence of last year's disruptions. Still, in general when reading all these reports they convey the feel that things are still moving "in range", and that conditions within the business network are not prone to sudden collapses. You have the feeling that the floor is healthier, and that there's more resistance to disruption.
That's really important, because consumer behavior is somewhat cash-flowy, and with personal disposable incomes not going anywhere very positive, we need continued business growth to cover that slack. Walmart is advertisiing cheap Easter candy, and that's not the most positive consumer sign I have ever encountered. Grocery stores look extremely marginal.
If we're not going to get as much push as I had hoped from construction, then we need basic industry to carry the ball, and at least this month's reports provide a case that it can. Auto advertising continues to degenerate somewhat, and consumer lending in H.8 is flat at best (most the overall increases in consumer lending are centered in student loans).
There is an interesting paper studying the effect among community banks of the GSE takeover. Community banks tend to do more baseline lending, and the effect of shorting capital among these banks was probably locally larger than appears from the study. The effect was cushioned by TARP injections.
Note: Rail is not pretty. I hope Lacker is right about 2-3% growth, but I cannot integrate that prediction with what I see in grocery stores, fuel consumption and rail freight.
A long time ago (early 2000s), I figured that the structural growth rate for the economy for the period was more like 1.8%. That is, growth over that margin would have to be purchased either with changes creating greater economic efficiencies or by borrowing. I didn't see anything in the private sector potential efficiencies that could give us more than an extra 0.2% (and that's included in the 1.8%).
Therefore, I do not think it is coincidental that we managed to haul through last year at 1.6%, but what alarms me is that we did it by borrowing so darned much.
Thursday, March 29, 2012
Economic stuff: GDP latest update, about the same. Four quarter growth average at 1.6%, which is hardly a strong basis for anything.
Initial claims at 359K SA, 4 wk moving average SA at 365K. But don't be misled - this is not an increase, but a result of revised seasonal adjustment factors. Really, we are still in the same range.
There's a Fed paper published on foreign investment influences on Treasury yields. I recommend it.
Yesterday's crude inventories report was a bit of a shock. Only increased production of propane held the overall 4 week supply measure up to -5.3% YoY. That is almost the same as the YTD YoY of -5.2%. There was a big build in commercial crude inventories, even with refineries running at a pretty decent 84.5% clip. We'll have to see how this plays out over the next few weeks, but:
Total products supplied over the last four-week period have averaged about 18.2 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 8.4 million barrels per day, down by 6.1 percent from the same period last year. Distillate fuel product supplied has averaged 3.5 million barrels per day over the last four weeks, down by 8.6 percent from the same period last year. Jet fuel product supplied is 3.3 percent lower over the last four weeks compared to the same four-week period last year.Umm....Maybe my ideas on construction pace were a bit overoptimistic? The trucking reports, when they come in, won't be too good. So far this year -4.6% in January, +0.5% in February, cannot be too optimistic about March.
Wednesday, March 28, 2012
I'm An SC Justice, Not A Bricklayer!
For me the big surprise in today's argument over severing the individual mandate from this horta of a bill, practibility thereof, misery thereof, torture of innocent justices (Scalia), aka ham acting, aka the old farts are tired, aka why do we have to read it if Congress didn't, was how unrestrained the implications of the remarks were.
In short, they're not happy at being put in this position. I disagree that the argument assuming a hypothetical shows the way they will eventually decide the case. This was argument devoted to the question of IF THE INDIVIDUAL MANDATE WERE STRUCK, what else in the bill must be struck? I think some of the reporting misunderstood the matter.
Still, I was almost astonished at how close some of them are to Vinson's ending point, even if Vinson's activity/inactivity distinction doesn't stand. The cars/broccoli bits came up earlier in the week, and what I thought was clearly out of the ballpark in Vinson's reasoning on severability may not be. Vinson dumped his legal career on the trash heap with that ruling, but it appears he wrote himself a memorable epitaph.
What surprised me first were the oblique and not so oblique references to the way ACA was passed. It starts sort of quietly with Roberts (basically addressing legislative intent):
CHIEF JUSTICE ROBERTS: The reality of the passage -- I mean, this was a piece of legislation which, there was -- had to be a concerted effort to gather enough votes so that it could be passed. And I suspect with a lot of these miscellaneous provisions that Justice Breyer was talking about, that was the price of the vote.Put in the Indian health care provision and I will vote for the other 2700 pages. Put in the Black Lung provision, and I'll go along with it. That's why all -- many of these provisions, I think, were put in, not because they were unobjectionable. So presumably what Congress would have done is they wouldn't have been able to put together, cobble together the votes to get it through.Now this contradicts the observation earlier that there are provisions which are renactments of long-standing legislation, and Roberts was the one who made that observation:
CHIEF JUSTICE ROBERTS: Well, but it would have -- it would have passed parts of the hollow shell. I mean, a lot of this is reauthorization of appropriations that have been reauthorized for the previous 5 or 10 years and it was just more convenient for Congress to throw it in in the middle of the 2700 pages than to do it separately. I mean, can you really suggest -- I mean, they've cited the Black Lung Benefits Act and those have nothing to do with any of the things we are talking about.So I was startled into a "huh?" (Because I'm not a justice of the Supreme Court of the United States of America, so I can make comments like "huh?" or "wow!" without earning any law professor's august disapproval.)
Breyer had earlier asked for suggestions on extent:
JUSTICE BREYER: Could I ask you one question, which is a practical question. I take as a given your answer to Justice Kennedy, you are saying let's look at it objectively and say what Congress has intended, okay? This is the mandate in the community, this is Titles I and II, the mandate, the community, pre-existing condition, okay? Here's the rest of it, you know, and when I look through the rest of it, I have all kinds of stuff in there. And I haven't read every word of that, I promise. As you pointed out, there is biosimilarity, there is breast feeding, there is promoting nurses and doctors to serve underserved areas, there is the CLASS Act, etcetera.Now we come to Kneedler's argument. He is the Deputy Solicitor General and so represents the government. The very first question he gets is a gloomy one from Roberts about the possibility of further litigation (for example, from insurance companies) with the question of whether they even have standing. Then Scalia clambers into the melee of misery:
What do you suggest we do? I mean, should we appoint a special master with an instruction? Should we go back to the district court? You haven't argued most of these. As I hear you now, you're pretty close to the SG. I mean, you'd like it all struck down, but we are supposed to apply the objective test. I don't know if you differ very much.
So what do you propose that we do other than spend a year reading all this and have you argument (sic) all this?
JUSTICE SCALIA: Mr. Kneedler, there are some provisions which nobody would have standing to challenge. If the provision is simply an expenditure of Federal money, it doesn't hurt anybody except the taxpayer, but the taxpayer doesn't have standing. That -- that just continues.Kneedler is trying to say it is, and then Breyer joins in again:
Even though it is -- it should -- it is so closely allied to what's been struck down that it ought to go as well. But nonetheless, that has to continue because there's nobody in the world that can challenge it.
Can that possibly be the law?
JUSTICE BREYER: What he's thinking of is this: I think Justice Scalia is thinking, I suspect, of -- imagine a tax which says, this tax, amount Y, goes to purpose X, which will pay for half of purpose X. The other half will come from the exchanges somehow. That second half is unconstitutional. Purpose X can't possibly be carried out now with only half the money.Kneedler responds again, yes. Ginsburg jumps in to second:
Does the government just sit there collecting half the money forever because nobody can ever challenge it? You see, there -- if it were inextricably connected, is it enough to say, well, we won't consider that because maybe somebody else could bring that case and then there is no one else?
I mean, is that -
JUSTICE GINSBURG: Mr. Kneedler, it's not a choice between someone else bringing the case and a law staying in place. And what we're really talking about, as Justice Sotomayor started this discussion, is who is the proper party to take out what isn't infected by the Court's holding -- with all these provisions where there may be no standing, one institution clearly does have standing, and that's Congress.Unfortunate choice of words there! One could read that as implying that Congress will wreck it - but she has a point. Roberts speaks to bring Kneedler back to Breyer's implicit point, and then Scalia intervenes:
And if Congress doesn't want the provisions that are not infected to stand, Congress can take care of it.
It's a question of which -- which side -should the Court say, we're going to wreck the whole thing, or should the Court leave it to Congress?
JUSTICE SCALIA: -- don't you think it's unrealistic to say leave it to Congress, as though you're sending it back to Congress for Congress to consider it dispassionately: On balance, should we have this provision or should we not have provision? That's not what it's going to be. It's going to be these provisions are in effect; even though you -- a lot of you never wanted them to be in effect, and you only voted for them because you wanted to get the heart of the -- of the Act, which has now been cut out; but nonetheless these provisions are the law, and you have to get the votes to overturn them.Remember, there are cuts and limitations to Medicare in the bill, and I think Breyer is uncomfortable with leaving such provisions, and at this point he had my sympathy. They would not have been passed separately - even wild dingoes roaming the Australian outback know this. I do think this is a violation of legislative intent. Breyer usually decides in favor of leaving Congressional scope intact, and this is no different. Not only that, but the purpose of the Medicare cuts is really to fund some of the other portions, so if you do strike those other portions, it's legislation without a purpose.
That's an enormously different question from whether you get the votes initially to put them into the law.
What -- there is no way that this Court's decision is not going to distort the congressional process. Whether we strike it all down or leave some of it in place, the congressional process will never be the same. One way or another, Congress is going to have to reconsider this, and why isn't it better to have them reconsider it -- what should I say -- in toto, rather than having some things already in the law which you have to eliminate before you can move on to consider everything on balance?
Then Kennedy surprised me:
JUSTICE KENNEDY: When you say judicial restraint, you are echoing the earlier premise that it increases the judicial power if the judiciary strikes down other provisions of the Act. I suggest to you it might be quite the opposite. We would be exercising the judicial power if one Act was -- one provision was stricken and the others remained to impose a risk on insurance companies that Congress had never intended. By reason of this Court, we would have a new regime that Congress did not provide for, did not consider. That, it seems to me, can be argued at least to be a more extreme exercise of judicial power than to strike -than striking the whole.Some might call it hoisting Congress with its own petard.
Sotomayor asks for guidance - remember, she's asking the federal government's representative, not on powers (scope of judicial power) but on "discretion". Kneedler kind of bobbles this, and she says no, policy, discretion. Well, I really don't understand that, and maybe Kneedler doesn't either, because he kind of goes around in a circle:
MR. KNEEDLER: -- blend into -- blend into discretion and, in turn, blend into the merits of the severability question. And as to that, just to answer a question that several Justices have asked, we think that severability is a matter of statutory interpretation. It should be resolved by looking at the structure and the text of the Act, and the Court may look at legislative history to figure out what the text and structure mean with respect to severability. We don'tHere Scalia cuts him off:
JUSTICE SCALIA: Mr. Kneedler, what happened to the Eighth Amendment? You really want us to go through these 2,700 pages?Kagan tries to rebut this:
JUSTICE SCALIA: And do you really expect the Court to do that? Or do you expect us to give this function to our law clerks?
JUSTICE SCALIA: Is this not totally unrealistic? That we're going to go through this enormous bill item by item and decide each one?
JUSTICE KAGAN: I mean, we have never suggested that we're going to say, look, this legislation was a brokered compromise, and we're going to try to figure out exactly what would have happened in the complex parliamentary shenanigans that go on across the street and figure out whether they would have made a difference.Thwap, bam! Kneedler says "Yes, indeed, Ma'am,", and Roberts:
Instead, we look at the text that's actually given us. For some people, we look only at the text. It should be easy for Justice Scalia's clerks.
CHIEF JUSTICE ROBERTS: Well, how is that -what's exactly right? It's a question of statutory interpretation; that means you have to go through every line of the statute. I haven't heard your answer to Justice Scalia's question yet.Kneedler responds that there's an easy way out - just strike the textually linked provisions of community rating and guaranteed coverage. Note that Breyer doesn't accept this. Roberts demurs also, and then Alito:
JUSTICE ALITO: May I ask you about the argument that's made in the economists' amicus brief? They say that the insurance reforms impose 10-year costs of roughly $700 billion on the insurance industry, and that these costs are supposed to be offset by about 350 billion in new revenue from the individual mandate and 350 billion from the Medicaid expansion. (Isn't he wrong here?)Note that severability case law does look at such issues. Kneedler's like hey, the economists are wrong. Kennedy pipes up again, and this shocked me:
Now, if the 350 billion -- maybe you'll disagree with the numbers, that they're fundamentally wrong; but assuming that they're in the ballpark, if the 350 million from the individual mandate were to be lost, what would happen to the insurance industry, which would now be in the -- in the hole for $350 billion over 10 years?
JUSTICE KENNEDY: But I still don't understand where you are with the answer to Justice Alito's question. Assume that there is a -- a substantial probability that the 350 billion plus 350 billion equals 7 is going to be cut in half if the individual mandate is stricken. Assume there is a significant possibility of that. Is it within the proper exercise of this Court's function to impose that kind of risk? Can we say that the Congress would have intended that there be that kind of risk?Kneedler's reply is that this is not the court's function, but again, that seems a bit odd based on case law.
JUSTICE KENNEDY: But isn't that -- isn't that the point, then, why we should just assume that it is not severable?Breyer again:
JUSTICE KENNEDY: If we -- if we lack the competence to even assess whether there is a risk, then isn't this an awesome exercise of judicial power?
MR. KNEEDLER: No, I don't -
JUSTICE KENNEDY: To say we're doing something and we're not telling you what the consequences might be?
JUSTICE BREYER: I mean, I think it's not uncommon that Congress passes an act, and then there are many titles, and some of the titles have nothing to do with the other titles. That's a common thing. And you're saying you've never found an instance where they are all struck out when they have nothing to do with each other.I take that Scalia comment as a direct reference to the fact that most of Congress never even read the bill and that it was negotiated among committee members and given to Congress to vote up or down before they even had a chance to read it. Scalia appears irked at the the suggestion that Congress carefully balanced all the competing claims. Are we really at the point where SC justices are basically insinuating the Congress is incompetent to deal with this mess?
My question is, because I hear Mr. Clement saying something not too different from what you say. He talks about things at the periphery. We can't reject or accept an argument on severability because it's a lot of work for us. That's beside the point. But do you think that it's possible for you and Mr. Clement, on exploring this, to get together and agree on -(Laughter)
JUSTICE BREYER: -- I mean, on a list of things that are, in both your opinions, peripheral. Then you would focus on those areas where one of you thinks it's peripheral and one of you thinks it's not peripheral. And at that point, it might turn out to be far fewer than we are currently imagining, at which point we could hold an argument or figure out some way or somebody hold an argument and try to -- try to get those done.
Is that a pipe dream or is that a -
MR. KNEEDLER: I -- I just don't think that is realistic. The Court would be doing it without the parties, the millions of parties -
JUSTICE SCALIA: You can have a conference committee report afterwards, maybe.
Farr picks up the argument. His position is all the rest of the act should stand. I think this is the Sotomayor default position. Here is one of his exchanges with Kennedy:
JUSTICE KENNEDY: So do you want us to write an opinion saying we have concluded that there is an insignificant risk of a substantial adverse effect on the insurance companies, that's our economic conclusion, and therefore not severable? That's what you want me to say?But Farr is arguing that the court shouldn't accept the economists argument, so he is asking the court to make an economic conclusion that guaranteed-issue and community rating are saveable even though the government and the text link them to minimum coverage.
MR. FARR: It doesn't sound right the way you say it, Justice Kennedy.
Most of the justices probably don't accept this argument, and Scalia's response is just to whack the whole thing as the judicially minimalist position, and it appears that Kennedy might agree. Kagan steps into query whether minimum coverage, being a tool to achieve guaranteed coverage and community rating, shouldn't cause guaranteed coverage and community rating to go down, and Farr still disagrees.
It is an unfortunate position for any Supreme Court, and this doesn't even begin to cover the tremendous number of other provisions in the bill. Most of them cost some money. The boards, the panels, the thousand and one studies, the changes to Medicare funding and incentive payments, the ACOs, etc.
I do sympathize with the justices, but this is their job.
I don't see much recourse to throwing it all back in Congress' lap or striking certain provisions and running a very high risk that Congress won't do the fixes. The 60 vote provision does make it difficult.
On the other hand, if the court does the blanket strike per the text (minimum coverage, guaranteed issue and community rating), absolutely everyone will be furious with Congress, so the pressure increases to address the problems with a bill that Congress has not read. That way, at least they'll find out what was in it.
The Sotomayor theory of handing it back to Congress has a real appeal, but Kennedy, at least, appears to doubt that they WILL deal with it. He doubts that they can, and Scalia agrees. And Kennedy is very worried about doing damage to the whole financing system.
Finally, there's an ugly reality, and only those who have really read the bill can grasp this. The court would really have to rewrite sections of the bill to make a selective strike work. Clement touches on this in closing:
MR. CLEMENT: Mr. Chief Justice, I will make four points in rebuttal, but I will start with Justice Sotomayor's question; which is to simply say this isn't just a tool; it's the principal tool. Congress identified it as an essential tool. It's not just a tool to make it work. It's a tool to pay for it, to make it affordable. And again, that's not my characterization; that's Congress's characterization in subfinding I on page 43A of the government's brief.Etc. Clement's closing begins on page 80. It's worth reading. The bill is very complex, and the construction is complex. I doubt the regulators can carry out their instructions under the bill if minimum coverage is ruled unconstitutional, and I don't think the Supreme Court should be sorting through anything like this to essentially construct a workable remnant. When you veer into bill construction, you have passed your own powers as granted in the Constitution.
Now, that bring me to my first point in rebuttal, which is Mr. Kneedler says, quite correctly tells this Court don't look at the budgetary implications. Well, the problem with that, though, is once it's common ground that the individual mandate is in the statute at least in part to make community rating and guaranteed-issue affordable, that really is all you have to identify. That establishes the essential link that it's there to pay for it. You don't have to figure out exactly how much that is and which box -- I mean, it clearly is a substantial part of it, because what they were trying to do is take healthy individuals and put them into the risk pool, and this is quoting their finding, which is in order -- they put people into the market "which will lower premiums." So that's what their intent was.
So you don't have to get to the -- the final number. You know that's what was going on here, and that's reason alone to sever it.
Now, the government -- Mr. Kneedler also says there is an easy dividing line between what they want to keep and what they want to dish out. The problem with that is that, you know, you -- you read their brief and you might think, oh, there is a guaranteed-issue and a community rating provision subtitle in the bill. There is not.
To figure out what they are talking about you have to go to page 6 of their brief, of their opening severability brief, where they tell you what is in and what's out. And the easy dividing line they suggest is actually between 300ga-1 and 300ga-2, because on community rating they don't -- they say that a-1 goes, but then they say a-2 has to stay, because that's the way that you'll have some sort of, kind of Potemkin community rating for the exchanges. But if you actually look at those provisions, a-2 makes all these references to a-1. It just doesn't work.
So that leaves you with the Kennedy/Scalia pole (kill it all) opposed to the Ginsburg(probably)/Sotomayor pole. Sotomayor's position - just strike minimum coverage (the individual mandate), let Congress deal with the fallout - is the most facially reasonable approach. It may prove to be very damaging to the country and the lives of millions of Americans, but the failure will be due to Congress, anger and pressure will be focused on Congress, and perhaps only an outright "throw the bums out" approach can fix Congress. In the long run, the court finds itself in this position only because individual congressional members are willing to vote for thousands of pages of legislation that they have not read and that bind their powers in the future.
A possible alternative approach not mentioned in today's debate is to strike both sets of provisions - the ones limiting Congressional powers to modify the bill & amend the regulatory decision-making plus the ones over the individual mandate. That would at least leave Congress with an easier task. It is quite reasonable to assume that Congress would not have included those legislative provisions restricting the powers of future Congresses if it knew it had to revise the legislation. If I were on the Supreme Court, this is what I would do.
We have reached an odd passage in which the justices of the SC doubt the powers of Congress to do their job. This should not make anyone of any individual political bent at all happy. Nonetheless, the purpose of judicial review is not to make life easy or simple for Congress - it is to preserve the fundamental governmental structure set up by the Constitution, and if Congress is incompetent, it is for the electorate to amend that situation, not for the SC to try to fix their legislative errors.
Tuesday, March 27, 2012
ACA's Dead, Jim!
The justices are too concerned about limiting principles at this stage:
MR. CARVIN: It is clear that the failure to buy health insurance doesn't affect anyone. Defaulting on your payments to your health care provider does. Congress chose, for whatever reason, not to regulate the harmful activity of defaulting on your health care provider. They used the 20 percent or whoever among the uninsured as a leverage to regulate the 100 percent of the uninsured.See, the SC would rather not interfere with Congress, mostly for very good constitutional reasons. But occasionally they do, for very good constitutional reasons. And therefore Kennedy would probably prefer a limitation way of confining this issue to health care, but he's not quite seeing that, and there has been cross-argumentation preceding pointing out that in many ways, health care is no different from any other market.
JUSTICE KENNEDY: I agree -- I agree that that's what's happening here.
MR. CARVIN: Okay.
JUSTICE KENNEDY: And the government tells us that's because the insurance market is unique. And in the next case, it'll say the next market is unique. But I think it is true that if most questions in life are matters of degree, in the insurance and health care world, both markets -- stipulate two markets -- the young person who is uninsured is uniquely proximately very close to affecting the rates of insurance and the costs of providing medical care in a way that is not true in other industries.
MR. CARVIN: And, Your -- I may be misunderstanding you, Justice Kennedy. I hope I'm not.
Sure, it would be perfectly fine if they allowed -- you do actuarial risk for young people on the basis of their risk for disease, just like you judge flood insurance on the homeowner's risk of flood. One of the issues here is not only that they're compelling us to enter into the marketplace, they're not -- they're prohibiting us from buying the only economically sensible product that we would want, catastrophic insurance.
Everyone agrees the only potential problem that a 30-year-old, as he goes from the healthy 70 percent of the population to the unhealthy 5 percent -and yet Congress prohibits anyone over 30 from buying any kind of catastrophic health insurance. And the reason they do that is because they needed this massive subsidy.
Justice Alito, it's not our numbers. CBO said that injecting my clients into the risk pool lowers premiums by 15 to 20 percent.
So, Justice Kennedy, even if we were going to create exceptions for people that are outside of commerce and inside of commerce, surely we'd make Congress do a closer nexus and say, look, we're really addressing this problem; We want these 30-year-olds to get catastrophic health insurance.
No one can say for sure how this will work out in practice, and SC justices do not like to intervene early. But the issue about early intervention is that by choosing an expansive solution to a limited problem, they put the justices in the position of, in Kennedy's words earlier:
JUSTICE KENNEDY: Could you help -- help me with this. Assume for the moment -- you may disagree. Assume for the moment that this is unprecedented, this is a step beyond what our cases have allowed, the affirmative duty to act to go into commerce. If that is so, do you not have a heavy burden of justification? I understand that we must presume laws are constitutional, but, even so, when you are changing the relation of the individual to the government in this, what we can stipulate is, I think, a unique way, do you not have a heavy burden of justification to show authorization under the Constitution?Kennedy was really focused all through on limitations:
JUSTICE KENNEDY: Well, then your question is whether or not there are any limits on the Commerce Clause. Can you identify for us some limits on the Commerce Clause?Now if Kennedy does accept the "massive subsidy" argument, then Verrilli's arguments here are rebutted. And Kennedy does seem to accept the idea that Congress is trying to force those who do not need insurance into the market to create demand for a lower-priced product. That theory, which it seems that Kennedy admits, removes any possible limitation of the type Verrilli was trying to draw.
GENERAL VERRILLI: Yes. The -- the rationale purely under the Commerce Clause that we're advocating here would not justify forced purchases of commodities for the purpose of stimulating demand.
We -- the -- it would not justify purchases of insurance for the purposes -- in situations in which insurance doesn't serve as the method of payment for service
-JUSTICE KENNEDY: But why not? If Congress -- if Congress says that the interstate commerce is affected, isn't, according to your view, that the end of the analysis.
GENERAL VERRILLI: No. The -- we think that in a -- when -- the difference between those situations and this situation is that in those situations, Your Honor, Congress would be moving to create commerce. Here Congress is regulating existing commerce, economic activity that is already going on, people's participation in the health care market, and is regulating to deal with existing effects of existing commerce.
Monday, March 26, 2012
In Love With This Blog
Oh, Fascinating - On Healthcare Reform
The first part of the SC case (a bunch of combined cases, really) is on the issue of jurisdiction. If you accept the idea that the penalty for not having individual acceptable insurance is a tax, then the provision of federal law that says that you can't litigate a tax until after you pay it makes the entire issue here pretty much moot at this time.
Today's oral argument is striking - there is real concern in the court about the jurisdictional restraints in the act. That doesn't mean they won't vote that this case can't be brought at this time, but it does show the way their minds might run about other aspects of the act, and this will eventually be an issue under due process/equal protection grounds. Nor is it a liberal/conservative split. The "liberals" are not necessarily comfortable with this:
JUSTICE KAGAN: Mr. Long, aren't there places in this Act -- fees and penalties -- that were specifically put under the Anti-Injunction Act? There's one on health care plans, there's one on pharmaceutical manufacturers, where Congress specifically said the Anti-Injunction Act is triggered for those. It does not say that here. Wouldn't that suggest that Congress meant for a different result to obtain?One does get the sense that all of the justices are looking for ways to issue narrow rulings in this case, no matter how the issues may be decided.
JUSTICE SOTOMAYOR: Absolutely. But even the section of the code that you referred to previously, the one following 7421, the AIA, it does very clearly make a difference -- 7422 -- make a difference between tax and penalties. It's very explicit.
JUSTICE GINSBURG: Mr. Long, you said before -- and I think you were quite right -- that the Tax Injunction Act is modeled on the Anti-Injunction Act. And, under the Tax Injunction Act, what can't be enjoined is an assessment for the purpose of raising revenue. The Tax Injunction Act does not apply to penalties that are designed to induce compliance with the law, rather than to raise revenue. And this is not a revenue-raising measure because, if it's successful, they -- nobody will pay the penalty, and there will be no revenue to raise.
In the just-decided Douglas case, Breyer, Ginsburg, Sotomayor, Kagan and Kennedy won the day. That case was over CA's cuts to Medicaid reimbursements. A coalition of beneficiaries and providers sued to prevent the cuts on the grounds that the cuts were so deep that they violated the federal language requiring that state payments be sufficient to provide care, hence a violation of the Supremacy Clause (federal law trumps state law, usually). After the case was decided by the Ninth Circuit (multiple cases) in the plaintiffs' favor and taken up by the SC, HHS issued a ruling which substantially upheld CA's cuts. In a carefully indecisive action, the majority vacated the decision of the Ninth and sent it ALL back for review, hinting that the matter should proceed under APA but leaving open the question of whether the plaintiffs still had a case under the Supremacy Clause.
The "conservative" contingent of Scalia, Thomas, Roberts and Alito disagreed with the idea that individuals could sue under the act, and obviously therefore disagreed with the outcome.
I think the liberal contingent on the SC will be much more troubled with the various clauses in the ACA that remove decisions from court and even legislative arenas, or attempt to do so, than the conservative group.
The healthcare reform law as it stands is strikingly different than Medicare and Social Security, to which the vast majority of the population is subject. The health care reform law fragments the population, and the group of the population who are subject to by far the largest spending mandates under it is the smallest group. This, in conjunction with the clauses forbidding the courts to intervene in various administrative decisions, eventually would lay the grounds for a due process/equal protection case.
However such a case cannot be ripe until the law is fully in operation, and it seems as if this is a preliminary skirmish.
Really, read Ginsburg in the argument, When she doesn't get the reply she wants she feeds it to Verrilli:
JUSTICE GINSBURG: Why isn't Reed Elsevier -- if you're dividing jurisdiction from claims processing -- it says you have to register before you can sue. There are a lot of things you have to do before you can sue. So, why isn't Reed Elsevier like you have to pay a filing fee before you can file a complaint?Really interesting.
Sunday, March 25, 2012
Jumping The Shark
This has got to be the weirdest, most inane bit of anti-male sentiment on the planet, and any one of the featured dog breeds would be the first to point that out. I have never known a dog effectively stupider than the person who compiled this load of trash. I can just imagine a woman living in an urban area trotting after a Saint Bernard with a rather large pooper scooper on a cold wet morning, mentally planning the lawsuit.
Useful tips about men for the Huffpro perp:
- There's this thing called "dating". It allows you to screen out men that are not worth the time.
- Dogs need to be fed. You buy their food. Most men can buy their own food (see Tip 1).
- In no environment of which I am aware does a woman normally have to potty break an adult male (see Tip 1). Should you ever find yourself in this predicament (hint - more attention to Tip 1) it would be much quicker to accomplish than with a Golden Retriever puppy. Simply inform male that he does not get any until he "gets it". Mission accomplished.
- Dogs have vet bills. Men usually pay for their own doctor visits (although it's almost as hard to get them to go to the doctor.)
- Most men brush their own hair (see Tip 1).
- I have NEVER seen a woman walking a male on a city street while holding a pooper scooper. If you should find yourself doing this, you should redouble your focus on Tip 1.
- If you should suddenly find yourself with a plumbing problem, you need a landlord or a plumber or a male. Not even a golden retriever will help you. Seriously, I know. Your golden retriever will likely view this as a feature rather than a problem and roll around laughing and cheering in dog language.
- Dogs have 78 chromosomes. You, my dear, have 46. Major fail in the reproduction department.
- Most women like to have sex. It's hard to tell if that has occurred to you, the author of this bilge, or perhaps you are exceptionally strange. Several of the comments on the slides suggest that you are asexual, at best.
- Your mother has been praying for you to find a nice man and settle down, because she's worried that you will wind up a lonely, embittered spinster of 78 trotting along behind your King Charles Spaniel with a pooper scooper at five o'clock on a frigid icy winter morning, fall, and break your hip, and she does not want that to happen to you. Try harder.
- It is true that Akitas will wash themselves. They do not take care of their own fleas. If you truly believe this qualifies as better personal hygiene then any man you could get, try working on your self-confidence and personality, and return to Tip 1.
- If you really want a man who doesn't care where you are as long as the refrigerator's full, you should find it no problem to find one to suit. Bonus: you won't have to get up an hour early to walk said male, and you won't have to come home from work and walk and feed said male before showering to go out with the girls. He will probably also do the cooking, and you can take him as a deduction on your tax return.
- It is probably true that most adult male Boston Terriers are not flexible enough to wash their balls with their tongues. Does that really make a Boston Terrier your idea of the American gentleman? Tip 1 - yer not doin' it right.
- I'm going to leave the whole border collie thing alone. Way alone. Dogs are not cheap - perhaps you should save the cash you would spend on a dog and seek psychiatric treatment instead. For the sake of the puppies, you know?
Friday, March 23, 2012
I Wake Up Every Morning In A Good Mood
Ignore the New Home Sales report. Yeah, yeah, the headline is that sales dropped 1.6% in February. They may well have done something like that, but the 90% confidence interval is +/- 23.9%, so that figure is worthless. Sales might really have increased 5%, or dropped 8%. No one knows with an error bar that big.
The YoY YTD increase is 11.4%, and the 90% confidence interval on that one is +/-17.8%, so there is a good chance that YoY YTD sales have increased. We have several months to go before we can get to a 90% confidence level that new home sales are doing anything. Builder confidence and comments probably mean more than this report right now. Not to mention results.
The NSA YTD increase, probably the most reliable figure, is +8.2%. The 90% confidence level on that one is 12.2%, so I think sales YTD probably increased 4-5% at least, but they could have increased 10%. Among my worries are the south region, which contains more sales in total than all the other regions. On an NSA basis, it does not look too good up at only 6.5%.
The other way a forlorn, rapidly aging blogger might be able to resolve this is by looking at rail and the construction-related categories, and there I think I find foundation for an increase in new home activity, but not a very large one. This week's rail report is really quite subdued. On a YoY YTD basis, carloads are now down 1.8%, with intermodal only being up 2.3%.
On a YoY YTD basis, the following carload categories are negative:
Grain (-10.3%)The combined Canadian/US/Mexican YTD YoY totals as of this week (almost at the end of the first quarter) are carloads -0.4% plus intermodal up 3.4%. For the US we have the minor hopeful comment that paper and pulp is up 2.6% on the year. If you scroll down on that link you'll get the Mexican data - the Mexican economy is not doing well. Canucks are doing much better than the US or Mexico, but now it looks like they may be slowing too.
Coal (weather plus EPA rules - summer electricity rates are going to be pretty high even with NG)
Food and kindred
Primary forest products
Waste & scrap.
Bullish this ain't. The Fed Heads are now quarreling in public over inflation risks and policy stances. Bernanke is right that household consumption is depressed relative to before 2008, but that's because we were funding household consumption by borrowing, and we can't do that. We were funding short-term consumption with long-term debt, and it is a recipe for future economic collapse. So really Bernanke is saying that the economy will continue to be very weak, which explains why he wants to hit the gas pedal. The other part of his claims - that dumping more money into the economy won't raise gas prices - is obviously false, and the Bullard/Fisher axis of non-voting dissent disagrees on inflation pressures. It seems as if more than 70% of consumers have reached the fiscal breaking point at which higher forced spending for some items is forcing contraction in spending on other items.
When you have reached that point, the economy tends to weaken. The fix is deflation in some items to rebuild consumer buying power. Since Bernanke fears that like death, the Fed is unlikely to let that happen. Yet the commodity bubble must collapse, or the world economy is just going to continue to slow.
One of the problems is that under current circumstances, it appears likely that many firms don't have the ability to cut pricing much without cutting operating expenses, which means that we are nearing the rapid diffusion series in which consumer restraint is suddenly bolstered by business restraint. That's why I'm so focused on inventories.
If inventories can correct from here slowly, then we still have a chance to travel through this one on a skipping recession basis. If not, there is little life left in this economic body.
I would say that there is over a 50% chance that we have already entered diffusion, and if we have, the chances that we get out without a longer contraction are below 10%. If we have not yet entered diffusion, then the chances of doing so over the next two months are clearly above 20%. This leaves me in a somewhat doleful frame of mind.
Thursday, March 22, 2012
Claims Good, PMIs Bad
Claims first. Initial claims are stuck in a really tight range around 355K, which is very good. At this time of year a lot of seasonal adjustments kick in. They may be overstating seasonal claims a bit. I don't know. The four week moving average of continuing claims is going down, which is an excellent sign. It has taken a while to get here, but isn't this pretty?
Continuing claims are not so pretty, but at least they are moving in the right direction with some determination:
For quite a while these graphs were just too ugly to post, because unlike certain people who collect sad graphs to torture their tax preparers, I have some decency at heart. The thing about initials is that once they really drop decisively below 400K they tend to fall for quite some time.
For much of last year we were stuck just on the wrong side of things:
I really hated these graphs then. They would give me stomachaches.
Last one in this series is covered employment, of course:
This one is still rather depressing, but it lags quite a bit and should improve further in April, when the next update for covered employment is due.
Having written all that, these aren't really leading indicators. They are coincident or lagging. Therefore past performance is no guarantee of future results.
On the international side, Eurozone PMI does not deliver the same thrills, unless you are a masochist. And China's - well, well, well, it's the lead exhibit at the S&M convention. German manufacturing reported a drop in employment, although their PMIs are the best of the Euro lot by quite a bit. The German economy is still expanding a bit on services, but manufacturing contract. France stuck on services but manufacturing contracted. Euro cost pressures on manufacturers are building, whereas China seems to be either further along in the cycle or really enduring a steep decline in business activity. Employment in Chinese manufacturing is contracting.
Prospects for Europe turning in growth in Q1 are slim indeed. Germany's in a skipping recession, and it probably won't get worse than that, but Germans are no great consumers, and the Contract-O-Matic group (Portugal, Italy, Spain, Ireland, Greece, plus half the eastern bloc) will keep Europe on the low side.
Europe won't be helped by China's slowing growth, and China won't be helped by Europe's situation.
So although the US hardly looks halcyon, it doesn't look that bad in comparison. I am becoming more negative on China, because it has a lot of structural imploding to overcome, and the early moves have all been to avoid the impact rather than shield the impact. They have to meet this head on rather than try to roll the ball further. There's significant internal growth possibilities, but you can't really exploit them without shutting down some of the bad stuff.
To end on a brighter note, Japanese exports improved in February.
Wednesday, March 21, 2012
The Sacketts Get Unanamous SC Decision
EPA's argument was that the ability of regulatees to seek court redress would totally mess up their whole deal and fundamentally change the regulatory structure that Congress had created. They also claimed that their decision wasn't final yet (because they hadn't yet sued the Sacketts to make them do it). The court reacted badly to that claim.
Recently Congress has been passing a lot of statutes that preclude judicial review. That may be putting the SC's back up somewhat. Obviously in this case, the potential harm is very great if the EPA oversteps its authority - without the ability to challenge the ruling in court the Sacketts had no way to seek any sort of reconsideration, and fines mount up quickly.
The range of views behind this very narrow ruling is significant. Alito's concurrence states that Congress needs to act because the EPA has overstepped its authority:
Real relief requires Congress to do what it should have done in the first place: provide a reasonably clear rule regarding the reach of the Clean Water Act. When Con gress passed the Clean Water Act in 1972, it provided that the Act covers “the waters of the United States.” 33Well, dear, don't hold your breath waiting for Congress to take up the matter.
U. S. C. §1362(7). But Congress did not define what it meant by “the waters of the United States”; the phrase was not a term of art with a known meaning; and the words themselves are hopelessly indeterminate. Unsurprisingly, the EPA and the Army Corps of Engineers interpreted the phrase as an essentially limitless grant of authority. We rejected that boundless view, see Rapanos v. United States, 547 U. S. 715, 732–739 (2006) (plurality opinion); Solid Waste Agency of Northern Cook Cty. v. Army Corps of Engineers, 531 U. S. 159, 167–174 (2001),but the precise reach of the Act remains unclear. For 40 years, Congress has done nothing to resolve this
Ginsburg wants to make the ruling as limited as possible. She does not wish her vote here to be interpreted as allowing judicial review of the content of the compliance order, but rather just judicial review of the argument that the Sackett property was wetlands:
Faced with an EPA administrative compliance order threatening tens of thousands of dollars in civil penalties per day, the Sacketts sued “to contest the jurisdictional bases for the order.” Brief for Petitioners 9. “As a logical prerequisite to the issuance of the challenged compliance order,” the Sacketts contend, “EPA had to determine that it has regulatory authority over [our] property.” Id., at 54–55. The Court holds that the Sacketts may immediately litigate their jurisdictional challenge in federal court. I agree, for the Agency has ruled definitively on that question. Whether the Sacketts could challenge not only the EPA’s authority to regulate their land under the Clean Water Act, but also, at this pre-enforcement stage, the terms and conditions of the compliance order, is a question today’s opinion does not reach out to resolve. Not raised by the Sacketts here, the question remains open for another day and case. On that understanding, I join the Court’s opinion.Still, I wonder. This is a huge slapdown of the EPA in fact; the ability to challenge such orders in court changes the balance of power, and various legal associations have a strong interest in doing so, so it is likely that selected test cases will be brought to court.
To some degree, the court as a whole regardless of any individual ideological, legal or political leanings, is strongly biased toward both the workability of the legal structure and the necessity for the legal structure to provide a path for parties to seek redress for injury. The more that Congress passes legislation precluding judicial review of regulatory determinations, the more Congress is risking the eventual case that litigates the question of whether such clauses in legislation are themselves unconstitutional. Such a case would be fact specific, but I think the day is coming.
I also suspect that Congressional attempts to place certain pieces of laws passed out of Congressional modification reach will increase SC resistance to legal clauses blocking judicial review. The court tends to respond cohesively when it appears that some executive interpretation of the law will shift the Constitutional balance of power in a meaningful way.
This is one of the most interesting legal questions of our time, and in some sense, it comes into play in two of the currently hot issues. The health care reform law blocks judicial review of many of the regulatory decisions set up in the law, and it also places limits upon the ability of future Congresses to modify decisions by law. The inflexibility and "reach" of such a law is potentially great. The various budgetary laws also set up such restrictions purporting to bind not only the current Congress but future Congresses, and that too sets up an interesting situation.
I think ACA is clearly unconstitutional, but unconstitutional based on equal protection/due process considerations, so the law may survive its first SC court ruling. But this decision implies that it definitely will not survive long after inception. Fiscally, the law is utterly unworkable unless the subsidized insurance packages cover very little, and this sets up huge equal protection/due process issues.
For Future Reference
Total products supplied over the last four-week period have averaged nearly 18.2 million barrels per day, down by 5.7 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged about 8.4 million barrels per day, down by 7.8 percent from the same period last year. Distillate fuel product supplied has averaged just under 3.6 million barrels per day over the last four weeks, down by 8.5 percent from the same period last year. Jet fuel product supplied is 1.0 percent higher over the last four weeks compared to the same four-week period last year.That's, er, not a good sign. Comparison December:
Total products supplied over the last four-week period have averaged nearly 18.5 million barrels per day, down by 5.8 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 8.7 million barrels per day, down by 4.7 percent from the same period last year. Distillate fuel product supplied has averaged nearly 3.9 million barrels per day over the last four weeks, up by 2.4 percent from the same period last year. Jet fuel product supplied is 0.5 percent lower over the last four weeks compared to the same four-week period last year.There is some fleet replacement effect on gasoline consumption, and of course those drivers with highest mileage have the biggest incentive to replace less fuel-efficient vehicles with fuel-efficient vehicles. And yes, distillate numbers are somewhat lowered by warmer weather. But not 5% (fuel oil heating adds about 5% to US usage over the winter, and it didn't all disappear). This says something about trucking, which says something about the economy, and most definitely something about the pace of construction and retail activity. Higher employment ought to increase gas consumption rather than lowering it.
Our YTD daily average of products supplied is 18,177, stunningly down compared to last year's 19,236. There is some ongoing conversion of the trucking fleet to natural gas, but it just can't move that fast. There are adaptive limits in any given period.
Change YoY for three categories.
One of the reasons that the 2001 recession didn't impact jobs that much early on was the imbalance in autos - the late 90s dot.com boom had amped up auto sales, which then slid a bit.
So by the time we hit deceleration diffusioin in 2000, there was a real offsetting factor in autos (helped by interest rates).
However it looks like we got the de-correlator of autos last year, in part because of the Japanese tragedy and its supply-line effects. This year, that looks like it may be wearing out.
Since real pace of construction isn't as good as I thought, everything depends on autos, and I'm in major doubt over that for the reasons I have explained. Last graph:
Mid-cycle growth recessions are not really a bad thing - they generally prevent a real recession from forming. At a minimum, that's where we are.
In general (she remarked grimly), you have to have some pretty substantial non-correlator pushing the whole economic engine the other way to stay in the growth recession. Political hot air doesn't qualify.
Paper (green line) is a proxy for net inventory cycle changes exclusive of autos and energy, and somewhat on the leading edge. The blue line is of course inflated due high prices. On a 'real" basis it is well below zero. It sure looks to me like we are at the weakest part of the exit from the late 2007-2009 recession.
There is one other major factor, and it is colored purple:
Value of construction. Inflation moves that line up too, but it is the great counterweight of the US economy, and I was counting on it to pick up some slack this year as auto production stopped holding us up.
That supposition, given rates and sales, appears to be a bit dicey.
The purple line is acutely sensitive to interest rates, and right now interest rates aren't our closest friend. They're about to bottom out. Up until now they have provided a decent growth push:
Tuesday, March 20, 2012
Pretty Good At Reading Tea Leaves
Treasury stats don't lie. New residential construction report is out for February, and it is not particularly strong. Under construction is up over the year, but only about 5%, which is only marginally statistically significant. I think there is about a 4% minimum real increase, but we needed a tad more. The Jan/Feb total of starts is up 25% over the previous year, but what about the pace of building? On a seasonally adjusted basis, we are not showing gains from November-December. The authorized but not yet started total is not statistically different from last February's. The south has been the strongest growth region and winter weather has the least effect there, so the spring trajectory may be disappointing.
Concern is growing over Chinese growth. It turns out that the ore/steel axis is showing some weakening. No kidding - is this really news? Oh, gee, now concerns over lower profit margins suddenly emerge? Australia is going to see some headwinds from this, so they responded by passing a big tax increase on iron and coal. The brilliance of this move cannot be exaggerated. I guess it's time to bail out of the Aussie dollar. Others think so too.
India is still struggling with its fiscal problems, especially the current-account deficit. Thus the gold tax moves there have caused a strong push-back.
There's no doubt that many commodities are set up for a steep fall. High inventories are not a new problem - when the mood changes suddenly traders start looking at what's in the warehouses. The world is not going to see strong international trade growth when consumers in China and India are looking to buy gold.
Singapore is hanging in at "equivocal". February looks better - I'm waiting for February industrial production. The timing of the Chinese New Year may have distorted January totals.
An earlier Easter in the US will probably make March retail look somewhat decent, but retail growth is slowing considerably on mostly gas prices.
Don't expect this all to make energy prices go down much if at all. Energy prices are now being controlled by monetary flows, which will increase for months, not decrease, as the amount of cash on deposit at ECB is slowly withdrawn and recirculated back out via Eurobanks repaying loans.
Monday, March 19, 2012
Optimistic Economic Recovery Headline Of The Day?
Real average hourly earnings for all employees fell 0.3 percent from January 2012 to February 2012, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. A 0.1 percent increase in the average hourly earnings was more than offset by a 0.4 percent increase in the Consumer Price Index for All Urban Consumers (CPI-U).Oops. Gee, I wonder what happened in November 2010? The bright side is that more people are working. This appears to be achieved by wage deflation, which is not necessarily putting the average worker in a good mood.
Real average weekly earnings fell 0.3 percent over the month due to the decline in the real average hourly earnings combined with an unchanged workweek. Since reaching a peak in October 2010, real average weekly earnings has fallen 1.2 percent.
Of course, the expansion in high-end wages versus low-end wages I was looking at in last month's Treasury receipts causes average weekly earnings for most to be overstated. Fortunately, BLS has that covered:
Real average hourly earnings for production and nonsupervisory employees fell 0.3 percent from January 2012 to February 2012, seasonally adjusted. A 0.2 percent increase in the average hourly earnings was more than offset by a 0.5 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).This is why wages are tending to rise for some median-wage workers. The workweek rose, so real weekly earnings were unchanged last month for most workers. . The 2% payroll tax cut has about compensated the median worker. But that is only for official inflation - many workers are experiencing much higher actual cuts in real incomes.
Real average weekly earnings was unchanged over the month due to a 0.3 percent increase in the average workweek and the decrease in real average hourly earnings. Since reaching a peak in October 2010, real average weekly earnings for production and nonsupervisory employees has fallen 1.7 percent.
This explains why I am seeing what I'm seeing in supermarkets, but it does not suggest much margin left in the consumer economy. In February 2011 we were still at +0.9% over the year. The relative effect of the payroll tax cut is now fading out. What to do, what to do?
Official graph, this is for full-time workers only, usual weekly earnings in constant dollars.
If you're wondering if this means that most workers have not seen a real increase in usual weekly earnings since, say, 1979 or 2001, yes, it does.
But actually it is worse because we have so many less full-time workers adjusted by population.
This is the level of full-time workers, same series:
I'm sure QE3 will fix all this, huh?
What the heck, why not belabor the point?
If you open up the constant earnings graph, you see that average weekly wages have fallen to close to the levels that we saw as we were coming into the first (2006) decline. No one noticed it at the time, because of course we were all borrowing money and spending it, so the economy was expanding and we were adding more low-wage workers.
That escape valve is over. By now, what seems to be keeping us afloat are enhanced government benefits (and lower taxes). Sooooo, our fiscal position is quite rough.
If you lower the aggregate amount of money flowing through the economy (which seems doomed to happen), you get an economic decline. Barring a very significant expansion in the number of workers (ain't gonna happen), or a vast expansion in hours worked (doesn't seem like it's gonna happen), any attempt to adjust our fiscal imbalance is going to put us under, isn't it?
Personally, I suspect that we are already under and that we entered the last stage of the recession-prelude, based on wandering through stores since through the beginning of February. Stocks are light, prices are looking very dicey (little pricing power, but no give-backs), spending is concentrated on basics, and staffing levels look "constrained". Usually you see it first in staffing levels - that's the first sign of the diffusion. It starts so small that it's not even perceptible in the stats. I don't expect fuel give-backs to come quickly enough to divert this.
This should be an extremely interesting election season. If March construction doesn't look any better, then I'm guessing things will be ugly this fall, as in tar-and-feathers ugly.
There's a rebellion in the ranks on Treasury yields, so I doubt the Fed can sit long. Maybe - it's just a thought - maybe the FRB shouldn't have FUBAR the last round of bank stress tests. In March of 2008, when we were almost this inflexible, the all-grades price of gas was $3.33 in the third week. This week, it's $3.92.
Unlike the 2007-2009 sequence, when a collapse in lending caused great weakness (because it caused a collapse in building), this should be a slower adjustment. However this time the Fed has already blown all the whistles and honked all the horns, so what happens, happens.
When I look at commercial paper outstanding, domestic, nonfinancial, I see the first signs of weakness. When I look at H.8, I see that C&I growth is starting to slow. Consumer lending is flat-out declining, except for RE. When you adjust those for price changes, RE looks a bit better but C&I looks worse.
It's early to call, but this expansion may be over. My hunch is that January or February was peak. Maybe something will happen to jolt us out of this, but what? Lightning bolts? Manna? The Second Coming? Solar panels? My imagination is failing me.
This is a pretty strong hunch. The economic journalist nuttiness index has reached a new all-time high, and it looks like structural expansion in large companies is mostly over. When I looked at NFIB this month I decided that they'd run it out (look particularly at planned vs actual inventories), and from here little positive jolt was left. I have covered my concerns over autos in nauseating detail. Rail just sucks. NACM looks a lot like NFIB on the YoY. About the same to marginally negative, except when you look at manufacturing you see some payment troubles popping up, I suppose due to margin compression. None of the above would matter if we were really getting much of a pop on incomes, but we aren't.
If inflation were to really fall out, we'd probably pull right out of this. But I do not believe that the ECB can throw so much money into the market without causing a much longer sweep in the inflation stakes.
I do so hope I'm wrong.
It's The Collateral Value, Stupid
When you lend, obviously residual collateral value affects your pricing and terms. Look at China's latest release on existing home sales price changes:
Wenzhou wins the prize with 10-15% price drops over the last year. Beijing is centered on 96% (4% price drop over the year). Nianjing is seeing the fallout in the smaller buildings, with over 5% price drops. Fuzhou is trying to chase Wenzhou down.
I would think the main effect of the falling prices in most cities would be to stop investment buying, but it would have to make homebuyers think a bit too. The effect is beginning to bleed through into pricing for newly-built buildings.
All real estate is local, and that's true for China - you can see very sharp differences between cities. This does not bode well for the economy. You can see that in some places it is buyers' exhaustion, and that in others it is a fall-off in business profits by looking at the different trends in pricing for differently-sized buildings.
Food and gold are still the outliers for retail price increases. I'm guessing that the rather large differential in price increases for gold and silver between urban/rural indicates that competition effect is taking over in the cities. It looks like an economic deceleration is picking up pace. The very restrained inflation in building supplies and materials probably means that building pace is slowing rapidly now. The "under construction" figures mean less than the pace of completions in coming months for the supply situation.
Friday, March 16, 2012
So I need to factor in a bit less from construction than I had hoped in 2012. Here we come to the end of the big weather effect. There'll be a little in March but not much, and after that it falls way off. On the other YoYs should be a bit more positive because of the April-on 2011 effects of the Japanese tragedy.
CPI - The big contribution was gas, of course. It looks like gas may be chipping into other spending. Who'd a thunk? Even with a monthly pop of 0.4 the headline stayed the same at 2.9% - that's because high inflation periods are dropping out. But the effect on consumers hasn't:
If you are in the grocery business, you probably noticed that.
Trucking - ATA Tonnage fell in January but it had soared in December, so we wait for another couple of months. Rail continues to weaken a bit - this week's combined tonnage miles is now -0.5% cumulative compared to last year. MV shipments are up nearly 20% YoY - you'd expect that trend to continue for months even if monthly sales of autos weaken because of last year's supply line impacts.
Nonetheless, theories that the economy is soaring seem poorly supported. It's growing. Perhaps it is slowly shifting more toward manufacturing. If you look at the rail link and scroll down a page you will get the Canadian stats. Quite a difference.
Crude oil consumption is still down YoY - by 5.2%. Trucking is seeing some conversions to NG, and of course moderate temps in the NE district that uses the most heating oil this year push down distillates. However, at the end of the December season, despite those factors distillate four-week was still up 3.9% YoY, so this week's -7% probably does have something to tell us about the next couple truck tonnage reports. The four week and accumulated gas YoY's are almost the same at -7.2% and -7%. Last year the distillate 4 week arcs did roughly track the short-term troughs and peaks. You probably want to mentally add 1-1.5% to the numbers this year for longer term economic comparisons, but following the ups and downs over the year will still tell us something. Over the last four months it's probably more like +2.5% adjustment due to the added heating oil effect. That's a seat-of-the-pants guess.
However, I will say that flat IP plus those distillate numbers plus those rail numbers induce a level of real caution in my statistical core. Autos will continue to do decently most this year, but any big pump is probably mostly gone - what I saw in the rail figures a few weeks ago is borne out by the IP report:
Within manufacturing, the output of durable goods increased 0.4 percent in February and was 8.5 percent above its year-earlier level. Output gains of more than 1 percent were recorded in February for nonmetallic mineral products; fabricated metal products; aerospace and miscellaneous transportation equipment; and electrical equipment, appliances, and components. Production declined in February for primary metals, machinery, and motor vehicles and parts; each of these indexes had risen briskly in January.And no, the temporary halt in Chevy Volt production does not account for this. Probably it's GM which has outrun the market a bit on trucks. This was a very small relative move down; auto production is still sharply up. If you look at this bit of detail from the IP report, you see that the auto arc last year strongly corresponded with the general economic arc. As long as we don't drop that much, we should carry through. That's why I'm paying so much attention to inventories! Still, as long as sales look like this we should be in no trouble. The prices of used cars have begun to drop with so many trade-ins:
I would be a lot happier if this thing would fall a bit, though. It gives me headaches.
Every month it seems as if I look at this data in another way, trying to convince myself that this is not a problem. This month's attempt concentrates on automobile component:
Autos ought to be the best inventory build prospect this year, considering fuel prices.
Still, I just don't find this all that reassuring.
The Yellow line is the sales to shipment ratio.
When I look at the financing side, I see that a growing amount of demand is being supported with "bad" financing deals. One of the reasons that everyone can afford to do this is the high resale value of running used vehicles. That sends me back to CPI, and as I look at the drop in prices for used cars, it induces extremely sober contemplation.
So if I seem to be discounting genuinely good news a bit too much, it's because I always am looking long and trying to figure out if trends can continue. MV builds always help you coming out of a recession, and because the drop in auto sales was so huge in this recent period, you would expect much greater builds. But everything says this may be reaching a natural slowing point.
This is why I am still generally favorable on Treasuries. German Bunds are dropping for about the same reasons as Treasuries, but toward the end of the year you might do very well on Treasuries, and since I believe the Fed is fixing the long rate, and since I believe the Fed has the means to continue to do so, my theory is buy the longs on the price dips. Only if you know what you are doing of course, and if you can stand the risk.
Because of growing US production I would be okay with that yellow line at the 2.3 level right now. At 1.8, NO.
Since I have to concede that construction isn't as much of a positive factor as I had hoped, and since purchase money mortgages aren't going to be much stimulated by rate moves from here, the relative risk of that yellow line is growing rapidly.