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Monday, July 16, 2012

Thar She Blows

Update: On this topic, see this ZeroHedge post and READ THE COMMENTS.  Stuff like:
July is going to be worse. People were actually shopping in June.
I talked to a few people in Target looking at school supplies. They were writing down what they have. The women all said they are going to wait until school starts to buy the supplies because they know Target will put everything 50% off and then drop stuff to 75% a week later.
Nothing moved in summer seasonal until it was at least 50% off.
Reality is asserting itself. People don't have enough money to pay for the inflated prices of everything. Historical 20% profit margins will be coming back to retail. The consumer will no longer pay $20 for an item that was bought by the retailer for $7.
The problem is the immense overhead of big retail will destroy it with margins like that. Deflation is the only outcome when the population can't afford anything. At least when the free market allows it. Supply and demand says if nobody buys at price X, you must lower it until somebody does.
Mon, 07/16/2012 - 10:12 | 2620056 Abiotic Oil
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Was in a local store this weekend.  Huge summer clothing clearance sale. Talked to an employee who has been at the same store for 20 years and he said he has never seen so much summer clothing inventory left over or marked down as much as it was.  It was finally moving at well over 50% off retail.

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Mon, 07/16/2012 - 10:30 | 2620120 Arnold Ziffel
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July sales are dismal. Every store is nearly empty even with 60% discounts AND cash back rewards. I have never seen it so bad

End update.

I believe I mentioned regarding the last employment report that we appeared to be in a consumer recession, but not a manufacturing recession.

This morning's retail report for June confirms that belief. If you look at Table 2, retail sales in the second quarter were down 0.2% from Q1 retail sales. There's a clear drop off in the YoYs:
For June compared to May, it's -0.5%. May was negative in comparison to April, but the early Easter could have accounted somewhat for that. Adjusted for inflation, the YoYs  are weaker than cited above. This graph only goes through May, because we don't have price indices for June yet:

In the US the rule of thumb is that real retail sales need to advance about 1% over the rate of population expansion. We seem to have fallen below that line in the last quarter. 

The short term data is beginning to develop consistencies. The spike in May revolving credit was due to strapped consumers. The spike in female head of households out of work is largely due to slack retail, and one reinforces the other. What I really don't like is that auto advertising seems to be shifting to the credit downside. This could accelerate the retail downturn over Q3.

Now factor the recent sharp drops in some of the manufacturing surveys  into the consumer-side picture (for example, the last two months of Chicago PMI abruptly changed trend to came in significantly below the 10 year and 40 year means and medians), and a vision of epic beauty and promise  materializes in your mind's eye - if you are a Romney campaign worker, that is. If you are a Romney policy wonk hoping for a job in the Romney administration next year, this is a bad development.

Empire State Manufacturing came out this morning, and although it increased, new orders fell significantly, and the headline level is about where it was at the beginning of the last recession. 

One of my brothers called me this weekend to report on the gun show index, and he told me flatly that it looked like a depression.

The gun show index is not that bad a method of determining the amount of discretionary funds that men have to spend.
As a compliment to the gun show index, I can add the bike tour index. The same demo, different politics. It ain't looking good. Only customers this year have been Canadians. Gear classifieds are also down and more of the cleaning-out the basement to raise funds vs. the selling of old parts after a recent upgrade.
My R&D clients are dropping like flies. Heavy equipment and industrial have gone utterly silent, joining automotive which never recovered from 2008. Staying busy with Defense, though. They're quite confident that the U.S. and a number of allies are going to go through a massive replacement-and-upgrade cycle as soon as the drawdown in Afghanistan is done, and that the contracts being let for new equipment now are the real deal. That makes it important to strut your stuff on the RFP's floating around.
Thanks for the news, MOM.

An even more depressing thought to ponder is that those presently in power on both the fiscal and monetary sides seem to have given even 10 seconds consideration to the possiblility that the continued stagnation is, at this point, irreversible without a supply side revolution in gov policy.

The business community, and also investors will not believe the US is a sound place to put money, regardless of expected return, until the consummate hostility of government towards business profit is completely abandoned.

This means, JUST TO START, the elimination ( to $0) of the US Fed budget deficit, and Obamacare, which, let's face it, are open-ended contingent liabilities on the balance sheet of anyone foolish enough to build or expand in the US. And nothing in any of Obama's announcements to date gives me any confidence that a 2nd term for the man will be anything but a death knell for US corporate profitability.

The slow economy will not go away until the present individuals pulling the levers of power go away. Most investors are not stupid people.
On reduced hours over here in food equipment manufacturing. The capital equipment pause-for-the-election is well underway.
All highly pertinent comments.

The US economy is heavily biased toward the consumer side. It is true that there is still pent-up demand, but it appears that a large portion of the population doesn't have the ability to buy. If they spend more in one area, they cut in another, and many are cutting spending in aggregate.

This inevitably has to work its way upward to higher income levels, and of course manufacturing is not helped by the external problems. I stsre at the picture, and I can no longer see where much growth can be generated. We're just very slowly sagging through the floor.

Neil, I have a brother who is also currently doing Defense contract work. I expect there to be a sharp contraction in Pentagon expenditures between two to four years out at the latest.

And I have to say, when I look at total government spending, I know this is not sustainable.
buy cable services....

Two years from now, I'll probably be doing something different.

Looking at government spending, I'd tend to agree that there's going to be belt-tightening at the DoD. But my clients are looking at a worn-out F-16 fleet and a bunch of worn-out armor that is probably trapped in Afghanistan anyway. That equipment is going to get replaced somehow, even if the overall budget has to drop.

And most importantly, right now they're spending their R&D money with me!
Get them to spend some of it on a decent shipbuilding plan for the Navy. We've got only two shipbuilding programs that work (Virginia class SSN, JHSV) and a host (notably LPD-17, LCS) that range from outright disaster to over budget and behind schedule. We're going to have a very limited budget, it would be prudent to buy something that WORKS.

Was wondering what you think about Arthur Laffer's WSJ column the other day, saying that the "tax cliff" is making 2012 look better than it really is? He's talking about the incentive to shift income forward to 2012 rather than take it in 2013. I'm thinking that might be making high-end consumer look better, but capital investment look worse.
There is some truth to it, Neil.

That is for those for whom it matters. Corporate taxation is another matter entirely, so I doubt it is affecting much there.

I think expensing tax breaks granted in previous years have moved capital investment around to some extent.

I think anxiety over not knowing what will happen next year is slowing investment this year. I think the lack of clarity is the worst thing facing businesses. It has to make many of them more cautious.
WSJ - that's not sexy, you know. It should be "green" something to get funded.

Buzzwords, we need buzzwords. We no longer care whether it works or not - we just care about where it fits in our ranking of verbal categories as "good" or "bad".

If you can find a way to describe a good shipbuilding program as "green" and "sustainable", then it will be favored.

I can just imagine the next generation of aircraft carriers with windmills on the flight decks. They'll tip in bad weather, and of course they won't be able to carry aircraft, but damn, they will be glorious in EVERY OTHER WAY. Our enemies will die laughing.
I don't think we're entering a recession, I think we're entering a new Dark Ages. I say that because it is now politically incorrect to even refer to the Dark Ages with that name anymore.
My wife and I just retired in the past few months. Our spending has been curtailed to necessities and some much deserved vacation time/travel.

We don't buy much anymore and we only buy what we need when it's on sale. Most of our friends new do the same.

Consider how many boomers are retiring now and in the future and when their incomes are cut in half or more as ours is ... the frivolous spending stops.

Retail is in trouble and that trouble is going to get worse.
Another data point: I'm in the Midwest right now, and I've never seen corn so bad. Right now, it should be tall and dark green with the kernels still developing, but it's already drying out. It's light green and the roots are brown in many places I've seen. The cobs can't be more than half-developed. It looks like half a harvest or less this year. Anybody that used the last few years of high prices to leverage themselves on new equipment is going to be in trouble, although thankfully I haven't heard of anybody being so optimistic. Most folks used the extra income to increase their margins one way or another.

Beans are still OK, but if the drought doesn't break in the next few weeks then soybeans will be an even worse situation than corn.
MOM - don't remind me about connecting the terms "green" and "Navy". Does this strike you as a sensible use of funds?
WSJ - Geeze, what do you think prompted my bitter rant? If we are dependent on fuel ranging from $30 to $60 a gallon to run our military, we might as well revert to slingshots.

JH - Uh-huh. The retail structure in the US looks like classic Misean malinvestment on a grand scale. It must continue to "rightsize", and there's no avoiding it.

Higher retirements of boomers will eventually help employment, but only expanding the production/consumption ratio in the US economy can meaningfully raise real wages.
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