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Monday, July 02, 2012

This Week In Purgatory

We're kind of running out of alibis. Let's see:

Construction spending is up, but it probably doesn't mean a whole lot. The May 2012/May 2011 ratio is 7%, but the YTD is +9.4%. Some of that represents seasonal factors, true. Weather was very favorable this year. However housing stats haven't been strong enough to keep us afloat, and that under the very best of circumstances with mortgage rates dropping well below 4%. So residential construction is not a drag, but it's not strong enough to overcome significant weaknesses in other areas of the economy should they develop.

And they are developing. The weakness seen in Chicago PMI is now showing up in ISM manufacturing, which dipped to 49.7, mainly on a huge drop in new orders. Both Chicago PMI and Philly Fed moved to recessionary levels in June. In and of itself, that is not enough to take the economy down should consumer spending be solid so services can sustain. That is not such a good bet.

US Markit PMI came in at 52.5, still in expansion territory. But it is an 18 month low, so we can take that with a grain of salt. 

CMI (B2B credit) is decent. Unfavorable factors are the problem this month, which showed only a small overall decline. Of today's reports, this offers the most optimistic outlook. I feel that CMI has been a bit overstated by inflation, which increases favorable factors such as sales and amount of credit provided. With a combined index of 54.5, it's safe to say that this measure of economic viability is still above the recessionary line. Unfavorable factors are at 50.6, which is more of a concern. Last year's downturn did show up in CMI, and this year's June figures are slightly above last June's. Right now B2B credit isn't dragging on the economy as a whole. 

Europe's dismal performance on the Markit PMIs (read them all here) is no surprise, but with Eurozone at 45.1, and with France and Germany at 45.2 and 45 respectively, it's hard not to stare in aghast horror. Input prices are dropping hard, so we can feel sure that this decline will continue into Q3. Declines in export orders for Europe are beginning to show up in other economies with more force, including the US economy. 

The ex-Euro bloc is getting impacted, with Poland coming in at 48 and the Czech Republic at 49.4. 

Indonesia is feeling it now. China is contracting at 48.2. Spain is at 41.1, near Greek levels. 

With negatives affecting other economies, it is not surprising that the US should be feeling some waves of weakness. This places the focus back on domestic demand. 

Here is where I am quite skeptical. I think the US consumer is steadily weakening. H.8http://www.federalreserve.gov/releases/h8/current/default.htm has shown a nearly two month trend for consumers increasing their CC balances. Under normal circumstances this might be considered a strength, but I don't think it is because the rate of increase in Other Deposits appears to be declining at the same time. This can't be good, because if more and more consumers are using CCs to get by, those consumers will have to retrench at some point. I am watching deposit growth very carefully. If summer employment kicks in and sustains deposits the outlook becomes more favorable.

It's very likely that increasing unemployment claims and weakness in employment are producing these results. Again, that does not bode well. 

This week we have the monthly employment report and car sales. A lot depends on car sales!

The tea leaves are ominous. But Mr. Market has taken a contrarian view. Bad news is good news. Why? It will awaken the Bernanke and his magical QE machine. At least that seems to be the kool aid that's being quaffed at this moment. After Independence Day, who knows?

Happy Fourth to us all!
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