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Tuesday, August 14, 2012

Tuesday's News

Here is where things get kind of interesting. First July retail. The monthly number is great, but the quarterly trend is still down. If you go to Table 2 on the right, you'll now see a rolling three month comparison with the prior three months. And that's the story. Retail is slumping quietly. 

Overall retail is still one of the brighter sides of this story:

This gives current retail data on a YoY basis. The red line is price-adjusted, the blue line is not. So the red line goes through June and the blue line through July. The depth of the trend change is evident when you look at it this way.

On the whole, retail is still one of the economic positives, because it hasn't yet fallen to the OMG we're in a recession levels. On the other hand, if you look at the 2000 sequence, it is not inconsistent with a mild recession either. But this graph is not too painful to contemplate, so I put it up first.

NFIB. The headline shows near stagnation after June's unhappy tumble. The real story for small businesses is this:

Earnings changes fell back into standard recession levels. July is one of the big samples, so I regard this as confirmed. This is why the economy is slack.  The commentary on this month's report is interesting:
If it weren’t for population growth, Gross Domestic Product growth would be about zero. More people eat burgers, get haircuts, drive a vehicle, etc. So, 1 percent population growth will support something like a 1 percent growth in spending. And that’s our basic support level. Absent that (as in Japan and Eastern Europe where it’s near zero), growth would be under 1 percent. And the NFIB indicators point to a continuation of just that kind of growth.

... . Overall, it is clear that the “economic growth stars” are not in alignment and that we can expect very sluggish growth for the balance of the year, ever grateful for population growth which will help insure that we don’t experience the dreaded recession. If consumers and business owners were presented with a plan to resolve our calamitous debt/spending cycle that they could believe in, they would spend more. Until then, no risky bets will be placed. 
I have to agree with that last statement. People are in "survive" mode. The big increases in basic costs (often rent), definitely food and fuel, combined with slack incomes, are making the majority of the people cautious. Also the continued seesaw of stimulus-forced increases in basic costs makes the average household worry. People have to plan ahead for expenditures. They can't simply go blithely from month to month. Most people in the US have moderate incomes. Their financial stability (or instability) is based on budgeting.

The worst indicators for the economy are some of the most basic, like inventory/sales ratios:
The only thing you can say about that is "yuck". The retail sales levels we saw in July are not enough to clear this trend, so China suffers.  The report is here. If you look at the non-adjusted YoY's, you see that worst is felt at the wholesale level, then at retail, and last at manufacturing. That means there is more to come this quarter as slowness rolls through the system.

We cannot truly believe that with the Baby Boomers retiring we can afford to keep payroll taxes where they are. We know we must change things. We just don't know how things will change, and at this point uncertainty is a growing economic drag.

Lastly, PPI shows the future stressors in the system. Producer prices are going up, not down, and headline inflation has reached a transitory low which is doomed to evaporate. Food prices, in particular, are rising. Food prices have a large impact on consumer buying behavior, and the combination of higher food prices (esp. for lower income households) and higher gas prices don't set us up well for the rest of the year.

Current trends in commodities and higher auction sizes are beginning to show up in Treasuries. The four week showed a significant jump in yield. But that is logical - as money can shift to other plays, there is no need to accept a really low four week yield.

Tomorrow we get Empire State Manufacturing plus industrial production.

Internationally, one really sees the impact of all of this. From India, where consumer food prices are still up 10% over a year ago, with July exports falling 14% from a year ago, with future investments compromised by the situation, to the Philippines, where just about everything is going wrong, the global economy is tightening up.

Currency deflation (China is trying to adjust down, India's is still sliding) will help these economies somewhat but raise the bar for other countries struggling to push exports.

The Euro-area economy is down 0.4% from a year earlier. The slow slide into contraction is beginning to take hold. The Czech experience pretty much shows the basic trend for the region:
I think this recession will be relatively mild, but it seems awfully determined. The cure to this one can only be price drops. The idea that central banks across the world can throw enough in the pot to change the curve is irrational.

In general, the economies of the Americas are doing better than the economies of Europe. But still, consumption/investment in too many of those economies is being supported by unsustainable levels of borrowing in one form or another. In the US, it is government borrowing. In Canada, it is household debt and declining disposable incomes. I look at Brazilian news, and see consumer loan defaults rising and Mantega demanding that banks lend more and average interest rates on lending above 30% for consumer lending, and above 20% for business lending, and I cringe.

Mexico's economy is doing well, but inflation may become a factor later this year and credit expansion is a big part of it.

I don't think the world is ending. But the global gearing isn't quite ending yet either, and it looks like we have another round of clashes in the mechanism to endure.

We just don't know how things will change

Sure we do: If you tax something you get less of it. Increase taxes on something and you get less of it. Reward something and you get more of it.

Tax smoking, you get less smoking.

Tax capital gains and you get less capital gains.

Tax property and you get less property.

Tax retail sales and you get less retail sales.

Reward insolvent banks and you get more insolvent banks.

Reward lobbyists and you get more lobbyists.
The Mexican economy should get hammered by food inflation this year. Remember, corn is a major staple in their diet, and what doesn't wither in the drought is mandated to go into gas tanks. The ethanol mandates are going to inflict brutal punishment through higher food prices this year.

How do you square July retail sales with sales tax receipts?
Anon - First, I think there is some issue of timing in the CA July receipts.

Second, CA is only one state.

Last, the seasonal adjustments really kick in during the summer.

If you look at unadjusted retail figures:
May: 424,012
June: 405,820
July: 401,988

It's not surprising that sales tax receipts wouldn't be that hot.

Also remember that the rolling three month average of retail sales, seasonally adjusted, is still dropping. CA's budget expected sales to be better relatively.

Here is the actual release from the CA office.

I don't understand why there would be a timing issue this year, because the 31st was in the middle of a week.

Nonetheless, alcohol tax collections of 8,486 compared to 2011's 34,853 raise questions. I don't believe alcohol usage fell that much.

Retail use and sales taxes collected in July 2012 were 586,962, against last year's 977,624. The mind kind of boggles. I do not believe this represents reality. If it did, CA would be in a momentous depression. We're talking unemployment of over 25%. I think I'd have heard about that.

I've said I believe we are in recession. Not to that degree, however.

I was also interested to see the insurance company shortfall! Corporate and personal income tax are ahead of goal.

If you look at CA's June receipts, you can see issues with sales taxes and alcohol taxes, but not to that degree.
Charles - but we don't know what will happen next year. We are pretty obviously in a recession. It's anyone's guess as to what happens next year with funding and tax increases.

Raising taxes next year as planned ain't gonna happen. Not in this economy.
John - agreed. Food prices are real problem. It's going to show up very vividly.
Raising taxes next year as planned ain't gonna happen. Not in this economy.

First off, I think you have far too much "hope" in the intelligence of DC leadership. The top quintile is getting a tax increase, I'd be surprised if they don't. At the very least we'll all get a tax increase in the form of Quantitative Easing.

Secondly, and more importantly, the stupidity is even worse at the state and local level where the union pressure is much higher.
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