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Tuesday, November 27, 2012

Durables

The advance report is here. The only thing that really matters about this now is motor vehicles, because that is what is going to move the economy up or down. Unfortunately, October was not a good month in that respect. Inventories have risen for three months and unfilled orders have declined. It is in no sense a catastrophic decline, but it is hard to look at this report and not think that autos have topped out. 

This does not surprise me at all, because as the summer wore on the auto advertising became increasingly desperate and moved up the economic ladder - so now all of a sudden Lexis dealerships were advertising ridiculously cheap lease deals, I started to hear radio ads for the 12-month no payments thing, etc. Auto financing terms have gotten as lax as they can be and will have to tighten, so there is less life in this whole shebang.

All other things being equal, this would not be a disaster. As autos paused and lost their position as the leading broad economic growth edge, residential construction would pick up and assume that position. We would not be poised for great growth, but we would be prevented from falling right through the bottom.

However all other things are not equal. There are not one, but two, deeply disruptive economic changes in store for the next two years. The first is the fiscal cliff thing - which will largely be avoided - but the second is Obamacare, which cannot be avoided. The mandate for individual coverage does not kick in until 2014, but the exchanges are supposed to be open in October 2013 so individuals can sign up. Businesses are forced to deal with the issue right now in their planning, and will make changes right through 2013 to implement their plans.

My estimate for Obama care is the loss of 1.2 million full-time jobs equivalent, which leaves us a very slack possible jobs gain over the next year and a half. A great deal of the loss is in hours, and it hits the consumer side of the economy strikingly hard. By the end of 2014, the unfortunates in this system will start defaulting on their mortgages and other loans again, so all by itself, Obamacare is a portfolio challenge for small banks. 

And the fiscal impact on the 2014/2015 budget will be immense. The subsidies and Medicaid bills will be far higher cost than CBO has calculated. Ultimately, Obamacare will fail because it is utterly unfeasible economically, but the car wreck will be like on of those fog-generated massive chain accidents on some CA highway, and will tie up economic traffic for a very long time.

Comments:
The only thing that really matters about this now is motor vehicles, because that is what is going to move the economy up or down. Unfortunately, October was not a good month in that respect.

I had an uneasy feeling earlier this month that there might be some pent down demand for autos. Seriously. Sigh.
 
Mark - one would think that the aging population and a wave of retirements would produce a natural decline in auto demand.

"Pent down" indeed!
 
" Inventories have risen for three months and unfilled orders have declined. It is in no sense a catastrophic decline, but it is hard to look at this report and not think that autos have topped out."

Inventories are indeed catastrophic. GM 120 days according to some. That's with a total shutdown of all their full size truck lines for new models.

Regards Obamacare. I have a post scheduled for 10AM Pacific that talks about the medical devices tax and the oft delayed reimbursement cuts. These idiots actually think charging a tax on medical devices id going to save money. News dimwits; the cost will pass through plus administative costs to the people who pay for medical devices. That means FedGov. Might as well charge sales tax on fighter jets.
 
MOM,

Mark - one would think that the aging population and a wave of retirements would produce a natural decline in auto demand.

If I am any indicator, autos are in for a heap of pain.

I've walked over 140+ miles so far this month. No joke.

I just enjoyed being outside. The dog loves it. It's good for me. Once I got past the minor blister phase, what's not to like?

The grocery store is 3 miles from me. I brought the Thanksgiving Day ham back with me on one of my outings. The car just stayed in the garage.
 
Mark -

No offense, but I don't think you're much of an indicator. But I'll let you know when I start seeing families bring a wheelbarrow to Cub Foods instead of a 12-year-old SUV.
 
http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html?mod=hp_opinion

We're screwed. $7 trillion in accrued SS & Medicare expense in 2011.
 
One small positive blip in autos before year end could be in purchases by small businesses looking for depreciation to shelter some profits from taxes. Of course that assumes a material number of businesses with profits to shelter and the credit capacity to buy...
 
I don't see residential construction leading economic growth either. New home sales are still near historic lows.

If apartment construction developments are supposed to be coming to market in 2013-2014, that would help some.
 
One needs to take into account all of the apartment complexes that were "converted" to condos during the housing bubble; how many of those have re-entered the rental market?
 
I guess I am a bit ignorant vis-a-vis the "fiscal cliff". Everyone says we need to get the deficit under control. The way to do that is by cutting spending and raising taxes. But when we try to do that, it is a "fiscal cliff" that threatens to plunge the country into recession. So the solution is...what? Don't raise taxes and cut spending? Kick the can?

In other news, the student loan bubble might be popping:

http://www.zerohedge.com/news/2012-11-27/scariest-chart-quarter-student-debt-bubble-officially-pops-90-day-delinquency-rate-g

This jives with several for-profit "colleges" going bankrupt and/or shuttering campuses. I guess the for-profits are the "subprime" canary in the coalmine for this rancid bubble.
 

Anon--

The only way out without a reduced standard of living was to attack the problem from three sides. Tax reform (broaden the base, lower the rates), spending cuts, and reduced regulation.

Reduced regulation was key, because it would remove barriers to productivity, letting the government collect more and spend less while allowing the private economy to take up the slack.

There is no chance now of getting less regulation--we're going to get lots and lots of productivity-killing regulation. Even if one things that all these regulations are a nice thing to have, the fact is that they're going to increase costs to the economy.

So, we'll get austerity (higher taxes and lower spending) and more regulation.

There's no way out anymore.

 

By the way, M_O_M, here's somebody who seems to agree with your gold-backed Treasuries prediction:

http://online.barrons.com/article/SB50001424053111904346504577531052271788084.html#articleTabs_article%3D0

 
Demographics is the main driver of health care costs. This year represents the first full year of boomers reaching medicare elgibility. Unless we radically change the health care system, medicare is bankrupt. Obamacare adds 1 point of inflation to healthcare. Demographics is the real driver. Tom
 
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