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Friday, December 28, 2012

Chicago PMI

Oooh. That's a shocker. The headline is okay at 51.6, with new orders helping, but backlogs are still contracting (fifth month), inventories fell less (giving less hope for future), and the employment index fell a startling 9+ points.

The employment index fall is so huge that my first impulse is to just call it wrong, but on further reflection I think it unsafe. This thing has been in recessionary territory for months, it seems as if GM has to pull back on truck production in the first half of 2013, backlogs just keep declining, Obamacare charges pend, and lastly, the fiscal cliff might be giving employers an additional case of the yim-yams. Indeed, it is hard to see how it would not be doing so.

It does point out that one should ignore the next couple of weeks of claims data. Hopefully we'll get a pleasant surprise on Jan 10th, but it would be a surprise.

We always knew we would have significant negative policy changes in 2013 to contend with, so forecasting at this point is impossible. Instead I have tried to figure a base case so I can rapidly adjust from there once we discover what policy would be.

Up until this point, my base case without any policy changes (moderate inventory cycle recession unwinding next year without unemployment increases) had been pretty strongly supported by data. The functional cause was low consumer incomes with a slow offset in increased retirement incomes, which limited the damage, plus constriction of business profits (low pricing power with increased input costs). To that I add problems with credit (for example, the increased delinquency rates for residential mortgages and the growing student loan drag), the practical end of the auto impetus in 2013 (partly driven by credit limitations), and locked in policy changes for 2013 (Obamacare prep plus Dodd-Frank on mortgages plus higher mortgage premiums, implied and overt). 

With some reluctance but a lrelatively high degree of confidence I had Sandy's impact shifting to a near-term positive by March, making the case that absent any of the policy changes that simply must occur, any recession would be of short duration. 

Now I just don't know. Under the best of circumstances (pretending the fiscal cliff and debt limit would cause no changes except for the expiration of the payroll tax cut), Ding of 2013 was never gonna be at all pretty. 

The first notification from the reality G_d that I might have a bit of rosiness tinting my specs came in the form of CFNAI diffusion passing the -.3 mark, and now my other buttock bears the Chicago PMI employment index bootmark. I feel ... discomfort. 

If my base case is truly wrong, then we are in a very deep pickle.

I've said it before. Froth at inflection points are to be expected.

Does your base case include windage for poorly-defined new EPA regulations? What about the new consumer finance regulatory agency?

That's the kind of stuff that has decision-makers that I know of spooked. We're all assuming that the fiscal cliff/sequestration will get resolved, and that Obamacare will turn into an expensive goat rodeo. But the EPA intends to destroy whatever they can.

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Neil - it does.

I think the bureaucracy involved in Obamacare has the potential to do a lot of damage.
Obamacare's bureaucracy sets up something that the U.S. has never really had before--a class system for health care.

If you're the right sort of people, you can get good health care from the private system, after paying the "tax" to get out of the public health system. If you're the wrong sort of people you get, well, let's just call it a "care pathway".

Is this destructive? It's certainly socially corrosive, but I'm not sure what the eventual economic effect will be.

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