Monday, April 30, 2012
Monday, The Day Of Reckoning
Oh, yeah, China:
What's really cool is this from the official release:
There is nothing like dropping profits and slowing payments to grease the wheels of commerce, is there? Companies don't need loans. They need cash flow. Mind you, in the Chinese corporate mind the concepts of "rigor" and "accounting" have only a very tenuous connection, so reported profits generally are a bit dreamy, if you know what I mean.By the end of March, the total volume of receivable accounts for industrial enterprises hit 7,119.9 billion yuan, went up 17.2 percent, year-on-year. The total value of finished products for industrial enterprises accounted for 2,783.0 billion yuan, went up 16.4 percent, year-on-year.
Friday, April 27, 2012
GDP About What I Expected
The problem is that from here on it gets harder. The weather and the calendar were honest-to-God helps this quarter, because the early Easter/Passover moved some consumption spending into the first quarter. Early job gains helped PCE somewhat, and the milder weather cut energy bills, thus giving households more money to spend. Tax refunds help a bit in this quarter too.
When you chop through the underbrush on this report, quarterly growth was just about entirely PCE growth (Table 3, 73.4 billion, PCE growth of 68.1 billion). Gross private domestic investment was about 54 billion less than in Q4, even with the weather/construction assist. Unfortunately, the weakness in fixed investment (which dropped over 21 billion) sort of dominated that category. Build up of private inventories was respectable at 17.3 billion, 37 billion less than in Q4.
Government spending dropped, of course.
The increase in GDP is very closed to potential, but real disposable incomes aren't increasing much, and this is the problem.
Housing sales numbers have also been helped recently by the FHA premium increase in April, which definitely prompted purchases. Gross private domestic investment grew a measly 10 billion without the inventory gains, and this doesn't project strength moving forward. Equipment and software only netted 4.9 billion. I suspect that small businesses, at least, are shifting more profits into compensation increases to redress for inflation.
If we could sustain job increases we could stay afloat. I'm just not seeing how well we can sustain job increases. The consumption side of the economy is most definitely assisted by retirements which introduce additional flows of income that show up in purchasing activity, but there is a future flip side to that. Much of the additional money is coming from federal, state and local governments, and for each, it requires tax increases and additional cuts in spending. Thus it is not going to be a net positive for all that long.
If you want to understand the trap, see Table 5 in the GDP report. That gives you quantity indexes.
Since 2005, GDP has grown a meager 7%. Personal consumption has grown about 8.5%, and Gross Private Domestic Investment has fallen over 12%.
The current cant is to write economic treatises on Great Housing Expectations, but the reality is that most of our federal efforts to support housing over the last few years have dragged first-time buyers into the negative net worth pit
This was neither brilliant nor humane, and it will come back to haunt us, along with the impact of the student loans. We must bear the chains we have forged for ourselves. Today, Dickens rules.
Thursday, April 26, 2012
Well, That's A Wrap
Update: Forgot to post this. BLS Mass Layoffs for March suggest the weakness may be pretty diffused through the whole service side of the economy.
Monday, April 23, 2012
SS Trustees Report
Wow. Combined the exhaustion date is 2033 - about 20 years from now. Not good news if you are 57 and have to wait 10 years before your full retirement age, is it?The Trustees project that annual cost will exceed non-interest income throughout the long-range period under the intermediate assumptions. The dollar level of the combined trust funds declines beginning in 2021 until assets are exhausted in 2033. Considered separately, the DI Trust Fund becomes exhausted in 2016 and the OASI Trust Fund becomes exhausted in 2035. The projected exhaustion date occurs two years earlier for the DI Trust Fund and three years earlier for the OASI Trust Fund and the combined
OASI and DI Trust Funds.
Over on DU the new claim seems to be that this rightwing nutty alarmism, and that the trustees think retirees live forever. But they don't, but hey, one thing you quickly learn about DU is that numbers are not friends to many there.The projected combined OASI and DI Trust Fund assets increase through 2020, begin to decline in 2021, and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2033. However, the DI Trust Fund becomes exhausted in 2016, so legislative action is needed as soon as possible. In the absence of a long-term solution, lawmakers could reallocate the payroll tax rate between OASI and DI, as they did in 1994.
So now it is about four years until disability checks get cut if Congress doesn't act. According to the trustees possible fixes are:
No, there is no escape. SS has to be cut, and taxes have to be raised. The recommended increase would be 4.61% on top of the current payroll tax.For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period, lawmakers could: (1) increase the combined payroll tax rate for the period in a manner equivalent to an immediate and permanent increase of 2.61 percentage points (from its current level of 12.40 percent to 15.01 percent);1 (2) reduce scheduled benefits for the period in a manner equivalent to an immediate and permanent reduction of 16.2 percent; (3) draw on alternative sources of revenue; or (4) adopt some combination of these approaches. Lawmakers would have to make significantly larger changes for future beneficiaries if they decide to avoid changes for current beneficiaries and those close to retirement age.
Note that all of this ignores the real funding problem - there are no assets in the trust funds. SS-DI is running a deficit now and every year in the future, and we have to borrow the money to pay for it.
The shocker in this report is that the long-range deficit was increased so much, but that's because the economy has been so feeble:
The projected long-range OASDI actuarial deficit increased from 2.22 percent of taxable payroll for last year’s report to 2.67 percent of taxable payroll for this year’s report. Changes in economic projections, due to new starting values and revised assumptions, are the most significant of several factors contributing to the increase in the deficit.
Who Wears Short-Shorts?
Germany will face perceptible demographic challenges over the next few years. The domestic labour force will shrink and age. The April Monthly Report examines the potential impact this will have on the German economy’s potential growth. The report shows that the dampening effects of demographics can be mitigated if suitable reform steps are taken by the end of this decade, thereby essentially allowing the current growth in potential output of around 1¼% per year until 2020 to be maintained.
This is conditional on the supply of labour being stabilised by further increasing labour force participation and boosting needs-based immigration. In addition, constant productivity gains need to be achieved by up-skilling the labour force and through technical progress.
The Markit PMIs Are Coming Out
Friday, April 20, 2012
Note: The Establishment indicators that I watch closely when underlying circs warrant are these:
Thursday, April 19, 2012
Really Good Book
I'm so mad and disgusted about the economic data that I am forced to divert my disgust into something I can do something about. That something ain't the economy.
However, we actually could do something to lower medical costs and achieve better outcomes, and this book is a good way to start thinking about the problem.
Medical science in the US is compartmentalized and terribly bad at handling aggregated risks. This has largely happened because of insurance companies, so they won't be the solution.
Periodically I dream of what a really good medical AI system could do. Right now we are mandating that most the monies being spent be thrown away, and it's a tragedy. To begin to understand that tragedy read Testing Treatments.
Sulking Unhappily In My Corner
But I am still rather unhappy about this, in part because we got the covered employment number this week. It increased from 126,579,970 to 127,048,587, which takes us back to April 2005 levels. I was expecting somewhat more of an increase. This is very close to the previous quarterly gain, and it indicates that the economy was a little worse in the first quarter than I had believed.
The covered employment series is very reliable, but a lagging indicator. It does track very well with the employment level as reported by the Household survey in the monthly employment report, although it lags. Here's a comparison between the two (only updated through March):
The covered employment series tracks accounts at state employment offices. They are held open longer, so during periods of a lot of employment transition you will have more covered employment than shows up in the household survey, which picks up job losses the quickest of the three main surveys (covered, household, establishment).
March payroll taxes were good, which made me expect a better result on the covered employment. The implications of the covered employment number are that the household survey March number of employed was pretty darned real, and since that showed a drop of 31K - I don't like it!
I woke up this morning in a good mood, ready to take the good covered employment number integrated with the March payroll taxes to post happily that things were a little brighter than the headlines would indicate, but as so often happens, an uncooperative universe peed in my morning coffee. This also lends weight to the drop in temporary employment shown in the March Establishment survey.
The total covered employment increase for the year (April 2011 to April 2012) is now 125,572,661 > 127,048,587, or 1.48 million. That's a 1.2% gain in total jobs. On its own, this doesn't fund a huge expansion, so we are really dependent on wage gains to sustain expansion. Through February, there was little evidence in payroll taxes or real-dollar disposable personal income estimates by BEA that we were getting enough of that. March payroll taxes implied a better result, but if employment gains are fading a bit, that may not hold for long.
So this morning I feel despondent and deflated and sort of harassed by reality.
I also had some somewhat optimistic trucking-related headlines, but they are not hugely supported by anything else. I do believe that we have a bit of forward momentum, but not a whole lot. Manufacturing surveys show a lower impetus.
Anyway, I have to lick my psychic wounds a bit over this one. Last year's Japanese disaster will make Q2 this year look better on a YoY comparison basis, but that doesn't necessarily translate to real growth.
Tuesday, April 17, 2012
Alrighty, Time To Wade Through It
New Home construction wasn't as bad as it looked - it's really the seasonal adjustments. It looks like +12 - 12% for the year. That wouldn't be bad, except that other forms of construction are tailing off.
Industrial Production is at 0% for the second month. There was a late 2012 surge that carried over to January - it looks like auto production is near to peak. Non-energy Ex-MV was -0.4% in March, which is less encouraging. The recent gains are strong enough so that the quarterly net is good. Utilities YoY are now down only 4.6%, and there was a gain in March.
Motor vehicle production should continue to be pretty strong over the next quarter, but while auto production may increase, we have probably peaked on trucks, and I expect the net to weaken somewhat on heavy trucks next quarter.
India is cutting interest rates. Their central bank is most doleful over their fiscal problems, focusing on their current-account deficit. Also RBI warned that there was a limit on rate cuts due to the inflation problem, and begged for an increase in energy prices:
In the budget on March 16, the administration announced record borrowing needs to plug a fiscal shortfall estimated at 5.1 percent of gross domestic product in 2012-2013. The current- account deficit reached $19.6 billion in the three months through December, the worst quarterly performance on record.They appear to be trying to give the government room to hike energy prices. Europe is in a nice stagflationary recession with CPI at 2.7%, right where it has been for months. The core rate accelerated to 1.6%.
“From the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true cost of production,” the Reserve Bank said.
The Australians will probably be cutting soon. That economy is so deeply tied to China that you have to expect growth to drop, and household indebtedness has been putting pressure on consumer spending.
Spain did fine at its auction today, but it paid high yields to move the debt. Right now the shorter-term stuff can move, of course, because there are still hundreds of billions of Euros left from the ECB Euro toss unplaced. So there are buyers for the shorter maturities at high yields. 2.6% for a year is an attractive rate, and what risk can there really be?
There's an Argentine-Spanish fracas developing over the announced seizure of Repsol's YPF unit. It is difficult to attract foreign investment when you seize the assets of foreign countries, and under the circs, this is going to be a very hot issue in Spain.
Since Argentina can't get the capital to develop the resources, look for China to try to move in, but if and when it does, it will probably move in troops. Is Fernandez is trying to reproduce the Venezuelan economic miracle? Mexico is also fried, because it owns a chunk of Repsol's unit.
They have over 20% inflation in Argentina, although the government statistics do not show it. To understand why foreign investment has been dropping so much, one must read stories like this. When the government resorts to threatening independent economists, the atmosphere is not friendly to business:
The government has gone to extraordinary lengths, involving fines and threats of prosecution, to try to stop independent economists from publishing accurate inflation numbers. The American Statistical Association has protested at the political persecution faced by its Argentine colleagues, and is urging the United Nations to act, on the ground that the harassment is a violation of the right to freedom of expression.That article is from the end of February. The people's crusade against the actuaries logically leads to such actions as seizing YPF, because the government desperately needs to stop importing oil to control inflation and boost their current-account surplus. The problem, as Chavez has demonstrated, is that once you seize it the money you need to reinvest comes directly out of the people's pockets, and they are not willing to reinvest profits because they are hungry now.
At the government’s request, last year the IMF sent experts to help it plan a new national CPI. Ms Edwin says that the new index will not be ready until early 2014.
The longer this deception goes on, the trickier it is for the government to end. Faced with deteriorating fiscal accounts, Ms Fernández has begun to trim subsidies amounting to 5% of GDP. Their removal will push prices up further—as would a weakening of the peso. So Mr Moreno’s latest wheeze involves responding to a vanishing current-account surplus with strict import controls, which will undermine growth. Argentina has created a statistical labyrinth that might have been dreamed up by Jorge Luis Borges, the country’s greatest writer. This story is unlikely to have a happy ending.
This entire series of events is unfortunate for South America. Venezuela and Argentina ought to be bright spots for future SA growth, but it looks as if they will continue to be a drag, and Fernandez may be stupid enough to let China in.
The tragedy of democratic Socialism is that it only really works for small homogenous countries with a relatively wealthy population (no significant portion of the population in actual need), high average IQs, high education levels, a culture that has evolved a strong accounting tradition combined with an ingrained hostility toward corruption, and a population skewed toward the math/tech side of things. In other words, a nation either run by Aspergers or Jews who vote rationally and can understand the limits and the issues, which are generally mathematical. The northern Europeans are pretty much the Aspergers, but the danger there is that they can flip. And when they flip, they flip big-time and go utterly berserk without much warning. That means their societies can't withstand major pressures without reverting.
There are very few nations in the world that match that description. None of them exist in the Americas, but Canada is by far the closest, although it yet may fail due to high immigration which will dilute the basic culture.
Adding Utilities graph:
Still very intimidating!
Monday, April 16, 2012
Here In Trog World It's Cooty Stew
The thing is, never shall trog and non-trog meet. We can't even communicate because the feeble gutturals of the trog beings cannot even be deciphered by Yale professors, whose ears are attuned to the pure tonalities of Mandarin spoken with a Boston accent.
“The government is confident that China will avoid a hard landing, otherwise why would they introduce the possibility of greater foreign-exchange volatility?” said Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia.It's an unanswerable question, isn't it?The Swiss central bank is trying to jack its currency down, the Japanese central bank is trying to jack its currency down, heck, everyone's trying to jack their currencies down. Clearly the motive for the Chinese must be different!
Lice-picking lower life forms such as yours truly are occasionally inspired by such brilliance to send Yale professors proposals for a truly sustainable economy based on extensive protein farming of personal parasites, which may explain the occasional red-state screeds you read. They may take me seriously, and truly believe that the traditional GA way to survive economic downturns is to make cooty stew once the squirrel and possum supply begins to wear thin.
Should you have troggy doubts still, China also eased foreign capital controls considerably. They started early this year, and I thought they were trying to offset the effect of trying to edge out foreign carmakers (who gained market share in the domestic auto market against domestic manufacturers last year). But the last move made me think they are trying to keep the local wealthy from moving their money entirely offshore. But that's just trog-grunting, I suppose.
More troggy grunts: China's heavy truck market seemed to reach peak last year, and so far this year appear to be falling YoY. Kenworth in the US is cutting staffing by 10% at the Chillicothe plant. Now being a Yale professor means that you don't have to pay any attention to recipes for braised Palmetto bug appetizers and truck manufacturing stats, but trogs do, and from a trog perspective this means China needs to export more. Chinese passenger vehicles did better in March, but discounting played a role and I'm afraid the domestic models are losing pace faster than the foreign models. Also they are going to have to get production in line with sales soon. I think they are close on passenger vehicles, but I am not so sure about the trucks.
Inflation has been running so high in China that it is difficult to figure out what retail sales figures really mean, but if you look at unit sales figures for cars and then look at the mix, which is shifting toward luxury/larger/high-end, and then look at this graph, one at least gets a feel for why the profit figures took that drop:
China has an export market for both trucks and cars in some of the emerging economies, and I think China will try to push that this year. Chinese industrial production stats are always challenging to parse, but the striking deceleration in electricity certainly implies that something has changed and the volume-measured increases in product output are not that hot for the first quarter. I come up with about 4-5% residual growth impetus, and they can certainly boost that up with some exports and some domestic pumping.
Anyway, my point is that there is a limit as to how much they can push infrastructure/construction, and so they need to expand major product exports. There are obvious advantages to a lower currency.
(Note - much of the ethylene is probably used to make polyethylene, which is used for plastics.)
Friday, April 13, 2012
Brief Summary( Which Turned Long)
William Dudley speech. Note that the "sustainable growth rate" for the economy is given as 2.25% annually. I still think that's too high, but consider what that assumption implies about federal deficits. Deficits always grow during downturns, and downturns are more frequent when growth rates are low. At that growth rate you would expect one at about every seven or eight years - and that's a minimal estimate.
To keep federal debt from growing faster than the economy over the long run at that sustainable growth level, one would need to limit deficits during expansions to no more than 1.5%. Crikey! To put that in perspective, on a nominal basis US GDP grew about 564 billion dollars in 2011, and debt held by the public grew by about 500 billion more. Real GDP only grew by about 212 billion from Q4 2010 to Q4 2011. Real GDP growth was 1.7% for 2011 on a YoY basis, or 1.6% on a rolling four quarter basis.
Or one could indulge in massive inflation, which would tend to shrink the pre-existing pot of federal debt relative to even real GDP. But don't expect investors to keep putting money into low-priced Treasuries if that happens - the cost of servicing the federal debt would rise dramatically. And consider the implications. Real GDP growth is a much better measure of ability to service debt, so inflating out of it really isn't an option UNLESS it can boost growth sharply and quickly.
US average interest rate in March on marketable securities is 2.187%. From here it may go up a bit. If you induce high inflation for long enough accompanied by real growth, those interest rates will probably double. Because so much of our debt is floated at short maturities, within a few years our average interest rate can double. Now figure this as a percent of real GDP (because you have to pay interest out of real GDP, i.e. taxes, or keep borrowing to pay interest):
floated debt 80% of GDP, average interest rate 2.2% = carrying cost of 1.76% of GDP.
floated debt 80% of GDP, average interest rate 4% = carrying cost of 3.2% of GDP.
So it is hard to see how inflation could boost real GDP. There's not margin in consumer incomes - cost rises are constraining spending and job creation, as B-Dud implies.
This is why investors are freaked out over Spain. It's supposed to reach the 80% level soon. It can't inflate out of debt, but the carrying cost of the debt compared to real GDP is mounting by leaps and bounds.
The only time a high-indebtedness country can really inflate out of debt is if most of its debt is in long term securities, so the inflation of the currency reduces the principal amount of your debt over a few years by much more than the increase in the average interest rate paid. However the cost of doing so is felt for years after the "surprise" inflation. Investors work on the "fool me once, shame on you, fool me twice, shame on me" rule and demand higher interest rates for years after your "surprise" inflation party.
Here is a useful treasury document as of Q1 2012 (fiscal), which contains the maturity profile for US floated debt:
I'm not making this up. The US has too short a maturity profile to be able to inflate our way out of the debt imbalance.
Right now we can get almost free money short term due to the Euro sovereign crisis. Since they are kind of going from bad to worse (proving the old maxim about committees) the US once again proves the prophetic capabilities of certain Canadians.
Approximately 46% of the debt is owed to foreign interests, so a rapid inflation of our currency could cause a massive funding crisis which would jack up interest rates far more than inflation alone would predict.
Thus, the US faces fiscal consolidation, not because we want to do it, but because any other course would make us all much poorer much faster. A paper discussing the situation from March of last year. Note that Spain's short maturity profile as discussed in that paper is one of the reasons why Spanish bonds are coming under so much pressure now. The last paper is very short. The striking difference between maturities at the end of WWII and now combines with the much poorer growth prospects of our current economy to make this a real issue.
So now Krugman and others are in the Leacock camp, but I personally am less confident of divine intervention. After all, the best bargain the Jews were able to work out over a few thousand years was "Here's the rules - you have to at least attempt to follow them and admit it and repent when you don't, or disaster will ensue." Running around and pretending there were no rules always worked out very badly in practice. It's tough to argue with thousands of years of history.
Hopes that the Fed will dash in and throw some money are daunted by March CPI. The "ex-food-and-energy" monthly increase is 0.2 and the annual is 2.3% - by no measure whatsoever has inflation fallen below the Fed target. Twelve month rolling increases are 2.4% for C-CPI-U, 2.7% for CPI-U, and 2.9% for CPI-W (which you have to look up here). The unadjusted one month change for C-CPI-U was 0.6. For CPI-U it was 0.8. For CPI-W it was 0.9. The SA monthly all-items increases are 0.3% for all categories. The Fed need not worry about deflation at this point.
Chinese GDP was reported at 8.1% (over the year). Quarterly 1.8%, annualized quarterly rate about 7.4% which is very much in line with the announced goal. Singapore's over the year was 1.6% (same as US!) The quarterly annualized change was 9.9%. In the first quarter of 2011 it was 19.7%. Singapore had a tough year, with two negative quarters. Japan is doing better, so Singapore ought to have a better year if all other things remain roughly stable.
US Treasury 10s, 7s and 5s are well in play now. This is pretty much a classic trader situation. There is not tons of product, especially on the 10s, so investor sentiment on certain types of economic news will move prices strongly, thus creating volatility, there's an underlying Fed stop-loss, so you don't have to pay for it, and odds of getting negative news from China and/or Europe to support lower yields are quite high. So far just under 2 is the limit, but we could easily have another 10 basis points in there if things get plug-ugly in Europe. Still I wouldn't go in a these prices. This is hot money.
I still don't see a clear path in Europe. The bottom line for the European Central Bank is that it is sitting on tons of yucky collateral. If it returns to bond-buying, it is left as the last-dollar investor. That is not a situation a central bank likes to be in - ECB desperately wants and needs the bailout funds to be buying these bonds to support values. ECB recently relaxed collateral rules again to let more banks participate in the Euro Toss Olympics. Over the short term that helped ECB, but now Mr. Market has turned to bite the hand that fed it, and will continue snapping away at the collateral value, especially since the banks are once more hung out there.
So within a week or two we should see some more talk over getting the next bailout fund underway - if Germany cooperates. That's the big if and the next big issue, because the money has to be committed. It's doubtful that China will buy in big - it doesn't want to be last Euro either.
Thursday, April 12, 2012
Well, It's Mixed
But that does leave us in a situation in which future inflationary pulses hit an economy that's kind of primed to see the spread. If the consumer is really as price-sensitive as I believe, then the response will be to pull back on purchasing a bit more.
For intermediate goods, the ex-food-and-energy number was 0.6 after 1% in February. Food was 0.6 and energy was 1.3.
Initial claims - the 380K headline looks high, but spring break claims probably produced it. There's no need to get all excited about this. The prior week's number was revised up substantially, probably from the same cause. Easter/Passover was early this year, and seasonal adjustments are a bit problematic. The four-week moving average is in the same range as a month ago.
February international trade numbers are out; the decrease shown probably has a lot to do with the timing of the Chinese New Year holiday. The average unit price of an imported barrel of oil was $103.63, just about $16 above the previous year's pricing. The average price of oil hit its high in December at $104.13. then dropped to the 103s where it has stuck. Total volume of imported crude was 10% less than the previous February (on a barrels per day basis).
In Europe, hopes that the ECB is preparing to buy some bonds are going to get us through the week without too much turmoil, but the Spanish 10 year shows that this issue will be with us. Italy is much more subdued, but the pricing level is significantly above the first half of 2011. If the earth would just stop quaking we could wander through to the weekend in relative peace, if a bit sobered.
From what I see in the supermarkets, most US consumers are at the breaking point.There is something eerie about walking through a parking lot and counting cars that indicate a very high socio-economic customer mix, and then walking through the store and seeing that everything in the store on sale is selling like hotcakes. Including the bottled water. A price drop from 99 cents to 79 cents for gallon jugs of store brand bottled water shouldn't produce bare shelves and no stock when you've got a bunch of Lexis/Prius/new mini-vans in the parking lot, but it does. Under these circumstances, it is almost impossible to be optimistic about the economy. Soda price drops, etc. It looks 70s-like. Austerity has clearly moved well into the middle class, which, in my experience, always means a consumer-led recession.
I've now been reduced to the Starbucks survey, which isn't going well either. By the time your 65-70% percentile shoppers are going to be influenced by the price of bottled water, you've lost all your economic margin.
Some good news - tax receipts in March were nicely up. If I can find the time I'll post the breakdown, but it was good on a YoY and MoM basis. February was down, so I expected the MoM to be good, but YoY was really good. So if we get price drops fast enough we could theoretically kind of bounce along the bottom, but what I SEE is the initial stage of a contraction in the final diffusion stage.
Nor is consumer credit going to save us:
All the consumer credit growth appears to be sitting in the federal government bucket, which means student loans. This is hardly mystifying under the circumstances, and it does explain why above-the-median shoppers are more price-conscious.
The US economy is still 70% consumer-driven; by the time you've tipped that this far it is difficult to turn in much of the way of growth there. A 2% cutback on the consumer side has to be compensated for with a 5% increase on the production side just to stay flat. That's difficult to achieve.
The US economy does have to move forward with a structural adjustment to shift from consumption to production. We are moving toward a more functional economy, if that's any comfort.
Tuesday, April 10, 2012
NFIB Not Too Good
Compensation for workers is up more than planned and is outrunning price increases, but the relatively large fall in loan availability might be a bad harbinger for the next few months.
Next month is the bigger sample; we'll have to see how things look then. Hiring plans fell back to zero, which is a turn from Jan/Feb. From the Dunk's commentary:
The March survey results were bad news, ending what promised to be steady, albeit glacially slow, improvements in the small business sector of the economy. Nothing much happened in March to make owners more optimistic about the future and that seems to be a problem, the status quo. Europe was quiet but somber, uneasy, as if waiting for another shoe to drop. Consumer confidence and spending remains depressed. And health care is in the Supreme Court creating more uncertainty, either way the decision goes.When you start to see signs of compression like this, it generally means small business hiring is not going to add much to the economy. The collapse into double digit negatives last year for general business conditions never did bode well for this year. If you look at page 7, you'll see the chart. Then look back at 2008. That one number tends to precede turns in the economy. The calibration is always a bit different, but it's usually the six month warning. The thing that saves it this time is that actual sales changes are still in the positive range.
Inflation pressures are building and reports of rising worker compensation are the highest since 2008. The percent of owners reporting “inflation” (rising costs for inputs) as the #1 business problem are the second most frequent since 2008, the highest since 2008 occurred a few months earlier in 2011. Reports of increases in average selling prices are rising and net 21 percent of the owners plan to raise their selling prices in the coming months.
At this point in the cycle small businesses were still in the rebound/rebuild stage, so I don't think a pullback in their spending will have the normal repercussions. Call it more of a stagnation/slow drain than a real contraction. Maybe next month will be a bit better. These folks have been running tight for some time, and they may be able to push through this without too much change in actual purchasing patterns - if credit holds up.
Europe is just wallowing forward into the next phase of their interminable sovereign credit crisis. The next step is that they will actually have to set up and use the special fund to buy bad bonds, but that means certain countries, who will not be mentioned by name, stand to take future losses. I think the ECB will stop throwing cash to make everyone actually ante up.
If those certain countries don't ante up, the ECB probably will start the money throw Olympics again, which will cause those certain countries higher domestic inflation. This would be much more of a problem for several of those countries than it was last year - last year the world economy was better and they could hope to make up the impact on exports and more jobs. Not this year. So I really do expect those countries to ante up, because they don't have to recognize the losses until later, and ECB is going to be mulish about this - ECB has all that lovely bad-bond collateral, and it never intended to be the last-dollar lender. Oh, no!
The problem is that last year the promise was made to private lenders (buyers of sovereign bonds) that the next round of purchases were going to be on an equal recovery basis with private buyers. So now we sit and wait for the inevitable backing and filling. Because you are going to lose a percentage of that money you put into the fund, and it's going to make your domestic debt rise.
There are limits to all things; the Mississippi Company ain't doing all that well, and the European PTB need to act quickly to support the notes. We've got a year or so to run on this one, and it is going to be entertaining.
Financial history really does repeat itself. Essentially Europe managed to fund its "bailout" of Greece mainly by robbing Greek bondholders, especially retirement funds. It wasn't a very nice or ethical thing to do, but it did work in terms of the balance sheets of the main players. This next round of the game is going to play out very differently. The French riot, the Italians shoot, and Spain is a grape that has already been squeezed. The Irish rebuff of the property tax levy is going to have legs. I don't have any feeling for how that will work out, but I am convinced that a lot of homeowners won't be able to pay it - so what happens next? You can bulldoze Portugal, but soon this stage of the plausible deniability will expire also.
US inventories still don't appear overdone, but when these builds happen they tend to happen suddenly, so that's not totally reassuring.
Friday, April 06, 2012
A Bit Cross
Gosh, what an awful employment report. Household survey has the number of employed persons dropping. Emp/pop ratio back down to 58.5. Not in labor force increased by 333K, which explains the drop in unemployment.
The pace of retirements picks up hugely this year and next year, so that's going to take unemployment down regardless. That will be wonderful for younger workers trying to get a job, and underemployed workers trying to get a living-wage job or more hours. But fiscally it imposes another type of shelf.
What's really so crushing about this report is in the Establishment survey, in which retail employment dropped again. And in grocery stores. Okay - the grocery stores number is usually very reliable, and when retail employment starts dropping like this it is usually the final stage before an official recession is recognized. Temp help services dropped. Another early recession indicator.
So at this point I guess I would have to say that hippo is clutching at the stage curtain to stay up, and any moment we may hear a tearing noise....
The odds on my March hunch that January or February was peak just rose. Any chance that we can remain in skipping recession territory has to rely on a continued rise in auto production. Thirteen weeks into the year, YTD YoY rail total volume is down 1.7%, carloads down 2.5%, intermodal up 2.5%. Autos are still up, and the good sales in March are showing up in rail, but....
Looking at this report makes me think that January was peak. It's a very, very bad employment report.
PS: It's possible that seasonal adjustments, which were out of phase this year due to abnormal weather, pushed prior reports up on an SA basis nd made this one look worse in comparison. But that factor shouldn't affect things like temporary employment and retail employment that much.
Thursday, April 05, 2012
That's so pretty!
I think Mitsubishi is one of the winners with its MiEV. Volts are being sold to a very niche group in terms of incomes. Also I wonder if company buying isn't helping car sales overall?
Initial claims still very healthy - don't forget that the seasonal factors were adjusted, which shifted the SA totals up a bit.
Wednesday, April 04, 2012
At least we get some better news
Commercial paper is not great. Domestic nonfinancial and total nonfinancial are turning down a bit. That one needs to be watched. You can make the argument that growing car sales are returning capital to the companies to clear this debt, and it's a good argument.
I am not a big fan of ISM data, because I don't find it very predictive, but the March reports do not show much in the way of angst-fodder - quite the reverse.
In general, Mr. Market does not seem to know what to think. ECB (Draghi) sort of poured cold water on any irrational exuberance, and the Fed said mean words over QE3, and unfortunately Markit PMIs do show a Europe in a mild recession - with Ireland being the bright spot. Irish households aren't seeing it - the Irish property tax levy is not going well. I suspect it's because a lot of the households really can't afford to pay, but in any case, it is now the Land of Ire. Something will happen and some compromise will emerge. French service data doesn't support a strong April. Italy's decline continues decisively. Spain is getting nearer to the bottom, but input cost rises really do not help. As long as margins keep dropping, this won't end.
Brazil is still chugging along, with the manufacturing resurgence flowing over into services and turning in a good Q1. It probably doesn't have much in the way of surge left, though. India may be slowing a bit. India is a huge epic drama of its own, with definite structural problems, capacity limits, fiscal issues, etc. The high fuel costs don't help any of that one bit.
Mr. Market seems most concerned about Spain. I concede that the announcement that Spain's debt will reach the R&R lower limit of 80% isn't good news, but Italy overall still looks worse to me. Structurally, Spain should begin at least stabilizing in 2013, and see some growth in 2014. Italy has no space, and it's quite difficult to collect taxes from unemployed people.
Japan's rebound is picking up pace. This is important, because the government needs to begin a slow process of fiscal consolidation. But rising input costs and falling output charges imply some real limitations to this rebound. Still, it should be enough to keep that area on the plus side for a few months, which is great news.
US petroleum - there have been some methodology changes in the WPSR summary, explained here. The net effect would be to overstate US petroleum consumption previously. This makes total sense to me, because it is very confusing to read the current estimates and look at jobs - those two numbers should not diverge like that even with fleet changes.
So read that before you look at the overview (quite negative YoY for consumption) and the summary, showing YoY consumption drops. US petroleum inventories are currently very high - above the upper limit of the 5 year average range. The crude build was 9 million barrels and the total increase was more than 12 million barrels. The accuracy of that estimate shouldn't have changed. Refineries were running close to 86%.
The YTD average (thousands of barrels a day) of product supplied is 18,180 compared to a four-week of 18,159. This is very low. For example, in March of 2002, when the US economy was in a state of unpleasantness, the average was about 19,190. By March of 2005, when the construction boom was in full swing, it was more like 20,680. Over time conservation and an aging population can explain some of this. Not all.
One of the reasons I have been watching these numbers is because I think they will tell us something about construction activity - construction is a fuel-intensive economic function and fuel consumption should closely track with the pace of new construction.
Note: There is much more buying support for prices of petroleum product than there seems to be for crude - this suggests a ledge in the making and it is time to be very wary.
Tuesday, April 03, 2012
Waiting On Auto Data
Italian new-car registrations fell 27% in March as the recession and tough government reforms including higher taxes prompted consumers to postpone big purchases, with Fiat SpA (F.MI, FIATY) describing the result for its home market as the worst showing for the month in 32 years.So don't worry, be happy. Unless, of course, you are a car dealer in France or Italy.
Registrations in Europe's third-biggest car market totaled 138,137 units against 188,495 for the same month last year, according to data published by the transport ministry Monday.
The drop was worse than the one registered in France, which declined 24%.
Not bad, but it appears Mark's ration of cars may be increased to three by a democratically elected Congress:
The SAAR for February may have been upwardly distorted by abnormally good weather, which would put March and February at about the same SA level.
Monday, April 02, 2012
Yesterday Was April Fool's Day
Chinese Markit PMI was released dated April 1st. Headline 48.3, with falls in employment. The primary significance of this is that since there was significant worsening from February, the universal print meme that the Chinese economy would "trough" in Q1 must be wrong. So now HSBC has adopted the idea that it will trough in Q2. Huh:
China isn't close to a trough. It's about in mid 2008, compared to the US sequence. There seems to be a huge fallout pending in construction activity. Car sales aren't good, but truck sales might be worse. The Jan-Feb period auto sales fell 4.4% YoY, and total sales, which includes trucks and buses fell 6% YoY. Domestic orders seem to be taking the leading edge down now for total Chinese manufacturing, and this is not going to be that rapid a sequence. The government is going to try to throw money at it. That will have some effect. Inflation for consumers is stickiest on stuff like clothing and food, which is unsurprising but not a good indicator.
European PMI's are worse, with Eurozone total at 47.7, sharply down from February. Germany slid to 48.4, but France collapsed in March. 46.7!??? Main area of weakness for France was reported as domestic demand. The flash (prelim) was so much better that we must presume conditions worsening over the month. Employment fell. Prices rose. Italy reported 47.9, better than France, but don't get too hopeful - inventories rose and new orders and work on hand fell hard - we're not exactly looking at expansion soon. Employment is still falling. Spain - prices up, new orders down, employment down, 44.5. The shocker is Germany. The best Eurozone performers were Austria and Ireland at 51.5. That doesn't carry much water to offset France. German retail sales have not done well so far in 2012, even though unemployment is below 7% now. German workers are going to be pushing hard for meaningful wage increases this year, with major strikes possible. The more consumer-product oriented manufacturers of Europe are thus not getting as much of a push as hoped from German prosperity.
It would seem that costs are impacting manufacturers and causing some of this "next leg" down.
Now, when you go back to the Chinese figures and realize that Europe is a very important export market for China, the situation becomes even more daunting. The eastern bloc is mixed. Poland is hanging in at 50.1. The Czechs jumped up nicely to 52.1, with the Czech manufacturing economy having apparently come off an intermediate low late in 2011. Russia has been weakish so far this year, with a little job-shedding.
Taiwan and South Korea are moving up, having hit at least transitional lows late last year (similar to the Czechs). Some of this has got to be related to the relative improvement in Japan, but that improvement isn't very strong yet. Japanese business is increasingly more dependent on Chinese growth, so the internal improvement expected is going to get no help there, under the circumstances.
In Europe, the best growth in orders is stemming from the US. (Netherlands and Germany). But the US is not in a strong growth mode. Still, USA manufacturing surveys, credit surveys and Manufacturing PMI do point to the US being a relatively hot spot on the world map. This is why you have Canadian grocery chains trying to sell $30 dresses in Manhattan.
Still, you have bottom line figures that indicate future demand strength in the US looking pretty poor. Incomes are stagnant at best, and for lower-income persons really dropping. Consumption drops in electricity, food and fuel indicate that most US consumers are shaving their pennies to get by, and making US consumers look very like German consumers. Although we're more spendthrift on average. But in the US, food-at-home real spending on food declined in Q3 (marginally), and 2.2% in Q4 2011, and that goes right in line with utilities and gas. Q4 final GDP, Table 3, read it and weep.
Commodity prices will still be sustained for quite a while on money insertions, but this bubble is now clearly a bubble that is doomed to deflate in real terms.
My brilliant theory on construction activity in 2012.... Remember that one? Early indications were pretty positive, but it's not going too well, is it now? And mind you, the weather was unbelievably favorable:
There's nothing like getting back to 2010 levels to make you think "strong expansion"!!!! Whoooo, baby, the ditch is the limit!
If we want to keep this going we all need to run out and buy cars. Two each! But don't drive them - that would support gas prices and be fatal! Just leave them in the driveway with large, colorful Obama campaign stickers plastered all over. Be sure to insure them with comprehensive coverage, because somebody biking by to go to the supermarket might become offended and attack.
There are 20 carload categories on weekly US rail. Last week, 9 of them moved to YTD YoY declines. My skipping recession forecast is like a hippo trying to balance on one toe. Theoretically, there is a chance. Very definitely. That hippo is one heck of a ballet dancer! Very strong toes!