Tuesday, January 22, 2013
Stuff & Grumpiness & My Best Forecast
So the first three Jan manufacturing surveys have been disappointing, to say the least. Dallas should be okay. I'm wondering about Kansas and Chicago PMI, but they will come.
Existing home sales are lala, but not bad. Supply is down, which is good. Sales aren't too hot, but hey, at this time of year you don't expect that. 4.4 months of inventory at a slow sales pace is good for spring, although we'll have to see about mortgage rates (effective). YoY nationally home sales were up 6.9%. The bulk of the improvement is in the Midwest and the South (+10.5% & +9.6%, respectively), with the West barely improving (+1.1%) and the NE coming in at +4.5%. That surprised me a little bit, because I thought we'd have an NE boost from the Sandy effects, but there just hasn't been time, I suppose. Also a lot of the destroyed homes were on the coast.
CFNAI came in nicely for December, because it was static at +0.02. We had a strong upward revision for November (the first month is always tentative), so next month will be interesting.
However here's the problem: In the post 1970s, whenever 65% of the households have to pull back on their spending, the US has gone into overt recession. What I now have shows that on a YoY basis, at least 75% and perhaps 85% of households should slow spending this year, basically because they just don' t have the money due to increasing basic costs plus higher taxes. That doesn't mean that many of the better-off households don't have money, but they are the saving households, and the saving households with relatively high incomes have the capacity to slow spending much more relatively, and will generally respond to a decline in their savings rates by doing so. It's like Snarky Mark walking everywhere, much to his dog's delight, instead of following my advice to buy two cars.
This means that services should continue to be negatively impacted, which can have a pretty strong dampening effect.
Since 2009, the share of government income versus income from the private sector has zoomed up, which means that the GDP inflection curve is slower, but that potential growth is also dampened. The US economy is now functioning far more like European economies, which means the consumer side should be acutely sensitive to base-level inflation, and that we're all getting slowly poorer:
Post WWII, we have never had an extended period during which per capita disposable personal income has fallen from its previous peak. And it's not improving. Obviously it cannot improve this year, since the curve you see here does not show the effect of tax hikes.
There has been improvement in real personal income excluding government transfers, but we're stopping that this year:
Increased retirements plus increased social subsidies (which you would expect given the flat per-capita real disposable per capita incomes) mean that personal current transfers still keep rising:
So since the end of the recession, we've really eked out growth first on the basis of rebound (inventory replenishment) and then on the basis of increased government participation in private spending.
Although interest rates are very low, the massive increase in capital gains taxes taking effect this year must inevitably slow private investment. This is not a favorable effect under the circumstances - if you want to grow your economy, increasing the capital gains tax rate nearly 9% is guaranteed to be a Major Solyndra Fail. It could also be likened to playing Russian Roulette with a six-chambered revolver with all six chambers loaded. Or jumping from a 90 story building and lauding one's brilliance loudly for the first 70 stories of fall.
Then we have the 2% payroll tax increase, which will cut real disposable personal incomes across the board.
So I have two very strong negatives - the top end will be hit by huge tax increases this year, because both the Obamacare surcharges plus the tax compromise increases hit together on the top end. At least 85% of households are going to feel the effects of the payroll tax increase. There will be some households that will see overcoming effects based on wage/employment improvements, but not more than 10%.
Consumer credit indicators were already negative in the fourth quarter, so one would expect relative tightening of credit, which means that the result of lower consumer debt will not be to increase spending through borrowing.
The wild card, then, is the households which receive the bulk of their income from retirement sources or public welfare programs. They will not be affected by either force. However, in checking with them it seems as if most of these households are experiencing very high personal inflation rates, so their spending will at least be constrained. The cost of the basics is what is rising for them, and it is rising faster than their incomes.
Real gross private domestic investment is still rebounding, but now at a much slower pace:
We haven't quite reached 1999 levels yet, and the slowness of RGPDI accounts for the very slack real growth rate of the US economy. It's been greatly assisted by the energy rush - the fracking boom. It's been assisted by other types of manufacturing and insourcing, which should continue.
However last year we saw a worrisome sign in that private nonresidential fixed investment was topping out:
And this is the worst indicator, because it is reflective of lower business spending:
This tends to occur only when the consumer slowing starts to diffuse across the economy. It's predictive.
Now, using the European model, the diffusion through the economy should be very slow. Very slow. However the rebound is even slower, because the diffusion occurs in losses of businesses or spending categories across a service economy with very high government inputs into private spending. In the European economies, we've tended to see overt recessions shifted four to eight quarters later than they would be for equivalent forces in the US. However by the time you see the credit indicators falling and the business indicators falling, the curve seems to be set there as well.
As best as I can figure it, we will enter overt recession in the second half. That's four to six quarters shifted later than would normally have occurred for the US. With no further changes in US spending (no fiscal adjustments later this year), we would not emerge until 2015.
There will not be a huge change in official employment, because the net effect of Obamacare is to generate more part-time jobs but lower per-capita earnings, which effectively conceals negative economic changes, plus we have the assistance of the boomer retirements. Thus the maximum official unemployment rate should be in the range of 8.4% and it is more likely not to go above 8.1 or 8.2%.
The effect through the first half of 2015 should be to suppress interest rates, although perhaps not inflation rates.
The wild card is prices. If inflation should drop out, the curve could be dramatically shortened. But it is hard to see that happening consistently because of Fed policy.
The effect on the US fiscal balance will be quite negative, because the combination of increased spending on Medicaid (low incomes plus Obamacare), SS (retirements), Medicare (retirements) and Disability (retirements plus poor economy), the new insurance tax subsidies (Obamacare) along with very slow increases in income tax collections should really blow up the budget.
Thus that graph is a statistical artifact at this point in time.
Rail doesn't look strong, but it doesn't look that weak either.
A contrary positive opinion from BackRock a few weeks ago. But not that positive, just no recession. I note we have avoided a recession two years in a row after slowing down. Maybe the third time is a charm. I wonder what rabbit the Fed magic hat can produce next. Or maybe QE infinity is enough.
US Economy. The United States will maintain slow but positive growth, much like in 2012, but should not enter a new recession. Look for stronger growth as the year progresses.
When I expressed my horror she said, "hey, she's not the only one. There's a man who is 80 and was bragging about how sharp he still was and he was entirely serious that he thought he'd be driving for another 10 years."
Now these aren't the Boomer retirements you brought up, and pardon my french, but WTdoubleF! 80+ y.o.'s driving school buses? Hopefully the parking brake is set once they finally croak. I'd think if word ever gets out, some hard-up or, who am I kidding, not so hard-up lawyer will be throwing his own children under the bus.
I tell ya, you can take the octogenarian out of The Depression, but you can't take The Depression out of the octogenarian.
Where's the FAA when you really need them?
On the other hand, I don't think 85 year olds should be driving school buses either. Leave that for the young'uns - the 70s cohort.
It's very hard to fight the undertow at this point. The Fed is betting it all on a stock bubble.
One of the growing industries here is home care aides. There are a lot of companies, run by Somali and other African immigrants, who hire fellow immigrants. About 50 percent of it is a scam, as near as I can tell.
The other thing that's happening here is that for the first time in 20 years, we have a Dem governor and a Dem legislature. Oh, the taxes they will raise! They've waited so, so long for this, and now they have the chance to wreck things the way California has.
Just came away from a small-business conference, stuffed to the rafters with 50- to 65-year-old Baby Boomers working on their second career. Lots of energy, and a certain amount of time spent thinking about how to live with all the new regulations. Smaller and faster seems to be the mantra.
I still think that the U.S. could adapt handily to Boomer retirements, if the feds would stop trying to stuff us all back in the big-corporate employment box.
Then we could haul through.
Rather than some grand insurance scheme, do something moderate and targeted.
But the urge to meddle is too strong.
I'm glad somebody is having fun.
BTW. Gates of Vienna is moving to http://gatesofvienna.net/ - blogspot aka google kept screwing with them over the past few weeks.
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