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Tuesday, April 30, 2013

Kinda Surprising To The Downside

Two bad manufacturing reports this week. Yesterday Dallas was a slammer. The supplemental questions re the impact of Obamacare did not sweeten the picture either. Since I expected Dallas to stay up this year, this one was a very negative surprise for me. Yes, yes, I know there was some sequester impact, but not this big, this soon.

Today, Chicago PMI just beats us up and tosses us over the cliff. While the headline index dropped into outright contraction (the worst since Q3 2009), backlogs of orders, SA, dropped to 40.6, substantially below last year's minimum. It is only April, and we haven't yet even seen the full impact of the FICA increase. One would expect the low of this index to hit this summer, not now.

There will be a dignified silence while I consider the implications. Had Kansas or Richmond been better, then one could have taken the "great expectations" element in Philly more seriously. Even the Empire State survey did not look too pure this month due to diminishing backlogs.

Taken together, there is a consistent pattern of February having been an interim high, followed by a sagging process that's more than a bit unsavory due to its consistency.

Unfortunately, this impression of consistent negativity is boosted by NACM's April survey. Remarkably, the manufacturing sector there shows up as better than the service sector. Usually weakness in the manufacturing sector flags weaknesses in services a few months later. Thus one feels a certain sadness and foreboding. While weaker than last year, favorable factors for both manufacturing and services are holding up. But unfavorable factors are not - at 50.2 in manufacturing and 50 in services, this may well forecast declines in favorable factors this summer.

The final editorial comment from the report:
The year over year numbers are declining, and that is a worrisome trend. The index is at a year and a half low point. If the trend of the last two months does not reverse, the chances are good that the whole CMI will drift below that all important 50 mark, and if it does, the PMI will be right behind.
Needless to say, the Fed is going to continue its buying program. It's probably close to adding on to it!!! 

You can safely ignore the home sales numbers. FHA increased insurance premiums beginning April 1st, and after June 3rd of this year, they are increasing insurance premium terms. When the increase in insurance premium terms goes through, I expect housing purchases to be somewhat suppressed. Admittedly, this does not change qualifying ratios, but the cost of buying is increased over the longer term. 

The worst thing that's happening now in the US is that actual would-be home purchasers are being pushed out of many markets by investors, who have gobs of money to spend, much of it handed to them by the Fed's buying program.  FHA premiums now at or exceeding 130 bps are going to quash first-time buyers. Charging eleven years of annual insurance premiums for loans with LTVs below 80% seems insane.

Because the effective cost of buying is so much higher for many first-time buyers than it is for investors, you see price increases, which feed the desire of investors. But this shifts the market unfavorably for buyers who don't have at least 10% down.

Comments:
This comment has been removed by the author.
 
Welcome to the new normal, where it is never as bad as you think; it's always worse!
 
Isn't everyone sick of hearing the same thing out of the FOMC every time? They keep pointing to a light at the end of the tunnel that somehow never draws nearer.
 
It appears polite notate for economically. One person should not appear money incorrectly having shaping economy of country. Shape more money DOES NOT make persons more healthy! Acknowledge the sad that charts incorrect with money value dedication of country the persons culpable for recess friction. Abdul
 
The downturn shoulldn't be a surprise when there is less money circulating on Main Street and the quick reaction of JIT manufacturing. Money velocity does have an impact
on employment.
Sporkfed
 
WSJ - thank you for those encouraging words!

Abdul & Spork - yeah, I think we all know this. More money in the economy is only good if it is circulating well through the economy. By "well" I mean raising the living standards of the lower income brackets.

But (TJ too) the Fed is trying to hammer away at the problem with the only hammer they have.

However, they may well be doing more harm than good at this point. I can't see now shifting a whole bunch of housing into the hands of the big-money boys HELPS.

This is quite the mess.

Somehow, all functional societies have always realized that the wealth of a society is held in aggregate. You can't have a society in which the rich constantly get richer and the poor constantly get poorer. Eventually, it busts.
 
The only way to distribute the wealth is through
a major tax system overhaul. The longer we wait,
the more radical the overhaul will have to be.
You just can't build an economy from the top down.
Sporkfed

 
That's not true, Spork.

The wealth could be distributed by the upper 5% taking their investment losses rather than having the Fed and Congress bail them out.

You can bet that any tax increase will be coupled with INCREASED bailouts for the wealthy. So all you are going to wind up doing is screwing the middle class again.
 
See Bill Gross's latest Outlook.

In my opinion, low interest rates are permanent as are deficits which are needed to provide Treasuries. It the Fed's Treasuries start to lose value they will transfer them to the Treasury thus canceling them out.

This is the way it is going to be. And if it doesn't work they will resort to higher inflation as Carmen Reinhart says they will eventually have to.
 
The only way to distribute the wealth is through
a major tax system overhaul.
You just can't build an economy from the top down.


Why do I think you are contradicting yourself?
 
And how is that contradictory ? It isn't . Remember
in 1983 when the payroll tax was raised on wages
to shore up SS ? Income tax rates dropped but
especially for the wealth y. The reciepts from the
payroll tax hike were spendt on other government
programs and the deficits started piling up even as
the safety net was being cut. Now we are getting ready
to add another healthcare tax on labor. It will go straight
into insurance company coffers instead of into healthcare.
Sporkfed
 
Well maybe you ARE getting it Spork. You are right that you can't build an economy from the top down, and the top is D.C. The more restrictions placed on economic actors - regardless of income level - by the powers that be, the more the economy is restricted.

Top-down (really, D.C.-down) is the problem, not the solution. But the very height of the top is the tax code. If "tax reform" really meant "tax simplification" you would be onto something. But in my entire life, "tax reform" has always been code for "make the tax code bigger and more complicated so we can mulct the citizens even more".
 
Spork - if you are talking redistribution through the tax code, you are asking for depression. The weakness in this economy has been in gross private domestic investment, which is done by companies.

Go here and look at this graph. Real GPDI controls the strength of the economy over the long run, and we have still only rebounded to levels before not the last recession, but the last recession before that.

The only thing you can do to help the economy in the longer run is to help that along, and the way to do it is not through redistribution in the tax code, which will crush it.

This is a fantasy - our recent tax code changes have hurt this trajectory, and it may well be a fatal injury. .
 
That would be called "eating the seed corn", MOM. The locusts are good at that.
 
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