Thursday, May 16, 2013
The Story Is ...
Economically, it appears that the Fed has little ability to do anything with its QE extravaganza other than run up stocks and keep interest rates lower than they would have been. Okay, it also possesses the ability to drive commodity traders out of gold and into houses. But it doesn't seem able to actually stimulate the economy, because we now are moving into the second month of slack readings.
Initial unemployment claims are big news because of a sudden SA jump to 360K, but since the 4-week moving average isn't moving and continuing claims continue markedly benign, I wouldn't place undue weight on it. It probably has something to do with inventory/sales ratios, which have been correcting right along at these levels:
The US dollar is too strong for the comfort of some manufacturers given yen moves and China's apparent shift to a weakening yuan. You can't blame the industrial slowdown on foreigners, though, because retailer inventories were too high in March and that's why we have had two slack months of data from the production sector.
It is worth noting that last year's summer slump turned into a spring slump this year, which is not good. Bad weather and the FICA tax increase are responsible. Industrial production just went through its annual revision. A disappointing -0.5 in April was largely produced by weather shifts which shifted utility output. In March utility output was up 6.4 with an IP index change of +0.3. In April utility output was down 3.4, which shifted the headline. However look at the report! April gave us a string of negatives for all major market groups. Manufacturing was up only 1.3% on the year. Construction was up 1.8% on the year.
Of the regional surveys, Empire showed up in "May showers" mode, having declined to a negative. Update: Philly Fed came trotting up, wagging its tail enthusiastically and dropped a three-day old dead fish at our feet. -5.2.
The auto boom has worn out, so the major stimulation left at the ground level is composed of fracking and construction, with construction being less than brilliant. It's there and it will continue at higher levels than last year, but it is not soaring through the roof and there are troubling indicators that investors are creating market instability in some places. It looks as if builders have plenty of plans but are trying to roll through building at a measured pace so as not to get out ahead of the market or caught in a cash crunch. In many markets, the average first-time purchaser can't afford any new single-home purchase except for condos/coops. I think builders are carefully rolling their capital.
I have been watching consumer inflation in China very carefully for a better indication of real economic trends. Now the same gauge in the US is flagging a slowdown, to say the least:
The green line looks quite recessionary. This is not a surprise, but think about what the margin pressures do to the bottom lines of Main Street businesses! It's no surprise that NFIB just can't quite escape the recession zone. The interesting thing about the NFIB report is that there are clearly upward pressures on wages, and these pressures clearly are pushing in a different direction than end-user price pressures.
If you think about what is happening, the Fed's effective economic stimulus is actually lessening in real terms because real interest rates are less negative than they used to be. Yet by the time investor equity is chasing yet-to-be-built homes, the ability of the Fed to stimulate the economy by inserting money safely is about nil.
Note that increases in taxes on investment-type income at the beginning of this year, specifically capital gains, would be expected to hit business investment hard in some regions. If you are one of those people who will be left paying over 30% on capital gains, your best return may well be in tax-free bonds, but this removes stimulation from the economy. We will pay for this stupidity for a long time to come. I estimate that US capital gains tax policy shifted potential stable GDP growth down from 1.8-.19% to 1.5-1.6%. That, my friends, is not anything we can live with.
In sum, the US economy is weaker at this point in the year than it was last year. There is less potential uplift. The economy is struggling along trying to compensate with price cuts wherever it can afford them to boost real incomes. The Fed cannot do anything about this.
I presume the only possible policy response is for the federal government to subpoena all the press phone records from the Wall Street Journal and USA Today.