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Thursday, June 26, 2014

BofA Economists Smoke Or Eat Really Good Weed

Unfortunately, the result appears to be somewhat Maureen Dowd-like confusion rather than cosmic clarity. 

Exhibit 1: 
The weekly petroleum update through March.  Remember that really bad winter we had? This should have vastly increased the demand for heating oil (distillate), NG and propane. But look at the Products Supplied, and see the YTD drop for propane, the almost flat distillate (2.9% YTD, +0.6% last four weeks), and the huge drop in propane supplied for the last four weeks.

You know what that means? Consumers ran out of money, and so did a lot of businesses, so they turned the thermostats WAY down in just about unison. There was a corresponding drop in late-season deliveries in the affected areas. I know because I was so concerned I called some suppliers.

This meant that consumer spending in the second quarter would be affected. People who owed money would have to recover and pay off that bill, and those who didn't but had still turned down the thermostat would be socking money away for the next potential winter disaster. Nothing induces spending caution like having to live in a house at 58 degrees for six weeks when it is very cold outside. Rising food costs would reinforce the caution.

Exhibit 2:
Today's Personal Income and Outlays report.Many of those who do not inhabit the BofA Colorado economic prediction center have realized that Q2 is about over. While unquestionably economic activity rebounded, it really did so in March. Since, it appears that consumers have pulled back a bit, probably because they are doing so while they still can. 

So today's real consumer spending report covers the first two months of the second quarter, and the so-far figures are -0.2 April and -0.1 May. This compares to Q1 revised of -0.3 Jan, + 0.3 Feb and +0.8 March. 

Call me a troglodyte unenlightened slide-rule bearing primitive non-enlightened economic life form, but those figures make sense given the history, so I don't expect massive upward revisions in real PCE for this quarter.

PCE accounts for over 2/3rds of GDP, so no matter how ebullient the rest of the economy is, it seems unlikely that Q2 annualized can come out over 2.6-2.8% at this point.

Exhibit 3:
See, when you don't inhabit the Economic Weed Dome in CO,  you naturally go looking for confirmation of your assumptions. So what would be an indication that consumers outran their cash flow due to excessive basic costs in Q1, and will have to recover in Q2? Heh! Credit card debt. We can find that in H8. 
Note that this is seasonally adjusted, all commercial banks. That sudden "hockey stick" formation begins 3/26 and ends 6/11.Call me a crazy sober person, but the very strong correspondence with the sudden separation of demand and supply for winter fuel makes me suspect causation.

Call me a weed-edibles deficient economist, but that says to me that consumers are still struggling to comp, and that we have further consumer caution ahead. 

Now admittedly I have never eaten a hash brownie in my life, and thus can't really be in tune with up-and-coming economic thinking. But all my experience tells me that consumers are going to be getting those CC bills, and that they will have to recover over the summer. Their ability to fully do so seems somewhat questionable, especially since post-ACA, many of them are paying sharply higher copays and medical costs, with higher medical deductibles. This cuts into other spending, and it is in no way confined to the relatively small number of individuals who in fact have ACA policies.

So, marijuana chocolate aside, it looks like the rest of the year will be constrained on the consumer side. A lot depends on the weather, because utility bills in the southern regions are the big bank account drainer for the rest of the country that was not so winter-struck, and thus a correlating drive.

This leads me to a 75-80% certainty of consumer-led recession beginning in Q2 2015, becoming blatant at the end of Q3 2015. If we had a light winter next year maybe not - maybe the extra would produce a spending rebound in Q2 2015. 

The Fed did not get it last  year. They are moving counter-cyclically again, but I really don't know what they have left to shoot with. It's very hard to correct a consumer-led downturn from basically broken finances. That takes fiscal policy, not monetary policy. It's likely that the Fed would only make things worse if they tried to strongly ramp up the QE.


In a way, M_O_M, it's too bad you aren't in academia. It might be my ignorance, but I've never seen an economic journal paper or policy paper that includes real-time validation of the model in question.

Some anecdotal evidence about the affects of the ACA. Our daughter, a small businesswoman, had to buy a new Obamacare compliant policy last year. Her premiums went up by 75%. Her deductibles went from $1500 to $2500 and her copays went from 15% to 20%. These costs are not making it easier for her. She is still paying on a medical bill for major surgery she had two years ago. Another such bill and she will be in deep doo doo. She is going to max conserve on all her spending. She has cancelled her TV, keeps her thermostat at 65 degrees, buys clothing at Good Will, and only eats out when someone else is buying.

Multiply her situation by a 100 million or more. It doesn't look good.
Neil, no one who has ever used a voltmeter or a soldering iron is allowed in the land of fairy-fart economics, and if you even know what an oscilloscope is, you may not apply to a grad school economics program. Plumbers are also verboten.

The problem is the calculus. If you can do this

it is highly likely that you will tend to burst into disruptive laughter in macroeconomics classes. The urge to blurt "Og bang rock on stone!" is overwhelming, and offends professors deeply.

This is all too true:

Even at very high levels! For example, I was puzzling over Bullard's comments this morning, and then I realized that he is trying to steepen the yield curve, because the bond market is flashing recession:

But that is like trying to make water flow uphill. This is how you get papers claiming that housing prices have no relation to household incomes!
Jimmy J - precisely.

Now think about BEA's prediction that medical spending would go up in this environment. It awes the soul, doesn't it?

And you can claim that eventually the effect of that will wear off, but it will always be a drag compared to previously. Nor can the effect wear off quickly - we imposed a system that immediately made the functional middle class save a lot more in order to access health care. Over the next two years, many of them will accumulate the savings, but in the meantime,, their spending will be very constrained.

Once that wears off, the subsidy cuts and reimbursement cutting regimes kick in, so I think we have a five year pull-down in store.

When the economy was growing below 2%, this pretty much removes all cushion by itself.

State and local tax burdens are also pretty high and must tend to increase what with retirement burdens, and the housing price increases mean that many people are paying pretty high rents. The ability to buy rather than rent controls rent increases.

Then add increases in food and fuel. It's a pretty steep hill to climb.

Nice to see you back in pixels!

Unlike you, I have eaten a pot-laced brownie. And I suffered the Dowd effect, too. Because the high comes through digestion rather than inhalation, it's delayed. One thinks that the amount consumed was small, and eats more.

Then the high does hit, and wow. What's more, none of the THC gets away in smoke, so one gets it full blast, at an excessive dose. At that point one may as well curl up on the hotel bed and wonder why no one informed one of one's death.

I'm sure there's an economic metaphor in there somewhere.

Regarding the propane, I was out and about Minnesota when the big shortage hit. Supplies had been tight due to heavy use in grain drying the previous fall. And a pipeline which had been carrying Canadian propane south to Minnesota was switched to carrying distillate northward, so all of Minnesota's propane has to come in via rail and truck now.

At the retail level, the price was increasing in jumps of 50 cents per gallon for a few days. That was if the dealer could get any propane. Many could not. It was being trucked in from Texas for a while.
Gordon - probably something about QE.

BIS put out a very interesting take on the matter:

Good to have you back.

Looks like paying for the heating bills is crimping trips to the slots parlors. Vegas is doing better than the regional casinos, I'd guess because the higher end people that can afford to fly there aren't sweating the heating bill, so to speak.

New York, June 30, 2014 -- Moody's Investors Service has revised its outlook on the US gaming industry to negative from stable. The negative outlook reflects recent declines in comparable monthly gaming revenue for most jurisdictions, as well as the flat revenues that preceded them, outside Nevada, over the last year and a half.

"The fact regional gaming revenues excluding Nevada remained flat, despite further improvement in the economy and additional regional casinos throughout the US, is a strong indication that US consumers will continue to limit their spending to items more essential than gaming, even as the US economy continues to improve," says Moody's Senior Vice President Keith Foley in the report "Outlook Update US Gaming Industry: Moving to Negative Outlook on Weaker-than-Expected Gaming Revenue."

The recent overall decline in total gaming revenue was not severe -- 1.8% in April and 0.8% May for the 15 out of 18 jurisdictions that have released May results. Moody's had expected, all else equal, that the month-on-months comparisons would post small gains.

Moody's currently estimates that total US gaming revenues reported by state gaming authorities will decrease at a rate of between 3.0% and 5.0% over the next 12 to 18 months


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