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Wednesday, April 29, 2015

Fed Day GDP

Well, we know the statement will be full of reassuring noises and plenty of wiggle room. 

Advance GDP for the first quarter is in at +0.2. That's annualized. Current dollar GDP is +0.1, annualized. 

This is exactly what rail traffic implied, so I am not surprised. But the details are somewhat unpleasant - Gross Private Domestic Investment was quite weak at 14 billion. Excluding inventory builds (+30.3 & the new category of research and development (+8.3), it would have been quite negative. The inventory build isn't a surprise, but it implies future weakness to some extent. The question is, how long can oil stocks build?

The increase in PCE was less than half of that of the fourth quarter, but of course we can't continue to spend at that rate. 

Exports declined, but that was expected as a strong dollar effect. 

It was a bad winter for most of the country, and there is a natural bounceback. Usually. The problem is that we probably have a net weakening of the ability to consume in the private sector, as the lower fuel cost surge has somewhat run off, but natural changes to consumption patterns from high basic costs and medical insured-but-not-covered costs remain. 

Therefore, growth this year remains strongly dependent on credit-heavy sectors such as autos and homes. 

Later this week we will get the next CMI (B2B credit), and I am hoping for that to take a turn up. Right now, the current and future indicators are still, to use an elegant economic intellectual term, piss-poor. If you are wondering, at least that's a notch above the term of art "Stock up on Imodium" most commonly associated with recessions.

The increase in capital gains taxes really was not a good idea for a weak economy. One expects a natural slowing in investment, and we are certainly getting it.

So far freight hasn't shown a spring surge. Truck tonnage for March recouped somewhat from a dire February but stayed below peak. Rail continues quite flat.

Shale oil has been a big uplift for the US for years, and with that impetus gone from the economy, we are down to cars and houses. The strong dollar does, of course, tend to weaken manufacturing.

The consumer confidence report yesterday was rather poor. It fell more than 6 points in one month, and the weakness was centered on the job market. That should not really be surprising after CMI, because that much weakness implies a pull-back by businesses extending until they recoup their finances.

My reading on housing is that it's not that bad, so I still have some hope. April readings on retail haven't been good. Rail says we are not seeing any surge of hope and change. Consumer confidence is flashing a warning signal. I will have to wait a while to see if my bullshit theory on retail was true.

The natural term for CMI is two months, so if the low was March, then we could hope for a pick up in June. April will not be a good month.

Monday, April 20, 2015


This really is not a surprise. CFNAI was released for March.
Due to the generalized dolor indicated by CMI's B2B credit, we knew this was going to be poor. 

Note the downward revisions to January and February (somewhat related to employment revisions), and the sad YoY contrast with March of last year. The three-month moving average looks better in contrast to March of last year, because it evens out the moves.

But CMI does not forecast a good April, nor has rail shown much sign of economic green shoot-bearing potential yet for April.On a YoY basis, rail has been flat so far this year, implying an abrupt pull-back in growth compared to Q4. This is a little concerning, because remember GDP for Q1 2014 was distinctly bad.

The difference between last year and this year is that moving into Q2, we appear to be seeing growing weakness.

The current peak for this cycle is November 2014. If we arrive in June without seeing a distinct move up, the probability that we are in recession will be very high.

Wednesday, April 15, 2015

Industrial Production

Not a good report The weakness is not so much in March's headline, which is -.6. It's in the quarter, with a downward revision to January:
For the first quarter of 2015 as a whole, industrial production declined at an annual rate of 1.0 percent, the first quarterly decrease since the second quarter of 2009. The decline last quarter resulted from a drop in oil and gas well drilling and servicing of more than 60 percent at an annual rate and from a decrease in manufacturing production of 1.2 percent. In March, manufacturing output moved up 0.1 percent for its first monthly gain since November; however, factory output in January is now estimated to have fallen 0.6 percent, about twice the size of the previously reported decline.
 Oil and freight doesn't come up recessionary, but the concern here is that this feels more like 2006. The YoY is still +2%.The high for industrial production was in November, and when these figures are updated on the graph the decline will look worse.

Empire State rolled negative, still with great expectations. The last Dallas survey lapsed into the negatives, but that was expected due to the oil slowdown. In March, the Dallas general business activity index clocked in at -17.4. Richmond (March 24th) was negative as well, and decidedly so, if more modestly so than Dallas. Kansas has been quietly but steadily walking down, and turned negative in March as well.

We're getting to the point at which this should start showing up more in jobs.

While not brilliant, housing has been looking decent. Housing starts comes up tomorrow. 

Until the diffusion shows up in freight, it's not a recession. So I guess we wait for April trucking and May rail - two more months.

China's economy looks awful to me. I doubt we are going to be providing them any help, and I don't think they are going to be providing us any. China reported GDP steady at 7% for the first quarter, and while I might agree with that if I were held at gunpoint, I'd have to be sure that the gun was loaded.

The components look sick:

This I believe:

Because of this:

If you read the link above thoroughly, I think you'll goggle at the "steady growth" theory. too. 

Tuesday, April 14, 2015

Pretty Much A Sweep

Now this gets interesting. April is not looking that good.

Today we got NFIB for March, which showed a remarkably synchronized drop very similar to CMI's B2B credit survey for March.  There was a sharp change in inventory plans. Taken as a whole, the report is not forecasting recession, just low growth. Credit is still not a problem, but reported interest rates are up although still low by normal terms.

Note that the favorable employment gains last year were largely reflected in NFIB, so I will be watching this report carefully. Still, in general most categories are more favorable than they have been YoY..It's just that the trajectory shifted downward in March in a most unambiguous and determined way. CMI slid in February, but I didn't worry too much because NFIB was holding up. When I see both move down together, it assumes a whole lot of significance for the general economy.

I would have to be raving lunatic not to concede that economic trajectories are mostly resting on consumer spending over the next few months. So this brings us to the retail report.

Retail is not all that hot. Autos are still good, but Easter was early this year and March retail sales should have been better as a result. They weren't. In particular, grocery sales are troublingly low, and it does not seem to be because of price drops. But this report is not recessionary either - it merely forecasts weakness and a cautious consumer environment. The hallmark of recession in this report comes when discretionary categories suddenly drop. They haven't, in part because consumers are spending a lot less money on gas. But the trajectory for retail seems to be weakening.

Inventories are a month behind, so this report is for February. But it shows that while heavy inventories did not worsen, it appears that everyone has stocked up already. So one would not expect a growth pulse here through April. 

I would not bet against Treasuries. Only time will tell what spring will bring, but the March retail report implies a generalized weakness.

The retail report is worrying me. The headlines you will read on this are all wrong. March, looked at individually, looks like an improvement. But it is not - if you look at March YoY against three-month YoY, we're still weakening. 

Because I really don't like the March retail report, and because there is a really high month-to-month error ratio on retail sales, I am going to take the firm position that March retail is JUST WRONG, that the uptick in sales occurred late, and that March retail will be revised higher next month. Please note that there is no internal evidence whatsoever for my theory that the uptick occurred late in the month. NONE. Zip. Nada. I have about as much evidence for this as I do for the theory that space aliens are going to come by and drop buckets of cash on us. It's possible that my theory is true, and I would like for it to be true. I would not place much personal reliance on this M_O_M theory. I am not really a depressive person, and I tend not to see the worst aspects of things. 

If I am wrong, we only have a few months to turn this around. In further support of the theory that I am wrong about March, I have been following lines of rather recessionary advertising trends for lower end retail.

The 2014 winter was bad also, but one saw the uptick in March. This year it looks like the economy shifted into low gear in March. Also, there will be some drag on the economy through the summer from the CA drought.

Autos and housing are holding up. They rely on credit, and when people don't have money to spend but do have steady income, credit often does hold up the economy. 

As for prospects of any significant Fed moves up before fall, can one really believe that the Fed will kick out the economic props this summer????  This defies all logic.

Tuesday, April 07, 2015

More On That CES Mid-Year Update.

This is the release to which I refer:
 By quintile, it looks worse, doesn't it? The ability to save starts in the third (middle) quintile, and they lost over half of their excess income in a year. This is all the more material because of the higher deductibles  and copays most are seeing for insurance! 

As to access to significant care for the second quintile, it is really only in government insurance programs. In the first quintile, most get government insurance.  And interestingly, the second quintile was the only group in which expenditures dropped.  But the fourth quintile is the most interesting - it is important, because it accounts for an outsized amount of spending. They barely increased their spending. That's because they save, and their ability to do so was strongly impacted, and because they have been able to afford to spend more on higher quality items, and so they had room to cut back. 

Looking at this, I wonder just exactly what that second low quintile was easting! They got HAMMERED. 

But it explains everything about the 2014 elections, doesn't it? 

Another thought-provoking table provides the shares of expense categories by income quintile:

(We have one CPI number, two if you count the SS version, but we really need three.)

The previous release shows the press from 2012 to 2013, which has information for the last several years. Income dropped from 2012 to 2013, by 2.8%.  Expenditures declined less than 1%. 

 Anyway, the reason I was commenting in a prior post that I have doubts about the consumer's ability to carry this expansion is that I think they are running out of money. I think most would LIKE to spend more, but they won't. 

Now we don't know what is going to happen this year, and we can't, and we don't have precise figures for about three quarters of a year.

BUT: The reality is that the recent changes to health insurance have, for the majority, increased uncertainty. The natural recourse for those trying to live healthy financial lives is to try to put by a nest egg to deal with that uncertainty. When you increase savings needs and income isn't rising to allow it, expect a pullback. 

This can unbend and unkink, but there's considerable underlying weakness.

Sunday, April 05, 2015

Happy Easter/Passover

Yes,  I know the world's in more than a bit of a frightening  mess right now. It has been so at other times. Let it comfort you that there is an ever-renewing goodness and life in the world. If you don't believe in God, you surely must believe in spring!

This year Passover began on Good Friday.  It's a powerful conjunction. If you don't believe in the power of God to lead us out of darkness, than believe in the power of your fellow men, acting in concert, under the guidance of courage, decency, and respect for others, to bring us through.

I do believe in God, and therefore I say to you, Happy Easter.

Saturday, April 04, 2015

So Here's The Underlying Problem

Most families are running out of money. This is the mid-year update for the Consumer Expenditures Survey. It runs through mid 2014, which tells you a lot of about the delay function in consumer inflation indices. The ugly:

I'm sure this doesn't surprise many of you. But, for those who are confounded, dropping incomes (before tax incomes), and rising expenses for basics, including health care, imply that people are running out of money. While that's what I had figured inductively last year, it's nice (in a bad way), to see another way of calculating it.

The drops in expenditures on cash contributions confirm it. And really, a ten percent increase in health care costs in one year is rather difficult. Higher deductibles and copays also imply the need to set aside more cash. But food costs have been increasing as well. So people cut where and as they can, run up the CCs a bit, and try to get by. 

The drop in fuel/gasoline costs came at a great time for the US, and helped offset the summer blahs. But it isn't clear that it is enough to offset the winter blahs and the continuing health care cost problem.  We will just have to see.

The fact that a cash crunch is beginning to show up for manufacturing and service industries (again, looking at CMI that's rather clear) is a sign of some correlation. Spring cures a lot of ills, but last year the economy arced up in March, and this year it did not, and you can't expect April to be a renaissance. 

Regarding consumer credit's ability to carry us through a rough patch, I have my doubts. A look at the delinquencies and chargeoffs reports will explain them. Consumer credit is being tightly managed, with historically low delinquencies EXCEPT for residential loans, which still have delinquency rates roughly three times the 90s interrecession norm. Chargeoffs, however, for residential mortgages are quite low. So I would say there's some artistry involved. Artisanal portfolio default projections may be things of baroquely statistical beauty, but they tend to induce an overall caution in the architects.

Of course plenty of non-banks extend consumer credit, and they are happy to do so generally. The only signs of stress with rising delinquencies seem to be in subprime. This subsegment showed pretty darned bad performance in 2014 early delinquencies, which makes me suspect moderation must hit some time this year. At least in banks, which have troublesome regulators who started making snorty noises about this year. Normally the regulators make the banks pull back and there's one last party among the nonbanks which goes on far longer than you think it ever could, so who knows? 

I started reading through some financials of the normal culprits, noting that Capital One was apparently seeing some degradation towards the end of last year. Consumer non-performings were down but delinquencies were rising significantly. There were also signs of a little trouble in commercial - their criticized performing rose significantly while their average yield on loans held for investment dropped from 3.88% to 3.42%,. while net chargeoffs rose over the year.  

Ally Financial  is huge in auto finance - both dealer and consumer. One interesting note is that the off-lease inventory of vehicles is rising very rapidly while the gain per off-lease vehicle is dropping quite rapidly. There was degradation in the consumer auto metrics, but I'd be more concerned about dealers. 

If we don't pick up in May, I can see where the diffusion could set in. A pullback in consumer credit would have consequences. So I don't know. A segment of business has to be cut. A critical summary look at the overall from January can be found in this article.  Loan terms can't be stretched further.

I don't see how the Fed can meaningfully raise interest rates this year, to be honest. I just don't see it. They do have kind of a track record of "rationalizing" when they shouldn't, though. And if they want to do that this year, or begin it, they may. I look at financials like CIT and I think that the business world is all levered up again and maybe it's time to knock some of the air out. Currently we don't have the huge accumulation of excess that we did on the last two go rounds. 

And, if you look at it from the Fed's perspective, if they don't start the process this year, how can they next year? It's an election year! 

Friday, April 03, 2015

Unfortunately This Employment Report Was Not A Surprise

Still it's unwelcome. There is always the hopeful prospect of spring, and so far housing is okay when you look at weather effects, and the change in FHA premiums will help.

BUT, the employment report shows several disturbing characteristics. 

1) Household survey Feb/March combined total employment gains are 130K, for 65K average, with only 34K new jobs in March. 
2) Feb/March not-in-labor force numbers increased 600K, so of course the unemployment rate is not rising.
3) The Establishment survey shows different numbers, but the same sharp down-swing in employment increase, confirmed by drops in hours measurements.
4) The agreement in trend for March between two very different ways of measuring employment suggests that this is real, at least for the time being.
5) The temporary help indicator went negative in Jan, stayed negative in Feb, and rose 11.4 in March. I wouldn't get too hopeful about that March rise. because the overall category didn't rise, which may mean that companies don't want to hire permanents and went to temps.

One is tempted to put on the rose-colored glasses and announce that this is centered in manufacturing/strong dollar effects, and has natural limitations, and so forth. But that is why paying attention to the CMI B2B credit report referenced in the previous post is wise. The implications of CMI are that we have a propagating effect. If CMI were to take an uptick, then I think we would see employment follow. The type of financial stress shown in CMI does not contribute to good employment numbers.

I am not saying that a recession impends, because I feel sure that all the required factors have not lined up yet. But CMI is predictive, and the drops in indicators there are very significant and definitely don't forecast any trend improvement for April.

This trend is not our friend.

Lastly, you should take the reports of epic employment gains over the last year with more than a grain of salt. Covered employment gains YoY have not gone up since 2013:

When you see a credit contraction and YoY covered employment change is even stalling out for a significant period, you need to be very alert. If stimulus can't come from business spending, and it can't come from wage spending, then it has to come from government spending or lower interest rates. We have kind of tapped out low interest rate stimulus, anything the federal government dumps in the pot will be more than removed by necessary increases in government taxes at the state and local level, and I doubt the Fed will launch another QE.

We do have a little interest rate stimulus in the form of good mortgage rates and the policy change in FHA, which can provide some help to first-time buyers. However that's not huge, and if individuals sense problems on the ground, they won't buy a first house unless they have a lot of money in the bank. FHA buyers generally don't.

Note - what's confounding about covered employment is that it should have increased a lot due to the permits granted over the last few years to individuals allowing them to work legally, which should shift already-existing employees from the shadows to the light.

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