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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.

Comments:
No, I can't see how the Fed will raise rates this summer. When they do raise rates, I seriously doubt it will be to curb inflation.

There are only a couple of scenarios I see for raising rates. One of them is to curb capital flows from Europe into the U.S. stock market, if the Euro sovereign debt market really starts to come apart. I think this has a not-small probability.

The other is if tax revenues fall again, and we get our own sovereign debt crisis. But I don't think that's likely in the next few years--when it comes to sovereign debt, the U.S. is the one-eyed man in the land of the blind right now.
 
But, Neil, retail indicates that sales tax revenues are likely to be a weak spot in state and local finances.

So I don't know. State and local financing is a real issue for the economy.
 

If state and local bond rates rose, wouldn't the Fed just initiate QE4 (or N, whatever the next one is) to make sure that Treasury rates didn't rise?

I would think that it would require an actual Treasury crisis to make the Fed raise rates. But even then, it wouldn't help--if rates went from 1% to 2%, the interest payments would destroy the federal budget!

 
Yep, the Fed is in the coffin corner. If they raise rates, they further strengthen the dollar and kick housing and the Federal budget to the curb. Thataway lies recession.

If they don't raise rates, the stock market bubble continues to inflate and we teeter along the edge of deflation.

And the debt market is now following the stock market. Investment grade preferred and bond rates have been dropping while gaining in price since February. People are betting there will be no rate increase this year. I think they're right.

Maybe lightning will strike and consumers will keep the economy from dropping off the edge. But that is a long shot, IMO.

We have become Japan.


 
credit often does hold up the economy.


If we haven't we reached "peak credit" we're not far away. I know we can get dead people to vote, but we can't get them to borrow. There's enough people in their 70's with mortgages that we've already maxed out the ability to get the near-dead to borrow.

Credit held up the economy when we relied on productivity and productivity slipped. Now that we've relied on credit for the last 20 years, it can't hold up the economy any longer. And at this point, productivity cancels credit so TPTB certainly don't want increased productivity.

Either we get price discovery or we get asset seizure. American society has spoken and.... asset seizure for the win.

 
Hilsenrath gave us the all clear this morning. No raise, at least in June.
 
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