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Thursday, February 28, 2013

The Decline Of The Republic

"Yuck" Hagel was confirmed and here we have the people running the country PROVING that they are not qualified to bag groceries:

Maxine Waters thinks that 170 million jobs will be lost due to sequestration. 170 million. She calls that a "setback". We only have, by the most generous measure, 143 million people working, so I'd call it more than a setback. More like "Asteroid Sequestration hits, wipes out all US life."

Of course, if you are that numerically illiterate, perhaps 2% cuts do cause you to fear disaster.

I'm REALLY depressed.

Wednesday, February 27, 2013

Not A Good Durables Report

This is for January, and maybe we'll see improvements as the year goes on. The bright spot is fabricated metals, where we built more capacity over the last couple of years - in part to support fracking.

The unfilled orders/inventories ratios are not where I would want to see them. Unfilled orders for MV are down 6.8% YoY, whereas inventories are up. Primary metals unfilled orders are way down. Fabricated metals unfilled order are nicely up. But when you look at the monthly new orders things mostly seem slack. 

I don't know which way this is going. Orders for exports aren't going to be a strong point this year, it seems. 

It's time for something other than manufacturing to pick up the ball and run, but aside from housing, no candidates are appearing. Mortgage rates are going up, and I've got a bit of a case of the willies, because new homes built for cash is never going to be a huge chunk of the market. 

Friday, February 22, 2013

More Shots Fired In FEDWar

The debate is heating up quite quickly:
The economists say that the Fed could incur substantial losses that might occur when U.S. deficits are still high and Congress and the White House have been unable to put fiscal policy on a sustainable trajectory. 

“This unfavorable fiscal arithmetic might tend to push the Fed toward delaying its exit from the extraordinary easing measures it has taken in recent years; it could even affect decisions this year about how much further to expand the Fed’s holdings of longer-term government securities,” the authors said. “The Fed could cut its effective drain on the Treasury significantly by putting off asset sales and delaying policy rate increases. But such a response would presumably feed rising inflation expectations.”  
The paper is not officially "out" yet, but I am sure it will be circulated. This line of argument addresses the FOMC comment that the Fed's future losses wouldn't affect monetary policy. Of course they could. They could because they restrict its actions, and while it wouldn't necessarily be other than a confidence problem (which is a huge issue for a central bank) in another set of circumstanes, the current US context is that we run huge fiscal deficits as far as the eye can see into the future.

The real issue here is the federal budget interacting with the Fed's larded up balance sheet. If the Fed cannot unwind that as needed, of course the Fed's ability to control inflation is limited. For the Fed to unwind it quickly, the Fed would need a subsidy from the federal government.

Eventually, lending will pick up. Experience suggests that will occur between 2016 and 2018. Normally it would pick up substantially by 2015, but the pickup has been artificially delayed by the attempt to recover the housing disaster. When lending picks up, the massive insertion of money into the system that has occurred as a result of our badabing-baddaboom excursion into Bubblenomics will fuel massive inflation. 

If the Fed cannot intervene soon enough - and nothing at this time suggests that it can, and everything suggests that its ability to do so gets weaker by the month - the only recourse would be much higher taxation down to about the median level of household incomes. Only that can somewhat restrain borrowing and an uncontrolled growth of the money supply. 

Nobody should ignore this risk. Countries with welfare schemes as expansive as ours and demographic shifts as deep as ours cannot afford high inflation, because it jacks up the rate of social spending faster than private real incomes for most can possibly increase, thus creating a chain of economic consequences that are anything but virtuous.

Thursday, February 21, 2013

Something You Rarely See

The initial claims release shows no change in claims over the prior year. None. 362K SA, 346K NSA. The 4-wk moving average is 460K compared to prior's years 368K. Continuing claims are not piling up. Yet.

Wednesday, February 20, 2013

FOMC Several - Many - Few - Some

It's that time of the month again. The market had pre-FOMC syndrome, and is now groping for the Advil as the anxiety cramps hit. Here's the relevant passage from the January FOMC minutes:
The Committee again discussed the possible benefits and costs of additional asset purchases. Most participants commented that the Committee's asset purchases had been effective in easing financial conditions and helping stimulate economic activity, and many pointed, in particular, to the support that low longer-term interest rates had provided to housing or consumer durable purchases. In addition, the Committee's highly accommodative policy was seen as helping keep inflation over the medium term closer to its longer-run goal of 2 percent than would otherwise have been the case. Policy was also aimed at improving the labor market outlook. In this regard, several participants stressed the economic and social costs of high unemployment, as well as the potential for negative effects on the economy's longer-term path of a prolonged period of underutilization of resources. However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy. A few also raised concerns about the potential effects of further asset purchases on the functioning of particular financial markets, although a couple of other participants noted that there had been little evidence to date of such effects. In light of this discussion, the staff was asked for additional analysis ahead of future meetings to support the Committee's ongoing assessment of the asset purchase program. 

Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee's commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions. In this regard, a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee's exit principles, either as a supplement to, or a replacement for, asset purchases. 

Participants also discussed the economic thresholds in the Committee's forward guidance on the path of the federal funds rate. On the whole, participants judged that financial markets had adapted to the shift from date-based communication to guidance based on economic thresholds without difficulty, although a few participants stated that communications challenges remained. For example, one participant commented that some market participants appeared to have incorrectly interpreted the thresholds as triggers that, when reached, would necessarily lead to an immediate rise in the federal funds rate. A couple of participants noted that this policy tool would be more effective if the Committee were able to communicate a consensus expectation for the path of the federal funds rate after a threshold was crossed. One participant also indicated a preference for lowering the threshold for the unemployment rate as a means of providing additional accommodation.
 That was some discussion! There appears to be at least a significant minority that wants to end the 85 billion campaign no later than the end of summer. They probably have a number in mind of how deeply they want the Fed to get bogged down in these assets. 

But here's the thing - the Fed does not know what the federal government is going to do, and it does not know what the effect of the government's actions is going to be on the economy. Right now they have no other real tool, so it appears they will keep using this one. UGGH, Fed bang on economy with QE hammer!

My interpretation:
The earliest you can expect to see the program cut is probably July. It's a good bet it will be cut by September. I think the worried would like to start cutting slowly and sooner, because no one wants to take the stock trader's QE teddy bear away right before October, right? Not a good plan. 

The stated measurement goals have already been discounted in the minds of at least half the participants, and the argument is really now about how to get out gracefully, and without a market crash.

Because that's the real takeaway, and I think that's what's causing the nerves.The issue with the longer term losses was known to them all last year, and considered workable.  At least some of them have realized just how acutely dependent the stock market is upon their actions, and they don't know what to do about it.  And at least three of them are genuinely scared by this. One of the scared ones is willing to go hell-for-leather and put the bank into a future massive loss situation. I can guess who that one is. Several others are more confident and would just like to back slowly from the room, beginning as soon as possible, because they think they want to take their lumps while they are still small. 

A coalition is forming among the worried. 

The eventual compromise, providing no acute disasters in the interim, is going to be that the Fed sits on these assets. That will help them to avoid future losses. It does leave a lot of stimulus in the bag, and future inflation fighting is questionable.  

Despite The Chirpy Commentary

The new housing report for January is out.

Single family remains below the 09/10 levels. Multi-family continues at higher levels. Multi-family authorized-but-not-started are way up YoY (44.8%) so that should continue. Single-family authorized-but-not-started are up also YoY (12.8%) although the pace is not brilliant. The 90% confidence interval for multi-family is 20.5%. For single-family it is 10.8%. So not brilliant. We can however be quite confident that we are finally increasing. 

Starts for single-family are up 20% YoY with a 90% confidence interval of 11.2%. Starts for 5 or more units are up 34.7% YoY with a 90% confidence interval of 42.4%, so we are just not sure about this. 

Under construction numbers are the most important for the current economy, and those show very solid YoY gains. Single-family are up 17.8% YoY with a 4.4% 90% confidence interval, and multi-family (5 or more units) are up 38.2% with a 90% confidence interval of 7.4%. 

The drop off from the 09/10 period has something to do with the slackness in GDP evident in 2011. In 2012 other factors took over - the economy turned in a really weak performance despite genuine improvements in residential construction.

I haven't been discussing these figures much since Q1 2012, but that was because statistical significance was hard to find. These levels had to come up before the figures began to mean anything. Now they have. 

Single-family completions are way up YoY (+43.4%), with a confidence interval of 20.8%. Multi-family completions show no statistically valid trend - they are reported up 8.6% with a confidence interval of 31.4%. However you don't worry about that because the under construction figure is very strong there.

The weakest figures by far are shown in the NE, but that may be because of capacity constraints. Contractors are probably tied up fixing storm damage. Permits rose sharply from December in that region, although they were still below the confidence interval. So maybe they didn't. But completions picked way up MoM. The storm-damage fixing is going to FUBAR new construction in the region. 

Tuesday, February 19, 2013

Knock, Knock, Knocking On Reality's Door

The residential construction market is definitively off its lows, but a little bit of restraint to the euphoria is warranted:

The situation is improving, but by any realistic standard, US housing remains in a depression and clearly will for years to come. It is worth noting that the NAHB index took a slight wrong turn in February, dropping from 47 in January to 46. Of more concern is that the present sales index component fell a bit from 52 to 51, and the traffic component fell to 32 from 36. Expectations for future sales remained high.When current indicators are worsening, expectations mean less. This despite the NE boost from Sandy!

That we should remain at these levels, despite staggeringly low mortgage rates, is a rather frightening prospect. Mortgage rates will go no lower. If anything, risk premiums on mortgages will rise, and interest rates are apt to rise somewhat. That will tend to exert downward pressure on home prices.

The problem obviously is lack of money in the homebuying prospective population. There will be no quick fix for that. Downpayments, even at the 3.5% FHA level, plus any sort of reasonable debt-to-income levels, mean that the US economy must age out of this depression. The younger people who have gotten jobs have to pay off their student loans and accumulate some cash. The only thing that's going to fix this RE market is first-time buyers.

I am not convinced that all is well due to the approximately 5 months of supply on listed homes, because home vacancy rates are still at staggeringly high levels compared to history:

That's got to come down to at least 2.2 before you can see big new construction gains. We have years to go! I do not believe the NAR stats, to be honest.

Still, I think it is very fair to say that new residential construction is no longer a drag on the US. That's a big plus. I don't know how some of the administration economic forecasts are projecting 4% GDP growth rates for the 2015/2016 years. I think there is some irrational exuberance involved. Or major drinking. Or recreational drugs. The US could not possibly see growth rates like that until home construction returns to more normal levels, and that can't happen until mortgage delinquency rates return to more normal levels:
 This is not going to be a quick recovery.

What will determine the longer term future for the domestic housing segment will be the growth of at least full-time employment. You do not fund a home purchase from part-time employment, but from full-time employment with benefits. We are seeing improvement in this measure, but it is slow going:

As younger people begin to get better jobs, they will then need years to get themselves in a fiscal position to contemplate homeownership.

Sunday, February 17, 2013

Interesting Mastercard SpendingPulse Commentary

This is an interesting interview with  Sarah Quinlan:

I really recommend listening to it. Note the age segmentation. The real impact of the payroll tax increase will be felt later when people notice that the residual in their checking accounts is lowering. The payroll tax increase adds up over time, because a lot of people roll from month to month and react when they start getting short. However, the lower transaction amounts noted late in January are important. 

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A little context for the above:

One of the things you can do if you have a bank is just check what's happening in your own deposit accounts to get an update on your risks. When consumer rolling balances in checking accounts begin dropping, you can bet that your retailer accounts are going to follow, so you tighten up on your marginals.

Well, most of us don't have that data, but you do have H.8. Take a look at CC balances this January (Monthly SA data annualized change):
This January balances dropped much less than they did last January. I tend to think that's because of higher gas prices and the payroll tax increase, but it doesn't bode well.

Then we have Other Deposits:
Again, a different looking January compared to last January. 

I want to stress that from everything I know, this effect should be cumulative over months. I do think that if it shows up in MC transactions and in bank accounts, the effect is real and that we have a headwind building.

Saturday, February 16, 2013


Oh, yeah, it's that time in the business cycle again when I start paying a lot of attention to the Rockefeller Institute's reports on state and local tax receipts. 

Take a look at their latest report for Q3 2012:
 Total receipts were clearly in the danger zone. The acceleration effect (shouldn't that be deceleration?) was at work.

Oh, we all know why the Fed's doing what it is doing. 

There's a ton of data and analysis in their reports, but the bottom line is that we were not seeing much traction and the friction is of course building.

That's why the 2% payroll tax freaks me out. I know we needed to hike it, but I'm not sure that the economy can withstand it. Because here is where we were last year:
Durables consumption is mostly MVs. So unfortunately that part is dependent on some iffy lending. It will continue long past the point of sanity, of course, but it's been clear for over a year that the lending would have to get ever more "generous" in order to keep it going. These things reach their natural end.

I read all this stuff about the stronger economy with a feeling of great puzzlement. Really? Really? REALLY?

Mark is back to seregraphanade us through this adventure in interesting times. In honor of Mark's particular style of economic commentary, this post needs a soundtrack. What else could it be but the Stones' "Gimme Shelter"?

Tuesday, February 12, 2013

Well, This Is Just Depressing

NFIB.  I refuse to pretend this isn't happening, but it's the type of thing that does not sit well:
We're still at -30 for six-month business outlook. How is that even possible? With construction up, this thing should be in the 20s at the worst. During the entire 2008-2009 recession cycle, the number never got down into the 30s. 

There has been a notable degeneration in actual sales over the last year, so I can't even blame this on mood:
 We had climbed out to the positives finally last year, and then we keeled back over. But earnings and sales are very weak, so it seems like it isn't mood, but reality. 

Inventory outlook isn't good either.Updated to add:

Monday, February 11, 2013

Tomorrow, NFIB

It's going to be interesting, because we get a read on profits. If they don't go up now, what's the chance later?

This is the December graph:
These, um, big falls in earnings for small businesses tend to coincide with recessions. 

I am very curious to see what tomorrow's report looks like. Based on rail, it seems there is restocking going on. 

NACM was quite interesting. It looks like the next significant report might be April's. January's YoY's were significantly worse on the favorables and somewhat better on the unfavorables, meaning businesses have been struggling to adapt to a bit of a leaner environment. 

There's a rocker effect going on which implies credit adjustments in NACM. The long decline went from February through July, arced back up for two months and then slumped to a new low in October, and then arced up and slumped again in January, but NOT TO A NEW LOW. That's for favorables combined.

Well, we are rolling quite a few economic balls down the domestic economic bowling lane this year, and we will have to see whether businesses can keep jumping. New credit apps show a meaningful degradation in new business activity, which is one of my forward jobs indicators. 

It's interesting to compare NACMs from beginning of the Late Great Unpleasantness (which had nothing to do with easy money) to the current period. July of 2012 was much worse than July of 2007, but you can see the huge difference in trajectory at the end of the year. Of course, in July of 2007 the great wave of housing money was just breaking, whereas over the last six months the Fed has staggered out with the fire hoses and pump trucks. 

I don't think the Fed had to do it at all. I think there was a natural bend up this year that certainly did not exist in 2008. But if the Fed were going to do it, they should have done it last spring at the 35-40bil/month MBS level, and terminated it this last fall. 

Now they don't realize that those pump trucks inadvertently hit a gas pocket, and that things are about to get very interesting. Someone's going to do something to throw a spark. 

I'm sitting here laughing very hard as I write this, which doesn't make for coherence. And it's not funny, except, darn it all, it is. 

The thing is that at any given time the economy can only hold so much money, and when you hit natural slacks, the ability of the economy to hold extra money is minimal. That's why you have to jump in before the contraction sets in. So when you start pumping money in at this pace while the economy's ability to hold the money is minimal, it doesn't work the same way. The pressure builds up and unexpected whacky things happen - sparks fly, gears start stripping, leaks appear,

Saturday, February 09, 2013

Kick That Can???

Paul Krugman doesn't think the sequester should go into effect. But where, really, is the severe economic damage he foresees? The cuts this year are around 100 billion, which is very little.

We all know that we have to cut defense. In June, when this will be hitting, the housing construction cycle will be in full swing, and we will be four years out of recession. June 2009 was a long time ago. What is he even talking about here?
Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts, which would hit with full force. ... 

Realistically, we’re not going to resolve our long-run fiscal issues any time soon, which is O.K. — not ideal, but nothing terrible will happen if we don’t fix everything this year. Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.
If we have to cut over the longer term, and we do, then cutting gradually is the only way to do it. There will never be a year in which we can cut massively and not throw the US into recession. Nor do the sequester cuts come even close to dealing with our problems. When this is implemented, the US will still be massively deficit spending. 

The reason bubbles inflict such severe economic damage when they burst is that a substantial part of the economy is predicated on the bubble - and when the inevitable happens, it is not just the bubble collapse but all the other intertwined economic pieces that collapse and cause catastrophe. No economy can make such massive adjustments suddenly.

I no longer understand what Krugman is thinking, or even if he's thinking. If it has to happen, do it gradually. Four years after the end of a recession does not qualify as "recovery", and since we had at least some of the inventory cycle correction last year, the impact this year of these changes should be blunted.

We are in a long slow low-growth cycle, and there is nothing anyone can do about it, except perhaps really open up the energy production field. That will give us longer term growth and a manufacturing advantage we desperately need. 

Of course we need to let the sequester go into effect. Otherwise we are courting disaster.

Friday, February 08, 2013

Currently, Rail

This is through Feb 2nd. Intermodal is quite strong - +5.3% accumulated YoY. However auto shipments are down 2.2% accumulated. This bears watching.

Eating The Snake's Tail

Well, currently I am reading the CBO forecast in order to complete the mortgage analysis. I think the CBO forecast is quite wrong, but surely the constraints they outline are helpful in considering possible future paths. 

The biggest issue with mortgages has to do with interest rates. Even small increases in the 10 year Treasury seem likely to drop housing affordability dramatically, thus constraining housing prices. 

Right now a huge amount of home sales are still cash sales, so I am iffy on the whole housing trajectory. If you are locked into using the Fannie/FHA programs, the higher risk premiums involved are going to accentuate any increases you see related to Treasury rates. 

This is a beautiful and intricate problem that calls out for deeper analysis. The alternative - for banks to basically abandon the GSEs and strike out on their own - introduces higher rates due to less pool spreading of risk. Also it means that CBs cannot participate because of the five year rule for balloon payments. Mortgages would become acutely sensitive to changes in future interest rates. 

All of which suggests that CBO's forecast on rates and growth is dramatically wrong. Also, of course CBO never deals with recessions. They are not supposed to do so. But realistically, a forecast that implies a 14 year period without a recession is ridiculous. 

CBOs real forecast is for 86-87% debt-to-GDP ratios on federal debt held by the public by 2023. To that add another 4% for a recession (which will lower GDP and increase spending). That takes us to 90%. 

PS: Current debt held by public as a percentage of GDP:

Thursday, February 07, 2013

Slow Is Good

I remain somewhat hopeful about the trajectory (which is recession). If the economic drag is slow enough (diffusion develops very gradually), then the increased flow of income from retirements and the good trends in domestic energy production as well as insourcing of manufacturing, plus the favorables on housing in 2013, have a chance to keep this moderate. We will have to wait until April to see what Congress does on federal spending, but I don't think the sequester will have nearly the effect that the consumer payroll tax does.

The entire key to slow diffusion is little change in employment. My modeling shows me that this is possible due to the increased share of government transfers in total income. It doesn't prove that it will happen, though. One of the keys is maintaining a relatively slow decline in per capita real incomes. It is somewhat hard to see how this will happen based on the Fed's dedicated money pump. Consumers are ducking and running to get into the grocery stores unscathed by the constant bombardment of money bundles falling fromt the black helicopters.

CPI is violently constrained by circulating money, yet input costs to companies are not. I have never seen any economy in which this does not produce a business-led recession. 

Unemployment claims: I am watching these with great attention because they will tell me whether I have cooked up my own hopeful fantasy model or whether I am still in the reality zone. I have no faith in models, including my own. When have models ever done much for us? Why should I believe that my lovely model is any more predictive of reality than those of anyone else? 

So here is where we stand on unemployment claims this year. The running total of initial claims this year is 2,307,119 compared to last year's 2,412,173. This is sharply less favorable than the SA version, yet SA's shouldn't diverge so much from the underlying accumulated NSA trend. It is favorable, however, and it may be more favorable than it seems, because last year we were coming off a strong quarter and this year we are coming off a weak quarter. 

Continuing claims are not piling up yet, although they are on a flat to increasing trend. However NSA continuings are 3,720,496 versus last year's 4,097,013, so definite rosy model hope remains. 

The other thing I am watching is Other Deposits in H.8. These will tell me whether consumers and businesses are running out of money to keep this thing going. So far this year (we only have January 23) it does not look that favorable. The 2% payroll tax increase probably is responsible, but on the other hand a YoY sequence doesn't look that different:
There is a rough equivalence between the Nov end balances and the January low balances both years. The bright side is that this doesn't seem to be worse than last year. The negative side is that last year set up a weak first half, and last year was helped by a milder winter. 

The idea that consumers are going to load up on credit is ludicrous. Look at that drop - consumers get their bills and they pay them off. 

The other source of money flows in the economy is credit. So far this year the credit cycle on the consumer side is flat:
There was growth on the commercial side last year, but not on the consumer (as represented by CCs). Nor does it appear that consumers are contemplating charging them up this year. 

I'm back trudging through supermarkets, which show the effect of diminished cash flow in January. The big consumer product companies have not reacted yet.

Tuesday, February 05, 2013

Regarding the Recession Question

All of my forward indicators have now gone YoY negative. That would seem to indicate that we are in recession.

When in doubt, I always consult freight:

Note that after May, we managed to rack up a perfect record of lagging 2010 & 2011. 

Rail - this is the first really comparable week YoY, accumulated. Total ton-miles down YoY 6.7%. Intermodal is up 4.7%. Retail figures are going to hurt intermodal, and will hurt China. Because retail is going to be slack. Stores really are shutting down. 

Trucking - the bright spot. But the bright spot is down YoY for December:
As a result, the SA index equaled 121.6 (2000=100) in December versus 118.3 in November. Despite the solid monthly increase, compared with December 2011, the SA index was off 2.3%, the worst year-over-year result since November 2009. For all of 2012, tonnage was up 2.3%. In 2011, the index increased 5.8%.
So are we left with the theory that  tax increases will bring prosperity? 

What about diesel? So far this year it is down 5.5%, with somewhat colder weather which should be jacking up heating oil purchases. The four-week running total is -.6.3%.

So I have rising consumer loan and mortgage delinquencies, freight declines YoY, and short term unemployment up about 9% YoY. Trucking doesn't look too hot either.

Paper & metals don't look too hot. I kind of think auto sales have topped out - I don't think they'll do too much more this year. Maybe price increases will keep going, but I don't think production's going to do much.

Well, now it is down to watching Other Deposits. We'll see what people are able to do with the prices, their after-tax incomes and their needs.

Sunday, February 03, 2013

Employment Report, Summed Up

Have fun with the Super Bowl. Sorry about this.

Here is a graph showing the YoY percent change in unemployment levels for 0>14 weeks:
 When it reaches 10%, we are in recession. We're basically there now. 

The mid-cycle growth recession of the mid 1990s, which was partially caused by raising taxes, almost made it to the recession barrier. This can peak pretty high on the first rebound, so you don't look at the first peak out of recession (although that one was well past it). Once it steadies up and then starts climbing again, you panic. 

In November and perhaps December we had more plausible deniability because of Sandy. But now - ??? 

This is why I would not have raised payroll taxes the 2%. I would have spread the increase over 2 years. If we had not raised payroll taxes, I would think maybe there was a little leeway. But does anyone really think that people won't have to contract spending?

Friday, February 01, 2013


I am very busy today, and won't get time for a detailed post until this weekend at the earliest. 

Ed Koch is gone. That's the end of an era. I don't think Nanny Bloomberg is fit to kiss Ed's feet. Somebody bombed the US embassy in Ankara. I am waiting to find out how this is Romney's fault. 

US employment. This report has the updated population controls for the Household Survey and the annual benchmark adjustment for the Establishment Survey. So month to month figures are not that comparable. 

Highlights: Headline is 7.9% unemployment (increase), 157K nonfarm jobs. A YoY comparison (to Jan 2012) is warranted. Unemployment was 8.3% last January, and we had created 311K nonfarm jobs. There is an obvious difference in impetus. 

More subtle - I have written that the initial claims seasonal adjustment was clearly off, but I have been watching the continuing claims in that report, which have not been rising. The worrisome stat in the Household Survey is that under 5 week unemployment has been increasing for three months. Last January there were 2,495K persons unemployed for less than 5 weeks. This January the number is 2,766K. The 5 to 14 week unemployment rate has also been rising for three months. Last January it was 2,874K. This January it is 3,028K. The reason continuing claims are declining may be just retirements and not hiring. I do not like the look of this at all, because the Main Street growth rate isn't going to pick up this year. GDP will bend up in the first quarter due to the defense games played last year. Probably. The money was blown out in the late second and third quarters in order to crank GDP, and over this year, there will be a significant decline in defense spending.

YoY on wages: Average weekly earnings for January 2012 were $803.16. Average weekly earnings this January are $818.03. However FICA is increasing by 2% and a 1.8% CPI (understated for most workers) means that worker paychecks are decreasing by an uncomfortable margin.

Employment indicators for the Household Survey show that the employment situation has worsened slightly since October. This is entirely consistent with the GDP report, so I would take off the rosy glasses on that one.

I would still be somewhat optimistic, except that Q4 consumer credit indicators showed a marked degeneration, and I have never seen that not cause a problem. When you see your delinquencies start rising like that, you have to react. And everyone was blindsided - credit policies were still widely loosening in Q3 of last year. So you are going to see the yank. It's a tiny pull on the reins compared to what we saw in 2007 and 2008, but it's there.

Also, the Fed's asset buying program is going to crank commodities and contract the take-home pay checks of most workers. 

The Fed may be committing a massive blunder which will turn a moderate decline into a steep decline. A declining dollar can't help US manufacturers that much, and it is definitely going to cut consumer wages. If investors respond by moving out of the dollar, the Fed may be collapsing the US money supply at a time when consumer credit wants to contract. This could be a very vicious set of interactions - consumer credit was bad across the board in Q4, consumers are going to have less nominal money this year, and therefore the consumer credit trend is going to worsen, and consumers are also going to get hit in their pocketbooks again by Fedflation. 

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