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Tuesday, April 30, 2013

Kinda Surprising To The Downside

Two bad manufacturing reports this week. Yesterday Dallas was a slammer. The supplemental questions re the impact of Obamacare did not sweeten the picture either. Since I expected Dallas to stay up this year, this one was a very negative surprise for me. Yes, yes, I know there was some sequester impact, but not this big, this soon.

Today, Chicago PMI just beats us up and tosses us over the cliff. While the headline index dropped into outright contraction (the worst since Q3 2009), backlogs of orders, SA, dropped to 40.6, substantially below last year's minimum. It is only April, and we haven't yet even seen the full impact of the FICA increase. One would expect the low of this index to hit this summer, not now.

There will be a dignified silence while I consider the implications. Had Kansas or Richmond been better, then one could have taken the "great expectations" element in Philly more seriously. Even the Empire State survey did not look too pure this month due to diminishing backlogs.

Taken together, there is a consistent pattern of February having been an interim high, followed by a sagging process that's more than a bit unsavory due to its consistency.

Unfortunately, this impression of consistent negativity is boosted by NACM's April survey. Remarkably, the manufacturing sector there shows up as better than the service sector. Usually weakness in the manufacturing sector flags weaknesses in services a few months later. Thus one feels a certain sadness and foreboding. While weaker than last year, favorable factors for both manufacturing and services are holding up. But unfavorable factors are not - at 50.2 in manufacturing and 50 in services, this may well forecast declines in favorable factors this summer.

The final editorial comment from the report:
The year over year numbers are declining, and that is a worrisome trend. The index is at a year and a half low point. If the trend of the last two months does not reverse, the chances are good that the whole CMI will drift below that all important 50 mark, and if it does, the PMI will be right behind.
Needless to say, the Fed is going to continue its buying program. It's probably close to adding on to it!!! 

You can safely ignore the home sales numbers. FHA increased insurance premiums beginning April 1st, and after June 3rd of this year, they are increasing insurance premium terms. When the increase in insurance premium terms goes through, I expect housing purchases to be somewhat suppressed. Admittedly, this does not change qualifying ratios, but the cost of buying is increased over the longer term. 

The worst thing that's happening now in the US is that actual would-be home purchasers are being pushed out of many markets by investors, who have gobs of money to spend, much of it handed to them by the Fed's buying program.  FHA premiums now at or exceeding 130 bps are going to quash first-time buyers. Charging eleven years of annual insurance premiums for loans with LTVs below 80% seems insane.

Because the effective cost of buying is so much higher for many first-time buyers than it is for investors, you see price increases, which feed the desire of investors. But this shifts the market unfavorably for buyers who don't have at least 10% down.

Friday, April 26, 2013

GDP, Briefly

Advance Q1. The headline is 2.5%. GDP counts adds to inventories as positives and draws to inventories as negatives, and while there was a heavy draw on private inventories in Q4 (-47 billion), there was an add in Q1 (+ 37 billion). The real dollar measure of annualized quarterly changes was 12.9 billion in Q4 versus 84.7 in Q1. 

In Q1 PCE contributed the bulk of the gain at 76.1 billion versus Q1's 43.8 billion. That was more localized in services, and given the colder weather it shouldn't be surprising that services picked up. All property and casualty insurance rates need to rise due to low investment returns, and so there was a relatively large gain there (10 billion). This is all the more notable because we should be shedding medical insurance costs right now as more people go on Medicare! 

Gross Private Domestic Investment moved from 6 billion to nearly 57 billion. A lot of that was the change in private inventories. Nonresidential fixed investment fell from 46 billion to about 8 billion. This category is mostly business spending, and the weakness there is a warning. It may be somewhat weather related. Residential investment did not change much, especially considering generally adverse weather, moving from 15.3 billion to 11.6 billion. It should pick up in Q2.

In short, although the headlines were quite different (+0.4 versus +2.5) there is not a huge amount of underlying change. My diagnosis would be that we move into Q2 running at about 1.8-1.9% GDP growth, which is not materially different than it has been.

Thursday, April 25, 2013


We now have enough data to say with some confidence that the worst the US should do the rest of this year is bounce back and forth between contraction and expansion. That, btw, would look like slow expansion.

We've been through spring break-age in the initial claims series, and we came out the other side with a very favorable NSA 323K, with a four-week moving average of 357K. Further, continuing claims continue to drop.

If anything, the current employment data should be slightly influenced to the negative by the bad northern weather, which has slowed construction. 

And just simulating income flows this year indicates that we have some strong tenacity at the GDP +1.5% level, because if you were born in 1947, you turned 65 last year. And if you were born in 1948 you turn 65 this year. SS retirements are really picking up - over the last three months (Dec-March) the SS only bracket increased 416K, and the total increased 450K. It's not going to slow down from here. 

You can't have such large withdrawals from the workforce without dropping unemployment, unless you are in the middle of a deep recession. And these withdrawals come with increased income flows due to retirement checks. 

Also, the exit from the workforce generated by each retirement is more than one - it's at least 1.3. A lot of older couples will have one working in part-time employment or low-level who also leaves when the main one gets that SS check. The net additional income flow on that 416K should be be over 4.5 billion a month. Over the year, that alone goes a long way toward offsetting the FICA increase.

Assuming that 800,000 additional retirees exit in the first half of the year, the net SS bonus in net cash flow to the economy should be almost 9 billion a month in the second half. Employment may be slack, but as people exit most of these jobs will be filled. They may be filled at lower wages, but they will be filled, and by the time you add the tax subsidies for working it equates out. 

Further, I am ignoring an average Medicare monthly bonus which must be at least $200 a month for all those turning 65 and qualifying for Medicare. Those who were paying for insurance on their own, which was probably about 30%, get a nice monthly income supplement. 

So on income flows alone, the US cannot go into recession this year barring something truly remarkable. I think the Fed's employment forecasts are idiotic and I think their forecasting is done on the macro level and makes no sense given the massive demographic shift we have operating. Of course Congress is trying to give us massive unemployment by importing 15 million immigrants, but we'll see whether they succeed or not.

Next year things get rougher, because we don't really know the impact of Obamacare, but I think the big negative there hits in 2015. 

What about consumer inflation? Well, interestingly, everything I have shows that average household incomes should continue dropping, indicating that consumers will be very price-sensitive and that only government subsidies for consumption categories (food stamps, government insurance) can keep inflation above the GDP growth rate. 

Therefore I think the Fed is a bit drunk and dangerous. Too many Okun's Law cocktails are being imbibed over there.  It would not be able to fuel consumer inflation even if it bought 300 billion of bonds a month. The only thing it could possibly do is create a recession, but first it would create another large asset bubble. 

NOTE: In this post, I am trying to roughly annualize the figures so that they can be compared with the figures used by the Personal Income and Outlays report.  Annualizing the figures in that report allows them to be compared with GDP figures, but of course it can produce some startling effects, such as January's reported massive personal disposable income decrease. When March figures come out this will make more sense.

Wednesday, April 24, 2013

Not Very Encouraging Durables

To tell the truth, none of the manufacturing data has been all that encouraging, but it's hard to find a bright spot in this durables advance report. It's the three month totals that are worrying me. 

YTD YoY, shipments are up 2.5% but new orders are fractionally down. Capital goods new orders are down 5.8%. Nondefense capital goods orders are down 3.5%. Fabricated metals and machinery orders are still up. 

Motor vehicle new orders are up 9.8%, and total inventories are down less than 1%. That's the bright spot. Computers continue to be the worst, really. 

This report agrees pretty well with the slowing shown in Markit US PMI, released yesterday and showing a slowing trend with slightly contracting backlogs of work. Richmond Fed manufacturing survey was startlingly negative, but most US surveys seem to show a pattern of slowing activity, rather than contracting/stagnant activity. CFNAI showed the pattern quite clearly, with a big bounce in Feb and then a decline in March.

Still, the US looks sharply better than Europe. Chinese manufacturing PMI was distinctly worse than ours. The signals are that the global economy isn't moving into the second quarter with any great abandon or energy.

India has been weak and may continue to be quite weak. Singapore really does usually flag slowdowns in the Asian economies, and in the first quarter it fell into an annual negative for the first time since the Late Great Unpleasantness. That despite large rises in construction. 

We have to wait for one more month to see how much trouble Germany is really in for 2013. Construction PMI has shown consistent weakening and March was particularly bad, but weather had to be a significant factor. France is in a very weak state, so Germany has to stay up for Europe to stabilize. There's a lot more to come in France, because the drag from increasing unemployment has accumulated and they are just beginning to hit their housing wall. The Dutch economy stinks because of the hangover from their own housing funny-money loan debacle. 

In May the real drag from the FICA increase begins to hit the US, and some additional negatives from the sequester should start showing up. Housing should continue to be a positive for this year, but not a huge positive. Maybe it will be better than I think now - the next two value of construction reports should give us a better indication. 

But real growth in the US won't be epic this year. The first quarter was assisted by income effects - especially the shift in income payments last last year to beat the tax increases. But that implies a takeback this year. 

Thailand is doing well, probably out of Chinese outsourcing. I have no idea how Japan's going to work out this year. Their Scylla/Charybdis ploy takes some luck and good management. There is no doubt it helps their exporters.

Monday, April 22, 2013

Mortgages And Home Prices

I have recently been awed and dazed by the lack of realism at very top levels in US economics. For instance, home prices.

You can get US median household income historical data at this census page. It's split by ages in the H9 table. The data is currently only available through 2011.

The housing market is determined by new buyers, esp. first-time buyers. Therefore, when discussing affordability, you have to concentrate on the possible first-time buyer brackets.

This, of course, is the most important one. There has been over a 10% drop in real median incomes since 2000.

But catch-ups are a factor also:
They've actually done worse compared to the kids. For both of these brackets, prices with comparable interest rates should not be back to 2003 levels, but mid-1990s levels.

Actually, it should be worse. These cohorts will face higher real tax rates than they have during the last decade, especially on the state and local level. They will face higher insurance costs than they historically have, because the population is aging and that cost will be redistributed across the younger cohorts.

If interest rates come up meaningfully, prices must fall pretty damned hard. But interest rates cannot remain where they are after the Fed ceases its frenetic bond-buying campaign. They cannot. I don't expect the Fed ever to sell out, but they also cannot continue to buy at these levels.When they start to come off it, I expect mortgage rates to rise to 4.5%.

Student loan debts are an issue for the younger crowd. Obviously they will find it harder to save even a 3.5% downpayment. Not only do they have lower real incomes, but more of their incomes must be diverted to basic costs such as food, energy and medical. Even if they do not have high debt levels, this generation will find it harder to accumulate cash.

We are coming to a situation in which a household in the 25-34 bracket composed of 2 graduate degree holders is going to be less likely to buy a home than a working-class household. This is not stable.

The investors in the market are producing price increases that can't be supported longer term. Vacancy rates are still way too high. Homeownership rates are way down and must fall for some time further:

This doesn't mean that housing will be a drag the way it has been in recent years. It does mean that home prices will be constrained for a long, long time, and that home prices in many areas will slowly continue to fall over time.

Rental vacancies are still quite high:

This is in no sense a strong housing market, and it contains future price devaluation risks that are substantial, so creditors are facing a high-risk environment.

Does all of the above look like it supports this?

No. And if you think it does, you are demented, no matter what job title and credentials you hold. To even have a chance of getting back to supportable levels, this pricing index has to fall to about 140, assuming that mortgage rates don't get back over 4.75%. 

It is true that household formation is picking up, but that doesn't mean that finances support much buying, and anyone with any sense should already have realized that strong investor buying coupled with falling single-family rents in some markets amounts to a screaming canary in a mine rapidly filling with gas. 

There ain't no gold here, folks. Real household incomes for the most important home-buying bracket are about where they were in 1973. They are also very comparable to where they were in the mid 1990s.

Thursday, April 18, 2013

This is why you shouldn't sleep

So, I'm up late working on IT security stuff (long story), and this is the story I end up following:

There was like a shooting at MIT, two perps carjacked a cop car? Pursuit in Watertown, MA, now grenades. 

I quote:
If this isn't the bombers, but a separate incident, this is the most bananas f'ed up week in Boston since, roughly, the Revolutionary War.
Video, two suspects in custody now.

Monday, April 08, 2013

Inflection Point?

"The most since October 2008" are never words you like to read early in the morning:
Speculators cut net-long positions across 18 U.S. futures and options by 31 percent to 468,780 contracts in the week ended April 2, the most since October 2008, U.S. Commodity Futures Trading Commission data show. Investors are betting on a decline in silver for the first time and have record bearish positions in copper and sugar. Corn wagers dropped the most since June 2010, leading the biggest ever decline in agricultural holdings.
If the Japanese keep going with the yen devaluation, other manufacturing economies will have to respond. 

I sense a disturbance in the force! 

Friday, April 05, 2013

Oh, Geeze, Maybe This Time It's NOT Different

See, for years now I've had this future fudge factor sitting in all my calculations having to do with boomer retirements. As these people retire, they exit jobs. And many of their jobs aren't really going to be replaced, but the influx of the retirement maintains or increases net cash flow into consumer hands.

Now that we get into the years where these retirements start really accelerating, this effect should be kicking in quite strongly. And what I had was basically the presumption that while net job growth would be poor, and because of labor slack wages would tend to decline in real terms, the aggregate consumer spending would be more stable. 

That allowed me to postulate an economy that's much less weak at lower GDP growth rates. Not stable over the long term, but over the near term, stable when it never has been before under these conditions.

But now I'm staring at the March employment report in dazed bewilderment, because this is a truly BAD report. As you work through it the badness just keeps growing. 

The best of it is in the Establishment report, but at 88K nonfarm jobs that isn't much of a best. And then I look at the details, and I become uneasy. Wholesale trade and retail trade both racked up significant negatives. Transportation and warehousing is negative. Temporary help services are a big plus, which at least keeps one from drinking bleach. But this looks like knock-on effects from a weak economy, i.e., the type of thing I was theorizing really couldn't happen due to the influx of retirement benefits. 

The Household report is significantly worse. It claims that we lost 206K jobs in March. One hopes not, but that is such a large number that it's difficult to explain away. The emp-pop ratio is stuck at 58.5. That's where it was last year. The participation ratio is at a new low of 63.3. Last March it was 63.8. The not-in-labor force group grew by 663K this month, which is very statistically significant. 

Now I know a lot of this is retirements, and a wave of retirements can briefly produce a gap in jobs as jobs are filled after departure. But still - we are seeing improvements in unemployment rates, but that's inevitable given these huge exits. 

On the Household side, the YoY job gains keep weakening. We are under 1.3 million now. This is what the time series looks like:


My dear friend Mr. Rail started January very badly, then was chugging along gaining. All of a sudden he has dropped out on me. I begin to feel the cold winds of destiny circling from my back to my front as a trudge along.

Bank deposits are very slow, and credit cards show that consumers are not gaining ground. In short, we are very close to recession levels for both GDI and YoY employment:

We got to about these low levels of YoY employment in the mid 1990s due to tax increases, but not that GDI stayed above the magic 5. It's very hard to stay up when GDI is stubbornly low and your YoY employment numbers are sagging this badly.

Of course I could pull a Krugman and claim that the only reason we are still up is because of the M_O_M fudge factor, but I don't believe that. I have noticed a certain substitution of passion for rigor in Krugman's work, and I think it makes him a bad prediction economist.

If I am substantially wrong, then later this year we pretty much crunch into the wall in a really solid and determined manner. Autos are topped out, very clearly. I suspect sales won't decline too much, but they aren't going to keep pushing us along. The housing market is far weaker than now appears. I've been reading FHA reports going "Oh, golly!"

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