EconomPics of the Week (Halloween Edition)

Economic Data
Q3 GDP: Subsidized Consumption Edition
Thank You Cash for Clunkers
Personal Income and Outlays Under Pressure
Consumer (Lack of) Confidence
Case Shiller (Housing) Surge in Perspective
More on Existing Home Sales
Dallas Manufacturing Turns Down
Non-Manufacturing Layoffs Continue to Rise

Outlook / Asset Prices
On the Relationship Between High Yield and Equities
Durable Goods and GDP / Equity Market Collapse
What Now?
Business Loans Record Freefall

Other
Where's the Shout Out?
The Death of the Newspaper

And your video of the week...
Phoenix - 1901 (can't get this song out of my head):

Where's the Shout Out?

My post/ chart @ 9:34 AM ET yesterday regarding the impact cash for clunkers had on GDP.

Clusterstocks post / chart @ 2:13 PM ET yesterday (at which point my post had ~3000 hits)

And I know for a fact that the author of that post Vincent Fernando reads EconomPic (he has used our charts in other posts before). Same dates / scale for the chart no less, even though data from the BEA for autos goes back to the 1960's.

As any reader of mine knows... feel free to use my charts or information, but PLEASE give me a shout.

Source: BEA (hat tip Barry)

What Now?

My latest four posts:

• Durable Goods and GDP / Equity Market Collapse
• Q3 GDP: Subsidized Consumption Edition
• Thank You Cash for Clunkers
• Personal Income and Outlays Under Pressure

Can be summarized as we had a HUGE downturn and the recent upturn was due in large part to:

1. Massive stimulus (think autos / housing)
2. Inventory restocking (details of the coming "mother of all corrections" from July here)

Now, lets take a look at the historical data showing the importance of each to Q3's recovery.

Q3 GDP Breakdown (Contribution of Each)

Unless you think autos, housing, or an inventory rebuild can be sustainable areas for future growth, the importance of the chart above is the green "other". The "other" accounted for the last of the pre-recession growth as the housing market stumbled and while we have seen a recovery (i.e. the "other" is no longer a drag), it accounted for a minuscule amount of growth in the latest quarter.

The million dollar question is 'can the economy grow on its own in coming quarters?'. While the stimulus (homeowner tax credit) and inventory restocking (which I suspect will only get bigger) should allow the economy to grow well through this year, the impact of both will likely be reduced going into Q1 of next year.

My guess is that all the taxpayer money that was (wasted?) used to pull demand into Q3 from future quarters, was done so with the hope of kick-starting the consumer in a manner that used to be done through Fed interest rate cuts. That worked in the past when consumers needed a nudge, but what if the answer is not for the US consumer to power the world's growth, but to rebuild and invest (i.e. save) for the future.

Source: BEA

Personal Income and Outlays Under Pressure

RTT News with details of the latest release:

With consumers saving more as a result of economic uncertainty, the Commerce Department released a report on Friday showing that personal spending decreased in September, while personal income came in nearly unchanged.

The report showed that personal spending fell by 0.5 percent in September following an upwardly revised 1.4 percent increase in August. The moderate pullback in personal spending came in line with the expectations of economists.

Additionally, the Commerce Department said that personal income decreased by less than 0.1 percent in September after edging up by a revised 0.1 percent in the previous month. Economists had expected income to be unchanged.

More important is longer term trends. Broken down below are the components of personal income over the past three years. The broad theme is decreased income, increased savings, yet relatively steady consumption.



Looking closer at the year over year changes in each, we do see a paradigm shift between consumption and savings (personal consumption down, personal savings up - though reader MAB points out total savings is WAY down due to the debt load taken out by the government), which has been partially eased by reduced taxes allowing consumers to spend more on the margin over the past year.



This is inclusive of the pulling of demand from the future into the latest quarter (i.e. consumption "should" have been much less) due to the cash for clunkers program.

The question is what happens now? More on that in a bit.

Source: BEA

Thank You Cash for Clunkers

Motor vehicles added a whopping 1.66% of the 3.5% growth in Q3 GDP. More specifically, motor vehicle output was up... wait for it... 157.6% on an annualized basis.



Source: BEA

Q3 GDP: Subsidized Consumption Edition

When the going gets tough, the U.S. consumer... consumes.

QoQ GDP Annualized



Consumption as a Percent of GDP

One day perhaps we can consume more than 100% of our economy.... we can only hope.

Source: BEA

Durable Goods and GDP / Equity Market Collapse

There have been a number of things pointed at to explain today's sell-off, one being Goldman Sachs reduced GDP forecast. I personally am in the "nothing can go up forever" / "market is overvalued" camp. BUT, here is Goldman via FT Alphaville regarding today's durable goods release:

Headline gain is in line with consensus and below our figure, but with a composition less dependent on volatile components than some (including us) had expected. Bookings for capital goods recover almost all of past two months’ setbacks. Shipments somewhat weaker, especially for nondefense capital goods, but they will eventually follow orders. Based on these data and other recent reports, we now estimate tomorrow’s GDP to be +2.7% at an annual rate, versus +3.0% previously.

And the details of the new orders portion of durable goods for September...



And year to date 2009 vs. that same time frame from 2008 which shows we can at least always count on the war machine.



So durable goods new orders are down almost 30% over that time frame. Rather than ask why the market is selling off today, shouldn't we be asking why the market is UP over the last 12 months?

Anyone think its "fundamentals" and not the MASSIVE liquidity injected by the Fed and no willingness by economic players [i.e. banks / lendees] to put that liquidity to actual use due to immense imbalances that NEED to play out [indebted consumers, asset writedowns, etc...], thus the liquidity is just sloshing into financial assets?

Source: Census

Consumer (Lack of) Confidence

The Conference Board details:

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumers' assessment of present-day conditions has grown less favorable, with labor market conditions playing a major role in this grimmer assessment. In fact, the Present Situation Index is now at its lowest reading in 26 years (Index 17.5, Feb. 1983). The short-term outlook has also grown more negative, as a greater proportion of consumers anticipate business and labor market conditions will worsen in the months ahead. Consumers also remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays."

Source: Conference Board

Case Shiller Surge in Perspective

Following my post about existing homes (the homes that are selling are lower-end), below is some detail of the most recent Case Shiller home price index release.

The deal? Home prices are SURGING (except in Vegas).



But, we need to put that SURGE in perspective.



Source: S&P

More on Existing Home Sales

Last week EconomPic detailed the strength in the existing home sales jump wasn't as strong as detailed... namely due to the discounts required to get those homes sold.

Barry at The Big Picture provides additional detail:

Less than 10% of the homes sold in the US were > $500k. We know the high end has collapsed, but we are not discussing multi-million dollar homes, mind you, but over $500k as a mere 8.2% of sales. I was surprised. (I wish we had data going back decades, which we could then normalize for inflation).

In September, 70% of transacted homes were priced under $250,000.

Check out the year-over-year growth rates — also astonishing:

Homes under $100k are up 22.5%
$100-$250 +6%
$250-$500 -5.2%
$500k-$750 +4.0%
$750-$1m -2.6%
$1M up -1.2%

I took that data and crossed it against data from the NAR to get the following:



What we see is that the entire jump is due to increase from the lower-end of the housing market, due in large part due to the fact that those are the houses that have been foreclosed, were purchased the past few years by should have been renters, and the first time homeowner credit.

Not so much strength after all...

Source: Realtor.org

The Death of the Newspaper

The AP details:

Circulation at newspapers shrank at an accelerated pace in the past six months, driven in part by stiff price increases imposed by publishers scrambling to offset rapidly eroding advertising sales.

Average daily circulation at 379 U.S. newspapers plunged 10.6 percent in the April-September period from the same six-month stretch last year, according to figures released Monday by the Audit Bureau of Circulations.

As both publications indicated earlier in the month, The Wall Street Journal surpassed USA Today as the top-selling newspaper in the United States. The Journal's average Monday-Friday circulation edged up 0.6 percent to 2.02 million — making it the only daily newspaper in the top 25 to see an increase.

USA Today suffered the worst erosion in its 27-year history, dropping more than 17 percent to 1.90 million. The newspaper, owned by Gannett Co., has blamed reductions in travel for much of the circulation shortfall, because many of its single-copy sales come in airports and hotels.

The New York Times stayed in third place at 927,851, down 7.3 percent from the same period of 2008. Its Sunday edition remained the top weekend seller at 1.4 million, a decrease of 2.6 percent.

Source: ABC (hat tip The Big Picture)

Dallas Manufacturing Turns Down

We all know about Texas and the energy business, but Bizjournals details its manufacturing prowess:

The Lone Star state produces at least 8 percent of the United States’ total manufactured goods, ranking behind California in production.

Who knew? Unfortunately, Reliable Plant details the less than enthusiastic results:

Texas factory activity declined in October, according to business executives responding to the Texas Manufacturing Outlook Survey, released October 26 by the Federal Reserve Bank of Dallas. The production index — a key indicator of current manufacturing activity — edged further into negative territory, suggesting output in October contracted after remaining stable in September.

Current activity indexes for new orders and shipments turned negative, erasing gains seen last month. The company outlook and business activity indexes remained slightly negative, but a growing majority of executives reported no changes from the prior month and only a fifth noted worsening outlooks and decreased business activity

Source: Dallas Fed

On the Relationship Between High Yield and Equities

Bloomberg details the outperformance of high yield relative to equities:

The worst performance by U.S. stocks compared with junk bonds since at least 1986 is making investors even more bullish on equities.

While owning debt in the riskiest companies has paid about the same as the Standard & Poor’s 500 Index over the last 23 years, bonds are returning more than twice as much in 2009, according to data compiled by Merrill Lynch & Co. and Bloomberg. When high-yield credit beat the S&P 500 by 32 percentage points in the 12 months ending March 11, 2003, stock gains exceeded bonds by 19 percentage points for the rest of the year.

Bonds rated below Baa3 by Moody’s Investors Service and BBB- at S&P are returning more after the worst recession in 70 years spurred purchases of securities that wouldn’t be erased in a bankruptcy. They rose faster than stocks as companies in the S&P 500 reported two years of declining earnings, the longest stretch since the Great Depression.

“There was a flight up the capital structure that swelled the interest in high-yield bonds,” said Kevin Starke, a CRT Capital Group analyst in Stamford, Connecticut. “Why own the equity of a company, which is almost a guaranteed wipeout in most bankruptcies, when you could own the bonds and have a shot at a recovery and still have an equity-like return?”

While the performance of each has diverged, the relationship has not. The chart below details the change in the S&P 500 (in points) against the spread of those bonds rated BB, to Treasuries (inversed). When the spread narrows and high yield outperforms, so does the S&P 500.



The big difference this year was the massive amount of income high yield was generating at lows (at one point reaching ~20% above Treasuries vs. the 2-3% dividend yield spit out by equities).

Source: Barclays

Business Loans Record Freefall

We have detailed the deflationary pressures from low capacity utilization and high unemployment before, but John Mauldin details the deflationary pressure coming out of an area that was / is supposed to power the U.S. recovery... businesses. We have detailed the pullback in new loans to consumers, but below shows the reduction in business loans. First to John Mauldin:

Then we have Reduced Borrowing and Lending, as consumers are paying down debt and banks are reducing their lending. Both are necessary in a credit crisis-caused recession. Bank lending is basically back to where it was two years ago, and shows no sign off rebounding. Banks, as I have written, are buying US government debt in an effort to shore up their balance sheets. Lending to small business, the real engine of job creation, is sadly decreasing eachmonth.

The chart below shows the year over year change in business loans as a percent of GDP going back 6o years.



A record drop and this one doesn't yet appear to be slowing down.

Source: BEA / St. Louis Fed

Non-Manufacturing Layoffs Continue to Rise

In the most recent Mass Layoff (i.e. an action involving the layoff of at least 50 persons from a single employer) release, we see a bifurcation between manufacturing and all other positions. While it appears that manufacturing mass layoffs are coming off highs, which results in the downturn of overall claims due to mass layoffs, mass layoffs from non-manufacturers have increased in recent months (i.e. the blue).



Source: BLS

EconomPics of the Week (10/23/09)

Economic Data

U.S.
Existing Home Sales... Not as Strong as You May Think
U.S. Fighting While We We're Down: Productivity Edges Higher
Strong, But "Flaky" Leading Economic Indicators
State by State Unemployment: Nowhere to Hide
Producer Prices Surprise to the Downside
Consumer Sentiment Sluggish

Global
Eurozone Industrial Production: Strong, but Split
UK Economy Continues to Contract
Japanese Tertiary Index Shows Strength
What if the U.S. is Unable to Power the Global Recovery

Asset Classes
Commercial Real Estate Fiasco
On the Attractiveness of Treasuries

Other
The Politics of Global Warming
The Rich Get Richer: Weekly Wage Edition

And your video of the week, which proves that love is blind:

Existing Home Sales... Not as Strong as You May Think

Bloomberg reports:

Sales of existing U.S. homes surged a record 9.4 percent in September as Americans rushed to take advantage of a tax credit for first-time buyers before it expires next month.

Purchases rose to a 5.57 million annual rate, more than forecast and the highest in more than two years, the National Association of Realtors said today in Washington. The median price fell at the slowest pace in a year as the number of houses on the market shrank.

As Barry of The Big Picture points out, there wasn't actually a jump on a non-seasonal basis:

Existing Home Sales fell 5.4% last month, despite the nonsense you have read elsewhere. NAR continues to bullshit America with their garbage data and spin, month after month, with few people calling them on it. Well, I’ve had it up to here with their garbage.

While I am not as fired up about the NAR reporting as Barry, it is important to note that the rush of last minute tax-credit incentivized home buyers did distort the impact on a non-seasonally adjusted basis (I am typically less inclined to have an issue with seasonally adjusted data when there aren't one-time items making the adjustment more or less useless).

That said, there is another key piece of data in the release; the prices. Everything that has been done thus far (the Fed's mortgage purchase program, the tax credit, etc...) has been with the idea that we can put an artificial floor in place in the housing market. The media hyped the success when the median prices jumped as recently as July... not so much in September.

Source: NAR

Eurozone Industrial Production: Strong, but Split

The Good

Interactive Investor with the details:

"Euro zone industrial orders encouragingly rose by a larger-than-expected 2.0 percent month-on-month in August, thereby achieving a fourth successive increase. The underlying improvement was highlighted by the fact that euro zone industrial orders jumped by 7.1 percent in the three months to August compared to the three months to May.

The Not So Good

"However, it should be noted that August's rise in euro zone industrial orders was highly dependent on a 3.8 percent month-on-month increase in demand for intermediate goods while there were falls in orders for consumer goods and capital goods. Furthermore, euro zone industrial orders were still down by 23.1 percent year-on-year in August.

The Worrisome

The bifurcation between the "haves" and "have nots". While overall, the Euro Area was up 2% in August, countries were more than split to the downside.

Source: EuroStat

UK Economy Continues to Contract

The U.K. "surprised"with a 6th straight quarter of contraction. George Buckley of Deutsche Bank via the Telegraph with the details:

"The worst thing is that every single component of GDP that was published did not rise. It's a bad number. It's the first time that we have seen a six straight quarters of contracting GDP - this is akin to the peak to trough we saw in the 1980s."

"It raises the possibility they (Bank of England Monetary Policy Committee) will have to do more on QE. This will surprise the MPC. This means you've got more spare capacity. It means inflation will be pulled down more."

Source: Stats.Gov.UK

The Politics of Global Warming

File this under the "what the what" section. Yahoo reports:

Just 57 percent think there is solid evidence the world is getting warmer, down 20 points in just three years, a new poll says. And the share of people who believe pollution caused by humans is causing temperatures to rise has also taken a dip, even as the U.S. and world forums gear up for possible action against climate change.

Odd timing... or is it?

The steepest drop has occurred during the past year, as Congress and the Obama administration have taken steps to control heat-trapping emissions for the first time and international negotiations for a new treaty to slow global warming have been under way. At the same time, there has been mounting scientific evidence of climate change -- from melting ice caps to the world's oceans hitting the highest monthly recorded temperatures this summer.

Hmmm.... so when Obama starts to take steps to control emissions, the broader public changes their opinion. My initial thought was that this can't POSSIBLY because climate change is in any way a political issue (well, we all know about Republican's and energy, but that was always under the guise that the cost of doing something outweighs the benefits, but the FACTS are pretty clear)... right? Wrong.

So how has the Republican party made their case? Using research from the EPA? Nope. The EPA believes humans have impacted our climate. So what is it? Apparently Minority Leader John Boehner's "cow farts" theory from April is getting some traction.

If CO2 is the culprit, then why did God create farting cows?

Minority Leader John Boehner described the overwhelming scientific consensus that carbon dioxide is contributing to climate change as "comical" during an appearance on Sunday, noting that cow flatulence contributes CO2 to the environment all the time...

"The idea that carbon dioxide is a carcinogen that is harmful to our environment is almost comical," said Boehner. "Every time we exhale, we exhale carbon dioxide. Every cow in the world, you know when they do what they do you've got more carbon dioxide."

And the results per Environment Magazine:

While more than three-fourths of Democrats (76 percent) believe global warming is already happening, only 42 percent of Republicans share that view in 2008.

Un-friggin believable.

Source: Yahoo

U.S. Fighting While We We're Down: Productivity Edition

WSJ reports:

Both the U.S. and South Korea saw productivity rise 1.2% in 2008, the first full year of the recession, from 2007. They experienced the largest increases of the 17 countries included in the Labor Department's international manufacturing-productivity report released Thursday. Productivity, which is defined as output per hour worked, declined in 12 of the countries, with the largest drops in Singapore and Denmark.

In the U.S., "productivity growth in manufacturing has been above that in services for some time," said Mike Elsby, an assistant professor of economics at the University of Michigan. "Put another way, manufacturing has been progressively doing more with less for 40 years. Consequently, I would expect it to continue."

Over the long run, productivity is key to improved living standards because it spurs rising output, incomes and asset values. But in a down economy, improving productivity with existing workers might mean hiring fewer new ones.

Source: BLS

Strong, But "Flaky" Leading Economic Indicators

Not sure why the .pdf of the latest Leading Economic Indicators is called "Flaky.pdf", but the results are strong none-the-less. Marketwatch reports:

U.S. leading economic indicators rose 1% in September, the sixth straight increase and a strong signal that a "recovery is developing," the Conference Board reported Thursday.

Eight of the 10 indicators were positive in September, the private research group said.

Over the past six months, the index of leading indicator has risen 5.7%, the fastest increase since 1983. Nine of the 10 indicators have risen over the past six months.

Source: Conference Board

What if the U.S. is Unable to Power the Global Recovery?

Reuters details:

Japan's exports edged lower for the third consecutive month in September as a rising yen weighs on overseas shipments and as a rebound driven by global stimulus spending and the stocking of inventories starts to wane.

Shipments to China continued to improve, but economists doubt this will continue as the country is trying to prevent its fiscal stimulus from forming asset bubbles in its economy.

Exports to the United States, a vital market for Japanese goods, were also slow to recover, suggesting exports will make less of a contribution to Japan's growth in coming months.

"The yen's rise is hurting corporate revenues. While the global economy is picking up, the boost to exports from strength in China may start to fade," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"What's needed now is for consumption to recover in the United States, which is the major market for high value-added Japanese goods. In that sense, it may take time for exports to stage a full-fledged expansion."

As can be seen below, the relative strength of China has been a huge driver of the Japanese recover, but Japanese exports to the U.S. are down 34% year over year (which coincidentally matches Japanese exports to the "world ex-China / ex-U.S.", also down 34% year over year).



So when (or maybe more accurately stated will) the U.S. be able to provide the global economy with much needed private demand?

With a stretched out consumer that is busy rebuilding their personal balance sheet (or unemployed, thus busy just making ends meat), I personally doubt it. Even if they wanted and/or were willing to, is the U.S. consumer even able to with a shrinking supply of credit available to them and diminished personal assets to lever even if they do have access to a loan.

Source: Customs.Go.JP

State by State Unemployment: Nowhere to Hide

The BLS details:

Between August and September 2009, 15 states and the District of Columbia experienced statistically significant changes in employment, all of which were decreases. The largest statistically significant job losses occurred in New York (-81,700), Texas (-44,700), California (-39,300), Wisconsin (-21,700), and Michigan (-21,500). The smallest statistically significant decreases in employment occurred in Hawaii (-4,200), Nebraska (-6,300), and Arkansas (-7,700).

Over the year, 46 states experienced statistically significant changes in employment, all of which were decreases. The largest statistically significant job losses occurred in California (-732,700), Florida (-360,400), Michigan (-308,800), Illinois (-306,900), Texas (-303,700), Ohio (-258,100), New York (-256,100), and Georgia (-245,400). The smallest statistically significant decreases in employment occurred in South Dakota (-7,900) and Montana (-8,400).

Source: BLS

Producer Prices Surprise to the Downside

NY Times details:

Even as investors were bidding up the prices of commodities like oil and gold last month, wholesale prices in the United States were falling, reflecting weak demand at home.

The government’s Producer Price Index fell 0.6 percent in September after rising by 1.7 percent a month earlier, the Labor Department reported on Tuesday. The figures show that, despite a weakening dollar, inflation remains a remote concern as the American economy struggles to pull itself out of a deep recession.

“The demand for goods is still very soft; the United States economy is just barely recovering,” said Allen Sinai, president of Decision Economics. “In a weak economy where consumer spending is weak, businesses have been slashing left and right. This surprisingly deflationary result reflects that.”

Food and energy prices fell for the month, and prices were sharply lower than last year, when the financial crisis deflated a commodities bubble that had lifted gasoline prices to $4 a gallon and sent the dollar to record lows. In September, producer prices were down 4.8 percent from a year ago, and prices paid by consumers were 1.3 percent lower.

That said, expect the producer price index to level off over the next few months. As an example... if over the next three months the index is flat, the year over year change will bounce back to positive territory due to the comparison to the "cliff diven" months from Q4 of last year.



Source: BLS

Commercial Real Estate Fiasco

Bloomberg details the fiasco that is the commercial real estate market:

Commercial property values in the U.S. declined in August as job losses and the recession cut demand for offices, retail space and rental apartments.

The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the market’s decline to almost 41 percent since its peak in October 2007, Moody’s Investors Service said in a statement today. Prices fell 8 percent in both April and May, according to Moody’s.

The Why (i.e. the double whammy of too much supply from the bubble and no demand):

Values are falling as U.S. unemployment climbs and consumers cut spending. Office vacancies rose to a five-year high of 16.5 percent in the third quarter, according to New York-based property research firm Reis Inc. Apartment vacancies hit a 23-year high and mall vacancies were the highest since 1992.

The optimist point of view:

“We can’t call a bottom at this point, but it’s an encouraging sign to see the deceleration in the decline,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.

The realist point of view:

Commercial real estate prices are forecast to fall additional 17 percent through the fourth quarter of next year, Goldman Sachs Group Inc. said in a Sept. 30 report, citing scarce credit, rising vacancy rates and the risk of forced sales.

The ugly chart through August 2009:


The real fear is what will happen when those properties financed in 2005-2006 need refinancing (a lot of these properties were financed on 5 year'ish loans) and owners realize the asset they have is worth 40-50% less than they paid for it, but still need a loan for that full amount. But, the problems are happening earlier as those same owners are wondering why they should make payments with that type of future (or in many cases can't make payments now).

Late payments on commercial mortgages jumped sevenfold in September from a year earlier, as installments on $22.4 billion of mortgages were at least 60 days late, Credit Suisse analysts reported Oct. 12. The delinquency rate of commercial mortgage payments bundled into bonds rose to 3.64 percent in September from 0.54 a year earlier, Moody’s said Oct. 13.

Source: MIT

The Rich Get Richer: Weekly Wage Edition

Wages rose across the board! Good news right? Not necessarily. Per the WSJ:

There were about 8.2 million fewer full-time wage and salary workers in the third quarter than two years ago; the data doesn't include part-time or self-employed workers. Low-wage workers are hit disproportionally during recessions, and their absence from the tally could cause median wages to rise even if the typical worker isn't getting a raise.

Even with the benefit of the "drop out effect" of low-wage workers dropping out of the data, the lower income workers saw their weekly wages rise to a much less extent than higher income workers (i.e. the rich got richer). Here's the change in weekly earnings for quartiles and the top / bottom deciles since the recession began in December 2007.



BUT, part-time workers saw a large jump in pay too you say? Unfortunately, that is mainly due to:

• A large number of these part time workers "should" be / were full-time workers, thus this "jump" in pay were actually pay cuts as they got downsized to part-time
  
• Young workers were the only age group to see their wages decline over the past two years as there was limited demand for their services (the unemployment rate among young people is an outlier even in this ugly economy), thus a greater percent of the part-time workers were non-young people, who typically earn less
  

Historical figures...



Top decile earners now make more than 5 times the amount that bottom decile earners make, up from 4.4 in March 2000 (as far as this data goes back).

Source: BLS

On the Attractiveness of Treasuries

The Bad
The ten year treasury bond is yielding 3.4%.

The Good
That yield is 4.7% above the latest year over year CPI print, the highest level in 25 years.



So, are longer dated Treasuries a good investment? Depends on your outlook for interest rates and inflation. That measly 3.4% is still 140 bps higher than December lows should this "rebound" not be all its cracked up to be.

Source: Yahoo / BLS

Consumer Sentiment Sluggish

Reuters details Friday's Michigan Consumer Sentiment release:

U.S. consumer sentiment fell unexpectedly this month on persistent worries that the "dismal" state of personal finances would not recover quickly from the worst recession in decades, a report showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of sentiment for October fell to 69.4, from September's 73.5. That was below economists' median expectation of a steady reading of 73.5, according to a Reuters poll.

The report said diverging prospects for the general economy and personal finances would have a negative impact on the pace of the recovery, with consumers eager to increase their savings and pay down debts.

Source: St. Louis Fed

Japanese Tertiary Index Shows Strength

RTT News details:

An index measuring tertiary industrial activity in Japan was up 0.3 percent in August compared to the previous month, the Ministry of Economy, Trade and Industry said on Monday, posting an index score of 97.1.

That beat analyst expectations for a 0.1 percent monthly increase following the revised 0.7 percent increase in July - which was originally reported higher by 0.6 percent.

The index incorporates data from firms involved with wholesale and retail trade, financial services, health care, real estate, leisure, and utilities.

The largest jump in the index was in professional services, led by civil engineering and architectural services (of which geological survey services jumped a massive 46%) offset by continued weakness on the consumer side.



Source: Meti

EconomPics of the Week (10/16/09)

Week three of six (yikes... only halfway there) of crazy "real job" related travel if you've noticed the limited posts / lack of new analysis. Completely drained so don't be surprised if I decide to take a few days off next week, but a weekend has proven to regenerate me before.

Economic Data

Inflation
Output Gap and Inflation
Inflation Cools Off? No Inflation to Begin With
UK Weakness and Disinflation

Manufacturing
Philly Fed Shows Strength, But Less
Empire Manufacturing Index Roars

Consumer
Consumer Credit: Supply vs. Demand
Retail Sales Show Relative Strength
Good News Alert: Inventories Cliff Dive

Other
German Investor Confidence Slightly Lower
Costs of Employment Up... Just Not in Wage Form
Renting vs. Owning

Asset Prices
The Legacy of Bill Miller

Output Gap and Inflation

Marketwatch details:

Output of the nation's factories, mines and utilities rose 0.7% in September after an upwardly revised 1.2% gain in August and a 0.9% increase in July, the Fed said. The 0.7% increase in output in September was stronger than the 0.4% gain expected by economists surveyed by MarketWatch. Manufacturing output rose 0.9% in September. Capacity utilization rose to 70.5% in September from a revised 69.9% in August.

Looking at the chart below, we see an improvement in the year over year decline in capacity utilization, which indicates less disinflationary pressure in the system.

BUT, Macro-man details why inflation may tick up before the level of capacity utilization increases:

However, it's probably worth touching on some small aspect of the debate, as behind the scenes it seems as if the same is happeneing at the Fed. Don Kohn's recent speech highlighted the large size of the output gap, a view largely echoed in last night's FOMC minutes. Yet at a recent St. Louis Fed conference, Bank president James Bullard offered a somewhat contrary view-namely that the collapse of the bubble has eradicated some of the productive capacity of the economy, thus rendering the output gap smaller than commonly believed.

And an example of how a decrease in the value of a dollar may play into the inflation/deflation debate (i.e. a weak dollar will make it more difficult to import disinflation from overseas):

While it's certainly the case that import prices from China are still down year-on-year, intriguingly, the quarterly change in import prices has returned to zero. In other words, there is no marginal deflationary trend in US import prices from China. If (or rather, when) domestic inflation in China starts to rise, courtesy of PBOC's helicopter money-drop, it seems reasonable to posit that US import prices from China will begin to rise.

Source: BLS

Philly Fed Shows Strength, But Less

Unlike the strength shown in the Empire Manufacturing Survey, the Philadelphia Fed Survey showed the recovery may not be one direction in nature. Bloomberg details:

Manufacturing in the Philadelphia region expanded at a slower pace this month, a reminder that the recovery from the deepest recession since the 1930s will be gradual.

The Federal Reserve Bank of Philadelphia’s general economic index dropped to 11.5, lower than forecast, from a September reading of 14.1 that was the highest since June 2007, figures from the bank showed today.

Factories have been slow to rev up output as excess capacity, mounting joblessness and the wind-down of stimulus measures such as “cash-for-clunkers” point to an uneven rebound in demand. Even so, inventories near record-low levels set the stage for an eventual pickup in production when consumer spending strengthens.

Manufacturers were less upbeat about the future, today’s report showed. Expectations for the next six months fell to 39.8 from 47.8. Factory activity nationwide accounts for about 12 percent of the U.S. economy, the world’s largest.

Source: Philly Fed

Inflation Cools Off? No Inflation to Begin With

CNN's headline of this morning's CPI release was "Inflation Cools Off". My question... what inflation? Take this anecdote of the "inflation" in the system. USA Today details:

Colorado will become the first state to reduce its minimum wage because of a falling cost of living.

The state Department of Labor and Employment ordered the wage down to $7.24 from $7.28. That's lower than the federal minimum wage of $7.25, so most minimum wage workers would lose only 3 cents an hour.

Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.

But because Colorado's provision allows wage declines, the minimum wage will drop because of a falling consumer price index. It will be the first decrease in any state since the federal minimum wage law was passed in 1938.

Take the bottom left chart with a grain of salt as the three biggest components of CPI are Housing, Food and Beverage, and Transportation (i.e. the bottom three in the chart).

Source: CPI

Empire Manufacturing Index Roars

Bloomberg details:

Manufacturing in the New York region expanded in October for a third straight month, reinforcing signs that factories are helping pull the economy out of the worst recession in seven decades.

The Federal Reserve Bank of New York’s general economic index soared to 34.6, the highest since mid-2004, from 18.9 in September, the bank said today, marking the first time the measure has shown expansion for at least three months since a period ending in January 2008. Readings above zero for the Empire State index signal manufacturing is growing.

Government stimulus measures such as highway repairs and an auto trade-in program, record inventory cutbacks that set the stage for renewed production and a revival in overseas demand are helping factories expand again. Stabilization in manufacturing is one reason economists estimate that growth resumed last quarter.

Source: NY Fed

Good News Alert: Inventories Cliff Dive

Marketwatch details:

Paced by a large draw-down in autos, business inventories fell 1.5%, matching the largest percentage decline ever recorded in the 17-year history of the data. Inventories also fell 1.5% in December 2008 and in October 2001.

It was the 12th consecutive month of falling inventories. Read the full report.

Economists surveyed by MarketWatch were expecting a 1% drop in inventories. See Economic Calendar.

Meanwhile, sales increased 1% in August, which were also boosted by the government's cash-for-clunkers deal. The figures are not adjusted for price changes, but are adjusted for seasonal variations.

Inflation-adjusted business sales are one of four key indicators used to determine if the economy is in recession or expansion. The others are nonfarm payrolls, personal incomes, and industrial production

The good news is this sets up the "Mother of All Inventory Corrections" we've all been waiting for, but when? Well, inventories are at late 2005 levels (good for the inventory correction story), but sales are at early 2005 levels (not good for the inventory correction story).



My guess is that inventories continued to decline in September, but at some point the rebound (or even flattening in sales) will require a replenishment of inventories.

Source: Census

Retail Sales Show Relative Strength

CNN Money reports:

Retail sales fell in September after a popular program aimed at boosting auto sales ended, but the drop was smaller than economists had expected, government data showed Wednesday.

The Commerce Department said total retail sales fell 1.5% last month, down sharply from an increase of 2.7% in August, when overall sales were boosted by the government's Cash for Clunker's program.

Economists surveyed by Briefing.com had forecast a decline of 2.1% in September sales.

Sales excluding autos and auto parts rose 0.5%, compared to a 1.1% increase in August. Economists expected a gain of 0.2% in September sales, excluding auto purchases.

Looking at the change in sales from July (which ignores the spike in August), retail sales showed relative strength across the board with the exception of motor vehicles (the Cash for Clunkers program began in late July).



Source: Census

UK Weakness and Disinflation

In the face of strong numbers coming out of China indicating much of the world may be coming out of the global recession faster than anticipated, the dollar isn't the only currency selling off. In fact, the Pound has been selling off at a faster clip due to some serious relative weakness brewing out of the United Kingdom. BBC News details:

A key measure of inflation has fallen to its lowest level since September 2004, official statistics show, further weakening the value of sterling.

The Consumer Prices Index (CPI) dropped to an annual rate of 1.1% in September from 1.6% in August.

Meanwhile, the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, fell to -1.4% from -1.3%.

The pound fell 0.5% against the euro to a six-month low of 1.0628 euros.

It also fell to a five-month low against the dollar of $1.571, though pulled back against both currencies later.

Source: Stats.Gov.UK

Renting vs. Owning

The NY Times had a recent article 'The Hunt - The Apartment Hunters are Happy Renters' which follows a couple that were previous owners, but felt they were sucked into owning by the boom.

Nearly four years ago, “it was the height of a crazy bubble,” Ms. LeCount said. “We just wanted to buy something. We were like fresh meat.”

But after living for three years in the condominium they bought in Weehawken, N.J., they regretted it.

They had no idea what they were getting into. “We are not home improvement specialists,” Ms. LeCount said. “We are not the people who should be going to Home Depot and looking at grout.”

In other words, while the housing boom and subsequent bust has put a lot of people out of homes, it also trapped many would be / should renters into long term mortgages. But, as the chart below shows, that trend may be shifting course.



It will be interesting to see how home ownership is viewed after this mortgage crisis dissipates. The traditional benefit of ownership (building wealth, tax benefits, pride) may now be offset by what a mortgage actual is... a long term liability.

Source: Census

Consumer Credit: Supply vs. Demand

In response to my post on Consumer Credit, an anonymous reader asks:

Is it possible to determine whether the decline in consumer credit is due to consumers voluntarily paying down their credit, or to banks providing less of it? Consumers paying down their credit cards seems infinitely less scary than banks refusing to lend.

I can't find data related to actual paydowns (if anyone has it, let me know), but here is some data that shows the measure of supply / demand according to historical senior loan officer surveys (smoothed over 12 months).



It looks like there has been a lack of demand for consumer credit since late 2003, thus the need for easier and wider availability of credit. It has only been since late 2007 / early 2008 that supply has become constrained.

Source: Federal Reserve

German Investor Confidence Slightly Lower

Bloomberg reports:

German investor confidence unexpectedly declined for the first time in three months in October amid concerns that the pace of the nascent recovery in Europe’s largest economy may ease.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped to 56 from 57.7 in September. Economists had forecast an increase to 58.8, the median of 36 forecasts in a Bloomberg News survey showed.

Germany’s benchmark DAX index has surged around 57 percent since early March as the economy pulled out of the worst recession since World War II. While growth probably accelerated in the third quarter, according to the Bundesbank, the pace of the recovery may be tempered by rising unemployment, the fading of stimulus measures and the euro’s increase against the dollar.

“Enthusiasm is now gradually giving way to realism and the German economy is about to enter calmer waters,” said Carsten Brzeski, an economist at ING Groep in Brussels. Today’s reading is “no reason to fall back into depression.”

Source: ZEW

Costs of Employment Up... Just Not in Wage Form

This American Life's most recent podcast, More is Less, discusses one of the many implications of higher healthcare costs; the fact that less of the increase in costs associated with staffing is actually passed through to the worker in the form of wages (think broken system, greed, and the demand for procedures that may not be necessary from the patients themselves).

As can be seen below, while income has been stagnant in real terms, costs to employers has risen steadily due to the increase in the cost of benefits (i.e. healthcare).



Source: BLS

The Legacy of Bill Miller

Quick... predict the Barron's title for a fund manager that has underperformed their benchmark (in this case the S&P 500) by 15% over the last 12 months.

• "Tough Times for Bill Miller"
• "The Rise and Fall of Biller Miller"
• "Bill Miller Loses His Edge"

Nope.... the actual headline? "He's Back".

Lets go to Barron's for the fluff:

The aggressive manager of the Legg Mason Value Trust, whose remarkable run of success preceded a more recent patch of dreadful yearly returns, is again near the top of his peer group in 2009. Through last Thursday, the Value Trust (ticker: LMVTX) was up a whopping 37.52% so far this year, putting it in the fifth percentile (top 5%) of all large blended-fund returns. It's an amazing about-face from early March, when his fund had lost 72% of its value in a matter of about 18 months.

"If you do this long enough, the market has a way of making you look stupid from time to time," says Legg Mason Value Trust manager Bill Miller.

"The shareholders who stuck with us believed in our process and have seen us underperform; it has happened before," Miller told Barron's in a recent interview. At least "we built up large tax-loss carry forwards, which will mean no capital-gains taxes, which may go up."

True, he has underperformed before.... in fact, over the last ten years his fund has underperformed the S&P 500 by more than 17% and is down 23% in absolute terms over that time.



World Beta sums it up perfectly with his post:

Lose 72% of Your Investors Money, Make the Cover of Barron's

Source: Yahoo

EconomPics of the Week 10/09/09

Not much output this week (the "real job" took precedence).

Labor
10.9 People Unemployed per Job Opening
Labor Force Shrinkage

Consumer Credit
The Dangers of Non-Seasonal Data
Consumer Credit Crumbles

Other Economic Data
Trade Balance Breakdown
ISM Services Show Signs of Expansion
Same Store Sales Rebound.... To 2005 Levels
Is the Long Awaited Inventory Correction About to Spike
U.K. Production Slumps to 1992 Levels
Aussie Miracle Results in Rate Hike

Other
Hedge Funds: Up, Up, and Away
TARP Turns One
Wealthiest Americans Rebounding