Monday, December 28, 2009

On the Change in Q3 GDP

I hope you all are having a nice holiday season thus far. I am back in civilization, though I plan to keep posting light the remainder of the week.

I did want to touch upon the large downward revision to GDP prior to this becoming "last years news". The AFP reported:

The US economy limped forward at a 2.2 percent pace in the third quarter, according to government figures Tuesday that suggest a tepid recovery from recession.

The downward revision from last month's estimate of 2.8 percent growth in gross domestic product (GDP) came primarily from a weaker contribution from business investment, as well as slightly slower consumer spending growth.

The Commerce Department report confirms that the world's biggest economy swung back to growth in the July-September period after four quarters of contraction in the worst recession in decades, but with little forward momentum.

Scott Brown, chief economist at Raymond James & Associates, said the report was "a bit disappointing" and suggests "that underlying domestic demand is pretty soft."
Brown said he expects a jump in growth to at least 4.0 percent in the current fourth quarter, but says much of that will come from restocking of business inventories drawn down in the recession.

Below is a chart detailing what was revised down from the initial 3.5% release to the "final" (i.e. it can still be revised) 2.2% figure. It turns out... everything (consumption, investment, government spending, net exports).



Overall contribution remained centered around the rebound of the consumer in the face of mounting debt / high unemployment, but subsidized deals (i.e. cash for clunkers) winning the battle. Growth in investment and government spending outpaced the negative impact of the rebound in imports (what... you thought we were consuming only American made items????).


Source: BEA

Friday, December 18, 2009

EconomPics of the Week: See You in 2010 Edition

If I see something that is VERY interesting, I may post (also possibly going to post a "best of" EconomPic for 2009). If not, happy holidays to all!

Too Indebted
Treasury Debt to Receipts Spiking
Treasury Debt to Receipts over the LONG Term

Assets
On the Timing / Importance of Stock Buybacks
The Great (Two Week Glimpse of What Can Happen) Unwind

Capacity
Capacity Destruction?
Can Capacity Destruction be Good for GDP?
Capacity Utilization and Production Rebounding

Other Economic Data
Leading Economic Indicators Strong in November
State Personal Income Rebound
Consumer Price Index... Up, but (Seemingly) Contained
PPI Jumps from Energy Prices in November
Industrial Production Down in Eurozone

Can Capacity Destruction be Good for GDP?

Notice that I state GDP and not "the economy" in the headline (the broken window theory explains why destruction is not good for the economy, BUT it doesn't mean that it won't lead to a better GDP print down the road). As Richard Posner details, there are many issues relying too much on GDP:

But it is necessary to emphasize that it is just a starting point. I disagree with economists who say the “recession” ended in the third quarter. The depression (as I think we should call it if only because of its enormous potential political consequences) has caused massive unemployment with all the associated anxieties and hardships, has greatly reduced household wealth, has caused private investment to turn negative, has cost the government trillions of dollars in lost tax revenues and recovery expenditures (TARP, the fiscal stimulus, the mortgage-relief programs, the auto bailouts, etc.), has undermined belief in free markets and altered the line between government and business in favor government, and is threatening a future inflation while deepening our dependence on foreign lenders. To view a change in GDP from negative to positive as signifying the end of a depression (by which criterion the Great Depression ended in 1933 and again in 1938) is to misunderstand the utility of GDP as a measure of economic activity.
Historical Capacity Destruction

That said, as I initially stated in my post on capacity destruction:
Capacity utilization is utilized capacity / total capacity. This means that the change in capacity utilization may not only be due to a change in the numerator (utilized capacity), but in the denominator as well (overall capacity). And my guess is overall capacity is actually decreasing for the first time since the telecom overbuild collapse in the early 00's.
Reader Dennis Oullet pointed out that while I was correct, I went the difficult route to get to that point (full historically data is available on the Fed's website).

And here is that data showing the year over year change in total capacity going back to the early 1980's.



While the recent period has seen overall capacity removed from the system, the lack of capacity build since the telecom bust (2001) is even more striking (below is a chart showing 8 year rolling periods, which matches the time frame since that telecom bust).



Capacity Reduction --> Higher GDP Print?

Reader dblwyo made an interesting point that:
A complementary notion is that industry grossly under-invested relative to growth in the 00's and drove utilization higher, i.e. let equipment die off. That guess seems to tie a lot of things together.
So while we overbuilt toward the end of the 1990's, we have since under-invested as we outsourced production to cheap Asian labor, grew the economy via the housing / financial sectors rather than manufacturing, and ran into the worst economic slump since the Great Depression (or WWII at a minimum).

Combined with the recent capacity destruction, am I crazy to think that businesses may NEED to invest in new (or upgraded) capacity sooner than many think? My thought is along similar lines of how inventory restocking may lead Q4 '09 GDP to grow as much as 5% (per David Rosenberg):
We mentioned two days ago, there is an outside chance that we could see Q4 real GDP approach a 4-5% range at an annual rate, well above current consensus expectations (currently the Bloomberg consensus is expecting a 3.0% increase in GDP). A good chunk of that is in inventories, not final demand, but so be it.
Why can't capacity replacement lead to higher GDP prints as well (again, separating GDP from the actual economy)? Obviously the timing of this may be off (i.e. I can't imagine it occuring when capacity utilization is near all time lows, unless some new technology springs to life), but as capacity continues to be taken off-line (i.e. destroyed), couldn't the replacement be a surprise upside for GDP?

Source: Federal Reserve

Thursday, December 17, 2009

The Great (Two Week Glimpse of What Can Happen) Unwind

As detailed in early November in my post Did We Learn Anything: Carry Trade Edition:

The issue is that at some point the dollar will stabilize (or gain in value), increasing the "real" cost of borrowing the dollar.

BUT... if the correlation of assets purchased is near one on the way up, it is sure as hell going to be that high or higher on the way down. And what happens to all these investors that are attempting to leave the same exit door at the same time? Massive re-purchasing of the dollar and massive selling of any risk asset... joy.

While I still do not think this is the official end of the carry trade, the last two week's give a glimpse into what can happen.


Interesting (to me) is that equities have held up relatively well over this period.

Source: Yahoo

Leading Economic Indicators Strong in November

Per the Conference Board:

The Conference Board LEI for the U.S. increased again in November. The interest rate spread, initial unemployment claims (inverted), average weekly hours and housing permits made large positive contributions to the index this month, more than offsetting negative contributions from the index of supplier deliveries and the index of consumer expectations.

The six-month growth in the index has slowed somewhat in recent months -- to 4.7 percent (about a 9.6 percent annual rate) in the period through November, but it remains substantially higher than the increase of 1.2 percent (a 2.4 percent annual rate) from November 2008 to May 2009. In addition, the strengths among the leading indicators have remained widespread in recent months.

State Personal Income Rebound

BEA details:

Although third-quarter personal income growth was slower than second-quarter growth (0.8 percent), its composition improved. Net earnings accounted for most of third-quarter growth in 33 states and for the nation. In contrast, transfer receipts accounted for most second-quarter personal income growth in 41 states.

Nationally, the industries making the largest contributions to third-quarter earnings growth were finance and health care. Smaller contributions of the other private service-producing industries were offset by declines in goods-producing industries. Although mining, construction, and manufacturing continued to decline in the third quarter, they subtracted less from third-quarter earnings growth than from second quarter growth. Federal civilian and military earnings grew in the third quarter, but state and local earnings declined, so that the net contribution of the government sector was zero.

Quarter over Quarter Improvement


Year over Year Shows How Far We Had Fallen


Source: BEA

Wednesday, December 16, 2009

Capacity Destruction?

Upon further review of capacity utilization...

The chart below shows the year over year change in industrial production, capacity utilization, and the difference between the two. In a world in which productivity is booming (it is), that means people are making more... with less. Thus, productivity "should" be rising more than capacity utilization all else equal. However, as the chart below shows... it is not.



Why? Well, here's my theory... capacity utilization is utilized capacity / total capacity. This means that the change in capacity utilization may not only be due to a change in the numerator (utilized capacity), but in the denominator as well (overall capacity). And my guess is overall capacity is actually decreasing for the first time since the telecom overbuild collapse in the early 00's.

Thoughts?

Source: Federal Reserve

Update:

Reader Dennis Oullet points out that while I am correct, I went the difficult route (overall capacity data is available on the Fed's website).

Consumer Price Index... Up, but (Seemingly) Contained

Bloomberg details:

The cost of living in the U.S. accelerated in November from a month earlier, led by higher prices for energy and medical care.

The 0.4 percent increase in the consumer-price index followed a 0.3 percent gain in October, figures from the Labor Department showed today in Washington. The so-called core index that excludes food and energy was unexpectedly unchanged, the first month without an increase since December 2008 and restrained by a drop in shelter costs and cheaper clothing.

Energy costs have retreated so far this month, and comments from companies such as Best Buy Co. indicate unemployment close to a 26-year high is prompting retailers to discount their merchandise. Federal Reserve policy makers have said they expect “subdued” inflation in coming months, allowing them to keep interest rates low.

The report “gives them some more room to see how the recovery unfolds,” said Harm Bandholz, a U.S. economist at UniCredit Global Research in New York who correctly forecast the core rate. “The drivers are the vast underutilization of capacity, notably the high unemployment rate.”


Source: BLS

Tuesday, December 15, 2009

Treasury Debt to Receipts over the LONG Term

In response to my post on Treasury Debt to Receipts Spiking an anonymous reader asked for data going back further than the early 1980's. Using data from USGovernmentRevenue.com, the chart below shows debt to receipts going back to the mid 1800's.

So how does the recent spike compare?

Click for Ginormous Chart


The Good:
Debt levels have been higher relative to receipts

The Bad:
Those levels were only after the Civil War and Great Depression

Capacity Utilization and Production Rebounding

Reuters reports:

U.S. industrial output rose firmly in November as the manufacturing sector extended a recovery that economists hope will help turn around the ailing labor market.

Production climbed 0.8 percent, the Federal Reserve said on Tuesday, well above forecasts for a 0.5 percent gain. The strides were powered in part by the automotive sector, and came despite a sharp drop in utility output. Capacity utilization, the amount of the nation's industrial capacity being put to use, rose to 71.3 percent in November from a revised 70.6 in October, its highest level since last December but still well below the long-range average.


Update:

An Anonymous reader didn't like the post.
Come on Jake. This reporting is hugely inaccurate. If we really want BS spin reporting, we'll just watch CNBC! A prosuction increase of .8 percent is not significantly above a forecast of .5 percent. This is noise. Capacity Utilization is much closer to the bottom than 2007 levels. Your graph does not illustrate that at all.
While I did enjoy his candor... my response:
I will defend myself and say I used the word "spike" not "rebound".

After the freefall we saw from late 2008 through early 2009, I'll agree that we need a "spike" to get the economy back to trend, BUT a rebound is better than a continued decline.
And the data seems to show just that.



Does this mean the "rebound" is sustainable? Not necessarily, but it has been a rebound none-the-less.

Source: Federal Reserve

PPI Jumps from Energy Prices in November

Marketwatch reports:

Wholesale prices rose a larger-than-expected 1.8% in November after seasonable adjustments, with energy prices accounting for about three-fourths of the increase, the Labor Department reported Tuesday. The producer price index has risen 2.4% in the past year, the government said. This is the first rise since November 2008.

The core PPI - which excludes food and energy prices - rose 0.5% in November, more than expected. Leading the advance were higher truck and cigarette prices. Core prices are up 1.2% in the past year. Economists surveyed by MarketWatch expected a 1.0% rise in the November headline PPI and a 0.3% gain in the core rate. The PPI had risen 0.3% in October, while the core rate was down 0.6%.

Expect this to reverse course in December as energy prices have collapsed month to date.


Source: BLS

Monday, December 14, 2009

On the Timing / Importance of Stock Buybacks

WSJ reports:

During the third-quarter, stock buybacks moved off the record low levels seen during the March-through-June period. But the total level companies spent buying back their own shares remained at depressed levels, S&P analysts reported.

Preliminary results showed that S&P 500 companies spent $34.8 billion on stock buybacks during the third quarter of 2009. That represents a 61.2% decline from the $89.7 billion spent during the third quarter of 2008, and a 79.7% decline from the record $172.0 billion spent on stock buybacks during the third quarter of 2007.

Still, stock buybacks for the third quarter of 2009 bounced back 44% to $34.8 billion from the $24.2 billion spent during the second quarter of 2009, when the expenditures hit their lowest level since the first quarter of 1998. (That’s when S&P first started collecting data on buybacks.)

While buy-backs might be showing signs of recovery, ongoing corporate timidity reflects, in part, on the shut down of the borrowing markets last year during the financial crisis. Companies — those that survived — remember those days with trepidation and don’t want to get caught short if a similar credit freeze strikes again.
So... are corporations bad market timers buying at highs and issuing more shares at lows? Sure seems that way looking at the chart below which compares the market cap of the S&P 500 against the level of stock buybacks.

Or... is this just a chicken or the egg issue in that buybacks were an important CAUSE of the equity rally? The chart below does show the size of the stock buybacks relative to the market cap of the S&P 500 (they were LARGE).



How large? Buybacks accounted for 4.6% of the 6.5% (70%) of the S&P 500's total yield (as measured by dividends AND buybacks as a percent of the year end market cap) in 2007.



And now? Just 1.2% of the 3.2% total yield off of a base (the S&P 500 market cap) that is 24% below year end 2007 levels as of yesterday's close.

The key question for equity investors... will buybacks bounce back or were those levels of purchases made from 2005-2008 an extreme outlier caused by the excess liquidity in the system?

Source: S&P / Index Arb

Industrial Production Down in Eurozone

RTT News details:

Eurozone industrial production declined in October hurt by plunging demand for durable and non-durable consumer goods, pointing to meager support to GDP growth in the fourth quarter.

Industrial output in the 16 nation currency bloc fell by a seasonally adjusted 0.6% in October compared to the previous month, reversing the revised 0.2% rise in September, a report from Eurostat revealed Monday. Production thus declined after rising for five consecutive months.

However, the actual drop for October was slightly smaller than the 0.7% decline expected by economists. The statistical office revised the monthly growth for September from 0.3%.

Glass Half Empty
Strong improvement witnessed over recent months is losing momentum. BNP Paribas economist Clemente De Lucia noted that the impact of car incentive schemes is starting to ease and will not be felt anymore next year.
Glass Half Full
However, according to Martin van Vliet, an economist at ING, it is premature to conclude that the industrial recovery is seriously losing momentum as less volatile three-month rate of change remained firmly in positive territory. Economist forecast Eurozone GDP to expand at a fairly healthy clip in the fourth quarter.

Source: Eurostat

Treasury Debt to Receipts Spiking

For those that haven't yet had the opportunity to read Steve Keen, an economist out of Australia who has had some very insightful posts in the past (February's The Roving Cavaliers of Credit is a great 'out of the box' piece that I've reread multiple times), I recommend his latest piece 4 Years Calling the GFC (i.e. the Global Financial Crisis). He noticed that Australia and the United States have been able to service a growing level of debt (which has driven a significant portion of past economic growth) due to interest rates that have moved lower and lower, resulting in servicing costs that have stayed relatively flat.

The issue is what happens when you hit the zero bound and can no longer lower rates (or when the marginal buyer is not willing to accept those lower and lower levels). The best case is lower growth as those debt levels are worked off / inflated away gradually. A worst case is when those levels reach an unsustainable level and default is brought into question (the U.S. really can't default, but bringing out the printing press just to make payments would result in a situation just as bad in my opinion).

The level Steve Keen chose to look at to see just how much debt the U.S. has piled up was debt as a level of GDP. Why?

In dynamic terms, the ratio of debt to GDP tells you how many years it would take to reduce debt to zero if all income was devoted to debt repayment. That is an extremely valid indicator of the degree of financial stress a society (or an individual) is under.
That makes sense, but I thought debt levels relative to the actual receipts brought in by the government to service that actual debt would be interesting / instructive. As a result we have the below chart, which is marked by a collapse of tax revenue at its most recent point, but the result is frightening none-the-less.



Sources: Government debt outstanding (per Treasury Direct) divided by the twelve month rolling level of receipts (per the Treasury )

Friday, December 11, 2009

EconomPics of the Weeks (The Final Countdown)

Opinion
On the Value in Housing
Wealth Rebounds in Q3... Is It Sustainable?

Sustainable Rebound?
Wholesale Inventory Correction Isn't "Real" in October
Temporary Help as a Predictor of Broader Hiring
Income Disparity
Payroll and GDP
Deleveraging Consumer and Economic Growth

Economic Data
Retail Sales Strong in November
Treasury Budget: "Only" $120.3 Billion Deficit
Trade Balance Improves in October
Can't Get a Job? Here's Why...
The Real Lost Decade: Japanese GDP Edition

I figure we'll figure out shortly whether or not the recovery is sustainable. In other words... It's the Final Countdown! Da da da da... da da da da...

Retail Sales Strong in November

ABC News:

Sales at U.S. retailers rose more than expected in November as consumers spent more on gasoline and a wide range of other goods, data showed on Friday, raising hopes of a self-sustaining economic recovery.

The Commerce Department said total retail sales increased 1.3 percent last month, the largest advance since August, after rising by a downwardly revised 1.1 percent in October. It was the second straight monthly gain. Sales in October were previously reported to have increased 1.4 percent.

Analysts polled by Reuters had forecast retail sales gaining 0.7 percent last month. Overall sales in November were boosted by strong receipts from gasoline stations, increased purchases of motor vehicles and parts, building materials and electronic goods among others. Gasoline sales surged 6 percent, the largest increase since June.
Compared to November last year, sales were up 1.9 percent, the first year-on-year gain since August 2008, a Commerce official said.


Source: Census

Thursday, December 10, 2009

Wealth Rebounds in Q3... Is It Sustainable?

The Federal Reserve released their Flow of Funds Accounts of the United States report (yes, for a data hound such as myself, I am the kid in the candy store reading through it). Bloomberg reports on one aspect, the initial rebound from the larger wealth hole that we need to dig ourselves out of:

Household wealth in the U.S. increased by $2.67 trillion in the third quarter as stock prices and home values climbed, and revised data showed Americans have a larger hurdle to overcome.

Net worth for households and non-profit groups rose to $53.4 trillion from $50.8 trillion the prior quarter, a second consecutive gain, according to the Federal Reserve’s Flow of Funds report today in Washington. Revisions put the loss of wealth between the third quarter of 2007 and the first three months of this year at a record $17.5 trillion, compared with a previous estimate of $13 trillion.
Hey, what's $4.5 trillion amongst friends?

The chart below shows the rebound we have seen since year end 2008. Of interest (to me) is that liabilities have decreased slightly ($157 billion decline over the last 9 months), which may be the beginning signs of much needed deleveraging. More interesting (to me) is that all household assets haven't shared equally (or at all) in the rebound. The rebound has been largely concentrated in liquid financial risk assets (i.e. securities) vs. illiquid tangible risk assets (housing), which have actually continued to decline since the end of the year.



Why is this important? Because it brings up the question as to why these liquid risk assets have rebounded and whether that rebound is sustainable. I personally think it was due to a combination of fundamentals (sustainable) and technicals (questionable sustainability). Fundamentals in that risk assets dislocated in 2008 (i.e. got too cheap and had fundamental value), but a bigger share is due to the technical side of things, namely lots of buying as investors were forced (yes, forced) to take risk to earn anything besides 0%. This can be seen in the shift of personal sector assets below (from table L.10 - page 63).



Note that 2008 did not see a flood of money to savings or money markets (i.e. the flight to quality we have been told occurred), thus this decline is not a reversal of any dislocation. In addition, this ignores the hundreds of billions of dollars that has been poured by taxpayers (via the Fed and Treasury) into banks which also made its way into liquid risk assets during 2009.

In other words, what happens when the technical side of things is no longer a positive? Prices eventually revert back to their fundamental value, which I personally believe are much lower.

Source: Federal Reserve

Treasury Budget: "Only" $120.3 Billion Deficit

Reuters with the details:
The United States posted a smaller-than-expected $120.3 billion budget deficit in November, Treasury Department data showed on Thursday.

In November, outlays fell for the second straight month, dropping to $253.9 billion from $311.7 billion in October and compared with $270 billion in November 2008, Treasury said.

Receipts totaled $133.6 billion, down from $135.3 billion in October and the lowest for November since 2005, the department said. Receipts in November 2008 stood at $144.8 billion.

The deficit over the two months of the new fiscal year to date now stands at $296.7 billion compared with $280.7 billion for the same period a year ago and the record $1.4 trillion in the just ended 2009 fiscal year.


I am not making the case that getting spending in check is not a good thing in the long run (and the reduction was marginal). However, less government spending will be another reason why the recovery may not live up to the hype priced into risk assets. Back to Reuters:
"Those who are waiting for a V-shaped rebound are probably going to be disappointed," Penrod said. "It is not going to be a one-step recovery, it is going to be more baby steps as we move through this."
Source: Treasury

Trade Balance Improves in October

Marketwatch reports:

The U.S. trade deficit narrowed sharply in October as exports were powered by the weaker dollar and imports slowed to a crawl.

The nation's trade deficit shrank 7.6% in October to $32.9 billion from $35.7 billion in September, the Commerce Department said. The September trade gap had been reported at $36.5 billion.

The narrowing of the deficit was unexpected. Analysts surveyed by MarketWatch had expected the deficit to widen to $37 billion.

The lower deficit also eases fears that the trade balance would deteriorate sharply after the deficit widened sharply last month.

During this recession there has been a sharp drop in international trade that led to a substantial improvement in the U.S. trade deficit.
Good news in the short run, though the longer trend reversal since the economic recovery (i.e. going back to the "norm" of a strong imbalance of imports) remains.



It will be interesting to see what kind of results we get for November and December, but the October print is positive for Q4 GDP.

Source: Census

Wednesday, December 9, 2009

Wholesale Inventory Correction Isn't "Real" in October

We've been waiting (and waiting) for the "mother of all inventory corrections" to provide a boost to the economy (EconomPic reported that there was no inventory correction in September). Upon reading the initial releases it seemed like this trend finally reversed course in October for the wholesale sector. Per the WSJ:

Inventories of U.S. wholesalers unexpectedly increased in October, breaking a string of 13 declines and suggesting production will pick up.

Wholesale inventories rose 0.3%, the Commerce Department said Wednesday. The mild increase came even with strong demand, indicating optimism among distributors over the economic recovery.

Sales of U.S. wholesalers climbed in October by 1.2% to a seasonally adjusted $326.17 billion, the seventh straight increase.

The 0.3% increase in inventories was the first since a 0.7% rise in August 2008. Economists surveyed by Dow Jones Newswires expected a 0.6% drop in October wholesale inventories.
In looking at the data, it seems there was an increase, though that increase in dollar terms was extremely concentrated in farm products and petroleum (without farm products inventories were actually negative).



Of more importance is that the increase in inventory isn't "real" (literally or figuratively). The chart below shows the percent change in each inventory category. So why isn't this real? Well, during the month of October the price of both petroleum and livestock spiked (as an example the price of crude oil was up in more than 12% October, while the price of lean hogs was up more than 15%), both more than the inventory increase of each.



In other words the actual level of the drivers of this report (farm products and oil) may actually be lower and it is this "real" level that feeds into GDP.

Source: Census

Can't Get a Job? Here's Why...

BLS (hat tip Calculated Risk):

There were 2.5 million job openings on the last business day of October 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 1.9 percent. The openings rate has held relatively steady since March 2009. The hires rate (3.0 percent) and the separations rate (3.2 percent) were essentially unchanged and remained low.
Calculated Risk with some thoughts on the release:
I'm not sure if openings are predictive of future hires (the data set is limited), but openings near a series low can't be a positive. Separations have declined sharply, with fewer quits and layoffs, but hiring has not picked up. And quits at a series low suggests those that are employed were holding on to their current jobs in October.
And why should they quit? The level of openings as compared to the number of unemployed is at a series high (data only goes back to 2000) with once again more than 6 unemployed individuals per job opening.



Source: BLS

Tuesday, December 8, 2009

The Real Lost Decade: Japanese GDP Edition

I found the following piece from Martin Gremm (a longer bit than I normally post, but interesting), which details how Japan reacted to the initial bubble popping in their economy in the early 1990's and the pain it caused not then (important), but 10 years later (i.e. the beginning of the most recent 10 year period).

The government's response to the financial crisis inflated the national debt from 65% of GDP in 1992 to 180% in 2005. The Debt to GDP ratio has held steady near these levels since then.

Currently, Japan spends about 24% of their annual budget on interest payments. Any significant increase in interest rates would push this expense into crippling territory, but so far rates have shown little inclination to rise.

A decade of long-term interest rates in the low single digits should lead to inflation, but in Japan inflation has been very tame. We can understand why this is the case by looking at how money flows through the Japanese economy.

The first major difference between the US and Japan is that the savings rate in Japan is very high and many Japanese invest their savings into government debt. Ninety-three percent of the Japanese national debt is held internally. This would be unthinkable in the US because consumers are themselves over-leveraged and can't lend much to their government.

Japanese banks tend to use deposits to buy government bonds rather than lending them out to consumers. Presumably this reflects a reluctance of individuals and businesses to borrow, and a reluctance of banks to lend to any but the most credit-worthy borrowers.

In effect, the Japanese population lends its savings to the government, either directly or by keeping its savings in a bank, which uses the deposits to buy bonds. Interest payments are usually reinvested back into government bonds.

This process creates significant demand for Japanese government debt, which keeps bond prices high and interest rates low. It also prevents inflation, because a lot of bank deposits are used to fund the budget deficit rather than consumer and business spending, which could drive up prices.

This unusual arrangement enabled Japan to sustain an inherently unstable situation for the last decade. If the Japanese population decides to spend money instead of saving it, or the banks decide to look for higher returns by lending to individuals and businesses, inflation and interest rates will rise and Japan will have to address its debt burden.
With this as a backround, Bloomberg reports on Japan's horribly revised GDP figure and the government attacking the problem of debt, with more debt:
Japan’s economy expanded less than a third of the pace initially reported in the three months to September as companies slashed spending.

Gross domestic product rose at an annual 1.3 percent rate, slower than the 4.8 percent reported in preliminary figures last month, the Cabinet Office said today in Tokyo. The revision was deeper than the predictions of all but one of the 17 economists surveyed by Bloomberg News.

Stocks fell after the report underscored concern about the sustainability of a recovery that is under threat from deflation and a rising yen. Prime Minister Yukio Hatoyama unveiled a 7.2 trillion yen ($81 billion) stimulus package yesterday to ensure the economy avoids another recession next year.
While EconomPic had stated that each of the last two quarter's figures looked "odd" (see Q2 and Q3 posts), there was NO clue that it was due to massive errors in their estimates. Trying to ignore this, the broader issue is what this all means with regards to the Japanese economy. Even with massive stimulus, the country can not "eek" out a positive nominal GDP print and is becoming closer and closer to the brink every month.

How bad? Over the last ten years, the Japanese economy has SHRUNK in nominal terms... that is in Yen, the Japanese economy produces less now than it did 10 years ago.



A smaller economy means they have less of an ability to service any level of nominal debt, all else equal. Yet as the first paragraph of this post indicated, Japan has taken the opposite path which I feel is HIGHLY instructive for a potential "slog through" period within the United States should we continue to move down the path of ever increasing debt loads within the household and public sectors, without corresponding economic growth.

The question I keep asking myself with regards to the United States and Japan... where will this growth come from?

Source: ESRI

Temporary Help as a Predictor of Broader Hiring

Bloomberg reported:

The worst U.S. employment slump in the post-World War II era may be about to end as companies hasten to hire temporary workers and boost hours, according to economists such as John Ryding and Zach Pandl.

Employers took on 52,000 temporary workers in November, the largest increase since October 2004 and the fourth consecutive gain, the Labor Department said today. The average workweek climbed by 12 minutes, the most since March 2003.

“It is beginning to look like December could be the first month to show a positive payroll print,” Ryding, chief economist at RDQ Economics LLC in New York, said in a telephone interview. “Companies are running out of labor.”

Jumps in temporary help and working hours often presage the addition of permanent, full-time staff as companies grow more confident sales will be sustained. Job growth would help lift consumer spending, the biggest part of the economy, and aid the recovery from the worst recession since the 1930s.




This cycle may be slightly different as employers delay the full-time hiring due to uncertainty and quite frankly an ability to get top talent "on the cheap" on a temporary basis. Still, a nice sign on the margin.

Source: BLS

Monday, December 7, 2009

Deleveraging Consumer and Economic Growth

Consumer credit continues to decrease. WSJ reports:

Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.

The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. Before then, borrowing by U.S. consumers -- including credit-card debt and auto loans, but excluding mortgages -- had been growing for more than a half-century.

Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.
Until the recent crisis, consumer credit had exploded, now accounting for ~17% of nominal GDP, about twice the level from 50 years ago. All in, household debt is now more than 120% of GDP, twice the the level of just 25 years ago.



At some point this trend NEEDS to reverse course. Can it grow again before doing so? Sure, but that would push the level to a level even more unsustainable (and painful to correct).

So... if it were to change course, there are two ways this can happen:
  • Option 1a: Decrease the numerator (consumer credit outstanding) via reduced borrowing
  • Option 1b: Decrease the numerator (consumer credit outstanding) via default
  • Option 2a: Increase the denominator (nominal GDP) via true growth (i.e. real GDP)
  • Option 2b: Increase the denominator (nominal GDP) via inflation
Option #2a is unlikely. The reason? Consumer credit drives real GDP growth.

Long Term Trend


Relationship



So deleveraging or inflation? I know the preference by policy makers, but it is awfully hard to get inflation in the face of a deleveraging consumer.

Source: Federal Reserve / BEA

On the Value in Housing

Felix Salmon recently made the case in his post Against Liquidity:

Investing shouldn’t be about safety: it should be about calculated risk.
and...
Liquidity is not ever and always a good thing.
And I completely agree. But both of those points seem to be in conflict with a more recent post of his The Housing Speculators Return. I don't always agree with Felix Salmon, but I typically understand his thought process. That is not necessarily the case in this post. Per Felix:
It bears repeating: homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.
Let me go through my grievances with that one paragraph, then I'll detail my personal thoughts on housing more broadly.

Homes Are "Only" Places to Live

In addition to living in a home, a house can serve as a long term investment that produces income (i.e. he makes just that point with his alternative to owning... RENTING, which is just paying another homeowner for the right to live in that home).

Rent Must Be More than a Mortgage Payment to Justify Owning

This ignores the fact that rents (typically) rise, while a fixed rate mortgage payment doesn't. BLS data shows that the cost of renting typically rises by the rate of inflation over the long run.



Thus, if you plan to live in that home for a long period of time (there were previous generations who bought to live in home the rest of one's life), then as long as rent moves higher than a mortgage at some point in time, you may be better off (not to mention the tax benefits of writing off interest). That includes after 30 years when a homeowner no longer has a mortgage, but renters are still paying rent.

Stick to Securities When Investing
The below chart is from another post from June and shows that it wasn't just homes that fell dramatically in value in 2008 (equities, high yield credit, ABS, etc... all fell as much or more than housing in that time frame).



Leverage is Only Done in the Housing Market
Felix stated that securities "won’t drive you into possible bankruptcy and homelessness if they go down rather than up". I believe this is just an argument against an irresponsible investment in housing, as an "investor" could just as easily take on significant leverage investing in securities (think the futures market) or in taking out a loan for one's personal business.


My Thoughts on Housing

So, with that all as a background, do I think now is a time to buy? Depends. I must say that I agree with the post that Felix' was responding to. More specific, Daniel Indiviglio's post up on The Atlantic titled A Great Time to Buy a Home? in which he states:
30-year mortgage rates have dropped back down to their record low mark. There are generous government tax credits in place for virtually all Americans to buy a home. Foreclosures also remain high, meaning that there's significant pressure on prices -- it remains a buyer's market in most areas. Those factors combined sound like a good recipe that should result in a great time to buy a home.
And...
Despite all those good reasons to do so, it depends. I think short-term real estate speculation is probably still ill-advised. Even if home prices have hit the bottom, I don't think they're likely to increase quickly over the next several years. So if you're hoping to get in and get out, you might be in for a rude awakening.

But if you're in the market for a home as a long-term investment, say at least 10-15 years, it's pretty hard to make an argument against buying now. Even if we aren't at the precise bottom, it's hard to believe that home prices could plummet much further in most areas. And even if they did continue to decline a little, the tax credit might make up for most or all of that decline anyway. For anyone who can find an especially good deal on a foreclosure or short-sale property, I find it even more difficult to argue against buying.
In other words, "shake hands with the government"... sounds like risk, but a calculated risk to me. While I personally do not own a home nor plan to do so in the near future (my investment horizon is too short as I am not sure where I will be living longer term), I couldn't disagree more that a home is not an investment, let alone a potentially good one in today's environment of subsidized financing where there is considerable potential for increased inflation. The key that Daniel points out is that housing is and should be always considered a long term investment by investors seeking an alternative to renting.

There are times when any asset class becomes overbought or oversold. This can be clearly seen below when viewing the recent performance of equities (in this case the DJIA) or housing (the Case Shiller Index) over the past 20 years.



The chart above tracks equities and housing price levels against their "fair value" based on an assumption that home prices should rise by inflation and stock indices by nominal GDP (quick and dirty) starting in 1989 (as far back as I could easily get home price info). Regardless of whether this is the best approach, we can see how much the actual price fluctuates around these trends for each (actually equities never retreated below the initial starting trend over this 20 year cycle even with the poor performance over the last decade).

So, do I find value in housing? For the millions of unemployed or underemployed? No. For those that want to buy a home outside their price range? No. For those that want to sell within a short time frame? No.

But, for those with the wealth to make the long-term plunge, are willing to accept the risks of home ownership, and can take advantage of subsidized taxpayer money keeping rates artificially low, while the government throws in a sizable refund to boot? Heck yeah.

Income Disparity

Forbes (hat tip The Reformed Broker) with just how large the income gap has grown in the United States:

We based our list on the U.S. Census Bureau's Gini Index, which ranks income inequality in cities on a scale of 0 to 100. Imagine two islands, each with only five people, and a total income of $100,000. On one island, each person earns $20,000. This island has total income equality, and a Gini score of 0. On the other island, one person earns $100,000 and the other four people earn nothing. This island has total inequality, and a Gini score of 100.

The United States as a whole had a Gini score of 46.9 in 2008. By comparison, incomes are more equal in Europe (the E.U. has a score of 31), and less equal in South America (Brazil has 56.7; Bolivia has 59.2).

For what it's worth, no U.S. city has income equality that's close to the levels of Europe. Only seven of the 250 largest American metro areas have Gini scores below 40.
And the top 10 most unequal cities per Forbes:



The Reformed Broker notes that this trend is likely to reverse in coming years.
Income disparity in America is the one enduring thing George W actually can take credit for. Unfortunately for those on top, Obama's on a mission to tax this disparity back to the Stone Age. The pendulum always swings too far in both directions, this time, it's heading hard left.
Update: an anonymous reader has an issue with The Reformed Brokers semantics:
Obama's on a mission to tax this disparity back to the stone age???

I think what the Reformed Broker (who is clearly an idiot) means is that Obama plans on taxing this disparity back to the levels of 1994-2000... you know, when Clinton was busy destroying the economy and putting the US income inequality at Marxist levels. Moron.
I think the key takeaway is we are likely to see income disparity brought more in line. Whether it is the stone age or 1994-2000 is another question.

And The Reformed Broker responds with typical candor:
I have another fan!

As a centrist on many issues, I am no stranger to being the target of personal attacks from idealogues on both sides.

Thx to "Anonymous"!
Too true. If it were a right wing conservative with the issue, he would have attacked the George Bush rather than the Obama reference... actually, do conservatives even admit they voted for him twice?

Payroll and GDP

Calculated Risk looks at the strong relationship between Employment and Real GDP:

This shows that real GDP has to grow at a sustained rate of about 1% just to keep the net change in payroll jobs at zero.
A 3% increase in real GDP (over a year) would lead to about a 1.5% increase in payroll employment. With approximately 131 million payroll jobs, a 1.5% increase in payroll employment would be just under 2 million jobs over the next year - and the unemployment rate would probably remain close to 10%.
The following chart summarizes a table presented in the post, which is a quick and dirty way to estimate real GDP growth rates over the next 12 months time under a variety of employment scenarios (and what the unemployment rate would be at those levels).



Source: Calculated Risk

Saturday, December 5, 2009

EconomPics of the Week: Recovery Edition?

The unemployment figure is the first true upside "surprise" that actually "surprised" me. While there are still enormous structural problems remaining in the global and U.S. economies, my thought has been that employment will be a leading (vs. its typical lagging) indicator this cycle. Thus, my hope that this will be an improving trend....

Economic Data
Unemployment Drops to 10%
Chicago PMI: Strength, but No Jobs
Still Shedding Jobs
European Unemployment Remains at 11 Year High
Random Blip or Double Dip?
Autos and Emerging Markets
Private Construction Slump Continues
Manufacturing Continues to Expand, but at Slower Pace
Durable Goods Down, But Out?
Japanese Industrial Production Up, but Disappoints

Asset Prices
Thanks to the Fed, We Have Narrow Spread
Equities Lost Decade
1.2% over 10 Years?
The Scale of Hedge Fund Gold Purchases

And to celebrate the economy's potential "waking up", your video of the week... Arcade Fire's 'Wake Up' in a live post concert stairway acoustic performance (you may have heard the album version from a commercial for 'Where the Wild Things Are'). For those looking for an album to buy, their first album 'Funeral' is absolutely amazing.

Friday, December 4, 2009

Unemployment Drops to 10%

I wish I had some more time to break this down (traveling), but the headline AND details do look improved at first glance. The WSJ agrees:

The top-line numbers in Friday’s big jobs looked pretty good. So do the details. Temporary help services rose 52,000. The average workweek ticked up from 33.0 to 33.2. Average hourly earnings edged up 0.1%. And the U6, the broadest measure of unemployment dropped from 17.5% to 17.2%. All forward leaning signs of improvement.


Source: BLS

Thursday, December 3, 2009

Random Blip or Double Dip?

The ISM Non-Manufacturing Index registered a 48.7 in November, lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two straight months of expansion.

What Respondents are Saying per ISM:

  • "Capital markets remain very tight; lenders are not releasing funds for development projects, limiting expansion." (Accommodation & Food Services)
  • "Fourth quarter still looking grim, but potential upturn for Q1 2010." (Professional, Scientific & Technical Services)
  • "No one trusts that the recovery is real. Seems everything and everyone is in a holding pattern." (Public Administration)
  • "Business is still flat." (Wholesale Trade)
  • "U.S. business remains better than 2007 levels, although it's been through personnel and cost reductions that we are now profitable. Business continues to be about 8 percent below 2008 levels." (Real Estate, Rental & Leasing)


Source: ISM

Wednesday, December 2, 2009

Thanks to the Fed, We Have Narrow Spread

Today will be rhyming day...

While the broad economic recovery has been teetering along, assets classes have been another story. Agency MBS is now trading at Treasury levels (i.e. no spread) and Investment Grade Credit spread is at narrower than levels seen in June '08 (i.e. pre "system might crash"). I think "we've come a long way in 12 months" is probably too much of an understatement.



Source: Barclay

Still Shedding Jobs

Bloomberg reports:

Companies in the U.S. cut an estimated 169,000 jobs in November, according to a private report based on payroll data.

The drop, the smallest since July 2008, compares with a revised 195,000 decline the prior month, data from ADP Employer Services showed today. The figures were forecast to show a decline of 150,000 jobs, according to the median estimate of 32 economists in a Bloomberg survey.

The report signals the job market is still deteriorating and unemployment will probably climb further even as the economy is emerging from the worst recession since the 1930s. After overestimating payroll losses by 103,000 on average in the five months to September, ADP’s initial estimate for October was in line with the government’s payroll figures.

“Our economy is still a long way from adding jobs,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report. “Labor markets remain the one area where significant improvement in economic conditions has yet to manifest.”

ADP includes only private employment and doesn’t take into account hiring by government agencies.



Optimists will say this report shows "The Bleeding is Slowing', but the fact is that after shedding THIS many jobs and we are still losing 150k+ jobs per month is simply stunning.

Source: ADP

Autos and Emerging Markets

The AP details:

U.S. auto sales struggled to gain ground in November and big improvements aren't expected until people stop worrying about losing their jobs.

Sales were flat compared to last November, according to Autodata Corp. Even higher incentives couldn't push the needle much beyond the dismal lows seen a year ago, when a credit freeze and the financial meltdown kept car buyers at home.

Fuel-efficient cars showed continued strength, as did crossovers, which are as roomy as SUVs but are built on lower car frames, bolstering fuel economy. Truck sales were again weak.

Last month's big winner was South Korea's Hyundai, which posted double-digit sales growth. Sales at the top three sellers in the U.S. — General Motors, Ford and Toyota — held steady, while Chrysler struggled for yet another month.

Sales were down 11 percent from October. But Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates, said the industry is encouraged by the seasonally adjusted sales rate, which takes into account perennial factors like higher sales in the spring and summer. That rate has been climbing each month since Cash for Clunkers ended in August, he said.

The adjusted rate was 10.9 million in November compared with 10.5 million in October.

So is the market stabilizing? In aggregate, yes. But, as can be seen with November sales it is divergent among the haves (Hyundai) and have-nots (Chrysler).



But, it has stabilized at a MUCH lower base (this will not help with all the excess capacity).



So is the auto industry dead? Not by a long shot. It just doesn't happen to necessarily be "driven" by those that aren't in need of a new car (U.S. drivers SHOULDN'T be swapping in their "old" wheels every three years), but those that are demanding vehicles (i.e. those that don't have a car / NEED an upgrade). One easy example is China, which not only is growing, but is now LARGER than the U.S. market. Per the WSJ:
China accounted for a quarter of the global automotive industry sales in November, the highest-ever proportion, as manufacturers intensified their marketing in that country while shifting away from slower growing markets.

General Motors Co.'s top sales analyst Mike DiGiovanni said Tuesday that industry auto sales in China rose 93% in November compared with the same period last year.

And India per Livemint:
Driven by the buoyancy in the economy, coupled with demand because of the festive and marriage season, auto sales in India, Asia’s third largest market after China and Japan, continued to race ahead for the 11th month in a row. The high double-digit growth registered by most auto makers in November mirrored growth in the nation’s economy. In the three months to September, India’s gross domestic product grew a better-than-expected 7.9% from a year earlier, the government announced on Monday.

Maruti Suzuki India Ltd, India’s biggest car maker, which saw sales jump 60%, said some of the growth was on account of the base effect. “People should not be misled by this,” said Shashank Srivastava, chief general manager (sales and marketing) at the firm, adding that the growth was also a function of the weak sales base of last
November.

Maybe this whole "Emerging Markets will drive the global economy going forward" isn't so improbable this time around.

Source: Autoblog

Tuesday, December 1, 2009

Equities Lost Decade

BusinessWeek with the details:

With the '00s about to flip the odometer to the '10s, there has been a raft of commentary about how lousy a decade this has been. Stock investors can vouch for that: The ten years since Y2K are on track to produce the worst total returns for investors since the 1930s. And, after the roaring '80s and '90s, the disappointment of the last decade is all the more galling.

Indeed, it will be hard for investors to wash the taste of trillions of dollars of losses from their mouths.

In both the 1980s and the 1990s, the broad S&P 500-stock index index provided a total return (which includes dividends) of more than 400%, according to Capital IQ, a Standard & Poor's business. The total return for the S&P 500 since New Years 2000 has been negative 10.8%.


In looking at the chart, doesn't it appear the 80's and 90's were just as much outliers (and the reason for the RICH valuation at the beginning of the decade) as the 00's?

Source: ICMARC

Private Construction Slump Continues

Marketwatch details:

Spending on U.S. construction projects was flat in October and revised data now indicate that spending has not risen since April, the government reported Tuesday.

Overall, spending on construction projects barely changed in October, following a revised fall of 1.6% in September, the Commerce Department said. This was the biggest drop since January.

The revision was startling because September was previously estimated to be a gain of 0.8%. Year over year, construction spending is down by 14.4%.

One bright note was that spending on private housing projects rose 4.4% in October. This marked the largest gain in the sector since March 1998.

Not sure how good the news is that the level of private housing construction has increased in a period marked by a glut of homes for sale (the power of subsidies), but it does feed into short term GDP none-the-less.

Outside of this (non-needed?) residential construction, private construction continues to deteriorate (well, except schools). In the most recent three month period, the level of construction has decreased an amazing non-annualized 9% from already low levels.


Source: Census

Manufacturing Continues to Expand, but at Slower Pace

Marketwatch details:

U.S. manufacturing firms said business improved in November for the fourth straight month, but at a slower pace than in October, the Institute for Supply Management reported Tuesday.

The ISM manufacturing index fell to 53.6% from 55.7% in October. Readings over 50% indicate more firms said they were growing than said they were contracting.

In November, 12 of 18 industries were expanding. Economists surveyed by MarketWatch were looking for the index to pull back to 55% in November. See our complete economic forecast and calendar of events.

"While the rate of growth slowed when compared to October, the signs are still encouraging for continuing growth as both new orders and production are still at very positive levels, and the prices index fell 10 points, signaling less inflationary pressure on manufacturers' costs," said Norbert Ore, head of the ISM's survey committee.

"Overall, the recovery in manufacturing is continuing, but many are still struggling based on their comments."



Continued growth is the good news, but concerns for me are the slower pace of the employment rebound and continued slump with inventories (i.e. no inventory rebound as of yet).

Source: ISM

European Unemployment Remains at 11 Year High

NY Times details:

Euro zone unemployment remained stable at an 11-year high in October but September jobless numbers were higher than previously reported, showing the labour market has yet to feel the effects of nascent economic recovery.

Unemployment in the 16-country area totalled 9.8 percent of the workforce, unchanged from September's upwardly revised reading, the European Union statistics agency said.

"In addition to the euro zone's return to growth in the third quarter and improved business confidence, the rise in unemployment is currently being limited to some extent by government jobs support ... most notably in Germany," said Howard Archer, economist at IHS Global Insight.

It was still the highest unemployment rate since the 9.9 percent registered in October 1998, Eurostat said.

Economists polled by Reuters had on average expected a 9.8 percent rate in October against 9.7 percent for September.

A total of 15.567 million people were unemployed in the euro area in October, up by 134,000 against September.

In the whole European Union of 27 member states, the unemployment rate rose to 9.3 percent from 9.2 percent in September. This meant 22.510 million people were out of a job, 258,000 more than in September.


Source: Eurostat

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