Chicago Manufacturing Beats Expectations

The WSJ Blog details:

U.S. manufacturing activity was stronger than expected in June, with rising orders and easing price pressures, according to the monthly survey of Chicago-area purchasing managers.

The closely-watched Chicago Business Barometer broke three months of slowing growth in June, rising to a seasonally-adjusted 61.1 from 56.6 in May, well above the 53.5 consensus among analysts surveyed by Dow Jones Newswires.

Chicago PMI: Index > 50 = Expansion

Another important detail from this months report was the decline in inventories, which infers that manufacturers will need to produce more to meet demand (they met a portion of current demand simply out of inventories), a good sign for future growth.

Source: ISM

How We're Chillin...

When I took a look at the difference in the amount of leisure between those employed / unemployed and educated / uneducated, I was reminded of the old adage "cash rich, time poor". And apparently I watch a LOT less TV than most (actually... this may average out during football season) and spend WAY too much time on the computer.



Source: BLS

New Home Sales Flatlines

Reuters details:

The Commerce Department said May new home sales fell 2.1 percent to a seasonally adjusted annual rate of 319,000. Analysts polled by Reuters were expecting a slightly slower pace of 310,000 for the month.

The decline ended two straight months of strong gains, with sales rising 6.5 percent in April and 8.9 percent in March. May's new home sales were 13.5 percent above the May 2010 level.

Lets take a look at those recent "strong gains" by sale price.

And relative to the longer term by region (note that "strong gains" in percent terms are easy when the base is 80% below previous peaks).

As GYSC noted in a previous post:

I cannot believe how many run thier game under "The FED is behind us no matter what!". 

While that is a great trade when the market simply needs liquidity, as seen above it doesn't help so much when the asset has fundamental issues.

Source: Census

Suppressed Yields?

In a recent post titled Suppressed Volatility, EconomPic posited:

It is simply (in my view) that volatility across ALL sectors and asset classes has been suppressed by the liquidity that has successfully (to date) been finding its way into riskier and riskier asset classes following the combination of unprecedented fiscal / monetary stimulus and a lack of "real" investments (i.e. investments that feed into economic growth and create jobs) for this liquidity to go.

Here is a visual depiction of that mechanism.



That's right. In the first quarter, the Fed purchased $1.4 trillion in Treasury securites or 190% of all net issuance for the quarter (a period in which households reduced Treasury holdings by more than $1 trillion). This $1 trillion went somewhere (think risk assets). Also would seem to explain why Treasuries snapped back sharply in the second quarter when disappointing economic news and a subsequent rebound in demand for Treasuries was met by a reduced net supply.

Source: Federal Reserve

If the Fed is Missing This Big With Their 2011 Projections...

Source: Federal Reserve

Suppressed Volatility

FT Alphaville has a post Crouching Vix, Hidden Volatility claiming that:

Volatility is out there. You just have to look for it — and not by glancing at industry-standard, the CBOE Vix index.

The blog then points to a post by ConvergEX that states:

If you only focused on the CBOE VIX Index, you’d be tempted to think that the recent market volatility was pretty modest.

The problem is that it wouldn't only be a temptation, it would be a fact.

Looking at implied volatility, as defined by the VIX, relative to actual realized three month volatility of the S&P 500, the VIX has (much like most of history) been consistently overstating volatility (the VIX recently closed at 19 vs. three month realized volatility of 12, a difference of 7 relative to the average difference of 4 over the previous 20 years).

This isn't to say that I believe the VIX accurately reflects the economic environment and risks associated with investing in the current environment (I absolutely don't). It just isn't some conspiracy theory that the VIX is being artificially suppressed relative to the underlying market or that volatility is more accurately reflected in other sectors.

It is simply (in my view) that volatility across ALL sectors and asset classes has been suppressed by the liquidity that has successfully (to date) been finding its way into riskier and riskier asset classes following the combination of unprecedented fiscal / monetary stimulus and a lack of "real" investments (i.e. investments that feed into economic growth and create jobs) for this liquidity to go.

So tread carefully my investment friends. The part of the investment cycle where an investor can generate positive returns by simply providing liquidity to the market is likely over.

Source: Yahoo Finance

Leading Indicators Bounce

With everything going on in Europe, this release feels worthless, but here it is anyway.



Source: Conference Board

Foreigners Still Buying Treasuries

I'm reminded of the quote "Cleanest dirty shirt". Bloomberg details:

China, the largest foreign owner of U.S. government debt, added to its holdings for the first time in six months in April as economic data weakened and the Federal Reserve signaled no extension of its $600 billion purchase plan.

Chinese officials, as well as those in Germany and Brazil had been critical of the Fed’s asset purchase plan when it was first announced in November, said the proposal would be inflationary and could hurt the value of dollar-denominated assets. The Fed became the largest owner of Treasuries through what has become known as its policy of quantitative easing, in which bonds were bought to add cash into the economy and reduce the risk of deflation. The purchases end this month.

Also of note (and outlined previously at EconomPic here):

Even with the increase, the data “underestimates what China’s buying,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer. “China deals through foreign intermediaries” leading to initial tallies counting their purchases as belonging to other holders, such as the U.K.

Hence the China and United Kingdom aggregation below.



Source: Treasury

Producer Prices Moderate in May, Highest Year over Year Level Since September 2008

Marketwatch details:

U.S. wholesale prices rose in May at the slowest pace in 10 months as the cost of food fell and the increase in energy prices tapered off, the government reported Tuesday.

The producer price index rose 0.2% last month, the Labor Department said. It was the smallest gain since July 2010.

Food costs dropped 1.4%, owing mainly to lower vegetable prices, to mark the biggest one-month decline in almost a year. The price of food has fallen twice in the past three months, although food costs are still 3.9% higher compared to one year ago.

Energy prices, meanwhile, rose 1.5% in May, the slowest rate since September. A surge in fuel costs have push wholesale prices sharply higher since last fall, but oil prices have pulled back over the past month. Many economists expect the modest decline in oil prices to ease pressure on wholesale costs.

Over the longer term, easy money policy sure is working at the producer price level with finished goods increasing 7.3% year over year, the highest level since September 2008. One issue is that the easy money isn't feeding into demand / price increases for labor (likely because it is so focused at the producer levels, rather than the consumer level where corporations can pass on price increases) so the below acts as an added tax on goods used as inputs.



Source: BLS

Retail Sales Decline, but Beat Expectations

Reuters details:

Retail sales fell in May for the first time in 11 months as receipts at auto dealerships dropped sharply, but the decline was less than expected, offering hope of a pick-up in economic activity.

Retail sales last month were depressed by a 2.9 percent drop in sales of motor vehicles, the largest decline since February 2010, as a shortage of parts following the earthquake in Japan left inventories lean and prompted manufacturers to raise prices.

Excluding autos, retail sales rose 0.3 percent last month, the smallest gain since July, after rising 0.5 percent in April.

Below are the details. While any given month is potentially just noise, it is interesting to see the largest declines in "big purchases" including autos, furniture, and electronics while healthcare, food services (i.e. eating out), and clothing grew.



Source: Census

Trade Balance Improves in April

The WSJ details:

The U.S. deficit in international trade of goods and services declined 6.7% to $43.68 billion from a downwardly revised $46.82 billion the month before, the Commerce Department said Thursday. The March trade gap was originally reported as $48.18 billion.

The April deficit was much smaller than Wall Street expectations, with economists surveyed by Dow Jones Newswires having predicted a $48.3 billion shortfall.

A rebound in oil prices to levels not seen since the 2008 spike erased the modest reduction in the trade gap from late last year. But Nymex crude futures have settled back to around $100 a barrel after surging to nearly $115 a barrel in early May.

In other words, expect the fall in both the demand and the price for oil to continue to reduce the trade balance going forward in both real (due to demand) and nominal (due to price) terms.

And over the longer run...

The below chart compares April 2010 and April 2011 trade balances* for a number of items in real terms.

Note the big improvement in industrial supplies (though this may be due to the disruption in Japan - a drop of $3.2 billion in imports came from March alone) and the big jump in consumer goods imports. The latter is a trend I imagine will continue as consumers look for cheaper and cheaper goods that are increasingly produced outside of the U.S.

Not broken out is trade in oil, which improved greatly in real terms; exports up by $700 million, imports down by $2 billion (the problem is the price more than made the trade balance worse in nominal terms).

Source: Census

Federal Debt per Employee

This will be the last employment related chart for a while (I think) following recent posts This Time IS Different... Employment Edition and Breaking Down Productivity. This specifically outlines a much broader issue that will affect us over the long-term. Specifically, the level of U.S. debt and the number of workers available to pay down that debt.

The amount of debt per employed person has spiked in recent years to more than $100,000 per employed worker, up from ~$55,000-$60,000 throughout the 1990's.



There are a number of ways this problem can be solved / corrected:

• Economic growth (good)
• Higher taxes (not bad depending on your point of view, but not good for underlying growth expectations of the U.S. economy)
• Decrease government spending (good IMO, but also not good for underlying growth expectations of the U.S. economy)
• Inflation (decrease the "real" value of debt via a "tax" to savers / earners unable to keep up their returns / wages with inflation)
• Outright default (not feasible)

When evaluating the options, economic growth is the best, but difficult. Default is the worst and least likely. That leaves higher taxes, decreased government spending, and inflation as the most viable and likely (IMO).

All that said, debt deflation is still a major concern of mine due to the levels of debt and political grandstanding currently taking place in D.C. See Steve Keen's epic piece that changed my understanding of the economic collapse here for more on this possibility.

Source: Treasury Direct / BLS

Great Depression Employment Situation

In response to my post This Time IS Different, reader DIY Investor asked to see the information EconomPic presented, but for the Great Depression. Here you go...



The key takeaway... things were WAAAAAYYYYY worse than the recent 6% drop. Note (however) the rather remarkable snap back post 1933. The result is that within 10 years following the start of the Great Depression, employment was within 4% of the previous peak (and was positive year 11). Sadly, not too dissimilar to the -2% reduction in private employment we have seen over the last 10 years.

Source: U-S History

EconomPics of the Week (June Gloom Edition)

Lots of economic data was released this week and it was pretty much consistently bad (or at least disappointing).

On the investment front, that is partially offset by a crowd turning VERY bearish (normally a sign to buy). Not bearish enough for me though... similar to what I've done in the past when unsure, I am reigning it in BIG time. Almost all of my risk taking is through relative value trades (i.e. everything is at least partially hedged) and options (happy to pay sub 20% vol on calls to get my long equity beta exposures).

Here were those economic events as reported here at EconomPic.

This Time IS Different... Employment Edition
Breaking Down Productivity
Japanese Autos Crushed
Pace of U.S. Recovery Slowing
Gas Rules Everything Around Me
Chicago PMI Misses

And the video of the week... let's slow it down with Iron and Wine's 'Such Great Heights' (cover of a great / very different sounding Postal Service tune).

This Time IS Different... Employment Edition

Not different from past financial crises, but certainly different from recessions over the previous 40 years.

The first chart should look similar to other charts presented on the blogosphere. It shows the change in the total number of employed during past recessions. The key takeaway... this time is worse, but things are improving (albeit slowly).



The next chart shows how much worse. It takes the same data as the chart above, but shows the relative performance of this recession as compared to past recessions. For example, as compared to the last recession we are now trailing the employment situation by about 6.5% (we currently have 4.5% less jobs than our previous peak, while at this point following the 2001 recession we had 2.1% more jobs).



The concerning thing is that things seem to be getting worse, even though it "should be" easier to improve following a severe downturn (hiring back workers is typically easier than creating new jobs).

Seems more and more like a structural issue that cannot be addressed by simply trying to stimulate aggregate demand.

Source: BLS

Breaking Down Productivity

Bloomberg details:

The productivity of U.S. workers slowed in the first quarter and labor costs rose as companies boosted employment to meet rising demand.

The measure of employee output per hour increased at a 1.8 percent annual rate after a 2.9 percent gain in the prior three months, revised figures from the Labor Department showed today in Washington. Employee expenses climbed at a 0.7 percent rate after dropping 2.8 percent the prior quarter.

“Productivity growth has slowed in the past year but from very strong rates and it remains fairly decent,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. “Labor costs have moved higher because of the slowing in productivity growth, but they were generally falling for some time and remain very weak, essentially implying no threat to the inflation outlook.”

Let us dive into the numbers...

The first chart below shows total productivity broken out between its two components... hours worked and output per hour (you can only increase productivity by increasing one or the other).

Rolling One Year Change



A few points to notice... the snap back post recession was relatively small as compared to past downturns (especially considering how far things fell - a rebound to trend would have appeared especially large in itself) and the pace of productivity growth is slowing.

Rolling Five Year Change

The longer term trend above shows why we are feeling so much pain; we are at a multi-generational low in total productivity, almost entirely driven by the unprecendented decrease in hours worked.

The next chart outlines (in my opinion) the bigger story. It is the change in the productivity to hours worked ratio over rolling ten year periods. As an example of how to interpret the chart, the most recent period shows a change of around 40%. What this means is that productivity has grown by about 40% relative to hours worked over the past 10 years (they've grown 30%, while hours are down about 8%). This is by far a multi-generation high.



This helps explain a lot of the current situation. While productivity in itself is not a bad thing at all (in fact, I would argue it is one of the most important things for sustained economic growth), when productivity is increasing solely to offset hours worked, a lot of structural imbalances result UNLESS there is policy (education, reallocation from those that benefit to those that suffer, etc…) that helps transition the broader economy to a new “balance”. If this does not happen, workers replaced with new productive resources find themselves not only suffering personally, but dragging the economy down as they are no longer adding to the hours worked component of productivity (as I mentioned, it is one of only two inputs).

The other important question is whether the productivity is truly an increase in productivity or just a shift in the hours worked component from the U.S. to those abroad. As I’ve outlined here, over the last 10 years (i.e. when the output / hours worked ratio spiked in the chart above) there was a huge labor supply shock coming from emerging Asia. My concern is that we are not really becoming all that more productive with new technologies, process, etc..., but simply outsourcing a lot of the hours worked overseas. This would explain a ton, including the strength of emerging Asia relative to the U.S., the disparity between “haves” and “have nots” by educational attainment (i.e. the economic slump has been felt to a much greater extent by those with less education whose jobs have been exported), and the soaring profits by corporations even in the face of lower growth (cutting costs vs. increasing revenues).

Source: BLS

Japanese Autos Crushed

The WSJ details:

The Japanese auto makers were hit hardest, but nearly all major auto makers reported declines from a year ago. GM's sales fell 1.2% while Ford Motor Co. said its May U.S. sales declined less than 1%. Toyota's sales dropped 33%, Honda's sales fell 23% and Nissan Motor Co.'s dropped 9.1%.

Chrysler's sales rose 10.1%, giving the company a 10.9% shares of the U.S. market, putting it ahead of Toyota, which had a 10.2% share. GM, Ford and Chrysler together accounted for 49.7% of the month's sales. The last time they had more than 50% was September 2008.

Hyundai capitalized on a lineup that has the highest combined fuel efficiency of any in the industry and attractive prices relative to competitors. The South Korean auto maker has pulled drawn customers from Toyota, Honda and Nissan, which suffered production disruptions because of the March 11 earthquake in Japan.

Since the Japanese earthquake / Tsunami on March 10th, Hyundai's stock price has soared by more than 20%, while Toyota has slumped 7%.

Source: Auto Blog

Pace of U.S. Recovery Slowing

Growth in the economy appears to be slowing (not that the recovery was all that amazing to begin with).

ISM Manufacturing



ADP Payroll (the "real" figure arrives this Friday)

Source: ADP