Treasury Budget and Reliance on the Private Sector

The AP details:

The budget deficit for March showed a dramatic decline as the Obama administration formally entered a lower ultimate cost for the government's $700 billion financial bailout program.

The Treasury Department said the deficit for March totaled $65.4 billion, compared to a $191.6 billion imbalance a year ago. However, $115 billion of that improvement occurred because the administration lowered its estimate of the total costs for the Troubled Asset Relief Program.

Even with the change, the administration is still projecting that the budget deficit for the entire year will surpass last year's all-time high of $1.4 trillion.

The below chart shows the year over year change in receipts and outlays. This is where things will be interesting to watch. On one hand you have receipts leveling and possibly beginning to grow (a good thing) while on the other hand you have government spending no longer being a "stimulus" to further growth.

In a nutshell... this is where private demand needs to take over for further recovery. While recent data has shown relative strength in the private sector, that strength will be even more important going forward as the public sector will no longer be relied upon for marginal demand.

Source: Treasury

More on Oil's Impact on Consumption

Last Friday, I asked "at what point does the price of oil become debilitating?".

Fortunately for me, James Hamilton attempts to answer that question. First, he points out the concern:

Ten of the 11 recessions in the United States since World War II have been preceded by a sharp increase in the price of crude petroleum. Oil had been holding around $80/barrel over the last month, but traded as high as $87 last week, leading the Financial Times to ask whether oil could give the "kiss of death to recovery."

Before we jump to his conclusion, lets take a look at what James states the spike in oil price from 2009 lows means to the consumer.

Americans buy a little less than 12 billion gallons of gasoline in a typical month. With gas prices now about a dollar per gallon higher than they were a year ago, that leaves consumers with $12 billion less to spend each month on other things than they had in January of 2009. On the other hand, the U.S. average gas price is still more than a dollar below its peak in July of 2008.

12 billion gallons per month of gasoline is a lot, but according to the EIA, total crude use is almost double the level used in gas (about 18.5 million barrels per day x 42 barrels per gallon x 365 days / 12 months = 24 billion gallons per month). Using this "total" level and comparing it to personal income based upon market prices at each point, we can see how much of a drag the spike in oil would have impacted 'consumption ex oil'. We can also see why "this time" may not be so bad... the overall level of personal income that is allocated to oil is currently not much higher than what we saw pre-crisis (and much lower than 2008 levels).



Another way to look at this data is as a change over one and two year periods.



So while perhaps not a drag, the concern I have is that the price of oil is no longer the source of "stimulus" it was when the price of oil collapsed and Americans found themselves with much more disposable income (as much as 4% more to be specific).

In James Hamilton's post, he provides details for some indirect reasons higher oil prices caused a drag on the economy as well (reallocation of capital away from American business [i.e. small cars]) that he does not see re-emerging and concludes:

So to return to the question posed at the beginning: $87 oil is certainly not helping the recovery. But I would be very surprised if it proves to be the kiss of death.

Sources:

Personal Income: BEA
Oil Prices: EIA
Total U.S. Crude Consumption: EIA

EconomPics of the Week (4/9/10)

Asset Prices
Low Quality Tide
Long Fixed Income. Short Almost Anything Else
Short Fixed Income. Long.... Almost Anything Else
Hedge Funds Roar in March
Greek Borrowing Costs Soar

Economic Data
Unemployed to Job Openings Remains Elevated
Consumer Credit Contracts from January Bounce
ISM Services Jump
U.K. Produce Prices Soar in March

Other
Regarding the Decline in Birth Rates
Mortimer... We're Back!
The Religious Construction Collapse

And your video of the week... to celebrate Mr. Bernanke... Bloc Party's "Helicopter"



Are you hoping for a miracle?

U.K. Produce Prices Soar in March

The AP reports:

Oil prices rose above $86 a barrel Friday on a weaker dollar and after robust U.S. retail sales in March pointed to growing consumer demand in the world's biggest energy market.

By early afternoon in Europe, benchmark crude for May delivery was up 84 cents to $86.23 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 49 cents to settle at $85.39 on Thursday.

"The oil market is behaving the same way as we have seen during the past several weeks: 'one step back, two steps forward,'" said a report from Commerzbank in Frankfurt. "Supported by benign equity markets, sustained bullish sentiment and a slightly weaker U.S. dollar, the oil price recouped the losses of the previous two days."

This is definitely a sign of a recovery, but at what point does the price of oil become debilitating?

An example... this morning the United Kingdom had its highest producer price index print in two years. Per ecPulse:

PPI input for the month of Mach at 3.6% higher than the revised prior reading of 0.6% from 0.1% while on the year rallied to 10.1% from the revised previous reading of 7.5% from 6.9%.

PPI output for March rallied to 0.9% from 0.3% and on the year climbed further to 5.0% from the revised prior reading of 4.2% from 4.1%.

As can be seen, this jump is almost entirely due to the cost of energy (it has not yet fed into other goods / services) and elevated producer prices will be difficult for businesses to pass through to end consumers.

Source: Statistics.UK

Greek Borrowing Costs Soar

Bloomberg details:

Greek bonds dropped, sending the yield premium over German debt to the widest since the euro’s inception, and stocks tumbled on speculation that the bailout of Europe’s most indebted nation will unravel. The yen rallied.

The Greek 10-year spread to benchmark German bunds widened to 436 basis points at 8:15 a.m. in New York. Greece’s ASE Index of stocks slid as much as 5.2 percent, the most in four months, and the cost of insuring against a default by the nation climbed to a record. The Stoxx Europe 600 Index tumbled 1.1 percent and futures on the Standard & Poor’s 500 Index slipped 0.4 percent. The euro weakened for a fifth day against the dollar, and the yen advanced versus all of its 16 most-traded counterparts.

Source: Barclays Capital

Long Fixed Income. Short Almost Anything Else

I think it's fair to classify today's market performance as simply a reversal of Monday (the one exception being gold).



It may be worth while keeping an eye out for that shiny metal...

Source: Yahoo

Regarding the Decline in Birth Rates

The NY Times reported the link between recession and reduced birth rate:

American births fell in 2008, updated government figures confirm, probably because of the recession. The one exception was the birth rate among women in their 40s, who perhaps felt that they did not have the luxury of waiting for better economic times.

The birth rate for women in their early 40s rose 4 percent over the previous year, reaching its highest mark since 1967. The rate for women in their late 40s also rose, slightly. But birth rates fell for teenagers, as well as women in their 20s and 30s.

“Women are postponing births to those later ages, above 40,” said James Trussell, director of the Office of Population Research at Princeton.

Paul Krugman questions the link:

Doesn’t it take nine months from conception to birth? Abortion aside, to reduce births in the first three quarters of 2008 in response to a recession that started in Dec. 2007 would have taken pretty impressive rational expectations.

What are we missing?

First the data, then the missing piece.

The data seems to support the initial theory. The chart below shows the change in GDP by state on the x-axis and the change in the number of births by state (in 2008 [red] and 2009 [blue]) on the y-axis. In both years it appears that the birth rate had a relationship with GDP growth, thus individuals may have in fact based having a child as much in late 2007, as in late 2008 (i.e. predicting the downturn).



But was it a "prediction" or was the pain already felt? I believe the missing piece is HOW the recession began.... with a crash in the value of one's home. By the summer of 2007, the year over year change in the value of homes was pretty much down in all regions of the United States. Is it a surprise potential parents are less willing to have kids (expensive) when your largest investment tanks?

The chart below shows the relationship beween the change in the price of a home (Case Shiller) and birth rate change (I took liberty to match metro area to states). The y-axis remains the same as the chart above (change in birth rate in 2008), but the x-axis is now the annual change in the case Shiller home index from June 2006 to June 2007 (i.e. WHEN these couples would have been "trying" to have kids born in early 2008).

So were people able to predict the downturn or was it simply that the recession as defined by the NBER lagged the pain felt by potential parents?

I'll go with the latter.

Source: CDC / BEA

Consumer Credit Contracts from January Bounce

Been on the road away from it all this morning / early afternoon. It looks like I missed an interesting day of news. CNN Money details one of those pieces of information:

Consumer borrowing dropped in February, after increasing for the first time in a year during the previous month, according to a government report released Wednesday.

Total consumer credit fell a seasonally adjusted $11.5 billion, at an annual rate of 5.6%, to $2.448 trillion in February, the Federal Reserve reported.

Economists predicted a decline in total borrowing of $0.7 billion in February, according to a consensus estimate from Briefing.com.

"February's decline reflects on the still dire state of the economy," said Yasmine Kamaruddin, an economic analyst at Wells Fargo.

"Even if we have seen retail sales and personal expenditure increase in past months, we haven't seen these gains translate into the use of credit because consumers faced with unemployment and slow wage and salary growth are still shying away from taking on credit," she added.

Can't agree completely with Ms. Kamaruddin, as we detailed at EconomPic the paying down of debt outstanding is actually declining in the consumer sector (it's just that defaults are outpacing paydowns that has caused the level to shrink).



Source: Federal Reserve / BEA

Unemployed to Job Openings Remains Elevated

Calculated Risk provides some additional details:

According to the JOLTS report, there were 4.96 million hires in February (SA), and 3.957 million total separations, or 4 thousand net jobs gained. The comparable CES report showed a loss of 14 thousand jobs in February (after revision).

Layoffs and discharges have declined sharply from early 2009 - and that is a good sign.

However, hiring has not picked up - and even though total separations were at a series low, there were few jobs added in February (according to JOLTS). This low turnover rate is another indicator of a weak labor market.

Source: BLS

Hedge Funds Roar in March

EconomPic detailed last week that an assortment of hedge fund managers earned more than some of the largest corporations in the world in 2009. It looks like March may have been the launching pad for some nice paydays for 2010.



Source: Barclay Hedge

Low Quality Tide

Bloomberg details:

Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.

Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.

Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields.

“BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo, a strategist at Goldman Sachs in New York. “That has preserved a lot of value.”

Below is a chart showing the outperformance of BB's vs. CCC's. What it also shows is the outperformance of Ca-D's... that is securities in default.



A rising tide (in this case massive liquidity) lifts all ships... in some cases a LOT more than others.

Source: BarCap Live

Short Fixed Income. Long.... Almost Anything Else

Source: Yahoo

ISM Services Jump

ISM details what respondents are saying:

• "Business conditions have returned to normal (pre-recession). Our business is up significantly since 2009. We are very positive about the upcoming year." (Information)
• "Demand for loans, credit cards, mortgages and equity lending is expected to continue to increase." (Finance & Insurance)
• "Brisk business activity continues as more projects get 'green light.'" (Utilities)
• "Observing some relaxation on several fronts regarding spending and hiring. Still very cautious, but making investments where they make sense." (Retail Trade)
• "Limited funding available for development [and] expansions." (Accommodation & Food Services)
• "The economy appears to be holding its own; however, state and local funding is projected to decrease next fiscal year." (Educational Services)

Source ISM

Mortimer... We're Back!

After a few years of financial service worker salaries moving closely with the broader market (it is important to note that the level remained about 30% higher), the financial services sector has seen a spike in recent months.



That didn't take long...

Source: BLS

The Religious Construction Collapse

Reuters reports:

Supercheap, few-questions-asked loans were a temptation even churches could not resist, but now they are paying for their sins as the debt crisis enters the house of God.

Long considered among the safest of borrowers, churches gambled on real estate at a time when credit copiously flowed and lenders were startlingly lax.

But places of worship have since been battered by the economic downturn. Donations have dipped, investment returns have plunged and bank credit is still hard to come by.

"You build it and they will come. It really was true through the years," said Brad Hampton, executive pastor at the Faith Center of Rockford, Illinois. "They like newness," he says of younger churchgoers.

The decline in religious construction ended post-Internet bubble and never re-emerged with the residential / commercial boom and subsequent collapse.



Source: Census

EconomPics of the Week (4/2/10)

Opinion / Other
Does the U.S. Pay Too Little in Taxes?
When Investors Makes More than Corporations
Is Inflation Understated?
Explantion of How a Zero Boundary Causes a Steep Yield Curve

Economic Data
Are Americans Already Back to Their Old Ways?
Back in Black: Jobs Added, Unemployment Rate Stays...
ADP Employment... Not Yet "Back in Black"
Employment vs. Population Growth
Has the Inventory Rebuild FINALLY Arrived?
Chicago PMI Shows Expansion, but at Slower Pace
European Unemployment to 11 1/2 Year High
Confidence Rebounds... Remains Low
Japanese Production Takes a Breather
Japanese Consumer Showing Signs of Life

Asset Classes
For All the Recent Concern About the Treasury Sell Off
Housing Prices Flat Year-over-Year
UK Housing: The Benefit of a Weaker Currency

And your video of the week... The National with Mistaken for Strangers

Employment vs. Population Growth

The good news is non-farm payrolls jumped by 162,000 in March. The thing to keep in mind is that the population has grown by 211,000 per month (on average) over the past 10 years.



We're getting there, but until we grow faster than the population, unemployment levels will remain. This also shows how far fetched the low unemployment rates were in late 2007.

Source: BLS

Back in Black: Jobs Added, Unemployment Rate Stays at 9.7%

WSJ details:

U.S. employers created jobs at the fastest pace in three years in March, but nearly one-third came from temporary hiring for the Census, indicating the labor market has still some way to go to recover.

The Labor Department said in a report Friday that nonfarm payrolls rose by 162,000 in March, the largest gain since March 2007. That compared to a revised 14,000 drop in February, when the number was likely depressed by the blizzards that hit the East Coast.

Economists polled by Dow Jones Newswires were expecting payrolls to rise by an even higher 200,000. The February figure was revised upward from an originally reported 36,000 decline.

Taking into account revisions to prior months, the U.S. economy added an average of 54,000 jobs a month in the first quarter, fueling optimism about the job market's recovery.

However, the 2010 decennial Census accounted for 48,000 of the employment boost. Since those jobs will be lost in the second half of the year, economists cautioned not to read too much into the headline figure.

As a reminder of the labor market's continued weakness, the unemployment rate stayed at 9.7% last month, in line with economists' expectations. The jobless rate is calculated by the Bureau of Labor Statistics using a different, household survey.

Source: BLS

Explanation of How a Zero Boundary Causes a Steep Yield Curve

This post will hopefully explain Paul Krugman's great interpretation of the yield curve... it's caused by the zero bound on the front-end of the curve. First to Paul...

As I tried to explain last time, to a first approximation you can think of the long term rate as reflecting an average of expected future short-term rates. Short-term rates, in turn, tend to reflect the state of the economy: if the economy improves, the Fed will raise short-term rates, if the economy worsens, the Fed will cut. So long-term rates can be either above or below short rates.

Except that now they can’t. If the economy improves, short rates will rise; but if it worsens, well, they’re already zero, so there’s nowhere to go but up. This implies that there has to be a positive term spread.

At first this confused me and apparently I was not alone. Crossing Wall Street details their personal misunderstanding:

Where I really lose Krugman is when he seems to imply that the steep yield curve is the result of nominal short rates being near zero. I have no problem accepting that the curve should be positive but I don’t get how that ought to impact its unusual steepness. After all, the two-ten spread recently hit an all-time record.

Lets see if I can explain with an example and (of course) a few charts.

Yield Curve Due to Zero Bound Rates

Assuming longer term rates only reflect futures expectations of rates, lets also assume there is no view of interest rates... an investor thinks that for each period from here on out, there will be a 50% chance of a rate hike and a 50% chance of a rate cut (lets assume 25 bps).

Non-Zero Bound

If the Fed Funds rate was 4%, then next period will either be 3.75% or 4.25%. The period after that 3.5% or 4% (if there is a cut period 1) or 4% or 4.5% (if there is a hike in period 1). In this case there is no expectation of a yield curve steepening because each possibility is as likely (a 50 bps drop in 2 periods or a 50 bps hike in 2 periods). The four outcomes are 4% (cut, hike), 4%, (hike, cut), 3.5% (cut, cut), or 4.5% (hike, hike). An average of.... 4% (i.e. rates went nowhere on average).

Zero Bound

This is where things get interesting. The Fed Funds rate is zero. They cannot go negative. Thus, flip your coin for a 25 bps hike or cut. If you get hike, rates rise to 25 bps. If you get a cut... well, you can't cut any more. Go to period two. Now under the initial hike, rates can go back to 0% or jump to 50 bps. Under the initial cut, they can only go to 25 bps or stay at 0%. Thus, the four outcomes in period 2 are 0, 0, 25 bps, and 50 bps. An average of 18.75 bps (they went up).

Analysis

Starting at the zero bound and running this same scenario for 200 periods (and averaging the outcome of 15 samples), we get the following outcomes.

Example 1

Example 2

Running this hundreds of times (built a nice little spreadsheet I must say), the charts all looked roughly the same (just different scales).

I hope this was helpful...

Has the Inventory Rebuild FINALLY Arrived?

Marketwatch details:

The U.S. manufacturing sector expanded for an eighth straight month in March, boosted by stronger orders and production, the Institute for Supply Management reported Thursday.

The ISM manufacturing diffusion index rose to 59.6% in March from 56.5% in February, the ISM said. It was the highest reading since July 2004.

Higher numbers indicate more firms are growing.

Economists surveyed by MarketWatch were looking for the index to strengthen to 57.5%. Seventeen of 18 industries were growing in March, the private industry group said.

Diving deeper into the details, we see an important shift in inventories as companies are stating they are actually building inventories. The below chart details respondents stating they were building, shedding, or maintaining inventory levels.

GDP has seen a recent boost due to the slowing of inventory contraction (details here), but a real build in inventories will have an even larger impact on future GDP figures and hiring.

Source: ISM

When Investors Makes More than Corporations

Comparing the 2009 personal earnings of the top five hedge fund managers and the most recent fiscal year's net income for some of the world's largest corporations.



While these corporations employ millions of people, hedge funds support hundreds / thousands. The result is even greater inequality and capital flowing from productive means (business investment / innovation) to goods for the rich (yachts and indoor basketball courts*).

Source: The Big Picture

Not that I wouldn't have an indoor basketball court if I was worth billions

Update:

Reader Economists Do It With Models counters that wealth transfers to hedge funds does flow its way back (at least in some portion) to the economy.

I object just a tad to your characterization of the productivity of corporation net income versus private net income. Yes, the rich people are buying luxury goods, but they are then employing the people who make those luxury goods. On the other hand, if the rich people aren't buying things with their piles of cash, they are investing it, which provides funds for the development of other businesses. Corporations may be plowing their earnings back into their businesses, but they may also be distributing them as dividends to shareholders and whatnot. Perhaps some of those shareholders are even wealthy people who are going to use the proceeds to, oh I don't know, buy some yachts. :)

At least yachts are safe under any scenario!

Is Inflation Understated?

Doug Kass (via The Street) makes the case that inflation is not nearly as "in check" as headline figures would have you believe (and a potential source for the upturn in interest rates over the past few weeks).

The current artificially low readings on inflation and its salutary impact on real incomes might create the false illusion that the U.S. consumer appears poised to contribute to a self-sustaining domestic economy. Indeed, the recent strength in first-quarter 2010 retail sales is now being comfortably extrapolated by many managements, strategists and analysts.

The reasoning behind the understatement is a combination of headline CPI being made up by ~1/4 owner's equivalent rent "OER", which is dropping dramatically as it has become a "renter's market". Unfortunately in Doug's eyes, with 2/3 of all U.S. household's owning there homes, this "relief" is not uniformly felt (detailed previously at EconomPic here). In addition, as the U.S. economy becomes more integrated with the global economy, he believes it isn't only price levels in the U.S. that matter. Back to Doug.

As an aside, a critical eye would question the myopic focus on the U.S. CPI within the context of a global economy. Global inflation rates matter over here (and so does the policy reaction to those rates over there). China and India's inflation rates are heating up -- there is no OER in their calculations of inflation -- and China's policy actions to deal with this are especially important to us. In fact, one could argue that, at times, the Chinese inflation rate could be more important for the U.S. than the U.S. inflation rate.

I think Doug has an interesting take on the global aspect of inflation, especially if the United States were to devalue its currency relative to its trading partners (this will make imports more expensive, all else equal going forward). I also think that in many cases, government data needs to be taken with a grain of salt. All that said, if the reported numbers are to be believed, they just don't seem to show that inflationary pressures are heating up.

The below chart shows the headline figure, the "core" figure (ex food and energy), and the "core less shelter" figure for comparative purposes. While the headline ex shelter CPI did increase over the last year, it still remains relatively low at 2.6%.

Source: BLS

Does the U.S. Pay Too Little in Taxes?

Before I dive into the post, let me just say that when I discovered the actual amount I owe the Federal government in ~2 weeks, I almost threw up in my mouth. Lets begin...

Greg Mankiw questions measuring the level of taxes solely by the tax rate:

Some pundits, reflecting on the looming U.S. budget deficits, claim that Americans are vastly undertaxed compared with other major nations. I was wondering, to what extent is that true?

The most common metric for answering this question is taxes as a percentage of GDP. However, high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics (Taxes/GDP x GDP/Person = Taxes/Person):

The below is a chart of the table he references above ordered by each country's tax rate. In this case, the United States is in fact taxed at a very low rate, but is in the "middle of the pack" in per capita terms



Greg's conclusion:

The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.

I feel like an (extremely) exaggerated, but equivalent argument as this is saying a $4000 donation made by a billionaire is similar to a $4500 donation made by someone worth $100,000 (i.e. it may be in theory, but that billionaire is one cheap bastard).

It also matters what the money is used for. In other words, is it going to social services, such as education / training / health care, that promote equality or is it going to...



Before I get called a pacifist... I do understand the importance of our military, but by simple math taxes 'ex Military Spend' equals less tax revenue available for, well, everything else (unless you assume the military allows the United States to take advantage of the global political economy and increase our ability to consume... which we'll ignore for now). Remove this annual military spend from the first chart and it turns out the United States pays less taxes per person excluding military expenses than all but Spain and Japan in the initial chart. In fact, the United States is taxed ~10% less than the next (fourth least) taxed per capita country in the list, Italy (which is 37% smaller in GDP per capita terms).



Greg Mankiw's post was interesting to me in that it brought up a huge point of division between the right and left. On one hand taxes are only justified if they preserve order in society, while on the other the inequality we face has increased the appetite to "make right" all those that have been left behind.

Source: Population / Military Spend

For All the Recent Concern About the Treasury Sell-Off

Volatile? Yes. But, the yield of the ten year treasury bond is only 2 bps above below the level seen at the end of the year.



Source: Bloomberg

Chicago PMI Shows Expansion, but at Slower Pace

Marketwatch details:

Investors were also disappointed Wednesday by a survey of Chicago-area purchasing managers that showed U.S. business activity continued to expand in March, but at a slower pace than the previous month. The Institute for Supply Management-Chicago said its business barometer slipped to 58.8 in March, from a nearly five-year high of 62.6 in February. Economists expected a reading of 60.8.

Still, Croft noted that a reading above 50 still reflects expansion. "We think the economy is marching forward here, but not at an extremely fast pace," he said.

Source: Briefing

ADP Employment... Not Yet "Back in Black"

Peter Boockvar (via The Big Picture) reported pre-release:

While many are waiting for Friday’s Payroll figure to tell them the state of the US labor market, I’m going to rely on today’s ADP report as a better gauge. That is because it is private sector based and thus won’t be distorted by the likely 100k+ adds of government census workers and the “methodology used to construct it” takes out most of the impact of the Feb snow storms and March snapback. Thus, a cleaner number will result and expectations are +40k, the first positive reading since Jan ‘08.

It turns out that 40,000 was a bit optimistic as ADP showed a contraction of another 23,000 jobs. If these figures are to be believed (we will see "official figures" Friday), then we may have to wait for April for the private sector to stop contracting.



Source: ADP

European Unemployment to 11 1/2 Year High

Business and Finance reports:

Euro zone inflation was much higher than expected in March and the unemployment
rate reached 10 percent in February, data showed on Wednesday, highlighting the fragility of economic recovery.

Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February, the European Union's statistics office said.

The March figure was lower than the European Central Bank's target of just below 2.0 percent inflation. Analysts believe the bank will leave its interest rates unchanged until late 2010 or 2011.

The euro zone's 10 percent jobless rate in February was the highest since August 1998 and in line with market expectations. A month earlier unemployment was at 9.9 percent.

Source: Eurostat

Housing Prices Flat Year-over-Year

And to get here all it took was subsidized financing (i.e. $1.25 Trillion in mortgage purchases by the Fed), the bailout of Fannie / Freddie / banking system, 0% fed funds, tax credits, and new home supply at 50 year lows.



But as I've asked before, what happens going forward? At some point the market must reflect supply / demand at a "natural" clearing price. And that clearing price will depend on how sustainable the recovery truly is.

Source: S&P

UK Housing: The Benefit of a Weaker Currency

While a weak currency isn't ideal in all situations, it seems that a weaker sterling is helping to reinflate the U.K. housing market. Ed over at Credit Writedowns provides details of the rebound:

The Nationwide, the UK’s largest building society, released data this morning showing that UK house prices rebounded in March from February’s dip. The average UK home now costs £164,519, up 9% from year ago levels. Much of the increase has been driven by supply-demand imbalances with a dearth of properties coming to market in the poor economic climate of 2009.

A weak sterling has caused the housing market to be awfully attractive to investors outside the U.K. An example can be seen below, comparing the change in the price index in both local currency (sterling), as well as the dollar.



Source: Nationwide / Yahoo Finance

Confidence Rebounds... Remains Low

Bloomberg details:

Confidence among U.S. consumers climbed in March as Americans perceived employment was starting to improve.

The Conference Board’s confidence index rose to 52.5, exceeding the median forecast of economists surveyed by Bloomberg News, from 46.4 in February, the private research group’s report showed today. Another report showed home prices rose in January.

“With signs of improvement in the labor market, confidence is more likely to be up than down in the next few months,” said James O’Sullivan, chief economist at MF Global Ltd. in New York, who forecast sentiment would pick up. “It’s still a low level of confidence.”

Source: Conference-Board

Japanese Production Takes a Breather

Bloomberg details:

Japan’s industrial production retreated in February, snapping an 11-month winning streak that helped to secure a recovery from the country’s worst postwar recession.

Factory output declined 0.9 percent from January, when it rose 2.7 percent, the most in eight months, the Trade Ministry said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for a 0.5 percent drop.

The slide is unlikely to last as Asian demand for the country’s electronics and machinery continues to fuel exports, Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, said before the report was published. Factory output and exports have yet to return to their peak set two years ago, and the recovery remains plagued by deflation.

While today's 0.9% slide wasn't a surprise to the upside like yesterday's consumption release, it also wasn't that unexpected considering the huge jump we saw in January (industrial production is still up considerably from December's figure).



Putting it all together...

The good news is production is up considerably from lows. The bad news is how far things fell (i.e. can businesses operate profitably at these new levels). Relying on the United States for recovery is a concern, but the benefit of being situated near a red-hot China allows room for optimism.

Source: METI.Go

Are Americans Already Back to Their Old Ways?

Financial-Planning reports:

While 63% of Americans said they were concerned about the overall state of financial markets in 2009, just 45% said they were concerned in 2010.

Nervousness and fear about retirement dropped from 55% who were nervous or afraid last year to just 40% this year. American's concern about having enough money to retire has fallen from 56% in 2009 to 51% this year, the same as in early 2008, the study found.

“Americans appear more relaxed about retirement and are far less worried about their finances overall,” said Craig Hogan, Scottrade’s director of customer intelligence. “The number of people who reported being concerned about issues such as day-to-day expenses, education costs, paying off credit cards, and saving for big ticket purchases didn’t just decline – each category hit a four-year low.”

Which leads us to this morning's personal consumption and expenditure report. To the NY Times:

U.S. consumer spending rose as expected in February for a fifth straight month, while stagnant incomes pushed savings to their lowest level since October 2008, a government report showed on Monday.

The Commerce Department said spending increased 0.3 percent after rising by a slightly downwardly revised 0.4 percent in January. Consumer spending in January was previously reported to have increased 0.5 percent.

Source: BEA

Japanese Consumer Showing Signs of Life

Bloomberg details:

Japan’s retail sales gained at the fastest pace in more than a decade in February as the economic recovery spread to households.

Sales rose 4.2 percent from a year earlier, the Trade Ministry said today in Tokyo. That was the biggest monthly jump since March 1997, when they advanced 12.4 percent, according to Bloomberg data. The median estimate of 12 economists surveyed was for a 1.6 percent climb.

An export-fueled recovery and government stimulus spending are beginning to create jobs and support wages, improving prospects for companies including Dydo Drinco Inc. A turnaround in employment will continue to support consumer spending, according to economist Julian Jessop.

From a month earlier, retail sales unexpectedly climbed 0.9 percent, the second consecutive gain. None of the eight economists surveyed by Bloomberg News predicted an increase, and their median estimate was for a 1.2 percent drop.

Consumer confidence advanced for a second month in February, led by sentiment about employment, a sign households may boost outlays in coming months as fears of being fired recede. Japan’s economy added the most jobs in more than three decades in January, unexpectedly sending the unemployment rate to a 10- month low of 4.9 percent. Workers’ pay declined at the slowest pace in 19 months.

While the 4.2% year over year jump is against a collapsed low, the fact that the Japanese consumer has come back to near pre-crisis spending levels is encouraging for any lasting recovery.



Source: Meti.GO

The Social Security Tipping Point?

The NY Times reports:

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

and

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

It is important to note that there is still an overall surplus due to the interest received on the fund, thus the overall balance continues to grow, but we are getting closer and closer to the tipping point unless growth surprises to the upside or changes are made to the current structure.



Source: CBO

On the Housing "Gap"

I got the idea from Calculated Risk to directly compare new with existing home sales. A huge "gap" exists between the two which was explained by CR as:

The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The spike in existing home sales last year was due primarily to the first time homebuyer tax credit.

I took it one step further and broke out new and existing home sales by region to see where the phenomenon above had a greater impact.

The first chart shows the "gap" (i.e. the huge collapse in new home sales vs. existing).

The second is the ratio for each region over the past 10 years of new-to-existing home sales. Here we can see that each region (not surprising) was not affected the same. The areas impacted most (by far) were the west and south; the two areas hurt most by the run-up and subsequent collapse of their housing markets.

Source: Realtor / Census

Treasuries Sell-Off on Soverign Concern

Bloomberg reports:

The yield on the 10-year Treasury note rose to 3.85 percent, the highest since Jan. 8. The euro weakened against 12 of its 16 most-traded peers at 2:15 p.m. in New York and fell to a 10-month low against the dollar. The MSCI World Index of stocks in 23 developed nations slid 0.8 percent and the Standard & Poor’s 500 Index fell 0.5 percent, retreating from an 18-month high. The Reuters/Jefferies CRB Index of commodities dropped to a five-week low as oil slid 1.5 percent, copper lost 1.4 percent and lead tumbled 4 percent.

A record-tying $42 billion sale of five-year debt drew a higher-than-forecast yield and lowest demand since July from a group of investors that includes foreign central banks. France and Germany are nearing agreement on International Monetary Fund involvement in any aid package for Greece, according to a finance ministry official in Berlin, spurring concern the European Union won’t rescue the nation itself. The Portugal downgrade heightened concern that more European nations will struggle to fund swelling deficits.

Source: Yahoo

Durable Goods Jump on Continued Strength in Aircraft

The AP details:

Orders for big-ticket manufactured goods rose for a third consecutive month in February, bolstered by strong demand for commercial aircraft and machinery. The
hope is that continued strength in manufacturing will help sustain the economic recovery.

The Commerce Department said Wednesday that orders for durable goods advanced 0.5 percent last month, slightly lower than the 0.7 percent gain that economists had expected.

The increase was led by the second huge jump in demand for commercial aircraft, an increase of 32.7 percent which followed a 134.9 percent rise in this volatile category in January.

Below is the monthly gains by category:



As detailed above, the increase was driven by commercial aircraft (durable goods ex commercial aircraft was down 0.9% for the month) now up 211% since December!

Source: Census

Japanese Trade Shows Mixed Balance

Bloomberg report:

Japan’s export growth accelerated to 45.3 percent in February, led by Asian demand that increased the likelihood the economic recovery will be sustained.

The year-on-year increase was faster than January’s 40.8 percent, the Finance Ministry said today in Tokyo. The median estimate of 17 economists surveyed by Bloomberg News was for a 45.7 percent gain.

Imports climbed 29.5 percent in February from a year earlier, resulting in a trade surplus of 651 billion yen ($7.2 billion). The median estimate of 22 analysts surveyed was for 560.6 billion yen.

The strong export growth was driven by a large jump in exports to the United States (as well as the above mentioned Asian demand), but unlike Asian (including China below), trade did not flow both ways with the United States. The below chart shows the collapse in trade (imports and exports) between the United States and Japan during the crisis and the lack of a full rebound in exports to the United States and absolutely no budge in imports from the United States.



Source: Customs.GO

Americans... Hate... Everything

Bloomberg details:

The majority of poll participants -- 56 percent -- say big financial companies are more interested in enriching themselves at the expense of ordinary people, while 40 percent say such firms play a vital role in enabling the economy to grow.

At the same time, Americans are divided over the scope of government regulation. More than 40 percent of Americans say the government has gone too far in measures to fix the financial industry; 37 percent say it hasn’t done enough. Almost six out of 10 people say Wall Street hasn’t gone far enough on its own to protect against future emergencies.

And...



Source: Selzer & Co

Update:

Nelson did not appreciate the post:

Americans don't hate everything. They know they have been ripped off by the "FIRE economy, and the bought for congress. It is disingenous of you to label Americans as "hatas" when the whole financial economy is Lehman like, or are you too blinded by cutesy picturesque pie graphs and columns to see the graft from the graph? Either you help denounce the thieves, or you contribute to the cover up.

Disgusted@econompic

My response:

disgusted@econompic = another thing americans hate... econompic! (it was sarcastic people [nelson- you obviously do not read this blog regularly which is fine, but i hope i have done at least my share of "denouncing the thieves"]).

that is all besides the point. the main point and what i find interesting is not that everyone is fed up with the financial system (that makes sense), but how divided everyone is on... well, everything.

~half of americans hate the health care reform / ~half really like it.
~half say the gov't hasn't done enough / ~half say they've done too much

while the cutesy picturesque charts above shows americans view on business, the financial system, and government... we can add religion in schools (either side of the debate), abortion, war in the middle east, etc... and we'll still get close to 50% of people who do not approve.

that was my point... you cannot make americans happy doing anything, so leadership should simply just try to do what is right.

Risk Assets vs. Money Market Flows...

I must say the below chart is interesting, but as we all know "correlation does not imply causation"...



So did the fear that caused the sell-off in risk assets ALSO cause the flight to money markets (and the subsequent ease of fear that caused the reversal to occur) OR did the flows from money markets itself cause the rally?

Source: BarCap / ICI

Commercial Real Estate Bottoming?

Commercial real estate prices rose for the third straight month, bouncing from an epic collapse, on lower volume (less transactions), but higher dollar volume.

Before we jump into the details, as Calculated Risk notes:

Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.

The below two charts (index level and year over year change), both show what appears to be a bottoming in the commercial real estate market.



Year over Year Change



So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?

• Less demand (3,000,000 less people employed and office vacancy rates at 18% [up from 8%] in 2001)
  
• Significantly more supply (anyone have a source for square footage?)
• Less credit available for purchases
  

Source: MIT

Chicago Fed National Activity Declines in February

Reuters details what the index shows:

Zero values in the index indicate a national economy expanding at historical trends, while negative values indicate below-trend growth and positive values signal growth above trend, the Chicago Fed said. The 85 economic indicators that comprise the Chicago Fed's index are drawn from four categories: production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories. The three-month moving average provides a more consistent picture of national economic growth compared to the more volatile monthly index.

And the three month average fell to -0.64 in February from -0.04 in January (i.e. below trend growth).



Source: Chicago Fed

Global Productivity and Unemployment

The Economist details:

Producing more by working less is the key to rising living standards, but in the short term there is a tension between efficiency and jobs. America and Europe have managed this trade-off rather differently.

America has gone on a diet: it has squeezed extra output from a smaller workforce and suffered a big rise in unemployment as a consequence. Europe, meanwhile, is hoping to burn off the calories in the future. It has opted to contain job losses at the cost of lower productivity. That probably means America’s recovery will be swifter. Further out, productivity trends in both continents are likely to be uniformly sluggish.

Below is a chart showing just how varied the economic results have been between the U.S. and the fifteen member EU-15 have been.



Longer term, the chart below shows just how much more the United States has been able to squeeze out from its workers over the previous few decades (and I threw in Brazil to show just how sizable the growth potential is for emerging market countries simply to "catch-up" to the developed world).



The interesting thing is related to timing of the chart. Just a few years ago when unemployment was much lower and average hours worked per week was much higher, the chart would have looked much different. It was at that point in time that the European countries were more productive with their workforce as they tended to work much less.

Now the question becomes how much more will we really be able to squeeze out of those workers left? At some point that answer is "not much" and companies will be forced to hire.

Source: Conference Board / The Economist