Gingrich Sliding in Polls... Phew!

I try to steer clear of politics for the most part here at EconomPic, but the thought of Gingrich in any position of power frightens me (here is one example as to why). So, Insider Advantage's most recent poll showing a complete 180 in terms of favorite for the Iowa Caucuses brings me some comfort.



Source: RealClear Politics

EconomPics of the Week (12/16/11)

Economic Data

Breaking Down CPI

Real Retails Sales per Capita

Real Retail Sales Ex Autos and Gas Makes New High

Consumer Credit (Excluding Student Loans) Now Below 50 Year Average

Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

Global
China's Slowing Treasury Purchases

Will the US be Importing Deflation?
Trade Deficit Narrows

Global Manufacturing Recession or Noise?

Asset Classes
European Expectations and the Price of Gold

Why Do Large Cap Firm's Trade at a Discount to Market?

And your video of the week... The Black Keys with 'Gold on the Ceiling' off their (AWESOME) new album El Camino.

Breaking Down CPI

SF Gate details:

Overall consumer prices increased 3.4 percent in the 12 months ended November, the smallest year-over-year increase since April. The core CPI climbed 2.2 percent from November 2010, the most since October 2008.

The Fed's preferred price gauge, the Commerce Department's measure that excludes food and fuel and is tied to consumer spending, rose 0.1 percent in October after no change the prior month. It was up 1.7 percent in the year ended in October, at the lower end of Fed policy makers' long-run projection of 1.7 percent to 2 percent.

"Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable," Fed policy makers said in a Dec. 13 statement after their most recent monetary policy meeting.

The chart below breaks out the components of the 3.4% headline figure. As can be seen, the bulk of consumer inflation is embedded within transportation, specifically fuel which is up 20% year over year. As lower fuel prices from the first quarter of 2011 begin to roll off during the beginning of next year, expect headline CPI to move significantly lower unless gas prices rise again over the next few months (knock on wood). This roll-off can already be seen in the six month chart below.

12-Month

6-Month Annualized

Source: BLS

China's Slowing Treasury Purchases

With almost each Treasury holdings release, the mainstream media claims China is selling Treasuries, when in reality purchases are just flowing through the United Kingdom (and are later revised to China... see here, here, and here for a few examples). So, not a surprise when I read this via the AP:

China bought less U.S. Treasury debt in October and total foreign holdings dipped for the first time since July.

Total foreign holdings of Treasury debt edged down 0.1 percent to $4.66 trillion, the Treasury Department reported Thursday.

China, the largest foreign holder, bought 1.2 percent less to bring its total holdings to $1.13 trillion. China had increased its holdings 1 percent in September after a reduction of 3.1 percent in August.

The small decline in overall holdings still left them at high levels that suggest foreign demand for U.S. debt remains strong.

Details as to why the United Kingdom's holdings should be included can be found here.

BUT, when I looked at the data, something caught my eye. While the month over month level of Treasury holdings actually declined this time when accounting for the United Kingdom, which could simply be noise, the longer term trend is clear. The pace of growth in Chinese purchases of Treasuries has declined rather dramatically (in percentage terms). This may prove to be a smaller issue for the U.S. in terms of Treasury demand (the smaller percent is off a larger base, so in $$ terms the growth is still significant), but it may reflect the difficulty China may have growing their export driven economy at the scale required to prevent social unrest, as global aggregate demand has waned.

Source: Treasury

Will the US be Importing Deflation?

Bloomberg details:

The import-price index climbed 0.7 percent, the first increase in four months and followed a 0.5 percent drop in October, Labor Department figures showed today in Washington. Economists projected the gauge would increase 1 percent, according to the median forecast in a Bloomberg News survey. Prices excluding fuel decreased 0.2 percent for a second month, the first back-to-back drop in more than a year.

Oil prices may have reached a plateau this month, indicating increases in the cost of imported goods may moderate as slowing growth from Europe to Asia and a strengthening dollar hold down prices. Federal Reserve policy makers yesterday said they expected inflation to slow and reiterated their pledge to hold the benchmark rate “exceptionally low” at least through mid-2013.

The below chart outlines the longer term trend in imported inflation. Over the past three months, the price of imported goods (excluding petroleum) has declined for only the third time since 2005 (six month figure is now flat), while the twelve month change is turning lower (below 4%) after it peaked at over 5% as recently as September.

Source: BLS

Real Retails Sales per Capita

Following this morning's post on real monthly retail sales, a few readers asked to see the chart adjusted for population growth. I'm glad they did, as the results show why the recovery doesn't feel as strong as headline figures would otherwise indicate. To be more specific, retail sales excluding autos and gas are roughly where they were 12 years ago on a per capita basis.

Source: Census / BLS / BEA

Real Retail Sales Ex Autos and Gas Makes New High

Bloomberg details the latest retail sales:

U.S. retail sales rose in November at the slowest pace in five months, indicating faster job growth may be needed to spark the biggest part of the economy.

The 0.2 percent gain in sales followed a 0.6 percent advance in October that was more than initially reported, Commerce Department figures showed today in Washington. Economists projected a 0.6 percent November increase, according to the median forecast in a Bloomberg News survey.

It is important to remember that retail sales figures are nominal (i.e. they include inflation), thus any decline in the price of goods would make this figure appear lower. As a result, November likely understates retail sales as gasoline fell abruptly during the month (chart here). However, (sorry if this becomes confusing) if gasoline sales are understated... that means retail sales ex gasoline are overstated (all else equal).

Longer term, we are still making slow progress, but we have passed an important milestone. By my calculation (backing out BLS inflation figures for each of the below components), we have now made a new high in terms of real (i.e. after inflation) retail sales less autos and gasoline.

In other words, we're still purchasing a heck of a lot of stuff.

Source: Census / BLS

European Expectations and the Price of Gold

You never want to read too much into any short-term trend, but take a look today's market performance, as well as the "correction" we've seen across asset classes since spring / summer peaks and notice which assets have done well (high quality income producing bonds) and which have done poorly (equities, non-US currencies, commodities, AND gold). I highlight gold because over the past three years risk-asset sell-offs have broadly been met by strong bids for Treasuries and gold, but today's performance and the drawdowns indicate it may be losing that flight to quality bid.

Daily Performance (December 12th, 2011)

Drawdown from 52 Week High

As Eddy Elfenbein's gold model outlined (further optimized by Willem Weytjens), gold has broadly done well in low (or negative) real interest rate environments. In fact, should inflation run at its historical levels the next two years, Willem's revised model calls for $4000+ per ounce gold in the next few years.

Yet, gold is down about 12% from its recent peak. One possible reason is the concern over Europe. My own thinking... how unlikely is it that things get worse, impacting global aggregate demand and the financial system more broadly? In that case, how improbable is disinflation or deflation, which in turn would mean these low nominal rates may actually move a lot higher in real terms.

Source: Yahoo

Trade Deficit Narrows

Bloomberg details:

The trade deficit narrowed in October to the lowest level of the year, reflecting a drop in imports that will help give the U.S. economy a lift.

The gap shrank 1.6 percent to $43.5 billion, smaller than projected, from $44.2 billion in September, Commerce Department figures showed today in Washington. Purchases from overseas fell to the lowest level since April, due almost entirely to a plunge in demand for petroleum.

Imports of capital goods, like computers and aircraft, and consumer goods climbed, showing spending by American companies and households is keeping the economy growing. Exports to China and South and Central America reached records, indicating demand from developing nations that is benefiting companies like Dow Chemical Co. (DOW) may cushion the U.S. from any slowdown in Europe.

The below chart outlines the 12-month change in real net exports by category (as well as the breakdown between the change in real imports and exports). As can be seen, the trade deficit is improving, due to improved industrial supplies and consumer goods trade balances.

Source: Census

Why Do Large Cap Firm's Trade at a Discount to Market?

Aleph Blog outlines why he believes "behemoth" companies (i.e. firms with a market value greater than $100 billion) trade at relatively compressed price to earnings ratios:

For Behemoth companies to achieve large earnings growth, they have to find monster-sized innovations to do so. Those don’t come along too regularly. Even for a company as creative as Apple (or Google), it becomes progressively more difficult to create products that will raise earnings by a high percentage quarter after quarter.

As a result it should not be a surprise that Behemoth stocks trade at discounts to the market when global growth prospects are poor. They have more assets and free cash flow to put to work than is useful in a bad environment. Not every environment offers large opportunities.

The below chart outlines, by sector, the market cap of the current 39 behemoths using data from a follow up post at Aleph Blog (he adds even more granularity in his post).

I would also add that I believe these behemoths trade at an aggregate discount due in part by their composition. Financials (and to a lesser extent energy firms) trade at a large discount due to the damage they inflicted upon themselves and the threat of future regulatory restrictions that may impede profitability, both of which may force them to dilute shareholders as they raise / write-down capital. Technology firms on the other hand are constantly threatened by innovation and becoming irrelevant by the next generation of firms (i.e. what happened to Yahoo via Google), thus earnings become difficult to project past even a few years.

Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

From table D.3. of the Fed's Flow of Funds, we see that as the private sector deleverages, the public sector has added even more debt, which (in my opinion) has (thus far) prevented a debt deflation cycle.

Source: Federal Reserve

Consumer Credit (Excluding Student Loans) Now Below 50 Year Average

Bloomberg outlines:

U.S. consumer borrowing rose in October to the highest level in two years, propelled by gains in non-revolving debt like auto and student loans.

Credit increased by $7.65 billion to $2.46 trillion, the most since October 2009, Federal Reserve figures showed today in Washington. The advance was in line with the median forecast of economists surveyed by Bloomberg News that projected a $7 billion gain.

While overall consumer credit rose, consumer credit excluding student loans continued to decline as a percent of personal income from 15.74% in September to 15.71% in October. Of note, total consumer credit (revolving and non-revolving) is now below the 50 year average when viewed relative to personal income, with the big caveat that this excludes student loans*, a category that is now more than 3% of personal income (up from less than 0.5% on average the past 50 years).

Source: Federal Reserve / BEA

* this assumes all Federal student loans are student loans.

Global Manufacturing Recession or Noise?

Source: Investment Postcards via The Big Picture

EconomPics of the Week (12/2/11)

Economic Data
Traction on the Jobs Front... Headline vs. Actual
Construction Decline Bottoming

ISM Manufacturing Moves Higher

The Importance of Small Business Hiring

Consumer Confidence.... Things Are Looking Up as it Can't Get Much Worse Edition

European Industrial New Orders Crumble

GDP Growth Revised Down Due to (Lack of) Inventory Build

Asset Classes
The European Impact on Financials and Risk Assets
Whipsaw
Auto Recovery in Perspective

Are Home Prices Inexpensive Relative to History?

Corporate Profits vs. Personal Income

Random
Morality and Religion

And your song of the week... one of the more popular songs to cover in punk rock history, Fugazi's Waiting Room. For Fugazi fans, they just posted more than 1000 of their live concerts online here.

Not the best quality video, but the energy in that room (way back in 1988) appears to have been rather epic.

Enjoy the weekend!

Traction on the Jobs Front... Headline vs. Actual

First the (very strong) "headline", then the details.

The WSJ with the headline:

The U.S. labor market strengthened in November as private employers continued to add jobs at a healthy pace, while the unemployment rate fell to its lowest level since March 2009.

Nonfarm payrolls rose by 120,000 last month, the U.S. Labor Department reported Friday in its monthly survey of employers. Private companies added 140,000 jobs, while the public sector—federal, state and local governments—lost 20,000 jobs.

The unemployment rate, obtained by a separate survey of U.S. households, fell to 8.6% in November from 9.0% the previous month. The rate hadn't been below 9% since March, when it was 8.8%. The rate is now lower than at any point since March 2009, when it was 8.6% as well.

In another positive development, October's figure for nonfarm payrolls was revised upward to show a gain of 100,000 from a previously reported 80,000, while September was revised up to a 210,000 gain from 158,000.

The chart below shows the good news... an improving job market with declining unemployment and underemployment.

Now the details...

A improvement in the sense that jobs are being added, but a bifurcation between the "haves" (those getting jobs) and "have nots" (those so disgruntled they are leaving the workforce completely). Notice the huge spike in the number not in the labor force. In other words, the unemployment rate dropped not only due to an increase in the number of individuals employed, but also due to the number no longer counted as unemployed because they have dropped out of the labor force. Also notice the huge split between men (getting jobs) and women (losing jobs and leaving the job market). No clue what is going on there...

A better picture emerges when viewed as a percent of the total population of individuals qualified to work. The chart below shows the number in the labor force as a percent of that broader population, as well as the number employed. The good news is we continue to see stability in the employment to population ratio (i.e. jobs are growing at the rate of population), the bad news is that rate has been stagnant and remains near a 30 year low. The other concern is that the number of people participating in the job market continues to decline, so unemployment could present a long term issue even if the economy bounces back (those that left the workforce may find themselves unqualified to return).

If the above trend continues, expect the unemployment rate to continue to decline regardless of whether the job market improves. The good news is that this will result in a positive headline each month. It will be interesting to see if that headline helps with confidence, which makes a the recovery self fulfilling.

Source: BLS

Auto Recovery in Perspective

SF Gate details:

Four of the six largest automakers by U.S. sales beat expectations, boosting industry sales to a 13.6 million seasonally adjusted annualized rate, according to Autodata Corp. The pace exceeded the 13.4 million average estimate of 14 analysts surveyed by Bloomberg and is the best month since sales were helped by "cash for clunkers" in August 2009.

"Consumers have been waiting for this," Jessica Caldwell, an analyst for the researcher Edmunds.com, said today in a phone interview. "Cars are getting old, and people are getting to the point where they need to replace them. There's recession fatigue and people want to buy. We're getting tired of being in this saving pattern."

While any recovery is good news, we are still at very low levels relative to recent history. The chart below outlines historical auto sales normalized by population (i.e. "people per car"). What we see is that year-to-date auto sales are in the neighborhood of 1 auto sold per 24 people, down from 29 in 2009, but up from the 17 average seen from 1971 - 2007.

Source: Wards Auto

Construction Decline Bottoming

The AP reports:

U.S. builders spent more in October on homes, offices and shopping centers, pushing construction spending up for a third straight month. Despite the gains, construction spending remained depressed.

Construction spending rose 0.8 percent in October to a seasonally adjusted annual rate of $798.5 billion, the Commerce Department said Thursday. While an improvement, that's barely half the $1.5 trillion that economists consider healthy. And through the first 10 months of this year, construction spending is 2.9 percent below the dismal levels from 2010.

While things do remain well below normal levels, but not nearly the "half" quoted above. Even during the boom times earlier last decade, the US never approached the $1.5 trillion "healthy" figure (though I would note the below is in nominal terms, thus in real terms would look worse).

Source: Census

ISM Manufacturing Moves Higher

ISM Reports:

WHAT RESPONDENTS ARE SAYING ...

• "Business still holding its own. Some growth in margin now that some of the raw materials prices have abated. Oil is pushing $100 so that has not been favorable." (Chemical Products)
• "Orders for the remaining two months have increased after an extended 'summer dip' in sales overall. We expect to finish the year approximately 10 percent above 2010." (Electrical Equipment, Appliances & Components)
• "Seeing a slight slowdown in orders; could be related to the holidays." (Primary Metals)
• "Material lead times are getting longer. Seems like no one is hiring. Trying to do twice the output with the same amount of people." (Food, Beverage & Tobacco Products)
• "Japanese auto production has returned to 100 percent, and domestic manufacturing continues to increase." (Fabricated Metal Products)
• "Oil exploration seems to be really picking up. Government is permitting again, so business is the busiest we've ever seen." (Computer & Electronic Products)
• "The EPS ruling about higher fees for coal-generated electricity can have a huge, negative impact on our business if implemented in January 2012. We are at the peak of our seasonal demand push." (Plastics & Rubber Products)
• "Thailand flood impacting our business. Honda and Toyota cut production forecasts, and we are chasing some components made in Thailand." (Transportation Equipment)

Source: ISM

The Importance of Small Business Hiring

The WSJ details the potential good news on the job front:

Private-sector jobs in the U.S. rose by 206,000, according to a national employment report published by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

Economists surveyed by Dow Jones Newswires expected ADP would report an increase of 130,000. The October data were revised to show a rise of 130,000 versus 110,000 reported earlier.

The chart below shows that the bounce has come almost entirely by small and medium sized businesses (i.e. those with payroll of less than 499 employees). I would note that hiring among companies with payroll of less than 50, saw the highest jump in hiring since November 2006. I personally wonder whether those that can't find jobs are creating their own or if there are opportunities out there that corporations aren't seeing as they have downsized and focused on reducing expenses.

Either way, this is part of a longer term trend in the job market. Corporate payroll now makes up less than 16% of overall payroll, according to ADP, down from almost 18.5% a decade ago. The issue of course is that small and medium size businesses haven't grown their share, but rather corporations have reduced their share through the outsourcing of jobs overseas.

Source: ADP

Are Home Prices Inexpensive Relative to History?

It depends on the time frame you are looking at. The below charts show real appreciation (after inflation), by city where available, going back 5, 10, and 15 years.

5 Years (Home Prices Appear VERY Cheap)

10 Years (Home Prices Appear Quite Cheap)

15 Years (Regions Impacted Most by the Recent Recession Appear Cheap... Others Quite Expensive)

Source: S&P

Consumer Confidence.... Things Are Looking Up as it Can't Get Much Worse Editition

BusinessWeek details:

Consumer confidence climbed in November by the most in more than eight years as Americans grew more upbeat about employment and income prospects.

The Conference Board’s index increased to 56 from a revised 40.9 reading in October, the biggest monthly gain since April 2003, figures from the New York-based private research group showed today. The gauge, at a four-month high, exceeded the most-optimistic forecast in a Bloomberg News survey of economists.

An improvement (a much stronger than anticipated one at that) is a good thing, but we are bouncing off of extreme lows.

Source: Conference Board

The European Impact on Financials and Risk Assets

I wrote back in early October that financials have been an important factor in risk asset performance for the better part of the past four years. The below chart shows that since June, financials are still an important sector to keep an eye on, but that the sector appears to be driven (remarkably well) by the situation in Europe.

Source: Yahoo Finance

Whipsaw

What was down (risk assets), was up, then down again. What was up (Treasuries), was down, then up again. Below is an assortment of sector ETFs sorted by three month performance (Long Treasuries are up the most, EM Equities down the most).

Source: Yahoo Finance

European Industrial New Orders Crumble

Industrial production within Europe for the month of September was ugly (see here), but nothing compared to new orders made during the same month (which leads to future production). The Economic Times details:

Euro zone industrial new orders slumped in September, the EU said on Wednesday, the deepest fall since December 2008 and far worse than economists had forecast, in the latest sign that Europe may be heading for a recession.

Orders in the 17 countries sharing the euro tumbled 6.4 percent in the month compared to August, well below expectations of a 2.5 percent fall, with Germany and France registering sharp contractions, the EU's Statistics Office Eurostat said.

"The scale of the deterioration is surprising," said Clemente de Lucia, an economist at BNP Paribas. "We are entering some kind of contraction in the last quarter of this year that will continue in the first quarter of next year," he said.

Interesting to note that the core of Europe appears to be doing much worse than the periphery (a reader noted that the core is where "stuff" is made").

Source: Eurostat

Corporate Profits vs. Personal Income

Stagnant wages and outsourced production (reduced expenses for corporations - higher unemployment / underemployment for individuals), combined with cheap financing (lower interest payments for corporations - lower income on savings for individuals) have fed record corporate profits, while personal income slowly rebounds (and remains below pre-crisis levels).

Another way to view the same data is to compare real corporate profits (still the red line) with the difference between real GDP growth and real personal income. What we see is that when real GDP grows faster than real personal income, more of national income makes its way into corporate bottom lines.

What this misses is that for corporate income to continue to grow either:

• National income needs to grow
• Corporations need to grab an even larger slice of national income from individuals

Both of which will be much tougher on a going forward basis (the former a good thing, the latter not so much).

Source: BEA

GDP Growth Revised Down Due to (Lack of) Inventory Rebuild

Bloomberg details:

The economy in the U.S. expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Excluding stockpiles, so-called final sales climbed 3.6 percent, the most since last year’s fourth quarter.

As can be seen below, the decline was almost entirely due to the negative impact from inventories (i.e. we consumed what we had previously stored and businesses didn't restock), offset in part by an increase in net exports.

As I mentioned following the most recent trade release:

Trade (imports) is down not because we are consuming goods made in the U.S., but rather because businesses paused on rebuilding inventories.

In other words, it seems we are simply consuming past imports, thus when inventories are rebuilt, the above "should" revert to negative territory unless aggregate demand collapses. Something else to keep an eye.

Source: BEA

Morality and Religion

Lots of interesting topics in the PEW Research Center's The American-Western European Values Gap. Here's one...

Note: bringing up religion among any group of individuals where everyone is not like-minded is the equivalent of playing with fire, so I will not be making any comments.

Source: PEW

EconomPics of the Week

U.S. (Pointing Up)
Leading Indicators... Full Steam Ahead
Retail Sales Ratchet Higher
Capacity Utilization vs. Inflation

Employment (Ugly / Stagnant)
Unemployment: Due to Lack of Domestic Expansion, Not Layoffs
R.I.P. Teen Workforce

Europe (Getting Uglier)
European Recession?
France is No Germany

Investing Isn't Easy
Bill Miller Stepping Down as CIO

And your video of the week... AWOLNATION with Sail

Leading Indicators... Full Steam Ahead

Whether or not the U.S. can truly break away from European concerns is still an open question, but recent economic data points to a decreased likelihood of a double dip.

Bloomberg details:

The index of U.S. leading indicators climbed more than forecast in October, signaling the world’s largest economy will keep growing in early 2012.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.9 percent, the biggest jump since February, after a 0.1 percent September increase, the New York- based research group said today. The median forecast of 56 economists surveyed by Bloomberg News projected the gauge would advance 0.6 percent.

Source: Conference Board

Unemployment: Due to Lack of Domestic Expansion, Not Layoffs

The BLS released their latest Business Employment Dynamics report that breaks out positive change in employment (by expansions and new business openings) and negative change in employment (by contractions and business closings). The data lags a few quarters so it is not very good for looking at short-term trends, but the long-term trend is quite interesting.

The first chart outlines each component, which I then normalized by population to get an apples to apples comparison over the years. What may be surprising is that the negatives (contractions and closings) have actually come down as a percent of population over the past few decades (in fact there has been a huge "contraction in contractions" recently). The bad news is that the level of expansions and openings are down (by an even larger amount) over that time frame.

The next chart compares expansions vs contractions (i.e. existing business employment dynamics) and openings vs closings (i.e. new business employment dynamics). From the below chart we can see that the largest contributor to (the lack of) job growth has been existing business dynamics (though a long-term decline of new businesses have likely played a role in the lack of expansion hiring).

Taken together, we can summarize the charts as follows:

• Layoffs via contractions and closing may be less of an issue (than at least I thought)
• There has been a decline in new business employment over the past few decades
• The lack of expansionary hiring (and negative expansionary "shocks" during the last two recessions) seems to be the the likely reason we are facing high unemployment

The issue we face is that the lack of expansionary hiring among businesses is structural in nature. As I've detailed before, the shift in hiring by existing businesses from the U.S. to overseas has played a huge role (the example of China is shown here). The good news is that policy may be able to fix some of this, either through incentives for new business development and/or shifting employment back to the U.S. (the latter of which I expect targeted policy at some point, regardless of the kicking and screaming by pro free-trade economists and corporations).

Source: BLS

Bill Miller Stepping Down as CIO

Update: the Yahoo Finance data for LMVTX that I had used appears to be wrong (no clue why and quite frankly concerning). The chart has been replaced by one from Morningstar.

Following the Legg Mason announcement that Bill Miller will step down as CIO after a 30 year run with the firm, Abnormal Returns details the difficulty of providing consistent above average equity returns:

Bill Miller co-manager of Legg Mason Capital Management Value Equity announced he was stepping down as CIO of LMCM effective April 2012. Like Woods Miller had a fifteen year period where he was seemingly unstoppable. His fund topped the performance of the S&P 500 every year over this time period.

Bill Miller has managed the Legg Mason Capital Management Value Equity fund (LMVTX) since 1982 and results of that data (relative to the S&P 500) is shown below. The data now shows the average performance pre-1991, the remarkable performance from 1991-2006, and the underperformance since due to the misplaced bets on financials.

Back to Abnormal Returns on the potential danger of allocating to outperforming managers:

In investing a fall from grace is a common occurrence. In 2011 we have seen both John Paulson who conducted the “The Greatest Trade Ever” and Bruce Berkowitz, Morningstar’s manager of the decade both stumble badly.

Source: Morningstar

Capacity Utilization vs. Inflation

Marketwatch details:

The output of the nation’s factories, mines and utilities rose 0.7% in October, the Federal Reserve said Wednesday in another sign the manufacturing industry is still expanding.

The October gain was the biggest since July and was stronger than the 0.4% increase expected by analysts.

Source: BLS / Federal Reserve

France is No Germany

FT Alphaville details:

The 30-year German bond yield is close to a record low, around 2.48 per cent at pixel time. France might be able to borrow for 30 years at just 4.4 per cent (i.e. hardly a distressed credit)… but the days of convergence are long gone.

Retail Sales Ratchet Higher

The WSJ details:

U.S. retail sales rose in October as Americans spent their dollars at electronics stores and on the Internet, a sign that consumers are willing to open their wallets ahead of the all-important holiday shopping season.

Separately, U.S. wholesale prices in October dropped at the fastest monthly pace since February 2010, a move that gives the Federal Reserve leeway to boost the economy and jobs with its monetary stimulus.

Retail and food services sales climbed 0.5% last month from September to an adjusted $397.67 billion, the Commerce Department said Tuesday. That came on top of a strong 1.1% gain in September retail sales.

Electronics saw a spike due to huge demand for the latest iPhone, but strong results across the board in the face of declining energy prices during the month.

Source: Census

R.I.P. Teen Workforce

Last Thursday, my friend GYSC had a post at his blog Economic Disconnect titled Odd Jobs Over the Years. He outlined the jobs he has had over the years, many of them during his pre-teen / teenage years.

Reading the post allowed for some self reflection on jobs I had before turning 20 (lawn mowing, snow shoveling, race track concession stand, snack bar at a swim club, waiter at a retirement community, waiter at a diner, painter, medical assembly line, data entry at a local college... to name a few). While some of these jobs were miserable and some quite enjoyable, I truly believe that in aggregate they helped me figure out what it was that I wanted to be (and what I didn't), the "rules" of work, as well as the importance of hard work.

Which is why the below chart is absolutely terrifying to me. It shows that for the next generation of teens (and now early 20-somethings) only 1 in 4 teens are employed, down from the 40-50% range from 1950 through the end of the century. A large portion of the next generation will be left behind.

I had the above post all ready to go, when I came across a similar post over at Rortybomb, but that post points to something perhaps more concerning:

To leave the United States for a minute, one way people are trying to understand the Arab Spring is through the lens of mass youth unemployment and inequality. Given how high unemployment has been in these MENA – Middle-East and North African – countries, what else could we expect besides revolution?

He then shows a series of charts (this one is telling) that shows unemployment among the youth in MENA countries is awfully similar to levels seen among 16-24 year olds in the U.S.

Source: BLS

European Recession?

Expect there to be a larger focus on European economic data in the coming months. With that in mind, Bloomberg details European industrial production for September:

European industrial production declined the most in 2 1/2 years in September, led by capital and consumer goods, as the sovereign-debt crisis pushed the economy toward a recession.

A few things to note in the above...

• Germany appears to have been severely impacted by broader European austerity
• Italy was crushed
• Eastern Europe (an area that was initially impacted more by the crisis) saw positive growth in industrial production

Warning: While my guess is the above is more of a trend than a blip, the data is backward looking (over a month ago) and just one data point, thus it will be important to see how this progresses.

Source: Eurostat

EconomPic Recap: We're Not Gonna Take It Edition

Similar to the sentiment hopefully shared by all of you, I am appalled by the horrific events that have taken place over the course of the last 15 years by one sick individual and a lot of potential individuals that didn't report it (and allowed it to continue) at Penn State. What most readers don't know is that I happen to be an alum of the university, thus in addition to the disgust I had a huge sense of disappointment in the (lack of) leadership from the organization. That disappointment led to initial feelings of shame as I called Penn State home for four years of my life.

Fortunately for me, a fellow alum (and good friend) Jerry Needel, didn't allow that shame to linger as he (along with his wife and a few friends) put the control back into our own hands. The thought was if the leadership of the university was going to hide when needed most and the (minority of) students were going to provide the media an easy way to showcase the worst reactions, then we all needed to show what the Penn State community was really about.

Hence, the Proud to Be a Penn Stater movement, which outlines that we are:

• A grassroots network of proud Penn State alumni, students, parents, and fans, who are embarrassed and shocked by the recent events at Penn State
• Here to stand up for the victims of abuse and help Penn Staters get their pride back
• Tired of feeling helpless in this situation and are compelled to do our part by mobilizing the Penn State fan base - alumni, students and college sports fans - to ensure something like this never happens again - anywhere
• Partnered with RAINN.org, one of the largest anti-sexual violence organizations in the country, to launch a Penn State-specific donation campaign
• Looking to raise over $500,000 - one dollar for each of the 557,000 Penn State alumni

And how's that going? Parabolic. As of this writing, "we" have raised over $130,000 (about $10,000 an hour) showing that we will not be defined by the acts of a few individuals. Regardless of whether you have a connection with Penn State, I encourage everyone to think about donating to a great cause. If interested, go to Proud PSU for RAINN.

Make your own comparisons to the Occupy Wall Street movement and the potential of that energy if it is focused on making actual change.

Now, to links from the past few weeks:

Income / Spending

The Rich Get "Slightly Less Baller"

Unsustainable... Transfer Payments

Spending, Transfer Payments, and Taxes

Jobs

Job Opening and Labor Turnover Point to (Slow) Recovery

Breaking Down Employment

How's the Job Recovery?

Economic
Breaking Down Trade

Deleveraging is Not a Myth
Economy Grows at 2.5%, Led by Spending and Investments
Below Trend Growth

Consumer Uncertainty

Assets
On the Seasonality of Equities

Breaking Down Trade

While the U.S. still imports MUCH more than we export ($43.1 billion more in September alone to be exact), the trend has shown positive signs. The below chart outlines the year-over-year change in the real (adjusted for inflation) level of imports and exports, broken out by petroleum and non-petroleum trade. Note that an increase in exports is shown as a positive contributor below, while an increase in imports is shown as a detractor.

What can be seen:

• The pace of growth in non-petroleum imports is down significantly over the past year
• The pace of growth in non-petroleum exports is relatively flat over that time
• Petroleum imports are actually down in real terms (i.e. we are importing less)
• The net change is actually positive (i.e. trade is a positive contributor to GDP)

The good news is that this net decline in trade balance has not been met with reduced consumption (i.e. it is not a reflection of reduced aggregate demand). Potential bad news is that petroleum trade is down (good for the long-term independence of the U.S., but a potential short-term signal of an issue - see Bonddad Blog for further detail) and that trade is down not because we are consuming goods made in the U.S., but rather because businesses paused on rebuilding inventories (see here).

In other words, it seems we are simply consuming past imports, thus when inventories are rebuilt, the above "should" revert to negative territory unless aggregate demand collapses. Something else to keep an eye.

Source: Census

Job Opening and Labor Turnover Point to (Slow) Recovery

NPR reports:

U.S. employers advertised more jobs in September than at any other point in the past three years. The increase suggests hiring could pick up in the next few months. Competition for jobs is fierce. And many employers aren't rushing to fill some because they are worried about the strength of the economy. Still, most economists say the increase in openings is a reassuring sign. Nearly 3.4 million jobs were posted in September, the Labor Department said Tuesday. That's the most since August 2008, one month before the financial crisis intensified.

Digging into the data, we see that hiring, openings, and layoffs are moving in the right direction, but the levels of hiring and openings are still significantly below pre-crisis levels. Also note that while job openings are bouncing, we haven't seen the same improvement in actual hiring (perhaps this points to the difficulty in finding talent and/or we are due for a bounce in hiring).

Diving a bit deeper, the below chart shows the ratio of quits and hires to layoffs. In a nutshell, when people are confident enough to quit or are being hired at an increasing pace relative to layoffs, it means things are improving.

So we are bouncing off of lows (a good thing), but still need a lot of improvement.

Source: BLS

Deleveraging is Not a Myth

The New Yorker's The Develeraging Myth states (at a high level) that consumers are not deleveraging because they are still spending:

Americans certainly have lots of debt, but the evidence that it’s killing the recovery is surprisingly sketchy. For a start, American consumers are not actually keeping their wallets closed. Real consumer spending, after collapsing in 2009, has risen for nine straight quarters; this past quarter it was up at an annualized rate of 2.4 per cent. That looks anemic by the standard of past recoveries, but, with an unemployment rate near ten per cent and wages barely rising, that’s to be expected.

EconomPic has explained how spending has remained strong in the face of lower income and higher savings here. More curious is why an article on consumer credit focuses on spending, rather than consumer credit.

Looking at the actual consumer credit data, we see that consumers (with the exception of student loans) have reduced consumer credit dramatically. Both revolving (mainly credit card loans) and non-revolving (excluding student loans) credit levels are back to 2004 levels. As a percent of GDP, the reduction has been even greater.

Note that in the chart above, federal non-revolving loans are assumed to be 100% student loans. Likely close, but I can't find specific details.

Source: Federal Reserve

Breaking Down Employment

BusinessWeek details:

U.S. employment climbed in October at the slowest pace in four months, illustrating the “frustratingly slow” progress cited by Federal Reserve Chairman Ben S. Bernanke this week.

The 80,000 increase in payrolls was less than forecast and followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed today in Washington. The unemployment rate fell to a six-month low of 9 percent from 9.1 percent even as the labor force expanded.

The above 80,000 figure was non-farm payroll. Taking a deeper dive into the household data (the figure used for the unemployment rate and one that historical has better captured any upturn in employment), we see a slightly improved, but sluggish employment recovery.

Month over Month

• 277,000 more employed individuals (better than the headline payroll figure of 80,000)
• 95,000 less unemployed (the difference being population growth)
• Only 17,000 individuals leaving the labor force

Long-Term

The sluggishness of the recovery can be seen below in both the longer term picture of unemployed (i.e. unemployment rate) and underemployed (i.e. broader total unemployment), which remains extremely elevated.

How About the Levels

Another way to view the magnitude of the downturn and lack of recovery is below. While the number of individuals employed is roughly 3% higher than seen 10 years ago, the number after normalization for population growth is down a whopping 8% and has not seen any improvement since the downturn (i.e. since the downturn in employment bottomed, the rate of employment growth has matched population growth).

Source: BLS

How's the Job Recovery?

While MF Global and the situation in Europe significantly reduce the importance of any economic release, I thought I would highlight today's ADP employment figure anyhow.

The chart below outlines the change in goods producing, service providing, and total employment figures going back ten years. Note that over this time there have been no jobs added, while the population has grown roughly 10% (i.e. it looks bad, but it's been even worse).

The good news: service providing jobs (the type that make up the majority of jobs these days) are rebounding

The bad news: goods producing jobs (the type that actually produce stuff) are down almost 25% (yes 25%) since 2001

Source: ADP