Eurozone Retail Sales Show Record Decline

WSJ details:

Retail sales volumes in the 16 countries that use the euro matched their sharpest-ever monthly drop on record in November, scotching hopes that consumer spending will help drive the currency area's fledgling recovery, official data showed Thursday.

Retail sales slumped 1.2% from October, matching the record monthly drop seen in October 2008 and 2001, the European Union's Eurostat statistics agency said Thursday.

Sales were 4% weaker than in November 2008, the sharpest annual drop for nine months and the 18th consecutive month that sales have fallen on a year-to-year basis.

The data are much weaker than expected. Economists surveyed last week expected sales to increase 0.3% from the previous month in November, leaving them 1.8% weaker than a year earlier.

Source: Eurostat

Why Does It Feel Worse than Reported?

Gross Domestic Purchases are (per Babylon):

The market value of goods and services purchased by U.S. residents, regardless of where those goods and services were produced. It is gross domestic product (GDP) minus net exports of goods and services. Equivalently, it is the sum of personal consumption expenditures (PCE), gross private domestic investment, and government consumption expenditures and gross investment.

dblywo (with patience) detailed the divergence between GDP and Gross Domestic Purchases in recent years, commenting:

For 4-5 decades they tracked closely, especially on a YoY basis but started diverging in the last five years. I find that GDPx is much more useful right now for linking to PCE, Employment, et.al.

And here is a chart showing the five year annualized change in both GDP and Gross Domestic Purchases.



So what does this show us?

It shows that consumption over the years leading up to the crisis grew much faster than what we actually produced. This, was never sustainable. In addition, the further one moves down this path, the more difficult it becomes to grow off of this higher / boosted base. As a result, in the recent period growth in purchases has not been able to keep up with the growth seen in the headline GDP figure, even though net exports have remained negative (i.e. we still consume more than we produce, just not the larger level needed to maintain growth). Putting numbers to this, GDP has grown at a bit more than 1% annualized over the past five years, whereas growth in Gross Domestic Purchases over that period was only 0.5% annualized (low and lower).

So what does this mean?

It means that we became accustomed to living beyond our means, irrelevant of the actual production that was created within the confines of any GDP figure. This is one of the reasons that the recent GDP figures have not reflected what has actually been felt by each of us... the recent economic decline has in fact felt much worse.

The below chart makes this more clear. It is a chart similar to the one shown above, but is on a per capita basis.



As one can see, Gross Domestic Purchases per capita (i.e. GDP less net exports) is now less than it was FIVE years earlier... the first time this has happened since at least WWII.

Source: BEA

Goods Producing vs. Government

Tim from The Mess that Greenspan Made (great blog by the way) showed a rather astounding chart detailing that for the first time (ever?) the number of individuals employed by the government is larger than the number employed within the manufacturing sector.



However, in this instance, this is not a story about "bigger government". Rather, it is a story of a long in the making shift from manufacturing to servicing (as anyone who has lived or visited an old manufacturing city [think Detroit or Cleveland] can attest to).



For all the hype of big government, the number of individuals employed by the government is actually smaller as a percent of the civilian institutional population than it was in the mid-1970's (9% vs. 10%).

Source: BLS

Industrial Production Declines in Eurozone for First Time Since March

Slightly dated (October figures) as there is a delay in the release, but this would impact Q4 GDP for the Eurozone. Reuters details:

Euro zone industrial new orders were weaker than expected in October and producer prices grew less than anticipated in November, data showed, underlining the fragility of economic recovery and weak inflationary pressures.

Industrial new orders in the 16 countries using the euro fell 2.2 percent in October against September, the European Union statistics office Eurostat said on Wednesday.
Orders were dragged lower mainly by a slump in volatile demand for ships, planes and trains, without which the monthly decline was only 0.4 percent.

October new orders, which will translate into industrial production over the following months, were 14.5 percent lower than a year earlier, although that was only half the annual decline in May.

Source: Eurostat

Manufacturing Jobs Down 20% from 2006

This is rather remarkable. With the continued decline in "goods producing" jobs, a full 20% less people work in manufacturing (per the ADP) from just a bit more than two years ago.



Source: ADP

ADP Jobs Down 84,000; Services Jobs Grow

That would be the first positive month for services since March 2008.

Source: ADP

Auto Sales Improved, but Still a LONG Way to Go

Money CNN details:

The auto industry ended its worst year in memory with one of its best sales months of the year.

Overall industry-wide U.S. sales soared 15% compared to a year ago, the biggest percentage gain since July 2005. Total sales topped the 1 million mark for only the second time this year, trailing only August. Sales spiked that month thanks to the federal government's Cash for Clunkers program.

Most of the automakers posted better than expected results as five of the seven largest automakers reported increases of 18% or more from a year earlier.

But the boom in December wasn't enough to lift the industry out of its year-long slump. Last year was a tumultuous one for the industry to say the least as GM and Chrysler filed for bankruptcy and many auto plants and dealerships closed.

Full-year sales fell 21% from 2008 to 10.4 million, a 27-year low. Last year's sales are also far below the 16.7 million annual average during the 10 years before the start of the recession.

Below are sales of those "big seven". Were sales up from a year ago? They sure were, BUT that "jump" is still 27% below December 2007 figures.



An improvement, but still a long way to go.

Source: Autoblog

What Happens When the Stimulus Dies?

Assets supported by that stimulus die as well. Marketwatch details:

"Pending home sales plunged a seasonally adjusted 16% in November as a highly popular tax credit for first-time buyers was set to expire on Nov. 30, the National Association of Realtors reported Tuesday.

The good news...

The pending sales index -- which measures contracts signed but not closed on previously owned homes -- was 15.5% higher than in November 2008. October's increase was revised higher to 3.9% from 3.7% previously reported.

The Bad News:

The tax credit was ultimately extended through the first half of 2010 and expanded to repeat buyers.

Why bad? Well, besides another "pulling demand forward with taxpayer money" issue, without the revival of the tax credit, things would have been a lot worse. Not a good sign for the sustainability of the housing market.

Source: Realtor.org

2009 Performance Snap Shot

I think this is the chart that speaks 1000 words. To try to summarize all of it in one sentence... all ships rose with the rising tide.



Why?

Well, what was the alternative option for an investor than to dip their toe in the water? A 0.2% return on cash.

Source: Capital Spectator

J-E-T-S Jets Jets Jets

Will this post be relevant for 99% of you? Doubt it, but please tell me there are some Jets fans (or at least NFL fans) who read this blog...

Do the Jets deserve to be in the playoffs?

While there are plenty of critics that state no (to "sneak" into the playoffs they beat the Colts who rested their starters, followed by the Bengals who had already locked up a wild card playoff spot), I believe they do. Having ended the season winners of 5 of 6, they played the Colts tight (a one possession game when the Colts gave up) and blew the Bengals out even when their starters were playing. In addition, over the full course of the season they allowed the least number of points in the league, led the league in total rushing, AND were 7th in the league in point differential (points scored less allowed).

And that relationship (point differential) was a remarkably accurate predictor of teams that would make the playoffs (top 10 all made it).



But, to sums things up lets go to Av Sinesky of The Vertex:

As I walked back to the car after the game, I received an email from my dad. "Cold day in hell arrives," he wrote, ending off a regular season that I had insisted early on would be defined as distinct from those my father had endured. This team with a bold new head coach, a dazzling rookie quarterback, and a tenacious defense, were not my father's Jets. And although they spent much of the season trying to prove me wrong, in the end, they vindicated me. My father's Jets would have been a team that despite leading the league in defense and rushing, would have missed the playoffs. But these Jets made the playoffs despite having a rookie coach and a mistake-prone rookie quarterback and despite having an 0-5 record in games decided by fewer than five points. My father's Jets would have been a team that missed the playoffs despite starting out 3-0; these Jets made the playoffs despite a mediocre 4-6 record heading into the home stretch. My father's Jets would have apologized for a lucky break; these Jets realize they have nothing to be sorry for.

Source: ESPN

Manufacturing Sector Continues to Expand

The WSJ reports:

The U.S. manufacturing sector finished 2009 on a high note, helped by improving production and ordering activity, according to data released Monday by the Institute for Supply Management.

Separately, U.S. construction spending tumbled in November more than expected, pulled lower by the housing and commercial sectors as the recovering economy deals with high unemployment.

The ISM's manufacturing purchasing managers' index rose to 55.9 last month, from 53.6 in November. December's reading was above the 54.0 forecasted by economists surveyed by Dow Jones Newswires. Readings above 50 indicate expanding activity.

"The manufacturing sector grew for the fifth consecutive month in December as the PMI rose to 55.9, its highest reading since April 2006 when it registered 56," said Norbert Ore, who directs the survey for the ISM.

Source: ISM

Strength in U.S. Consumption... of U.S. Made Goods

The following chart in my post On the Change in Q3 GDP shows that consumption of goods contributed about 1.7% of the third quarter's 2.2% GDP growth, BUT that the importation of goods removed more than 2% (GDP is a function of output WITHIN the United States only; if a good that was consumed here was made elsewhere, the negative value removes it from the overall GDP figure). That got me thinking... everyone is so focused on the U.S. consumer "bouncing back", but that ignores where those goods were made.

Prior to the recent "Great Recession", the marginal good consumed within the U.S. wasn't produced here. This can be seen (below) by the strong relationship between the change in goods consumed and goods imported. More interesting (to me) was the change in the relationship over the previous 12 months. Consumption of goods has indeed declined, but not nearly the level at which imported goods have declined.



Taken together, the chart below shows the difference between the two (the change in the consumption of goods subtracted by the change in the level of imported goods). This can be thought of as a quick and dirty way to estimate the marginal increase / decrease in consumption of goods made within the U.S. (i.e. consumption of goods ex. importation of those goods).



And surprisingly (to me) that level increased by more than $250 billion over the last 12 months.

Not really sure what caused this jump (trading away from expensive imports / trade barriers???), but it looks like the U.S. consumer has already been a much larger source of stability for the U.S. economy than many may have given them credit for.

The question of course remains... what happens now?

Source: BEA

Avatar Rounds Out Record Year at the Box Office

NY Times details the epic run (thus far) by Avatar:

Critics may be at odds about the meaning of Fox’s 3-D science-fiction epic “Avatar,” but its meaning to the box office is clear: It started the new year at No. 1 in domestic ticket sales. With just over $68 million for the weekend, “Avatar,” directed by James Cameron, finished its first 17 days in theaters with $352.1 million, a record for a film in its third week of release, according to Variety.

More amazing is that worldwide, Avatar is already the fourth highest grossing film of all time.



Although ticket sales did not break the all-time record, the success of Avatar (and higher ticket prices) propelled the 2009 domestic box office to the all-time record in terms of $$ grossed. Reuters details:

Sales rose more than 8% to a record $10.61 billion, while the number of tickets sold (i.e. admissions) climbed almost 4%.

Paramount's "Transformers: Revenge of the Fallen" ($402.1 million), Warner Bros.' "Harry Potter and the Half-Blood Prince" ($302 million) and 3D phenoms such as Fox's "Avatar" ($352.1 million) and Disney/Pixar's "Up" ($293 million) helped set the new box office mark.

But admissions in the United States and Canada -- at 1.41 billion, compared with 1.36 billion in 2008 -- fell a bit short of beating the all-time record of 1.60 billion set in 2002. The box office year began January 5, with tracking firm Nielsen EDI always starting its calendar on the first business day after New Year's.

Source: Box Office Mojo

On the Change in Q3 GDP

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

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

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

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

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

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

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



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

Source: BEA

EconomPics of the Week: See You in 2010 Edition

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

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

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

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

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

Can Capacity Destruction be Good for GDP?

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

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

Historical Capacity Destruction

That said, as I initially stated in my post on capacity destruction:

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

Reader Dennis Oullet pointed out that while I was correct, I went the difficult route to get to that point (full historically data is available on the Fed's website).

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



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



Capacity Reduction --> Higher GDP Print?

Reader dblwyo made an interesting point that:

A complementary notion is that industry grossly under-invested relative to growth in the 00's and drove utilization higher, i.e. let equipment die off. That guess seems to tie a lot of things together.

So while we overbuilt toward the end of the 1990's, we have since under-invested as we outsourced production to cheap Asian labor, grew the economy via the housing / financial sectors rather than manufacturing, and ran into the worst economic slump since the Great Depression (or WWII at a minimum).

Combined with the recent capacity destruction, am I crazy to think that businesses may NEED to invest in new (or upgraded) capacity sooner than many think? My thought is along similar lines of how inventory restocking may lead Q4 '09 GDP to grow as much as 5% (per David Rosenberg):

We mentioned two days ago, there is an outside chance that we could see Q4 real GDP approach a 4-5% range at an annual rate, well above current consensus expectations (currently the Bloomberg consensus is expecting a 3.0% increase in GDP). A good chunk of that is in inventories, not final demand, but so be it.

Why can't capacity replacement lead to higher GDP prints as well (again, separating GDP from the actual economy)? Obviously the timing of this may be off (i.e. I can't imagine it occuring when capacity utilization is near all time lows, unless some new technology springs to life), but as capacity continues to be taken off-line (i.e. destroyed), couldn't the replacement be a surprise upside for GDP?

Source: Federal Reserve

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

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

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

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

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

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

Source: Yahoo

Leading Economic Indicators Strong in November

Per the Conference Board:

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

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

Source: Conference Board

State Personal Income Rebound

BEA details:

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

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

Quarter over Quarter Improvement

Year over Year Shows How Far We Had Fallen

Source: BEA

Capacity Destruction?

Upon further review of capacity utilization...

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



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

Thoughts?

Source: Federal Reserve

Update:

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

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

Bloomberg details:

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

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

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

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

Source: BLS

Treasury Debt to Receipts over the LONG Term

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

So how does the recent spike compare?

Click for Ginormous Chart


The Good:
Debt levels have been higher relative to receipts

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

Capacity Utilization and Production Rebounding

Reuters reports:

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

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

Update:

An Anonymous reader didn't like the post.

Come on Jake. This reporting is hugely inaccurate. If we really want BS spin reporting, we'll just watch CNBC! A prosuction increase of .8 percent is not significantly above a forecast of .5 percent. This is noise. Capacity Utilization is much closer to the bottom than 2007 levels. Your graph does not illustrate that at all.

While I did enjoy his candor... my response:

I will defend myself and say I used the word "spike" not "rebound".

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

And the data seems to show just that.



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

Source: Federal Reserve

PPI Jumps from Energy Prices in November

Marketwatch reports:

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

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

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

Source: BLS

On the Timing / Importance of Stock Buybacks

WSJ reports:

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

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

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

While buy-backs might be showing signs of recovery, ongoing corporate timidity reflects, in part, on the shut down of the borrowing markets last year during the financial crisis. Companies — those that survived — remember those days with trepidation and don’t want to get caught short if a similar credit freeze strikes again.

So... are corporations bad market timers buying at highs and issuing more shares at lows? Sure seems that way looking at the chart below which compares the market cap of the S&P 500 against the level of stock buybacks.

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



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



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

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

Source: S&P / Index Arb

Industrial Production Down in Eurozone

RTT News details:

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

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

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

Glass Half Empty

Strong improvement witnessed over recent months is losing momentum. BNP Paribas economist Clemente De Lucia noted that the impact of car incentive schemes is starting to ease and will not be felt anymore next year.

Glass Half Full

However, according to Martin van Vliet, an economist at ING, it is premature to conclude that the industrial recovery is seriously losing momentum as less volatile three-month rate of change remained firmly in positive territory. Economist forecast Eurozone GDP to expand at a fairly healthy clip in the fourth quarter.

Source: Eurostat

Treasury Debt to Receipts Spiking

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

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

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

In dynamic terms, the ratio of debt to GDP tells you how many years it would take to reduce debt to zero if all income was devoted to debt repayment. That is an extremely valid indicator of the degree of financial stress a society (or an individual) is under.

That makes sense, but I thought debt levels relative to the actual receipts brought in by the government to service that actual debt would be interesting / instructive. As a result we have the below chart, which is marked by a collapse of tax revenue at its most recent point, but the result is frightening none-the-less.



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

EconomPics of the Weeks (The Final Countdown)

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

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

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

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

Retail Sales Strong in November

ABC News:

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

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

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

Source: Census

Wealth Rebounds in Q3... Is It Sustainable?

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

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

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

Hey, what's $4.5 trillion amongst friends?

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



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



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

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

Source: Federal Reserve

Treasury Budget: "Only" $120.3 Billion Deficit

Reuters with the details:

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

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

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

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

I am not making the case that getting spending in check is not a good thing in the long run (and the reduction was marginal). However, less government spending will be another reason why the recovery may not live up to the hype priced into risk assets. Back to Reuters:

"Those who are waiting for a V-shaped rebound are probably going to be disappointed," Penrod said. "It is not going to be a one-step recovery, it is going to be more baby steps as we move through this."

Source: Treasury

Trade Balance Improves in October

Marketwatch reports:

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

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

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

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

During this recession there has been a sharp drop in international trade that led to a substantial improvement in the U.S. trade deficit.

Good news in the short run, though the longer trend reversal since the economic recovery (i.e. going back to the "norm" of a strong imbalance of imports) remains.



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

Source: Census

Wholesale Inventory Correction Isn't "Real" in October

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

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

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

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

The 0.3% increase in inventories was the first since a 0.7% rise in August 2008. Economists surveyed by Dow Jones Newswires expected a 0.6% drop in October wholesale inventories.

In looking at the data, it seems there was an increase, though that increase in dollar terms was extremely concentrated in farm products and petroleum (without farm products inventories were actually negative).



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



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

Source: Census

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

BLS (hat tip Calculated Risk):

There were 2.5 million job openings on the last business day of October 2009, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 1.9 percent. The openings rate has held relatively steady since March 2009. The hires rate (3.0 percent) and the separations rate (3.2 percent) were essentially unchanged and remained low.

Calculated Risk with some thoughts on the release:

I'm not sure if openings are predictive of future hires (the data set is limited), but openings near a series low can't be a positive. Separations have declined sharply, with fewer quits and layoffs, but hiring has not picked up. And quits at a series low suggests those that are employed were holding on to their current jobs in October.

And why should they quit? The level of openings as compared to the number of unemployed is at a series high (data only goes back to 2000) with once again more than 6 unemployed individuals per job opening.



Source: BLS

The Real Lost Decade: Japanese GDP Edition

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

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

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

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

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

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

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

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

This unusual arrangement enabled Japan to sustain an inherently unstable situation for the last decade. If the Japanese population decides to spend money instead of saving it, or the banks decide to look for higher returns by lending to individuals and businesses, inflation and interest rates will rise and Japan will have to address its debt burden.

With this as a backround, Bloomberg reports on Japan's horribly revised GDP figure and the government attacking the problem of debt, with more debt:

Japan’s economy expanded less than a third of the pace initially reported in the three months to September as companies slashed spending.

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

Stocks fell after the report underscored concern about the sustainability of a recovery that is under threat from deflation and a rising yen. Prime Minister Yukio Hatoyama unveiled a 7.2 trillion yen ($81 billion) stimulus package yesterday to ensure the economy avoids another recession next year.

While EconomPic had stated that each of the last two quarter's figures looked "odd" (see Q2 and Q3 posts), there was NO clue that it was due to massive errors in their estimates. Trying to ignore this, the broader issue is what this all means with regards to the Japanese economy. Even with massive stimulus, the country can not "eek" out a positive nominal GDP print and is becoming closer and closer to the brink every month.

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



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

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

Source: ESRI

Temporary Help as a Predictor of Broader Hiring

Bloomberg reported:

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

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

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

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

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

Source: BLS

Deleveraging Consumer and Economic Growth

Consumer credit continues to decrease. WSJ reports:

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

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

Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.

Until the recent crisis, consumer credit had exploded, now accounting for ~17% of nominal GDP, about twice the level from 50 years ago. All in, household debt is now more than 120% of GDP, twice the the level of just 25 years ago.



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

So... if it were to change course, there are two ways this can happen:

• Option 1a: Decrease the numerator (consumer credit outstanding) via reduced borrowing
  
• Option 1b: Decrease the numerator (consumer credit outstanding) via default
  
• Option 2a: Increase the denominator (nominal GDP) via true growth (i.e. real GDP)
• Option 2b: Increase the denominator (nominal GDP) via inflation

Option #2a is unlikely. The reason? Consumer credit drives real GDP growth.

Long Term Trend


Relationship


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

Source: Federal Reserve / BEA