Friday, April 29, 2011

You Take the Good. You Take the Bad.

A few data points from today...

The Good

This morning's Chicago PMI showed that delivery times have slowed. How is this possibly a good thing? Well, if corporations are slowing delivers due to a lack of capacity, they are more likely to invest in more capacity, add (or at least stop laying off) employees, or in a perfect world... both.

The Bad: Sustainability of Consumption

Also released this morning was personal income and consumption for March. The chart below shows personal income, personal consumption, and personal consumption less transfer payments (defined as money given by the government to its citizens). Excluding these payments, which includes unemployment benefits, the savings rate is... wait for it... negative (good over the short run perhaps, but without hiring this hardly seems sustainable).

Source: ISM / BEA

CWP=D: Part I - Where Are The Jobs At?

This is the first of a multi-part post on CWP=D (consumption without production equals debt) that will hopefully provide some clarity into how we got into this current mess (high levels of debt and unemployment) we are in. The reason for the multi-part structure? I am not exactly sure where this is going.

What I do know is the last section will hopefully be “What Does it All Mean for Investing?” and follow up sections may include more on the Federal Reserves misunderstanding of NAIRU, “forced” consumption, misallocation of capital, the subsequent rise in private then public debt, and what it means for future growth.

Let’s see how this goes…

Part I: Where Are The Jobs At?

The chart below outlines the dramatic shift in the Chinese labor force from 1999-2009, which along with a number of mercantilist emerging economies dramatically shifted the global labor force. Specific to China, the number of workers within primary sectors (defined as sectors that extract or harvest products from the earth) declined, while the number in secondary sectors (sectors of the economy that manufacturer finished goods) and tertiary sectors (those that provide services to the general population) spiked. To put this in perspective… that 50 million increase in the secondary sector labor force is equal to roughly 40% of the ENTIRE U.S. labor force.

Some may argue that the increase in secondary labor was caused by U.S. demand for Chinese goods rather the Chinese riding on the coat tails of the U.S. consumer, but either way it is clear from the following two charts (trade balance and currency reserves) that China's secondary workforce increased not only to meet aggregate demand coming from China, but global (and U.S.) demand as well.

U.S. – China Trade

Chinese Currency Reserves

The impact of a huge supply shock in any good or service (all else equal) should be a substantial decrease in the price of that good or service. In the case of U.S. employment, which tends to be sticky (i.e. prices have a hard time going down), the impact would also mean a decline in the quantity of U.S. labor demanded by the global economy.

As I will outline in section two, the Fed's misunderstanding of the source of the reduced demand for U.S. labor (i.e. the jobless recovery experienced early last decade) led to a monetary response that emphasized easy money to stimulate aggregate demand, when aggregate demand from the U.S. was not the issue.

To Be Continued....

Source: Haver Analytics

Thursday, April 28, 2011

Taking a Look at the "Transitory" Slowdown in Q1 GDP

UPDATED: made a mistake in the earlier version (apparently I'm a bit rusty).

Bernanke per his testimony (bold mine):
Most of the factors that account for the slower growth in the first quarter appear to us to be transitory. They include things like, for example, lower defense spending than was anticipated, which presumably will be made up in a later quarter. Weaker exports, given the growth in the global economy. We expect to see that pick up again. And other factors like weather and so on.

Now, there are some factors there that may have a longer-term implication. For example, construction, both residential and nonresidential was very weak in the first quarter. That may have some implications going forward.

So I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory. That being said, we've taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy.

I have a hard time believing a decline in government spending will stop any time soon and that drop in exports Chairman Bernanke referenced seems non-existent in the numbers. Also note that the level of real imports ignores the fact that the price of those imports spiked. In real terms imports reduced GDP by only -0.79%, but a whopping -4.16% in nominal terms.

Finally, when looking at the sustainability of growth, one always needs to consider how we are building the infrastructure (i.e. productive non-residential investment) for future growth. On that front, this was a HUGE disappointment.

Source: BEA

Wednesday, April 27, 2011

Germany as the Poster Child for Fiscal Responsibility

In yesterday's post on European Debt, I noticed:
What is interesting (to me) is that debt levels in Germany are almost (or at least in the ball park) of Portuguese and Irish levels at 83% of GDP. While Ireland is WAY over their heads with a death spiraling economy, Portugal has actually been relatively lockstep with Germany; Germany's GDP and public debt levels have grown 2.7% and 32% since 2007, Portugal's 1.9% and 39%.
The below chart takes a look at Germany from a different perspective, comparing their debt dynamics (i.e. the responsible ones) to that of the U.S. (i.e. the wild child) rather than a country within the EU periphery.

While the United States has certainly outpaced Germany in terms of the amount of debt supported by the underlying economy, Germany is:
  • Not far off
  • Perhaps only lagging because they are a step or two behind (what do things look like post periphery bailout)
Source: Haver

Tuesday, April 26, 2011

European Debt Once Again Front and Center

Don't call me the Brett Favre of bloggers yet. I'm not officially back, but getting the itch and may post here and there (and likely more to be a long form post - we shall see). Not sure why the below is my first entry back (nothing epic or new about the below), but it piqued my interest as restructuring seems FINALLY likely to happen (thank goodness, especially for the individuals of Ireland who are currently in a severe downward spiral).

Bloomberg details the history of the liquidity solvency problem in the European periphery:

Today’s data brought the debt crisis back to where it started. Greece last year obtained a 110 billion-euro lifeline from European governments and the International Monetary Fund. Ireland followed with a 67.5 billion-euro package and Portugal is now negotiating for 80 billion euros in aid.
A bail out for Portugal? Must mean that things are improving (i.e. the bailouts helped) Greece and Ireland... or not.
Greece’s debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history, the EU figures showed. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP.

What is interesting (to me) is that debt levels in Germany are almost (or at least in the ball park) of Portuguese and Irish levels at 83% of GDP. While Ireland is WAY over their heads with a death spiraling economy, Portugal has actually been relatively lockstep with Germany; Germany's GDP and public debt levels have grown 2.7% and 32% since 2007, Portugal's 1.9% and 39%.

Source: Eurostat