Tuesday, January 31, 2012

One-Two Punch.... Equities and Bonds Rip It in January

The Dow and S&P 500 posted their best January returns since 1997, while Emerging Market equities had their best start since 2001 (expect to hear a lot about this the next day or two). What likely won't be in the news as much is the remarkable run bonds had during the month (i.e. in other words, it was hard to lose money this past month).

Speaking of a one-two punch (my apologies for the horrendous transition, but I REALLY wanted to show these dunks), perhaps the best two dunks of the past 12 months happened within a day of one another. The Reformed Broker pointed readers to Lebron James literally jumping over John Lucas III on an alley-oop.

But, this dunk was somehow outdone just one day later by perhaps the biggest "posterization" in years by Blake Griffin on Kendrick Perkins.


Three times a charm... a reader sent in the following dunk by Paul George in last night's Pacers / Nets game. George goes DOMINIQUE!

Source: Barclays Capital

Monday, January 30, 2012

Checking in on Personal Consumption

Reuters details
U.S. consumer spending was flat in December as households put the largest rise in income in nine months into their savings, potentially signaling slower consumption early in 2012. It was the weakest reading on spending since June, the Commerce Department said on Monday, and it followed two tepid gains in October and November.
The slow fourth quarter pushed the year over year real per capita spending (i.e. the amount of actual spending per person adjusted for inflation) down to 0.7%, the lowest reading since the crisis and the lowest reading since the early 1990's recession excluding the crisis.

Source: BEA

Friday, January 27, 2012

EconomPics of the Week (1/27/12)

Your EconomPic links for the past two weeks...

Economic Data

Asset Classes

And your video of the week... a song I can't get out of my head. Gotye with 'Somebody That I Used to Know' (found it from this viral video cover of the song)

GDP Print Okay, Composition Disappointing

Peter Boockvar (via The Big Picture) details this quarter's GDP print (slightly edited / reformatted):

After three quarters (in a row) that averaged just 1.2%, fourth quarter GDP grew 2.8%, a touch below expectations of 3.0%, but Nominal GDP grew well below forecasts. Because the price deflator was up just 0.4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%.
  • Personal Consumption rose 2.0% vs the forecast of 2.4%.
  • Fixed Investment rose 3.3% (helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%).
  • Trade was a slight drag on GDP growth and government spending was as well, led by a 12.5% decline on national defense spending.
  • State and local government spending fell by 2.6%.
  • Inventories added almost 2% to growth and, taking out this influence, Real Final Sales rise just 0.8% vs 3.2% in Q3.
Thus, inventories were a large swing factor in the Q4 rebound. Bottom line, Real GDP was near estimates, but nominal GDP was the weakest since Q3 ’09 and Real Final Sales were the 2nd softest since Q1 ’10.
Details below... we can see the HUGE impact of inventory rebuild (potential is there for this to be a HUGE drag in Q1 '12) and the continued drag of local government (i.e. austerity measures).

The below chart shows the longer term breakdown of GDP, showing the importance of consumption on growth. We can see the huge shift in consumption from goods (i.e. things) to services (i.e. outsourcing of "actions" to make out lives easier). Of note, for all the chatter about how large government has become, the Federal government (excluding defense) has not really become a larger as a component of GDP.

Source: BEA

Thursday, January 26, 2012

Durable Goods Grip It and Rip It in December

Reuters details:

New orders for U.S. manufactured goods rose in December and a gauge of future business investment rebounded, showing the U.S. economy ended the year with more momentum than previously thought.

Commerce Department data showed orders for durable goods climbed 3.0 percent last month. That was likely boosted by a surge in orders at aircraft builders like Boeing. Economists had forecast orders rising 2.0 percent.
Strong month, but note that excluding the highly volatile nondefense aircraft component, the index would have been up a (still healthy, yet not as impressive) 1.6%.

Source: Census

The New (and Improved) Leading Economic Indicator Shows Expansion

Bloomberg details:

The Conference Board’s gauge of the outlook for the next three to six months increased 0.4 percent after climbing 0.2 percent in November, the New York-based group said today. The median forecast of 44 economists surveyed by Bloomberg News called for a gain of 0.7 percent.

The article also outlines a change in a major component of the index (the first change in the index since 1996):
Changes in the components of the leading index were announced earlier this month. Instead of the inflation-adjusted money supply, the Conference Board used its own Leading Credit Index, which aggregates measures of the yield curve, interest- rate swaps and the Fed’s senior loan officer survey. The Institute for Supply Management’s supplier deliveries gauge was replaced by the group’s index of new orders.
The change from money supply to credit index is a major change, removing a component that was directly in the hands of the Fed (money supply), with one that is only partially in the hands of the Fed (credit index). Note that in past months, EconomPic has removed the money supply component, as well as stock and interest rate components, for an index excluding Fed involvement.

A comparison of the new (revised) index, the old index, and the "EconomPic" index that excluded Fed control is shown below. What we see is the new index is much more aligned with one excluding the Fed's control and shows the index likely overstated underlying economic strength over the summer.

Wednesday, January 25, 2012

The Impact of Low Rates Through 2014

Bloomberg details the latest from the Fed:

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.
Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate."
The immediate market reaction was a risk asset rally, a huge rally in gold (per Calculated Risk: Bernanke made it clear that even if inflation moved above the target - and unemployment was still very high - the Fed would only slowly pursue policies to reduce the inflation rate), and a rally at the belly of the yield curve (the yield curve flattened out to five years... shorter rates couldn't fall as they are already at or near zero). Why? The "late 2014" date is much later than the June 2013 date previously projected by Bernanke last summer.

The impact of this announcement (and the previous projected rates) can be seen in the chart below that shows the Fed Funds rate curve (implied by EuroDollar futures) for March 2013 through December 2014, as of various dates over the past year.

What do we see? We see an initial drop between March and June of last year as Bernanke indicated low yields for the foreseeable future, then a huge drop (mid-summer) after Bernanke stated rates would remain zero through June 2013. Today's announcement really did nothing through June 2013 (that was already projected), but was felt further out along the curve.

The key question is what is the Fed trying to accomplish?

In "normal" times, low yields = cheap financing = increased consumption (it creates an incentive for individuals to borrow and banks to lend), but in today's zero-bound world the impact is minimal. Increased consumption is limited as individuals are trying to rebuild their own balance sheets and those that might benefit most from borrowing, don't necessarily have the credit to qualify for a loan. In terms of impact on unemployment, GYSC (of Economic Disconnect fame) states:
Unemployment is a structural problem, not a cyclical one, but the FED is still stuck in the past.
In addition, there are some theories that consumption may actually be negatively impacted by zero bound rates. As I outlined over the summer, I think it is possible that negative real interest rates may actually cause individuals to save more, while Kid Dynamite outlined yesterday that low rates forecasted may cause individuals to hold off from making a loan fueled purchase:
Let me explain: right now, one appealing factor of home buying/selling decisions is that interest rates are very low – you can afford to buy more house. If I think that interest rates are going to remain low for a long period of time, I will be in no hurry to lock in this low rate on the debt I’m borrowing – I will be in no hurry to go out and buy a house.
So what is it then? Corporations!

There is one sector that I think will be positively impacted by the latest announcement.... corporations. Don't let their record profits as a percent of GDP (while personal income is at record lows) fool you into thinking they don't need help at the populations expense. Seriously though... my initial reaction upon hearing that rates would be held down near zero through 2014... buy credit... WITH duration out to around ten years (the secondary impact is positive for equities, as explained below).

While Treasury yields are at all-time lows, corporate spreads remain at elevated levels (when yields fell during the summer when we had to deal with the US downgrade and Europe, spreads widened significantly).

In "normal" times, when markets calm these spreads would be expected to narrow, which I still believe is the case. One would also "normally" expect Treasury yields to rise as investors shift out of Treasuries, causing the hard interest rate component of corporate yields (rate + spread = yield) to rise, but this risk has been removed for the foreseeable future out to around ten years. The result is that corporate bonds seem like a very safe investment. This decreased risk should mean even cheaper financing for longer dated maturity corporate bond issuance.

So will this finally set off a round of corporate fueled expansion? If they don't see aggregate demand improving, then I don't see how this will impact the underlying economy. But, with the cost of equity high (i.e. what I perceive as fair to cheap equity valuations) and cost of debt low (i.e. these lower yielding corporate bonds), we may see significant change in capital structures (perhaps via private equity).

Source: Barclays Capital

European Manufacturing Feeling the Downturn

Marketwatch details:
Industrial orders in the 17-nation euro zone fell 1.3% in November after a 1.5% rise in October, the European Union statistics agency Eurostat reported Tuesday. Compared to November 2010, orders fell 2.7%, the agency said. Economists had forecast a 2.3% monthly decline and a 2.8% year-on-year fall.
Since the European crisis re-emerged in mid-summer, the European core has seen a rather sharp drop off in new industrial orders, while Emerging Europe (and the UK / Ireland) have shown strength (note that Greece didn't release data for November, but was down 5% from July through October).

Source: Eurostat

Tuesday, January 24, 2012

Apples Numbers Were B-A-N-A-N-A-S

Before jumping on the Apple bandwagon, I'll turn it over to Tadas of Abnormal Returns fame who summarized Apple's blow out earnings with the following powerful statement:
Apple’s results highlight this simple fact: no one knows nothing. The most followed (and analyzed) company in the world was able to exceed even the most bullish analysts’ estimates by a wide margin. If this can happen, then it should remind us that anything, good or bad, can happen in the markets. Any one telling you they know something will happen for certain, just remind them about Apple 2012 Q1 results.
Now to the blow out earnings.... just a part of the exponential growth the firm has seen over the past eight or so years.

Data shown is from quarterly financial statements

Billions of this size is hard to grasp, so the following chart attempts to put it in perspective. Apple's sales over the last twelve months are equal to almost 1.2% of all U.S. personal consumption over that time (yes, I know Apple has sales outside of the U.S., but think about how much stuff 1.2% of everything U.S. citizens consume is) and around 2% of last quarter's consumption.

Data shown is rolling twelve month

Source: BEA / EDGAR

Friday, January 20, 2012

Existing Home Sales Rise

Bloomberg details:

Sales of previously owned U.S. homes rose for a third month in December to the highest level since January 2011, a sign the housing market ended last year with momentum.
Purchases increased 5 percent to a 4.61 million annual rate, the National Association of Realtors said today in Washington. The pace was less than the 4.65 million median forecast of economists surveyed by Bloomberg News. The gain helped push down the inventory of homes for sale last month to the lowest level since 2005. Purchases in 2011 climbed 1.7 percent from a year earlier as prices fell.
Historically low mortgage rates and a pickup in employment may be giving Americans the confidence to purchase homes that have fallen in value. At the same time, another wave of foreclosures may inhibit a faster recovery in real estate as more distressed properties are put on the market.
Looking at the data, it appears sales are on the rise as prices are creeping lower (to a level where demand is finally meeting supply). My guess is the reason higher priced home sales are less is two-fold... they don't qualify for conforming loans and prices are being reduced (i.e. houses formally in the $500k-$750k "bucket" are now in the $250k-$500k bucket).

Source: Realtor.org

Thursday, January 19, 2012

CPI Steady in December

CNN Money details:

Inflation overall held steady last month, as declining gas prices balanced out higher prices for other items.
The government's key measure of inflation, the Consumer Price Index, showed prices were virtually unchanged from November to December. It marked the second month in a row CPI has barely moved.

In the past 12 months, prices rose 3%, a slowdown from a 3.4% annual inflation rate in November. The numbers are seasonally adjusted.

Source: BLS

Do Initial Claims Matter?

Fox Business details:

New applications for unemployment benefits dropped to a near four-year low last week, a government report on Thursday showed, pointing to continued improvement in the labor market.
The Labor Department said initial claims for state unemployment benefits dropped 50,000 to 352,000, the lowest level since April 2008 and the biggest drop since September 2005. The prior claims data was revised up to 402,000 from the previously reported 399,000.
Good news, no doubt. BUT, initial claims SHOULD be falling (and falling dramatically). According to the BLS, we still employ less than 5 million people from the peak employment achieved in late 2007. Initial claims simply tell you the number of new people filing for unemployment benefits (i.e. those just laid off). If you have already shed 5 million people, this number SHOULD be falling (there are less people to lay off) even without an improved underlying economy.

The following chart in no way is intended to be a good measure of normalized initial claims, but it is meant to make that point. It shows the initial claims figures (through December) as an absolute figure and relative to the number of new jobs made over the previous 95 months (an arbitrary number that is the length of time from the bottom in employment during the '01 - '02 recession and the latest recession) and shows that the reduction in initial claims is less apparent when you take in account the sluggish employment growth.

So do initial claims matter? You sure don't want to see them rising. But. there is only a limited amount of information in the data when an economy has experienced the type of employment recession the US has faced the previous 4 years.

Source: DOL / BLS

Wednesday, January 18, 2012

Checking In on Capacity Utilization

China Still Buying Treasuries

I feel like a broken record, but once again the mainstream media and fear-mongering finance blogs get the Chinese Treasury holdings data wrong. Here's Zero Hedge:

Today's TIC data confirmed what Zero Hedge readers have now known for quite some time: namely that foreigners are selling US paper. And while we have used contemporaneous Custody Account data from the Fed to present that in the past 7 weeks foreigners have sold a record amount of bonds, we now get confirmation via TIC that in November the selling continued, especially at the biggest non-Fed holder of US paper, China, which saw its holdings down to $1,132.6 billion, the lowest in the past year.
As EconomPic readers know, China's purchases are just flowing through the United Kingdom (and are later revised to China... see here, here, and here for a few examples).

I did note last month that:
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

Tuesday, January 17, 2012

China's Growth in Perspective

Credit Writedowns highlights Goldman Sachs Asset Management Jim O'Neill's views on the latest 9.2% Chinese GDP growth rate:
"It’s a bit stronger than I thought as well, actually. It is a bit of a blow for the hard landing guys, given inflation has come down so much as well. And policy makers are moving away from restraints and flirting with some sort of stimulus. If I was a hard landing guy, I would not be feeling very excited this morning."
I personally question the sustainability of an economy that has grown to be such a large part of the global economy, yet still relies so heavily on exports (and growing imbalances), as well as central planning (i.e. misallocated capital), but the below charts clearly show the (rather epic) growth China has seen over the past 40+ years.

Source: Wikipedia

Monday, January 16, 2012

S&P 500 / VIX Matrix

As a follow up to last week's VIX as a Predictor of Equity Returns and Model Building / Data Mining posts, I put together the following two 'VIX Matrix' tables. These tables show the:
  • One month forward return of the S&P 500
  • One month change in the VIX index
against a number of scenarios involving the one month month change in the VIX and the absolute value of the VIX since its 1990 inception.
  • S&P 500: Less than -1.0% = Red, -1.0% to 1.0% = Yellow, Greater than 1.0% = Green
  • VIX: Less than -2.5% = Red, -2.5% to 2.5% = Yellow, Greater than 2.5% = Green
Lots of interesting information in these tables that I won't bother summarizing (look at it yourself), except to say that even in these turbulent times (bull market 90's, roller coaster 00's), markets were (on average) very mean reverting.

Note that there are plenty of limitations to these tables, most of which involve the limited data points for a number of the cells.

One-Month Forward S&P 500 Performance

One-Month Forward VIX Change

Update: much more on the above from my friend Bill over at Vix and More blog.

Sunday, January 15, 2012

The Treasury Rally that Keeps on Trucking

The WSJ reports on the Treasury Rally that Won't Die:

According to investment-research firm Morningstar, a portfolio of U.S. Treasurys with an average maturity of 20 years—the quintessential safe haven—rose 28% last year, even better than its 26% jump in 2008. You would have to go back to 1995 to find a better year.

More confusing still: Last year's surge came in the 30th year of a historic rally. Since 1981, long-term Treasury bonds have returned 11.03% annually, 0.05 percentage point better than the Standard & Poor's 500-stock index.
This comes a full year and a half after the WSJ said Treasuries weren't only overpriced, but that we were experiencing The Great American Bond Bubble (my rebuttal 'Bond Bubble Blasphemy' is here, while my rationale for the value of Treasuries at the time can be found here).

One of the charts outlined in my post back then (and updated below, but brought back to 1941 using data from Shiller) shows the takeaway... treasury rates have been a reflection of the historical growth of nominal GDP going back 50 years. Before that there was a huge disconnect following the Great Depression (when nominal GDP dropped by ~50% between 1929 and 1934... yes 50%!) and World War II, which conveniently allowed the U.S. to grow out of the massive amount of debt the nation had accumulated.

By this measure, the 3.8% annualized nominal GDP growth over the past ten years makes the current sub-2% interest rate seem low, but not as much when you take the following into account:
  • Five year annualized GDP growth is only 2.2% (i.e. we are trending down)
  • The Fed has made it clear they won't be raising short-term rates anytime soon / they have taken significant Treasury supply out of the market with quantitative easing programs
  • Deflationary pressures / potential shocks from Europe remain
  • Investors continue to flee risk assets into "safe" assets
So, does that make me a buyer of Treasuries at these levels? Not necessarily. I'd rather take a barbell approach to investing by allocating to return seeking assets on one side (I'll never tell you where) and cash on the other (for preservation of capital purposes). 2% is just not worth it for me and the beauty of investing for the average investor is we don't have to manage our own investments to a benchmark. That said, I don't think Treasuries are ridiculously priced given the circumstances.

Friday, January 13, 2012

EconomPics of the Week: Friday the 13th Edition

Asset Classes
Economic Data
Retail Sales Weak... A Reflection of Lower Prices?
Consumer Credit Set to Be a Positive Contributor to Growth

And your video of the week... in honor of the return of Portlandia, the theme song... Washed Out with Feel It All Around

Consumer Confidence and Equity Returns

Businessweek details:
Confidence among U.S. consumers increased more than forecast in January, reaching its highest level in eight months on signs the labor market is improving.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 74 from 69.9 at the end of December. The median estimate in a Bloomberg News survey called for 71.5. The measure has increased 9.9 points in the last two months, the biggest such gain since April-May 2009.
The Interloper and I have had some discussion regarding consumer confidence and the impact (if any) on forward equity returns. Looking at the data, it became clear that on average consumer confidence is a lagging, rather than leading, indicator for equity returns (great chart here and can be seen in the table below in the average columns).

There does however appear to be pockets of opportunity at extremes.

The table below outlines the average three month forward S&P return against the three-month change in the Michigan Confidence index and the absolute value of the index since 1979. While the data is limited for each "box" (and in some cases, there were no data points), it does show that the S&P 500 has performed very well on a going forward basis when:
  • Confidence Levels are low (less than 70) and stabilizing (between -5% and 5%)
  • Confidence Levels are high (greater than 85) and slightly falling (-10% to 0%), indicating potential "buying the dips" opportunities
On the other hand, returns were much more volatile at low confidence levels and when confidence fell abruptly.

Note we are currently up 22% in three months to that 74 level, which would indicate stability in equity returns going forward if the table is to be trusted.

Source: Bloomberg

Thursday, January 12, 2012

Retail Sales Weak... A Reflection of Lower Prices?

Peter Boockvar (via The Big Picture) details:

December retail Sales were light relative to expectations, rising just 0.1% month over month headline and falling 0.2% ex auto’s vs up 0.3% for both that was expected. Sales ex auto’s and gasoline were flat vs an expected rise of .4% and also taking out volatile building materials, sales fell 0.2%.

November was revised up slightly for all categories but not enough to offset the December weakness relative to expectations. Sales weakness was seen in the 3.9% drop in electronics sales after just a 0.5% rise in Nov. Department store sales fell after zero growth in November and online retail sales fell 0.4% after a 1.7% rise in November.
The below chart outlines the change in sales by category. What is important to note (and NEVER reflected in reporting by mainstream news or economist forecasts) is that retail sales is a reflection of nominal, rather than real sales. We already know for example that the decline in gasoline sales was a direct result of the decline in the price of gas during December.

What does this mean?

It means that if CPI was flat or negative in December (my guess is it will be) then actual sales aren't as bad as reported in real terms (i.e. it won't be as big a hit to GDP growth expectations). That said, it would still reflect real weakness and the power of consumers to demand larger discounts during the holiday shopping season (perhaps resulting in lower sales in 'holiday' items like electronics and general merchandise).

Source: Census

Wednesday, January 11, 2012

Model Building / Data Mining

Yesterday, I outlined findings of a model that allocates to the S&P 500 when the VIX is below 20 and to cash when above 20. This post will expand on that post to build a model that outperforms the S&P, with less volatility, over the 1993-2011 time frame. The post is less about how great the model is (that is to be determined), as much as just how easy it is to use simple data mining techniques to build models that look GREAT using historical data (i.e. buyer beware of all these new funds / models coming out).

The Model

When analyzing the original model, we saw that the S&P 500 actually performed quite well on average (albeit with huge swings at times) at both low (VIX below 17.5) and high (VIX above 25 levels). Thus, a simple model would allocate to stocks when the VIX is below 17.5 or above 25 and cash when it is not. But, let's see if we can data mine improve on that further. When stocks do poorly, bonds (especially government bonds) tend to do very well (i.e. they become negatively correlated). Using Fidelity's Government Income Fund 'FGOVX' (I am not vouching for this fund, it was simply the first I found with daily returns going back to 1993), we compare returns of government bonds within each volatility "bucket" relative to what we found for the S&P 500.

As can be seen above, in each of the 17.5 to 25 VIX "buckets", government bonds outperformed (on average). This is just what we were looking for.

To the model's results... in 'daily rebalancing' we allocate on a daily basis to the S&P 500 (ETF SPY) when VIX is below 17.5 or above 25 and to government bonds (fund FGOVX) when it is not (monthly is simply on a monthly basis). This rotation strategy had excess returns over SPY's 7.7% annualized return since 1993 of almost 3% on a daily basis and 1.7% on a monthly basis annualized (excluding transaction costs) with volatility reduced around 3% over that time frame.

Model Results (January 1993 - December 2011)

So is this legit model building or data mining? I believe it may be both (if a potential legit model, it needs further testing across markets and time frames), but in no way am I confident this performance can be replicated on a going forward basis.


Tuesday, January 10, 2012

VIX as a Predictor of Equity Returns

Marketwatch has a post Cash is still king, at least for now, which points to a model that goes to cash when the VIX is above 20:

Consider a hypothetical portfolio that switched in and out of the Wilshire 5000 index according to whether the VIX was above or below 20 — investing in the market on a given day if the VIX closed the previous session below that level, and otherwise staying in cash. This portfolio would have produced an 8.9% annualized return since 1990, when the CBOE’s data for the VIX commence, in contrast to 8.5% for buying and holding. (I chose 20 as the threshold level for illustration purposes only; it is not far from VIX’s median level over the last two decades.
I thought I'd take a look at the results using daily VIX levels and SPY data for daily equity performance. As SPY didn't launch until January 1993, the comparison isn't apples to apples in terms of equity index or timing, so I can't vouch for the accuracy of the returns in the paragraph above, but I can state the model didn't work as anticipated for the data I pulled. More important, it did show some interesting results that I will share.

The chart below shows the different "buckets" of VIX levels I utilized, which were selected based on getting a close to even distribution across these buckets (as can be seen each grouping had between 500 and 700 days of returns to analyze).

Then I simply took the daily 1-day forward returns (including dividend) associated with each bucket and calculated annualized returns and standard deviation based on a 252 day trading year.

The result?

While volatility was significantly less when VIX was lower (showing volatility is sticky), returns appear to have been better at extreme readings, perhaps when securities were selling at a huge discount. Also of note, performance appears to have been worst when VIX levels read between 17.5 - 20 and 22.5 - 25, while performance was best (in sharpe ratio terms) when the VIX read between 15 and 17.5.

A further breakout of bucket '30+' is shown below (note these buckets are not even, as most data points fall within '30-35').

My thoughts based on data from 1993 - present... when the VIX creeps higher from teens to low 20's, be cautious. When it flashes red, if you can stomach EXTREME volatility (and EXTREME drawdowns) it may be a good time to buy.

Consumer Credit Set to Be a Positive Contributor to Growth

The WSJ details:

The level of consumer credit outstanding increased by $20.37 billion to $2.478 trillion, the Federal Reserve said Monday. Economists surveyed by Dow Jones Newswires had forecast an $8.0 billion increase.

In percentage terms, the increase was the biggest since October 2001 and a big driver of the gain was revolving credit, which includes credit-card debt. It increased by $5.60 billion to $798.27 billion.

Nonrevolving credit also surged, rising $14.78 billion to $1.679 trillion. The increase was fueled by federal government, a category that includes student loans and has been increasing a lot over the past year–a sign high joblessness in the U.S. has led many people to go back to school.
The below chart shows where consumer credit stands in nominal terms (click here for a chart outlining consumer credit relative to personal income). We can see that more than 100% of the growth over the past 12 months has come in the form of student loans (i.e. consumer credit growth excluding student loans is negative year over year), as the consumer continued to delever. Note that the rate of this decline has decreased and appears ready to flip positive on a 12-month basis, indicating that consumers will once again be levering up in nominal terms, a positive sign for short-term growth.

Monday, January 9, 2012

China, Liberty, and the Products We Love

When Steve Jobs passed away, I commented:

The 5 iPods, 3 iPhones, iPad, and 2 Macs currently in my home attest to the fact that I believe Steve Jobs' was brilliant. And at times he was more than a "computer guy" and truly inspirational.
On the flip side of Apple's success, I want to link to an extremely powerful This American Life podcast, Mr. Daisey and the Apple Factory, that shares how Apple products (and most electronics from China) come to be. Specifically how China allows corporations (corporations that American corporations outsource jobs to) to use their citizens like (almost) zero-cost depreciating assets. The portion I won't forget (definitely more powerful in context of the broader story):
How often do we wish more things were hand made? Oh, we talk about that all the time don't we? I wish it was like the old days. I wish things had that human touch. But that's not true. There are more hand made things now than there have ever been in the history of the world. Everything is hand made. I know. I have been there. I have seen the workers laying in parts thinner than human hair. One. After another. After another. Everything is hand made.
How can we compete with that?

Source: This American Life

Where the Ladies at?

My last post Men at Work outlined that employment among men has rebounded since 2009, while employment among women has stagnated over that time after strong relative performance (as compared to men) at the beginning of the recession.

Taking a deeper dive, after a 60+ year trend (think WWII) of women entering the workforce in large numbers, we have now seen a decline not only relative to population growth, but in absolute terms as well.

A chicken or the egg argument can be made for the relationship between employment among women and real economic growth (were women more likely to work when the economy was strong or did women entering the workforce create a strong economy), but the relationship is strong none-the-less.

Source: BLS

Sunday, January 8, 2012

Men at Work

The NY Post details (hat tip Eddy):

Since the US economic recovery started in mid-2009, a whopping 97 percent of the new jobs — all but 43,000 of 1.4 million positions created — have gone to the guys, according to data released yesterday by the National Women’s Law Center, which analyzed jobs data between June 2009 and December 2011.
By my calculation, using figures from the BLS, the numbers are even more striking. Since June 2009, women have lost ~750 thousand jobs while men have gained ~1.5 million. Since the bottom in BLS data (December 2009), men have gained 93% of all new jobs (2.62 million of the 2.82 million).

It is important to note that men have simply regained employment they had lost, as the recovery still puts job losses by men above women since the beginning of the recession.

Source: BLS

Friday, January 6, 2012

EconomPics of the Week... 2012 Edition

Economic Growth
How Do We Grow From Here?
Leading Economic Indicators Rise in November
GDP Revised Down to 1.8% on Weaker Consumption
Something Positive for the New Year

BLS: Employment: Positive, But No Blow Out
ADP: Is this the Employment Figure We've Been Waiting For?

Manufacturing / Services
Manufacturing Data Starts 2012 On a Positive Note
ISM Services Expands in December

Confidence Upswing Continues
Consumers Don't Care About Savings Rates
Breaking Out the 0.1%

Even More Perspective on Housing
Some Perspective on Housing

What a Year it Was!!!
Auto Recovery Perspective
Gingrich Sliding in Polls... Phew!

And your video of the week... M83 with Midnight City

Employment: Positive, But No Blow Out

The Good: Unemployment rates (both headline and those including underemployed) continued to decline.

The Bad: unemployment rates continued to decline in large part due to individuals dropping from the labor force.

The Good: there is a definitive sign that hours worked per person (an important aspect of GDP growth) has bottomed and is once again growing.

The Pretty Good: private sector growth has been consistent (but perhaps too low), but headline figures have been dragged down by a decline in government workers (due to austerity). My opinion is that government workers tend to add less to economic activity, so headline employment may underestimate GDP growth.

Source: BLS

Thursday, January 5, 2012

Is this the Employment Figure We've Been Waiting For?

Is this finally an employment figure that shows we are out of the weeds? Not so fast per Peter Boockvar (via The Big Picture):

ADP said private sector job adds totaled 325k in Dec, a blowout compared to expectations of 178k and compares with 204k in Nov. Job gains were mostly led by small and medium sized businesses in the service providing sector but we also saw job gains of 52k in the goods producing area of which 22k were created in manufacturing and 26k in construction. Bottom line, it’s great news to see this level of job gains in the private sector but Macroeconomic Advisors, which compiles the data, did say December seasonals may have had ‘idiosyncratic’ influences of the report. Dec ’10 also saw a big jump from the prior few months only to fall back in the months after.

We'll see official employment figures tomorrow. Fingers crossed...


The FT outlines why this may be a seasonal event (even more at Calculated Risk)

Source: ADP

ISM Services Expands in December

ISM reports what respondents are saying:

  • "Year-end uptick in activity." (Finance & Insurance)
  • "Business is stabilizing — some good signs in the private sector for commercial construction." (Construction)
  • "Some additional proposal requests, but clients continue to delay decisions on capital spending. Expect first quarter 2012 activity to be sluggish." (Professional, Scientific & Technical Services)
  • "Automotive industry growth seems to be outpacing the rest of the economy." (Information)
  • "Demand increasing gradually." (Wholesale Trade)
  • "Business is holding steady. Outlook for December and first quarter 2012 is good." (Retail Trade)

Source: ISM

Wednesday, January 4, 2012

Auto Recovery Perspective

MSNBC details:

Countering earlier concerns about a double-dip recession, U.S. auto sales wrapped up a skittish 2011 on a positive note, surging in the final weeks of the year, with Detroit’s automakers helping drive the overall market to its highest level since the start of the long economic downturn.
Overall sales of new cars, trucks and crossovers increased by 10.2% during 2011, largely paced by a surge in demand for domestic brands.
The chart below shows the 2011 bounce (Honda excluded) among the largest companies in the world, but also shows the changing auto landscape from December 2005 peaks. South Korean Hyundai Kia Automotive Group not only took market share, but surged, as the US big three and Japanese big two struggled (Nissan performed very well).

Source: Autoblog

Tuesday, January 3, 2012

How Do We Grow From Here?

Paul Krugman's latest article Nobody Understands Debt outlines why government debt is different than private debt:
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
How do you grow the tax base? Two ways, increase the tax rate and/or (with fixed rate debt) grow nominal national income. My view is that an increase in taxes is inevitable, so let's move on to some components of national income to determine areas of "opportunity".

The chart below breaks out nominal GDP by real GDP per hour worked and hours worked (which combined make up real GDP per capita), population growth (which added to real GDP per capita equals real GDP growth), and inflation (which added to real GDP growth equals nominal GDP growth) over rolling ten year periods. As can be seen, the "lost decade" has resulted in GDP growth levels at generational lows.

So.. what are the opportunities?

Inflation: it seems easiest to simply inflate our way out of our debt issues, raising nominal GDP without concern over the impact on real GDP. Our monetary policy (i.e. zero rates through at least 2013, quantitative easing, etc....) is aiming at just that. The problem is it really isn't all that easy to add "good" inflation (all price move higher), rather than just commodity inflation which actually adds deflationary pressure to non-commodity goods (less disposable income remains). In addition, as long as debt deflation concerns remains in the U.S., European issues continue to work their way through the financial system, and a lack of global aggregate demand continues, downward pressure remains on price levels.

Population: to me this is the easiest way to grow nominal GDP in theory (i.e. just open immigration for the wealthy and educated), but probably the most difficult to enact new policy to deal with considering we have an entire party against this. In a perfect world, this brings in wealth (i.e. aggregate demand), population (a component in the above chart), and technical skills (i.e. increases the GDP per hour). Oh well...

Hours worked: we face a continued lack of aggregate demand, so corporations aren't hiring / the public sector continues to shed jobs in the face of required austerity. In a perfect world we put people able to work... to work. This could include any project that has positive return on capital and with our dilapidated national infrastructure, there are in my view plenty of projects that can do just that. In addition, as I've mentioned before on the blog, any policy dealing with outsourcing of jobs abroad would have (in my opinion) a positive impact.

Productivity (GDP per hour): we need investment, which requires an increase in savings. Looking at the chart, it looks like GDP per hour jumped in the early part of last decade. The issue is that a lot of this was simply due to outsourcing labor abroad (hence the decline in hours worked). This is coming to roost as outsourcing and lower savings has caused productivity growth to slip to generational lows despite the number of people working on the decline.

Source: BEA

Manufacturing Data Starts 2012 On a Positive Note

ISM details what respondents are saying:

  • "Slow Q4 — lots of destocking and inventory reduction going on." (Chemical Products)
  • "Business seems strong, but likely due to tax advantages of purchasing capital expense items." (Machinery)
  • "Our business is stable with a very good outlook for 2012." (Miscellaneous Manufacturing)
  • "Food prices seem to have peaked as demand is starting to wane." (Food, Beverage & Tobacco Products)
  • "All auto demand remains strong." (Fabricated Metal Products)
  • "Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by Euro zone sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election." (Computer & Electronic Products)
  • "Business beginning to slow down (seasonal), but will finish with a very strong year." (Plastics & Rubber Products)
  • "Business is steady today around the world." (Transportation Equipment)
  • "Market has definitely slowed in the last month, and is expected to remain so this month." (Wood Products)

Source: ISM