EconomPics of the Week (8/28/09)

Vix and More fans that have been directed here... check out the latest EconomPics of the Week (i.e. not last weeks news) here:

Economic Data

Domestic (US)
Where's the Investment?
Another Jobless Recovery, Even with a Deficit Spike
Home Prices Continue Rebound
North Dakota or Bust
The Wage Freefall
Michigan Consumer Confidence Stalls
New Home Sales in Perspective
It's Good to Work for the Government
The Futures So Bright...
European New Orders Above Forecast
Durable Goods Jumps
Q2 GDP Remains at 1%... Breakdown Shifts

Global
Japan Struggling
The German GDP Recovery

Banks
Almost 1/3 of Banks Rated F
The Mass Layoff Non-Seasonal Disconnect

Assets
Top Holders of Commercial Real Estate Loans
Since the Market Bottomed...

Other
D.C. Hates Cash for Clunkers Tarantino Scores Big

Services: Bad to Worse

We already looked at the awful number from the manufacturing survey earlier in the week, now we look at services... and it ain't pretty (per ISM):

"The NMI (Non-Manufacturing Index) registered 37.3 percent in November, 7.1 percentage points lower than the 44.4 percent registered in October, indicating contraction in the non-manufacturing sector for the second consecutive month. The Non-Manufacturing Business Activity Index decreased 11.2 percentage points to 33 percent. The New Orders Index decreased 8.6 percentage points to 35.4 percent, and the Employment Index decreased 10.2 percentage points to 31.3 percent. These are the lowest levels for each of these indexes since they were first reported in 1997.

Don't confuse Inventory Sentiment levels above 50 as a good thing:

The ISM Non-Manufacturing Inventory Sentiment Index decreased 2.5 percentage points to 65 percent in November, indicating that respondents still believe their inventories are too high at this time.

Manufacturing: Bad to Worse

WASHINGTON (AP) --

A measure of U.S. manufacturing activity fell to a 26-year low in November as new orders dropped for the twelfth consecutive month, a trade group said Monday.The Institute for Supply Management's monthly index of manufacturing activity fell to 36.2 from October's 38.9. The reading is worse than Wall Street economists' expectations of 38.4, according to a survey by Thomson Reuters. A figure below 50 indicates the sector is contracting.

Source: ISM

Leading Economic Indicators (October)

Better late than never... leading economic indicators for October (released last Thursday) were down 0.8 percent:

The leading index declined sharply in October as stock prices, building permits, consumer expectations and the index of supplier deliveries made large negative contributions to the index, despite continued positive contributions from real money supply and the interest rate spread.

In the past two months, without the very large positive contributions from inflation–adjusted money supply (the largest in seven years), the leading index would have been substantially weaker. Between April and October 2008, the leading index declined 2.4 percent (a -4.7 percent annual rate), falling considerably faster than the 1.2 percent decrease (a -2.3 percent annual rate) over the previous six months.

CPI: Largest Drop in 61 Years "Fueled" by Fuel

Per the AP:

Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount.

The Labor Department said Wednesday that consumer prices fell by 1 percent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 percent decline analysts expected.

The quick reversal in CPI was almost exclusively "fueled" by fuel. It will be interesting to see how other prices react to the slowing economy and crushed consumer demand.

Producers Price Index (PPI) - October

Per the BLS:

The Producer Price Index for Finished Goods fell 2.8 percent in October, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 0.4-percent decline in September and a 0.9-percent fall in August. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 3.9 percent in October after declining 1.2 percent in September, and the crude goods index dropped 18.6 percent subsequent to a 7.9-percent decrease in the previous month.

Month over Month




Year over Year




Source: BLS

The Changing Global Economy by President

He left off information for George Bush I. Maybe he was trying to forget that ever happened...
The biggest change that we are feeling now is the interlinked nature of the global economy. Emerging market countries are no longer a diversifier to the rest of the world economy, they ARE the world economy.

Source: Infectious Greed

Birth Death Model Overstates Employment... Again

The Birth Death Model once again overstates employment. In other words, things are a lot worse than the 6.5% rate presented to us. Per The Big Picture:

Since 2003, the B/D adjustment has been part and parcel to BLS' Current Employment Statistics (CES) program, the official measure of US employment. In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to participate or be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.

Does anyone think small businesses have really added 50,000 jobs to the financial sector over the past 12 months?

Source: BLS

Unemployment Analysis (October)

We also broke out a Broader Total Unemployed Rate, which includes unemployed, plus discouraged workers, those working part time who want a full time position, plus marginally attached workers. For more information on why, Barry has a great post over at The Big Picture.

ISM Report: Manufacturing Contracted in October

Per ISM:

Manufacturing contracted in October as the PMI registered 38.9 percent, 4.6 percentage points lower than the 43.5 percent reported in September. This is the lowest reading since September 1982 when the PMI registered 38.8 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

GDP Breakdown... Not "Better" than Expected

At first glance, the GDP figure was outright ugly. The U.S. consumer simply gave up in the quarter. Without the government's massive spending and contribution from net exports, it would have been horrific. Unfortunately, there was even more to the number than I first gathered and the horrific term rings true (Note, for those that need a better grasp of the GDP Deflator before they dive in, go here.)

In Q3, imported goods contributed -1.6% to the GDP Deflator (down from -4.6% in Q2).

As we'll explain, this -1.6% figure is too negative, which means the GDP Deflator is too small. Since the GDP Deflator is the rate required to convert nominal GDP to real GDP, this means the -0.3% GDP figure for Q3 is too high. Lets take a look at petroleum imports (and its impact on GDP in Q3) to see why.

Petroleum imports contributed to roughly 1/4 of the reduction in overall imported goods for the quarter (-0.65% of the -2.43% change - Table 4.2.2). Importing less goods in Q3 contributed a positive 0.45% to GDP, thus the ~1/4 contribution of petroleum imports equates to 0.12% of that growth (Table 1.1.2).

This is based on a -3.3% real change in petroleum imports (Table 4.2.1). HOWEVER, this is the case only if we believe the price of petroleum imports INCREASED 8.4% in the quarter (Table 4.24).

The problem is THE PRICE OF PETROLEUM DECREASED CONSIDERABLY IN ANY MEASURE during the third quarter. Crude prices decreased ~30% in the quarter (end of month June to end of month September) or more accurately for this analysis decreased ~5% using the average price in Q2 vs. the average price of Q3. Below is a chart of the change in the index level for petroleum (as reported by the BEA) vs. the change in the average market price for the past three quarters.

Assuming there was no change in the price of petroleum, rather than a decrease (to be conservative), the reported 3.3% decline in imported units of petroleum becomes a 5% increase. This coincides with the recent reports that miles driven by Americans have rebounded from June lows. This small calculation change turns the 0.12% positive contribution to GDP into a negative 0.18% detraction (or a 0.30% total change to the downside). This would move the GDP figure from -0.30% and "better" than forecast to -0.60% and worse than forecast.

This is just one area I specifically targeted, as I was looking for a reversal from some insanely large GDP Deflator contributions from petroleum in Q2. Who knows what else is in there. What I do know is consumption makes up ~70% of GDP and consumption was down a whopping 3.1%. That is certainly not "better" than I was forecasting...

GDP Deflator De-Mystified

The GDP Deflator is the rate required to convert nominal GDP to real GDP. In Q2, the nominal rate was 3.9% and the real was 2.8%, thus the GDP Deflator was 1.1%, at a time when inflation was ticking up at around 5%.

Ed over at Credit Writedowns writes:

The GDP deflator was clocking in at an annual 4.2% clip, whereas last quarter it was a preposterous 1.1% and in Q1 it was a hardly more believable 2.6%. I have been looking for ways to explain this increase in the deflator and can't. If anyone knows, please write me and tell us.

I previously broke down the Q2 GDP Deflator here, but let me dive a little deeper.

Before we can fully understand why the GDP Deflator was so low in Q2, we first need to step back and think about what makes up GDP:

The key to understanding the 1.1% GDP Deflator in Q2, is the subtraction of imports. Think back to what the biggest story related to imports was in Q2... the spike in the price of oil of course.

This means the nominal import figure needed to be drastically reduced, to account for all that inflation, in order to turn that figure into the real contribution. Petroleum imports needed to be reduced by 24% in the quarter alone to account for the inflated price. Now, remember the negative sign in front of imports? This means that the contribution of this 24% rate needed to be removed from the GDP Deflator, not added (again... GDP is production in the U.S. only).

Take the inflated price of almost all imports in Q2 and you can see why this had such a large impact. In Q2, that import figure contributed a massive –4.6% to the GDP Deflator in total. Without this figure, the GDP Deflator was a much more understandable 5.7% figure versus the 1.1% number we saw.

I still don't buy the GDP figures for Q2 for other reasons (and I will post shortly some issues I have with Q3), but it is important to understand how it all works...

Update:

I traded a few emails with Ed and his final email really describes the process too well not to post:

What I imagine they do is:

1. Collect the data (quantity and price) to arrive at a nominal number that they seasonally adjust for all of the components of the GDP like imported goods for example.

2. They take this seasonally adjusted nominal figure and match it with a price change figure which is the deflator to get real GDP changes in sub components of GDP. This is how one gets from nominal goods imports to real goods imports.

3. They also then roll up these numbers in a weighted average into a GDP deflator. As imports are subtracted from GDP, that particular item actually DECREASES the GDP deflator.

4. The GDP deflator can then be used to take nominal GDP, which is an aggregation of the nominal sub-components, in order to compute Real GDP.

Non-Durable Goods Consumption Biggest Drop Since 1950

Barry over at The Big Picture points us to a Bloomberg article that notes:

The 6.4% rate of decline in spending on non-durable goods, like clothing and food, was the biggest since 1950.

Q3 GDP Down 0.3%

Please note the consumption cliff dive...

Durable Good Shipments YTD (September)

Strength in National Defense...


Source: Census

Consumer Confidence Analysis (September)

As most know by now, consumer confidence in hit an all-time low in October:

The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September. The Present Situation Index decreased to 41.9 from 61.1 last month. The Expectations Index declined to 35.5 from 61.5 in September.

Lets take a deeper look. Putting those responding 'bad or worse' in the numerator and 'good or better' in the denominator we get a new measure we'll call the "Armageddon Index" (higher ratio = more negative). Lets see how this "Armageddon Index" scores in various categories:

After an improved outlook in September, consumers now believe the worst is yet to come.

Source: Conference Board

Leading Economic Indicators Up 0.2% in September

Per the Conference Board:

The leading index increased in September, the third increase in the last six months, and these increases and decreases have been alternating and offsetting each other. As a result, the leading index is now at the same level as in March 2007. In September, building permits made the largestnegative contribution which was offset by large positive contributions from vendor performance, stock prices, and unemployment insurance claims (inverted). In the period from March to September, gains in real money supply and stock prices have offset the weakness from the housing permits and interest rate spread components.

"CPI has Gone Dormant"

Per the WSJ:

The consumer price index was unchanged in September compared to August, the Labor Department said Thursday. Excluding food and energy, the CPI advanced just 0.1% last month.

Unrounded, the CPI actually fell for a second-straight month, by 0.031%. That's the first back-to-back drop in two years.

"Consumer price inflation has gone dormant," said Global Insight economist Brian Bethune.

For the quarter, CPI increased by a mere 0.4% annualized (compared with 4.9% year over year) as energy costs feeding into both housing and transportation tumbled.

Industrial Production Non-Existent in September

I was traveling today (hence the burrito post), but back to today's economic releases...

Per Forbes:

Manufacturing output dropped by 2.6%, the largest monthly decline seen since May 1980. Mining output fell by 7.8%, the largest drop since September 2005. Output at utilities managed to rise 2.2% after two prior months of declines.

Industrial production is 4.5% lower than its level a year earlier, and capacity use is 4.6% lower than its average level from 1972 to 2007.

Retail Stores Slump (September)

Source: Census