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

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.

Source: VIX, SPY, FGOVX

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.

Source: Yahoo Finance

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.

Source: Federal Reserve

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

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

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

Employment
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

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

Housing
Even More Perspective on Housing
Some Perspective on Housing

Other
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

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...

Update:

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

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

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

What a Year it Was!!!

So... what happened to asset classes in 2011?

Bonds crushed equities. Real assets were mixed.

More important (to me)... what happened to me in 2011?

1) I retired from blogging
2) I un-retired from blogging
3) I moved across the country
4) I found out my wife was pregnant (with our first child) the first night in our new place post-move
5) I quit my job (it involved commuting away from where I moved to each week... a kid [see point #4] made that a non-viable option for us)
6) I called everyone I knew who may have known someone in the city I moved to, met 100's (literally) of people for coffee, lunch, dinner, and drinks, then interviewed... then interviewed... then interviewed. Did I mention, I interviewed?
7) Had an amazing kid (though he is still in "blob" phase [i.e. he can't do much except eat, sleep, and sh@t, but he does them very well])
8) In the past month I have received three job offers! (I understand how lucky I am as, amazingly, two of them sound ideal. It will be a tough decision)

So a new job, a new city, and a new kid. I can only hope that 2012 is as great, but MUCH slower.

EconomPic in Review

There are now 2520 subscribers to EconomPic (wow!)

The Top 5 Most Read Posts of 2011 were...

1) Emerging Market Rotation Strategy
2) Unsustainable: Transfer Payments
3) Secret Sauce Continues to Grip It and Rip It
4) Gold Model Still Rocking
5) China Owns Lots of Paper

Not a surprise that 4 of 5 were asset class (rather than economic data point) related. Asset class posts tend to get linked to by financial blogs / forwarded more, which drives traffic whereas most of my readers that are interested in economic data view the blog via an RSS feed.

Videos of 2011

Reader GYSC says I have good taste in music, so that is all the encouragement I needed to list all the live performance music videos posted at EconomPic during 2011 (quite an eclectic mix I must say, which I hadn't realized started in January and ended in December with The Black Keys)

The Black Keys - Gold on the Ceiling



Fugazi - Waiting Room



AWOLNATION - Sail



Sublime - Badfish



Broken Bells - The Ghost Inside



The Decemberists - The Wanting Comes in Waves



Edward Sharpe and the Magnetic Zeros - Home



Jay-Z + Toto = Girlfriend in Africa



ThePETEBOX (cover of The Pixies) - Where is My Mind?

Iron and Wine (cover of the Postal Service) - Such Great Heights

The Strokes - Under the Cover of Darkness

Passion Pit - Little Secrets

The Black Keys - Tighten Up

Happy New Year!!!!

Something Positive for the New Year

An ugly (yet improving) chart shows the number of hours worked per person...

Which, when combined with real GDP leads to a new high in GDP per "man hour".

We have never been more productive with our labor in our history than now (because this is meant to be a positive for the New Year, I won't get into detail why this is also a result of outsourcing labor to emerging countries which has been a horrible policy move IMO).

Source: BLS / BEA

Breaking Out the 0.1%

Greg Mankiw outlines who earns the 0.1% of national income:

Here is an interesting paper that answers the question. Some highlights from Table 3 about the top 0.1 percent:

• 18 percent are financial professionals.
• 42 percent are executives, managers, or supervisors in nonfinancial businesses. More than half of those are in closely-held (presumably often small) businesses.
• 7 percent are lawyers.
• 6 percent are in medicine.
• 3 percent are in arts, media, or sports.
• Less than 1 percent are professors or scientists.

Note that this is only as of 2005 (my guess is financial professional income spiked as a percent of 0.1% of income from 2005 to 2008). It also doesn't show that the 0.1% earned 2.8% of all income in 1979, but 7.3% in 2005, or how much the above figures changed over the years. The latter is outlined below (i.e. the shift to finance was dramatic).

Confidence Upswing Continues

Bloomberg details:

Confidence among U.S. consumers rose in December to the highest level in eight months as an improving job market helped regain all the ground lost following the mid- year government budget battle and credit-rating downgrade.

The Conference Board’s index increased to 64.5, exceeding all estimates in a Bloomberg News survey and the highest since April, from a revised 55.2 reading in November, figures from the New York-based private research group showed today.

Source: Conference Board

Consumers Don't Care About Savings Rates

LA Times details the (lack of) savings:

Consumer spending last month grew faster than people’s take-home incomes as households cut their savings rate a bit to support their purchases of cars and other goods and services.

The government said Friday that the personal saving rate — the percentage of after-tax income that’s not spent — fell to 3.5% in November from 3.6% in October. As recently as June, the rate was 5% after being consistently at about that level or higher since late 2009.

I'm not sure why it took me so long to realize the below relationship (I have been looking over this data for years now), but the savings rate broadly does not matter to consumers. In fact, over the past 50 years (as the chart below shows), it hasn't mattered at all.

What has mattered for the average American is simply that a specific amount is saved, which has been around $100-$200 a month in real (after-inflation) terms, irrespective of the amount they have actually earned. So while real disposable income and consumption have roughly tripled over the past 50 years on a per capita basis, savings is up a less-than-whopping 13% (0.25% annualized growth).

The other thing to notice in the above chart is the declining level of real per capita disposable income, something that will have to reverse to keep the concept that we can grow our way out of our debt alive.

Source: BEA

Leading Economic Indicators Rise in November

BusinessWeek details:

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

The Conference Board’s gauge of the outlook for the next three to six months rose 0.5 percent after a 0.9 percent October increase, the New York-based research group said today. The median forecast of 54 economists surveyed by Bloomberg News projected the gauge would advance 0.3 percent.

Source: Conference Board

GDP Revised Down to 1.8% on Weaker Consumption

The WSJ details:

The U.S. economy expanded less than thought during the third quarter as consumer spending fell short of an earlier estimate, though signs point to stronger growth in the final months of the year. Gross domestic product, the broadest measure of all the goods and services produced in an economy, grew at an inflation-adjusted annual rate of 1.8% in the July to September period.

The revisions cause?

The latest estimate showed personal consumption expenditure, which accounts for about two-thirds of spending in the economy, rose by 1.7% in the third quarter. That compares to a previous estimate of a 2.3% increase.

Source: BEA

Even More Perspective on Housing

In response to my post Some Perspective on Housing, reader Tom Lindmark commented:

It would be interesting if you could take the time series back far enough to account for the rise of the Boomer generation. My guess is that if it were at all possible to normalize the data for their outsize impact we might see a far lower number of new home starts than what economists predict would occur in a "healthy market".

The chart below normalizes housing starts by the 16+ year old population (not perfect as it does not account for family size... the smaller the family size, the more housing units needed). What we see is that the most recent spike in housing units during this bubble was not as outsized as I would have thought (at least relative to the baby boom when household formations spiked), while the drop off remains severe. For reference, 0.5% roughly equates to 1.2 million homes (i.e. the number of homes economists referenced in a healthy market).



Source: Census / BLS

Some Perspective on Housing

Washington Post puts some perspective on the new housing data:

Builders broke ground on a seasonally adjusted annual rate of 685,000 homes in November, a 9.3 percent jump from October, the government said Tuesday. It’s the highest level since April 2010.

Still, the rate is far below the 1.2 million homes that economists say would be built each year in a healthy housing market.

Construction of single-family homes rose 2.3 percent in November to a seasonally adjusted annual rate of 447,000. Apartment construction jumped 32 percent to a rate of 238,000 units. Single-family homes account for about 70 percent of homebuilding.

The chart below shows the increase in 5+ unit buildings (i.e. apartments) and the continued struggle in single family homes (November 2011 was actually below the level seen in November 2010).



Source: Census

Gingrich Sliding in Polls... Phew!

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



Source: RealClear Politics

EconomPics of the Week (12/16/11)

Economic Data

Breaking Down CPI

Real Retails Sales per Capita

Real Retail Sales Ex Autos and Gas Makes New High

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

Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

Global
China's Slowing Treasury Purchases

Will the US be Importing Deflation?
Trade Deficit Narrows

Global Manufacturing Recession or Noise?

Asset Classes
European Expectations and the Price of Gold

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

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

Breaking Down CPI

SF Gate details:

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

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

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

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

12-Month

6-Month Annualized

Source: BLS

China's Slowing Treasury Purchases

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

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

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

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

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

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

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

Source: Treasury

Will the US be Importing Deflation?

Bloomberg details:

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

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

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

Source: BLS

Real Retails Sales per Capita

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

Source: Census / BLS / BEA

Real Retail Sales Ex Autos and Gas Makes New High

Bloomberg details the latest retail sales:

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

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

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

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

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

Source: Census / BLS

European Expectations and the Price of Gold

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

Daily Performance (December 12th, 2011)

Drawdown from 52 Week High

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

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

Source: Yahoo

Trade Deficit Narrows

Bloomberg details:

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

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

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

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

Source: Census

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

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

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

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

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

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

Public Sector Balance Sheets Leveraged to Offset Private Sector Deleveraging

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

Source: Federal Reserve

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

Bloomberg outlines:

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

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

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

Source: Federal Reserve / BEA

* this assumes all Federal student loans are student loans.

Global Manufacturing Recession or Noise?

Source: Investment Postcards via The Big Picture

EconomPics of the Week (12/2/11)

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

ISM Manufacturing Moves Higher

The Importance of Small Business Hiring

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

European Industrial New Orders Crumble

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

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

Are Home Prices Inexpensive Relative to History?

Corporate Profits vs. Personal Income

Random
Morality and Religion

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

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

Enjoy the weekend!

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

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

The WSJ with the headline:

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

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

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

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

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

Now the details...

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

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

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

Source: BLS

Auto Recovery in Perspective

SF Gate details:

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

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

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

Source: Wards Auto

Construction Decline Bottoming

The AP reports:

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

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

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

Source: Census

ISM Manufacturing Moves Higher

ISM Reports:

WHAT RESPONDENTS ARE SAYING ...

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

Source: ISM