Credit Continues to Ratchet Tighter

Biz Journals reported yesterday:

Banks across the nation made fewer business loans in the second quarter, largely because of weaker loan demand and deteriorating creditworthiness, according to a quarterly Federal Reserve survey of senior loan officers released on Monday.

A smaller percentage of banks tightened loan standards in the May-through-July period, compared with the last survey, released in April. But loan demand was down in every category except prime residential mortgages, which are home loans to the most creditworthy borrowers, according to the survey.

About 45 percent of U.S. bankers reported weaker demand for commercial and industrial (C&I) loans from large firms during the period, and 55 percent indicated weaker demand from small firms. That was down slightly from the last survey, in which 60 percent of loan officers reported weaker demand for C&I loans from large firms and 65 percent saw weaker demand from small firms.

The bankers that reported weaker C&I loan demand unanimously cited customers’ shrinking need to invest in plant or equipment as the reason, according to the survey. Other key reasons included decreased needs to finance inventories, accounts receivable, and mergers or acquisitions.

When looking at the below chart it is important to note that anything above zero indicates continued tightening. Thus, while the recent period showed that not as many banks were tightening as in the previous period, overall credit is still tighter relative to that period (some media outlets seem to think this equals improvement in available credit... it doesn't.)



Source: Federal Reseve

Household Debt to Net Worth Ratio Spiking

Below we take a look at household debt, net worth, and the subsequent household debt to net worth ratio (think of it as an analogy to a company's debt / equity ratio). What we've seen is a large decline in household net worth, but unfortunately we haven't seen a corresponding decline in household debt.

As a result, the debt to net worth ratio has risen from about 17% in 2006, to 25% by the end of 2008.



But of course, that's not the whole story. Looking at the most recent data (hat tip Zero Hedge) from 2007, we see that the above debt to net worth ratio is significantly higher for the lower and middle class who have saddled themselves with debt in recent years (the lower level for the lower class tends to be smaller as the lowest percentile do not have much / any debt, as they typically do not have access to financing).

That said, the lower and middle class had debt in the range of 30-40% of their net worth in 2007, as compared to the 20% average for all individuals as of that date. The upper 10-percentile had debt at an average of only 10% of their net worth.



So where does this currently stand? While the richest were impacted the most in $$ terms, the lower to middle class tend to have more of their net worth stashed in real estate (i.e. their home). Thus, while the financial markets rebounded in 2009, it is likely that the lower to middle class didn't reap the reward (housing has continued to fall). Thus, when data is updated for 2008 and 2009 (though too early to judge where we'll end up this year), expect the discrepency to be even wider.

Source: Federal Reserve (hat tip reader Bryan Keller) / Zero Hedge

Empire Manufacturing Index Turns Positive

Bloomberg details:

Manufacturing in the New York region grew in August for the first time in more than a year, reinforcing signs the worst recession since the 1930s is nearing an end.

The Federal Reserve Bank of New York’s general economic index climbed to 12.1, higher than forecast and the first expansion since April 2008, the bank said today. Readings above zero for the Empire State index signal manufacturing activity is growing.

Today’s report, one of the first regional factory measures for the month, indicates companies are restarting assembly lines after slashing inventories at a record rate. Economists project growth will resume this quarter, helped by stabilization in manufacturing and housing.

“Manufacturing is in the midst of a turnaround,” John Herrmann, president of Herrmann Forecasting in Summit, New Jersey, said before the report. “Inventories are lean relative to sales and companies will need to restock. It means orders will rise and production will rise” in coming months.

Source: New York Fed

Money Market Funds Yielding Nada... In Other Words "Solid" Real Returns

USA Today reports on the (lack of) returns in money market space:

Money isn't everything, at least to investors in money market funds. Yields are at all-time lows, and nearly a quarter of funds yield nothing at all.

The average money fund yielded an annualized 0.08% the week ended Aug. 4, the latest data from iMoneyNet, which tracks funds, show. At that rate, a $10,000 investment would return 15 cents a week. But 275 taxable funds have no yield, 23% of the 1,180 funds iMoneyNet tracks.

With that as a background, this won't surprise you. Over the past twelve months, the Lipper Money Market Index has returned 1.01% (higher than 0.08%, but minuscule none-the-less).

However, this may. Over that same period, inflation (as measured by CPI) has DECREASED 2.1% year over year, which has resulted in real returns in money market space (i.e. returns less inflation OR importantly returns + deflation) up more than 3%.



With the economy shrinking and expected by many to grow at 2-3% when it does rebound (in real terms), 3% real returns don't seem so bad.

Source: Lipper / BLS

Japan's Odd Q2 Positive GDP Print

Bloomberg details:

Japan’s economy grew for the first time in five quarters as a revival in exports and consumer spending helped the country climb out of its worst postwar recession.

Gross domestic product expanded at an annual 3.7 percent pace in the three months ended June 30, following an 11.7 percent decline in the previous quarter, the Cabinet Office said today in Tokyo. The median estimate of 22 analysts surveyed by Bloomberg News was for 3.9 percent growth.

The recovery may not be sustained once the $2 trillion in worldwide stimulus that propped up sales for exporters from Toyota Motor Corp. to Kubota Corp. runs out. Some 40 percent of factories still sit idle, forcing companies to cut costs and leaving the winner of an Aug. 30 election with the challenge of staving off unemployment that’s approaching a record high.

What wasn't mentioned is that GDP actually shrunk in nominal terms (i.e. more was produced, but sold for less).



This has happened before (but real GDP has never been higher, while nominal GDP was negative).

QoQ Nominal vs. Real GDP


My question... how strong is end-user demand really if the price deflator increase GDP a full 1% quarter over quarter?

Source: ESRI

EconomPics of the Week 8/14/09

If you want to keep up with anything interesting I might find, check out EconomPic at www.twitter.com/EconomPic

Economic Data

U.S.
Least Hours on Record Since... Well... Ever
Consumer Credit Down Sharply
Capacity Utilization Jumps from 17.4% Increase in Auto Production
July Retail Sales Way Below Estimates
CPI Down Most Since 1950
Predicting CPI
Output per Hour Up, but Hours Slashed
Q2 GDP Downside Revisions Coming?
Trade Stabilizing
Spending Soars, Receipts Cliff Dive, Treasury Budget Crashes
Deflation Hits Germany
Consumer Credit Down Sharply

Global
Global Demand Freefall Waning... Japanese Export Edition
Japanese Machinery Orders Up... Still No Private Demand
Eurozone GDP Upside Surprise
Record Drop in CPI in Eurozone
Global Demand Freefall Waning... Japanese Export Edition
Japanese Machinery Orders Up... Still No Private Demand

Assets
Buyer Beware

Wealth and Employment
Net Worth = Net Negative over Past Ten Years
"Average" Real Income of the Population
Least Hours on Record Since... Well... Ever

Other
$4 Trillion Down... Up to $9 Trillion to Go

Capacity Utilization Jumps from 17.4% Increase in Automotive Production

The good news... a 0.5% jump in industrial production and an increase in capacity utilization. The bad news... capacity utilization jumped to levels last seen... in April (i.e. not much) even with the MASSIVE 17.4% increase in auto production due to the cash for clunkers program.



And the update of the capacity utilization vs. CPI chart, which shows CPI may be bottoming in a few months. Details of this analysis can be found here.



Source: BLS / Federal Reserve

CPI Down Most Since 1950

I was right and wrong. Right in the fact that year over year CPI was lower than expected (down 2.1%), but wrong in the month over month change (flat as expected, but down on a non-seasonally adjusted basis). But, long bonds are rallying thus far (we'll see what happens post Industrial Production data) so I am happy. WSJ Reports:

U.S. consumer prices fell last month at their fastest annual pace since 1950, an indication that inflation isn't a threat to the economy or the Federal Reserve. The consumer price index was unchanged on a monthly basis in July from June, the Labor Department said Friday, matching economist expectations, according to a Dow Jones Newswires survey.

The core CPI, which excludes food and energy prices, rose 0.1%, which was also in line with expectations. Unrounded, the CPI posted no change last month. The core CPI advanced 0.091% unrounded.

Consumer prices plunged 2.1% compared to one year ago, the largest 12-month decline since January 1950. Most Fed officials think a positive inflation rate around 2% is consistent with their dual mandate of price stability and maximum employment.

Source: BLS

Record Drop in CPI in Eurozone

Marketwatch details:

Consumer price inflation in the 16-nation euro zone fell at a record-low annual rate of 0.7% in July, the statistics agency Eurostat reported Friday. Eurostat had previously estimated a 0.6% annual drop in July. CPI fell at an annual pace of 0.1% in June.

Source: Europe.EU

Buyer Beware

This is why David Rosenberg is a must read... from this past Tuesday's Breakfast with Dave:

The S&P 500 has rebounded 49% from those March 9 lows. Imagine how abnormal a 49% rally over a five-month span is — it’s unprecedented back to the 1930s. In the last cycle, it didn’t happen until February 2004 — 18 months into that bull phase where again there was tremendous policy stimulus and an oversold low to climb out of.

In addition, household credit was expanding rapidly. Even coming into what was a secular bull market in 1982, it took a good seven months to rally 49%, and that was with the benefit of a V-shaped economic recovery.

Going back to 1950, it has taken an average of around 18 months for the market to rebound 49% from a recession trough, not five months as has been the case thus far.

Let’s examine what the macro landscape usually looks like at that magical +49% point in the equity market rally:

Back to David....

We have never before witnessed a stock market rally of this magnitude over such a short time frame and absent anything more than tentative signs of economic improvement.

The only rally of this magnitude was the wild bear market rally ride in 1930, which was followed by a resumption of the decline that finally bottomed 82% lower in 1932.

Source: Gluskin Sheff

Predicting CPI...

So, I got lucky and somehow predicted Q2 GDP the night before the release (as a friend of mine told me, "even the blind chicken gets the kernel of corn"), BUT I'll try again. Economists (smarter than me) are predicting a month over month CPI print of 0.0%. I'll go on record here that it will come in lower. To understand my reasoning, lets take a look at details from today's July import price levels release. Marketwatch reported:

Prices of imported goods fell 0.7% in July, the first decrease since January as petroleum prices declined, the Labor Department estimated Thursday.

Analysts polled by MarketWatch had expected the import price index to fall 0.1%.

Import prices were down 19.3% in the past year, the largest annual decline since the data were first published in 1982. In June, the import price index rose a revised 2.6%, compared with a prior estimate of a 3.2% gain.

In July, imported petroleum prices fell 2.8%, the first decrease since January. The petroleum imports price index is down 49.9% over 12 months. Non-petroleum import prices fell 0.2% in July, and are down 7.3% for the year, the largest 12-month decline since the data began publication in 1985.

We can see below that the change in the import price level was largely driven by the change in fuel (i.e. petroleum) prices.



Now the significance. There has been a very strong relationship between the price level of imports and broad CPI, as changes in the price of petroleum has been the main driver of CPI. Thus, the fact that July's import prices declined makes me think we may be in for a surprise regarding July's CPI print. The below chart shows the longer term relationship.



Regardless of the month over month figure, expect a sizable drop in the year over year number. As we can see below, prices spiked last July as the bubble in oil was in full gear. Thus, if prices are flat month over month (as expected), the year over year CPI will move down to -1.9%.



The important question... how do you position for this? I personally own TLT (a long positon in the long bond). My view is if CPI comes in lower than expected, long bonds will rally.

So would I rather be wrong about CPI or TLT? CPI of course...

Source: CPI - BLS; Import Prices - BLS

Net Worth = Net Negative over Past Ten Years

Take household net worth, then remove the effects of inflation and population growth to get real net worth per capita.



And this doesn't communicate the widening disparity between the haves and have nots (i.e. the bottom 90% have MUCH less net worth now in real terms than in the recent past).

Source: Federal Reserve (hat tip reader Bryan Keller)

July Retail Sales Way Below Estimates

Money CNN reports:

Retail sales fell in July after two straight months of gains, the government reported Thursday -- a drop that surprised economists.

The Commerce Department said total retail sales declined 0.1% last month, compared with June's revised gain of 0.8%. Total sales were originally reported to have increased 0.6%.

Economists surveyed by Briefing.com had been expecting June sales to increase 0.7%. The much worse-than-expected monthly report followed a worrisome quarterly report from Wal-Mart (WMT, Fortune 500) Thursday in which the world's largest retailer said it logged an unexpected 1.2% drop in its second-quarter same-store sales.

Sales excluding autos and auto parts also registered an unexpected decline of 0.6% compared to a revised 0.5% increase in the measure in June. Sales, excluding autos, were originally reported to have increased 0.3% in the prior month.

How any economist thought that a cash strapped consumer would spend more on non-autos after a large auto purchase is beyond me. Though I will say the decline in overall sales, even with an increase in sales of autos, was a surprise even to me.

Source: Census

Trade Stabilizing

WSJ reported yesterday (bold mine):

The U.S. trade deficit widened in June, forced up by higher oil prices, as growth in both imports and exports signaled renewed life in global trade.

Total June exports rose 1.9% to $125.78 billion, with imports increasing 2.3% to $152.79 billion. That resulted in a trade deficit of $27.01 billion, up 4% from a slightly revised $25.97 billion in May, the Commerce Department reported Wednesday.

The deficit was largely due to energy prices, which have been on the rise again this summer. Adjusted for inflation, the trade deficit narrowed to its lowest level in 10 years.

It is true that both imports and exports were up, but stripping out petroleum, we see the continued slide in imports from a continued lack of consumer demand.

Back to the WSJ:

"What we're having is a leveling out right now," said Joshua Shapiro, an economist with Maria Fiorini Ramirez Inc., an economic consulting firm. "The evidence is that we're in the stabilization phase."

Source: Census

Eurozone GDP Upside Surprise

Marketwatch reports:

Euro-zone gross domestic product shrank by 0.1% in the second quarter compared to the first three months of the year, the statistics agency Eurostat reported Thursday. Compared to the second quarter of last year, GDP fell 4.6%. Economists had forecast a 0.4% quarterly fall and a 5% annual decline. But an unexpected return to growth by Germany and France in the second quarter had trimmed market expectations for a second-quarter euro-zone GDP decline.

Below is a chart of the quarter over quarter change by country (for those available), as compared to that of the U.S.



Source: Eurostat

Spending Soars, Receipts Cliff Dive, Treasury Budget Crashes

Bloomberg details (bold mine):

The U.S. budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for July as the recession curbed revenue and the government ramped up spending to rejuvenate the economy.

The shortfall so far for the fiscal year that ends Sept. 30 totaled $1.27 trillion (actually its $1.43 trillion, but what's $160 billion) compared with a $389 billion year-to-date gap in 2008 (actually $370.1 billion), the Treasury said today in Washington. The excess of spending over revenue for July climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history.

Taking that ten-month (year to date) period and roll it back to 1981 (as far back as the data I could find goes) and we get the following.

Back to Bloomberg:

Tax receipts are sliding and spending is surging even as some economists say the recession may have ended. The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts, infrastructure projects and a goal to create or save 3.5 million jobs. President Barack Obama also is pushing a health-care overhaul that may cost $1 trillion over a decade.

"Tax receipts are sliding and spending is surging" is right.

Source: Treasury

"Average" Real Income of the Population

Yesterday's post about the number of hours worked by the "average" person in the population (full details here) had some great feedback and an additional request. Before moving on to that, here is an additional chart showing the relationship (strong) between the number of hours worked by the average member of the population and growth in the economy.

And now the request (bold mine) by an anonymous reader:

Now to get the real "eye popper".... multiply the last graph (the red hours worked in the above chart) by the trend in wages. That will reflect the "earning power" (hence spending power) of the population.

Taking the previous chart and multiplying the data by the average hourly wage (I used private wages found here, but open to suggestions if there is better data) going back to 1964 and adjusting to 2009 $$ (via the CPI index), we get the following:

Interesting. Despite the spike in real hourly wages to levels last seen 30 years ago (due to a steady level of pay and deflation in recent months), average weekly wages are down to levels seen in the late 1990's (due to the decline in hours worked).

My guess is that the number of hours worked may be bottoming, but the real hourly wage increase we've seen has a large correction coming sooner than later. Thus, expect the weekly figure to continue its steep descent.

That said, anyone care to help with an explanation the movement in the 1960's and 1970's?

Output per Hour Up, but Hours Slashed

More news from yesterday...

With an article headline like this "Productivity rises 6.4%, Fastest rate in Six Years" you'd think the news was good. And the beginning of the Marketwatch article seems to convey a positive message:

U.S. companies slashed their workers' hours in the second quarter, boosting the productivity of the workplace to an annualized rate of 6.4%, the Labor Department reported Tuesday. It was the fastest increase in productivity in the nonfarm business sector in nearly six years. Economists surveyed by MarketWatch had been looking for a gain of 5.4%.

Was hourly output up 6.4% annualized in Q2? Yes. But OVERALL output was down again and at an increasing rate (hours were slashed).



Back to Marketwatch with some more sobering news:

Unit labor costs -- a key indicator of inflationary pressures -- plunged at a 5.8% rate, the largest decline in nine years and slightly wider than the 5.3% decline expected by economists. Hourly compensation rose just 0.2% in the second quarter. After inflation, real hourly compensation sank 1.1%. Read the full government report.

"U.S. businesses have slashed employment aggressively in order to cut costs and to streamline their businesses," wrote Harm Bandholz, an economist for UniCredit Markets.

Source: BLS

Q2 GDP Downside Revisions Coming?

Peter Boockvar (via the Big Picture) takes a look at yesterday's wholesale inventory release (been traveling, thus the reason for the late posts):

June Wholesale Inventories, which make up about 25% of Business Inventories, fell a greater than expected 1.7% vs a forecasted drop of .9% and May was revised down by .4% to show a decline of 1.2%. The greater than expected fall IF followed by a similar drop in Business Inventories, will lead to a revision downward in Q2 GDP as the inventory drag would be more than expected.

Back to Peter:

Because sales rose .4%, the inventory to sales ratio fell to 1.26, the lowest since Oct ‘08 when it was at 1.21. While the inventory is somewhat old news, it gives us a snapshot of how the quarter ended and further quantifies the extent of the inventory contraction. It also should follow that the greater than expected drag in Q2 should lead to much less of one in Q3. Business Inventories are out on Thursday.

Don't fret green shoot worshippers. Any Q2 downward revision (Q2 is SOOOO.... last week) means upside potential for the Q3 rebound.

Source: Census

$4 Trillion Down... Up to $9 Trillion to Go

Click for Ginormous Chart of Taxpayer Outlays

Source: Bianco Research via Ritholtz' The Big Picture

Update: The above chart is a direct reproduction of the Bianco table. Jake (i.e. me) spent no effort verifying the data, which long time reader dblwyo believes may be off:

My own inspection indicates that there are many different instruments here - that flows are very badly confused with stocks - and that authorities with actual outlays.

That set of mistakes is being made all over, e.g. with the arguments that all the bailouts exceed WW2. Excuse me authorizations for credit authorities are what percent of the real economy and represent what level of disruption in the situation ?

I find it fascinating that the stimulus isn't working at all (not true btw) yet it's more massive than WW2 :) ! Amazing.

Deflation Hits Germany

Bloomberg details:

Consumer prices in Germany posted their first annual decline in more than 22 years in July and wholesale prices plunged after energy costs fell and the worst recession since World War II curbed spending.

Consumer prices, calculated using a harmonized European Union method, fell 0.7 percent from a year earlier, more than initially estimated, the Federal Statistics Office in Wiesbaden said today. A separate report showed wholesale prices dropped 10.6 percent in July from a year ago, the biggest decline since the data were first compiled in 1968.

The statistics office previously reported that German harmonized consumer prices fell 0.6 percent in July from a year earlier. Prices fell 0.1 percent from June, it said. On a non- harmonized basis, consumer prices declined 0.5 percent in July, the first annual decrease since March 1987.

Source: Destatis

Least Hours on Record Since... Well... Ever

In a response to my post detailing how the employment rate could drop while the number of employed individuals continued to drop (i.e. fuzzy math), I received the following post from Ryan in connection with my chart showing the employment / population rate returning to levels seen 25 years ago.

Jake - why did you choose to leave out the 1970s and early 80s which would have likely shown the recent #s aren't out of line?

My response was:

i was just trying to show that we are at our 25 year low to put this into perspective. i didn't mean to cut off any data intentionally, but i can see where it would seem that way, so i do apologize.

So to make amends, here is the data since 1964 (the first year in which such data is available).



Is the employment to population ratio up since the 1960's? Sure. But that doesn't show the full picture. I continued...

that said the 1960's - 1970's data is too stale. that was when the two-income family didn't truly exist (i.e. when women weren't necessarily expected to work and/or given the same opportunity to do so). thus not remotely an apples for apples comparison.

Here is the data showing just that. While the employment to population ratio has risen from the 1960's, the number of hours worked is down dramatically. By looking at the aggregate amount of both (the employment to population ratio multiplied by the # of hours worked per week), we see the following....



A figure not only at the lowest level in 25 years, but the lowest in the full 45 years worth of data available.

Source: BLS

Consumer Credit Down Sharply

Another strike for consumers (they may WANT to spend, but with job losses, wealth destroyed, and the inability to spend with borrowed money, they may not be able to do so). Money CNN with the details:

Consumer credit fell in June for the fifth straight month, as widespread unemployment curbed spending, a government report said Friday.

Total consumer borrowing sank a seasonally adjusted $10.3 billion, or 4.9%, to $2.503 trillion, according to the Federal Reserve. The report measures how much debt consumers have outstanding.

The reduced borrowing comes as the economy sheds jobs by the thousands, and mass layoffs and pay cuts have limited consumer spending power. At the same time, banks have tightened lending standards due to growing concerns about default risk.

Consumer credit began contracting last August, the first decline since January 1998. It rebounded in September before contracting again and fell for three consecutive months to close out 2008.

Source: Federal Reserve

Global Demand Freefall Waning... Japanese Export Edition

The AP with the details:

Japan's exports in June fell by the smallest margin in six months, adding to evidence that global demand is recovering as the recession loosens its grip.

Shipments from the world's second-biggest economy fell 35.7 percent from a year earlier, an improvement from a 40.9 percent decline in May, the government said Thursday. Exports have fallen every month since October.

As a result of a bigger fall in imports, Japan posted a trade surplus of 508 billion yen ($5.4 billion) — the highest value since March 2008, according to the Ministry of Finance.

Export declines eased in all of Japan's major markets, particularly China. Huge stimulus spending by Beijing helped Chinese growth accelerate in the second quarter, expanding by 7.9 percent from a year earlier.

Exports to Asia and the U.S. are showing the clearest recovery, said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

I've posted on this in the past, but we can see the growing importance of China to any Japanese recovery. More important, we can see the bounce not only in Chinese exports, but those to the U.S. as well.

The composition of exports to each country is widely varied and the good news is that we are seeing a stabilization of exports to both. The U.S. is a much larger market for transportation equipment (i.e. autos), whereas China is the larger market for machinery (needed for the continued industrial expansion) and manufactured goods.

It will be interesting to follow how this plays out in the coming months. We should be able to see the impact of the cash for clunkers program has on exports to the U.S. and the continuation of China's stimulus plan on exports to China.

Source: Customs.Go.JP

Japanese Machinery Orders Up... Still No Private Demand

Daily FX with the details (bold mine):

Japanese Machine Orders, when excluding ships and utilities, June rose by 9.7% in June, beating expectations of a 2.6% increase in the figure. The latest release is the highest of such since April of 2008. Last month'a release saw orders for such industrial needs contract by 3.0%. Most of the increase in demand in June came from abroad, growing 43.8% on the month.

The domestic public sector weighed in only slightly. Overall, when including orders for ships and utilities, total orders rose only 2.3% with private demand actually slipping by 15.9%. But it is important to strip the metric of boat orders because such expenditures are generally used for military or freighters. Still, it may somewhat worrisome to see such a substantial gap between the headline figure and the figure with the two excluded items.

Source: ESRI

EconomPics of the Week (8/7/09)

If you want to keep up with anything interesting I might find, check out EconomPic at www.twitter.com/EconomPic

Economics
U.S.
Unemployment Rate Drop = Decline in Labor Force
Five Years of Real GDP per Capita Lost
Real GDP per Capita Redux
Less Unemployed, but More Unemployed Longer
Unemployment Down to 9.4%
What's Another 370K Jobs Anyhow?
July Same Store Sales
Consumption Stabilizing... Now What
Manufacturing Contracts for 18th Straight Month
Services Declining at Slightly Faster Rate

Global
"China is Leading the Way"
UK Producers Price Index Surprises to Upside
Aussie Employment "Surprise" to Upside
"Japanese Wages in Record Plunge"
Decline in Energy Drives Euro PPI to Largest Drop in 13 Years

Asset Classes
Corporate Bonds Rockin'
Ford Ends 18 Month Skid
Sovereign Wealth Fund Breakdown
Hedge Funds are "en Fuego"
AIG Soars... Still Down 96% Year over Year
Income Down, Savings Up = Consumption Down = Stalling Economy

Other
Economics of Steroids

Less Unemployed, but More Unemployed Longer

Last employment post (for now). Here are a few charts comparing the length of time individuals have been unemployed.

By Number


As a Percent of Total Unemployment

Source: BLS

Unemployment Rate Drop = Decline in Labor Force

The country shed another ~250k jobs in July, but the unemployment rate dropped to 9.4%. How is that? It looks like individuals have left the labor force.

Month over Month Change (S.A.)


How does this work? The numerator in the unemployment rate is unemployed... the denominator is labor force. Simplified example:

• 19 people are unemployed out of 200 in the labor force = 9.5% unemployment rate
• 1 of those unemployed individuals leaves the labor force
• 18 people are unemployed out of 199 in the labor force = 9.0% unemployment rate

This also explains why the percent of those unemployed decreased at a greater rate than the labor force (1/19 = a 5.2% drop in the # unemployed, but 1/200 = a 0.50% drop in the labor force).

So, was the data better than expected? Absolutely (good to great news on a relative basis), but lets make sure we understand the math... and the continued trend.

Employment as a Percent of Entire Population

Source: BLS

Unemployment Down to 9.4%

Source: BLS

UK Producers Price Index Surprises to Upside

Bloomberg reports:

U.K. producer prices unexpectedly rose in July, a sign the recession may be easing enough for companies to charge customers more and rebuild their margins.

The price of goods at factory gates climbed 0.3 percent from June, the Office for National Statistics said today in London. Economists predicted no change, according to the median of 19 forecasts in a Bloomberg News survey. On the year, prices declined 1.3 percent, the most since November 2001.

So things are better... OR oil is down 50% year over year AND up 50% over the past six months. But, that would be too easy an explanation.

Source: Statistics.Gov.UK

Hedge Funds are "en Fuego"

Source: Barclay Hedge

July Same Store Sales

WSJ reports:

Consumers preferred government-sponsored incentives over retailers' continued reliance on big markdowns, helping to make July same-store-sales another washout.
Retailers weren't only competing with the continued problems of low consumer confidence and employment levels, but also had the government offering big incentives for auto and home purchases.

"That doesn't leave much left over for other purchases, especially big ones like large screen TV's," said Chris Donnelly, partner in Accenture's retail practice. The poor July showing is also building a case for extreme caution going into Christmas. Retailers are likely ordering less, which may not mean discounts will have to be as big this holiday season. But any uptick in demand won't be met with supply.

Is Target becoming too "high-end"?

Source: CNN

Consumption Stabilizing... Now What

While we looked at personal consumption earlier this week, it is important to note that over the shorter run, we are beginning to see signs of stabilization.

First, the brutal year over year consumption cliff dive...

But again... stabilization over shorter time frames.

The question is HOW do we possibly rebound from here when consumer credit is so hard to come by, personal balance sheets are maxed out, incomes are declining, unemployment is rising, AND we are starting from such a low base of savings. How low? I think this chart speaks 1000 words.

That's right. According to Christianson Capital Advisors (via the Welsh Investment Letter), Americans spent more on gambling then they saved in 2007 before this mess. How do you increase spending from that unsustainable level? You don't. Thus, the need to figure out where else we are going to get our sustainable rebound.

Source: BEA

AIG Soars... Still Down 96% Year over Year

WSJ details:

Have the markets gone mad?

AIG closed up 63% to $22. Yes, AIG.

The troubled insurance giant — which reports earnings Friday — announced earlier this week that it company would soon get a new CEO. But that was on Monday, and wouldn’t really explain today’s surge.

Speaking to MarketWatch, Miller Tabak analyst Peter Bookvar says that he sees a technical issue at work stemming from the company’s recent reverse stock split. “It’s another example of where the float has dramatically shrunk, and now there’s a massive short squeeze going on,” Bookvar said. “There is certainly no news to account for it (AIG’s stock move), he added.

First a little perspective. Even after yesterday's 60% jump, AIG's share price is down an astounding 96% year over year (and down 35% from levels seen just 2 months ago).

While something does seem fishy, this type of volaility for AIG shouldn't be all that unexpected. After all, AIG is no ordinary stock. It is just a binary option on the continued bailing out of an entity currently too big too fail. At the end of the day, AIG should be worth $0.00 (i.e. nothing) or a high multiple of its current valuation.

The reason being it is a non-zero probability that the government will hand over billions more to equity investors via subsidized financing of their operations for years to come. How do you model that?

Source: Yahoo

Aussie Employment "Surprise" to Upside

Bloomberg details the good:

Australian employers unexpectedly added workers in July, supporting the central bank’s view that the economy is rebounding faster than it predicted six months ago.

The number of people employed rose 32,200 from June, the statistics bureau said in Sydney today. The median estimate of 18 economists surveyed by Bloomberg was for a decline of 18,000. The jobless rate held at 5.8 percent.

Central bank Governor Glenn Stevens kept the benchmark interest rate at a half-century low of 3 percent this week for a fourth month and said the economy is “stronger than expected a few month ago.” Woolworths Ltd., the nation’s largest retailer, is among companies planning to hire extra workers. Job vacancies dropped in July at a slower pace, a report showed on Aug. 3.

And the bad:

The number of full-time jobs dropped 16,000 in July and part-time employment increased 48,200, today’s report showed.

In aggregate, we see that the number of full time positions has declined year over year for the sixth straight month, BUT the decline looks to have finally slowed...

For now at least. Back to Bloomberg:

“The leading indicators of employment have shown signs of recovery,” Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney, said ahead of today’s report. “But we’re really interested to see what happens in the second half of the year as the government’s stimulus spending starts to abate.”

And that is the key... what happens after the stimulus?

Source: ABS.gov

Sovereign Wealth Fund Breakdown

Brad Setser (one of my favorite bloggers) is hanging up his keyboard.

This will be my last blog post, at least for the foreseeable future.

I have accepted a new job, one that will require a certain level of discretion. I am excited by its challenges: ‘Balanced and sustainable” growth is something that I believe in. But suspending this blog is still hard.

In tribute, I present one last Brad sourced entry on an interesting topic. Sovereign Wealth Funds.

Brad Setser and Rachel Ziemba detail the estimated level of sovereign wealth rolling through markets:

We don’t know the real total of course. Key institutions do not disclose their size – or enough information to allow definitive estimates of their size. But our latest tally would put the combined external assets of the major sovereign wealth funds roughly $1.5 trillion (as of June 2009) – rather less than many other estimates. This portfolio of $1.5 trillion does reflect an increase from the lows reached of late 2008. But it is well below the estimated $1.8 trillion in sovereign funds assets under management in mid 2008. Significant exposure to equities and alternative assets like property, hedge funds and private equity led to heavy losses by most funds in 2008 – a fact admitted by many of the managers.

$1.5 trillion is lot of money. But it is substantially less than $7 trillion or so held as traditional foreign exchange reserves.

More here.

Services Declining at Slightly Faster Rate

ISM details:

• What respondent's are saying:"Economic activity continues to decline." (Transportation & Warehousing)
• "Continued soft sales, offset by improving profit margins." (Accommodation & Food Services)
• "Stimulus funds have increased business activity." (Public Administration)
• "Business downturn seems to be stabilizing somewhat." (Information)
• "There is still downward pressure on our products; however, our sales volume is stabilizing." (Mining)
• "The past month's volume target and operating volumes were met. Rising concerns over the future form of healthcare reform and impact on provider organizations." (Health Care & Social Assistance)
• "Although attendance is up, business levels remain steady. More people, fewer dollars spent — an indication that discretionary spending is limited." (Arts, Entertainment & Recreation)

Source: ISM

What's Another 370K Jobs Anyhow?

Marketwatch reports:

In another sign that the labor market remains weak even as the economic downturn is moderating, private-sector employment in the United States fell by an estimated 371,000 jobs in the July ADP employment index, the smallest decline since October. The goods-producing sector lost 169,000 jobs, while the service sector lost 202,000, according to ADP.

"Despite recent indications that overall economic activity is stabilizing, employment, which usually trails overall economic activity, is likely to decline for at least several more months," ADP said in a statement.

Source: ADP