No Inventory Correction in September

Forbes reported yesterday (traveling again all week so expects delays):

Total business inventories continued to fall in September by 0.4%, less than the 0.7% decline economists were expecting, the Commerce Department reported today. September now marks the thirteenth consecutive month of inventory declines, the longest streak since the 15 months ending April 2002. Total business inventories are 13.4% lower compared to August 2008.

Total business sales fell 0.3% in the month, breaking the three-month streak of growth. The decline can be attributed to a 2.6% decrease in retail sales, reflecting a 14.3% decline in auto sales. All other major types of retail stores experienced sales gains of less than 1% except for building material stores whose sales decreased by 0.6%. Manufacturing sales and wholesale sale rose 0.85 and 0.6% respectively.

Marketwatch explains how inventory correction works its way through to final output figures:

Once businesses reduce their inventories to desired levels, any increase in sales will have to come from new production, which would boost both U.S. jobs growth and imports.

The inventories report typically receives little attention from investors, but the pace of inventory reduction will be at the heart of any economic recovery this year. Most economists believe inventories will continue to be cut for several quarters before general restocking is needed.

But unfortunately, the trend of a continued declining inventory to sales ratio was not in the cards for September.



While this is only one data point, without sales growing faster than inventories, we won't get the mother of all inventory corrections many (I included) expect.

Source: Census

Retail Sales Upside Suprise... Still Weak Longer Term

Marketwatch reports:

U.S. retail sales increased a seasonally adjusted 1.4% in October, led by a rebound in auto sales, the Commerce Department estimated Monday. Excluding the 7.4% increase in auto sales, retail sales rose 0.2% in October. Auto sales had plunged 14.3% in September after the expiration of the government's cash-for-clunkers program.

The 1.4% gain in October was higher than the 1% gain forecast by economists, but a large downward revision to September's sales offset the upside surprise. Economists were expecting sales excluding autos to rise 0.3%. October sales were mixed. Sales of durable goods, other than autos, were weak. Sales at the mall stores were generally healthier.

Source: Census

Has Euro CPI Seen Its Lows?

The AP details:

Consumer prices in the 16 countries that use the euro fell by 0.1 percent in the year to October, official figures confirmed Monday. Eurostat, the EU's statistics office, kept the rate unchanged from its preliminary estimate, in line with market expectations.

October's decline was the fifth in a row. In the year to September, prices fell by 0.3 percent. Though falling prices may be good for hard-pressed consumers, it is a sign of just how shaky demand remains.

Inflation is expected to turn positive in the months ahead as last year's sharp falls in energy prices fall out of the annual comparison and growth returns — figures last Friday confirmed that the eurozone returned to growth in the third quarter of 2009, albeit at a fairly anemic level of 0.4 percent.

Source: Eurostat

Japanese GDP... 4.8% Growth, but Ugly?

EconomPic detailed Japan's odd Q2 GDP print in which real GDP rebounded to positive territory for the first time since Q4 2007, even as nominal GDP continued to contract:

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

That is... until this release.



The issue with any recovery in real only terms is that the country's debt (and there is a ton in Japan) remains in nominal terms. Thus, the fact that Japan produced more (4.8% quarter over quarter annualized more in real terms), but the overall value of that production is still less in Yen terms (-0.3% in nominal space) makes it difficult to service that debt. It is not a surprise then that the cost of credit insurance on Japanese sovereign debt has risen during this "recovery". Per the WSJ:

Canary in the coal mine? The cost of insuring Japanese government bonds against default has doubled to 0.75 percentage point in the past three months, as markets fret about debt issuance. Credit risk is assuming ever-greater stature in government-bond markets previously blithely assumed to be risk-free.

Its debt-to-gross-domestic-product ratio is set to rise to a staggering 227% in 2010, the International Monetary Fund forecasts, making it particularly exposed to any rise in market interest rates. Japan's aging population is a crucial concern, driving a change from saving, much of which went into JGBs, to consuming.

Japanese government officials seem to share the concern that the "strong" print may not be all it initially seems. Per Bloomberg:

The acceleration in the world’s second largest economy is projected to fade in coming quarters as the impact of stimulus spending wanes and job losses restrain consumer spending. Prime Minister Yukio Hatoyama said the economy remains “worrisome” and that another supplementary budget is “probably” warranted.

I second that and will repeat the question I posed last quarter; how strong is end-user demand really if the price deflator increases GDP a full 5% quarter over quarter (annualized)?

Source: ESRI

EconomPics of the Weeks (11/13/09)

Economic Data

United States
The "Paradox of Deleveraging"
Civilian Hours vs. Real GDP
Consumers Don't Enjoy Unemployment
Trade Deficit Jumps in September
The State of States: They're Broke
Spending Down + Deficit Up = Not Good

Foreign
Eurozone GDP Breaks Through Zero... Concerns Still There
Aussie Miracle Continues
China is Ripping... Bears are Smoking Dope
Germany: Improving Economy

Long Bonds
Where are Long Bond Yields Going?
Where are Long Bond Yields Going: Late 70's / Early 90’s Edition
Just One Super-Secular Mean Reversion?

Other
Will There be Appetite for Another Stimulus Plan?
The Job Market and Equities

Consumers Don't Enjoy Unemployment

Bloomberg details:

Confidence among U.S. consumers unexpectedly fell in November for the second consecutive month as surging unemployment shook households.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 66 from 70.6 in October. The gauge was projected to rise, according to the median forecast in a Bloomberg News survey of economists.

A jobless rate that jumped to a 26-year high last month and is projected to remain above 10 percent through the first half of next year is weighing on Americans as they head into the holiday shopping season. Macy’s Inc. is among retailers showing a decline in sales as consumers spend only on essentials such as food and clothing.

Source: St. Louis Fed

Trade Deficit Jumps in September

Bloomberg details:

The trade deficit in the U.S. widened in September by the most in a decade, reflecting rising demand for imported oil and automobiles as the economy rebounded from the worst recession since the 1930s.

The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.

As detailed above, a large component of that net trade deficit was autos. This isn't a huge surprise. When we took a look at September Auto sales, foreign cars performed much better on a relative basis.

So glass half full... The global economy is rebounding. Glass half empty... We (the global economy) are back to relying too much of an indebted US consumer (see Eurozone GDP).

Source: Census

Eurozone GDP Breaks Through Zero... Concerns Still There

Bloomberg reports:

Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey.

Europe’s economy is gathering strength after governments stepped up stimulus measures and the European Central Bank injected billions of euros into markets to encourage lending. While confidence in the economic outlook is at a 13-month high, rising unemployment, the expiration of stimulus plans and a surging euro are threatening to undermine a recovery.

“The euro-zone economy has officially turned the corner and that is cause for relief, but not celebration,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “The economy remains in a fragile state and is recovering mainly because of government stimulus and temporary inventory effects.”

JP Morgan analyst David Mackie was similarly unimpressed (via FT Alphaville):

The third quarter GDP data suggest that the region has exited recession, but the move was hardly a decisive one. Despite a 12%ar gain in industrial production across the region, GDP managed to increase by only 1.5%ar. Clearly, there was a lot of weakness in construction and services. These data will reinforce the perceptions of the consensus: that the upswing will be lackluster and bumpy. And, they present a major challenge to our more upbeat forecast of growth over the coming year. Indeed, if GDP can only increase by 1.5%ar when IP grows at a double digit pace, the largest gain since 1984, one can only worry about the future.

As for the monster quarter from Lithuania... call it a massive dead cat bounce as year over year GDP is still down 14.3%.

Source: GDP

Just One Super-Secular Mean Reversion?

In response to my post Where are Long Bonds Going? Late 1970's / Early 80's Edition, reader Henry Bee responds:

I'm going to replicate the study using 20-year bond in place of 30-year to see if that makes a difference because 20-year bond data goes all the way back to the 30's.

While I am definitely interested to see what Henry comes up with for the late 1950's-1970's, he'll likely run into a problem if he simply tries to replicate what I have shown going back any further. The problem? Rates were never high enough in the first place (outright), let alone on a relative basis to shorter yields.

Below we see just that, but with the 10 year Treasury bond (data goes back to the late 1800's). Interesting to see the yield bumps against the 10 year average on the way up without really penetrating the average AND then again on the way down, but in reverse.



Well, they always say it's dangerous to bet against a strong trend. From the looks of it, the decline in interest rates is more than a long trend. It is a reversion to a 100+ year mean.

Source: Irrational Exuberance

Spending Down + Deficit Up = Not Good

Bloomberg reports:

The U.S. budget deficit widened in October from a year earlier, reaching a record for that month, as rising unemployment cut revenue at the start of the first full fiscal year under President Barack Obama.

The excess of spending over revenue widened to $176.4 billion last month, compared with a deficit of $155.5 billion in the same month a year earlier, the Treasury Department announced today in Washington in its monthly budget statement. It was a record 13th consecutive shortfall and the fifth-largest monthly gap on record, the department said.

The issue may be that outlays are reduced (non-stimulating) and the deficit still grows due to the collapse in revenues. That my friends, would be a lose-lose for the economy.

Source: Treasury

Where are Long Bond Yields Going: Late 70's / Early 80's Edition

My comment in my post Where are Long Bond Yields Going?:

But the money shot is that when the yield curve has been VERY steep (i.e. more than 4%) the Long Bond has rallied in all cases (19 out of 19 times) over the next year.

Received the following response by reader Henry Bee (bold mine):

This is a great observation! One caveat though: the data is taken during a period of time where the 30-year bond yield DECLINED consistently (the data was from 1986-2009). This observation would be more reliable if it includes 1960-1980 where the 30-year bond yield ROSE.

If we're experiencing a regime change today, then the relationship likely won't hold.

And he is correct that rates rose DRAMATICALLY from the late 1970's through the early 1980's (the Long Bond only started trading in 1977). Looking at the data from 1977-1985 (i.e. the time frame that took place before my post), we have the following:

Note that the yield curve was only as steep as it is now (i.e. more than 4%) for a brief period in 1982 and the steepness (i.e. spread between 30 Year Treasuries and 3-Month T-Bills) was much more volatile during the above time frame than since. We can also see the spike in this steepness from April - October 1980 when 3-Month T-Bill rates dropped dramatically (the data is from the Federal Reserve), only to rise within 6 months. As an anonymous reader explained:

In 1980 there was a mini credit crunch following, I believe, a speech by Pres. Carter about not using your credit card. The Fed eased in the spring, pushing rates down from the high teens to the high single digits. They reversed course by the end of that summer. You can see it in both the consumer credit data and in the effective Fed funds rate.

And below we show an updated chart showing the steepness of the yield curve on the x-axis and the change in the 30 year yield, one year forward, on the y-axis for the 1977-1985 time frame (each point represents an end of month figure) with that 6 month window broken out in red.

What do we see? I would say the overall theme is unchanged. When the yield curve is VERY STEEP rates move down in more cases than up. When Long Bond rates were rising dramatically, it was in a number of cases led by a rise in the short rates (in response to inflation and/or an attempt to stomp out inflation), which resulted in the yield curve to be inverted. The outlier was that odd period from April 1980 - October 1980.

In summary, when the market historical priced-in inflation into long yields, it typically also priced-in inflation in short yields. The idea that short-term deflation is a potential outcome, while at the same time long-term inflation is a potential outcome is an outlier event.

In other words, history can not necessarily help us with what to expect.

Will There be Appetite for Another Stimulus Plan?

Calculated Risk has a nice post detailing the Possible Upside Surprises, Downside Risks going forward. One area [frequently] mentioned is that only 1/3 of the fiscal stimulus has been spent to date. Below are the details how the ~$180 billion fiscal stimulus has been spent.



But while the impact of the stimulus has been HUGE (Mark Zandi, Chief Economist of Moody's Economy.com estimates the stimulus contributed ~3% to Q2 '09 GDP and 3.5% to Q3 '09 GDP before the Joint Economic Committee), much of the impact is now fading (a vast amount of the impact was due to pulling demand forward). Calculated Risk details the potential drag and the why there may be appetite for an additional stimulus plan in 2010:

This suggests that all the growth in Q3 was due to the stimulus package, and the impact will now wane - only 2% in Q4, and 1.5% in Q1 2010 - and then the package will be a drag on the economy in the 2nd half of 2010.

With unemployment above 10%, there will be significant political pressure for another stimulus package - especially if the economy starts to slow in the first half of 2010. This next package could be several hundred billion (maybe $500 billion) and could increase GDP growth in 2010 above my forecast.

Source: Mark Zandi

Aussie Miracle Continues

Bloomberg details what happens when a workforce of around 11 million (~1/13th that of the United States) that focuses on commodities is located near a BOOMING China that happens to be in need of those commodities:

Australian employers unexpectedly added workers in October, pushing the nation’s currency to its highest level this year on speculation the central bank will raise interest rates for a record third straight month.

The number of people employed rose 24,500 from September, the statistics bureau said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg was for a decline of 10,000. The jobless rose to 5.8 percent from 5.7 percent.

Australia’s economy is expanding with “less spare capacity than earlier thought likely,” according to the central bank, as Chinese-led demand for resources spurs companies such as Chevron Corp. to hire workers.

Total employed persons flat year over year during one of the worst global economic downturns in modern times... pretty, pretty, pretty good.

Source: ABS

China is Ripping... Bears are Smoking Dope

The equity markets opened up huge this morning with strong news coming out of China. Bloomberg details:

Production in China rose 16.1 percent from a year before, the most since March 2008, the statistics bureau said today. The trade surplus almost doubled from September, to $24 billion, as a drop in exports eased.

Separately, Japanese machinery orders, an indicator of business investment in three to six months, climbed 10.5 percent from a month earlier, according to the Cabinet Office in Tokyo. The median estimate of 25 economists surveyed by Bloomberg was for a 4.1 percent increase.

And the analysis of the day goes to Jeffrey Saught, chief investment strategist of Raymond James.

You got people out there saying the bear market rally’s over, I think they’re smoking dope.

Source: Haver

The Job Market and Equities

WSJ details the "hopeful" job opening data:

The Labor Department's Job Openings and Labor Turnover Survey found that the number of job openings in the U.S. increased slightly in both August and September, the first two-month rise since early 2007. Hotels, restaurants, education and health care made the largest contributions; even such hard-hit sectors as manufacturing saw a rise.

The number of job openings per unemployed persons has "slid" to 6.11 in September from 6.17 in August. Unfortunately, we already know the numerator in this equation jumps 558,000 jobs in October, so we need an increase of at least ~90,000 job openings to keep that ratio steady (unlikely). More "broadly", the broad unemployment measure points to almost 10.6 unemployed / underemployed persons per job opening (down slightly from 10.67).



The report also details the number of individuals separated from their jobs that were in the form of a "quit" (i.e. power of the people!) vs "layoff" (damn corporations!). Not surprising, when the going gets tough, the layoffs win.



Taking the ratio of quits to layoffs, we get the 'quits to layoff ratio' (anyone have a better name?), which has a very strong correlation (0.69 monthly correlation going back to December 2000) to the S&P 500 index.



Based on history it does appear that the equity market has been a leading indicator of 'quits to layoffs', but does anyone think the "power of the people" outweighs the power of the "damn corporations" right now?

Source: BLS

Where are Long Bond Yields Going?

The Case for Higher Rates

• Massive debt issuance (over supply)
• Central bank diversification (less demand)
• Rebounding economy will bring inflation (decrease value of nominal debt)
• Near historical (recent history at least) low yields

The Case for Lower Rates

• Pension (liability driven investing) demand
• Flight to safety
• Excess capacity and labor supply will bring deflation
• When the yield curve has been this steep, rates have rallied (in recent history)

Lets take a deeper look into the last bullet points for each case (i.e. the low yields vs. the steepness of the yield curve). The blue line in the chart below shows the one way direction of the Long Bond's yield since the early 1980's, which on a stand alone basis points to much more "downside risk" than "upside potential", while the red line shows how cyclical the spread between the yield of the 3 month T-Bill and 30 year Treasury bond has been.



In the second case, if one were to believe in mean reversion, history would indicate the yield curve will flatten in coming months / years. A yield curve can flatten (i.e. the spread becomes smaller) due to a fall in the long-end or due to a rise in the front-end (there are two camps on whether the Fed will hike rates anytime soon... I personally don't see that happening).

So what does history show has been the cause of flattening... the long bond rallying or the short-end rising? To see, below is a colorful chart showing the steepness of the yield curve on the x-axis and the change in the 30 year yield, one year forward, on the y-axis. The various colors show different time frames to show that each "lumping" isn't all from one period (each point represent the end of month figure going back to January 1986).

Notice any patterns?



The first pattern I notice is that the change in the Long Bond's yield becomes much more unpredictable when the yield curve is mildly steep (the first chart shows it doesn't stay 'mildly steep' long) and tends to be more stable in periods when the yield curve is either very flat or very steep.

But the money shot is that when the yield curve has been VERY steep (i.e. more than 4%) the Long Bond's yield has rallied in all cases (19 out of 19 times) over the next year.



Why? The only thing I can think of is that the yield curve becomes this steep due to massive easing by the Fed. And why would the Fed cut rates so dramatically? A slow deteriorating economy, which has historically been the opportune time to own long dated Treasuries.

Germany: Improving Economy, Idea of Fast Turnaround Fading

Some insight into Germany, European's largest economy. Similar to the U.S. the current situation is rather ugly, but improving, while optimism for the future is stronger, but expectations for a fast rebound are fading.

Bloomberg details:

German investor confidence declined more than economists forecast in November as the prospect of expiring government stimulus programs and rising unemployment tempered expectations for economic growth.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped to 51.1 from 56 in October. The median forecast in a Bloomberg News survey of 39 economists was for a decline to 55.

ZEW’s gauge of the current economic situation rose to minus 65.6 from minus 72.2 in October. The DAX index and the euro fell after the report and the yield on German 10-year government bonds slipped 3 basis to 3.27 percent.

Source: ZEW

The State of States: They're Broke

Loads of good data and charts in the Rockefeller Institute's latest State Revenue report (hat tip Calculated Risk), but unfortunately it is all depressing.

Here's one such depressing nugget.



Source: Rockefeller Institute

The "Paradox of Deleveraging"

CNN Money with the details of Friday's continued decline in consumer credit outstanding:

Consumer credit fell in September for the eighth straight month, the longest streak of declines since the Federal Reserve started keeping records in 1943.

Total consumer borrowing fell a seasonally adjusted $14.8 billion, or 7.2%, to $2.456 trillion in September, according to the Federal Reserve.

Ed over at Credit Writedowns asks whether this decline in consumer credit shows actual deleveraging.

My baseline for deleveraging is Debt to Nominal GDP – when debt to GDP goes down, that shows deleveraging. For example, for the latest data released in September for Q2 2009, Private sector total debt to GDP (incl. financial services) in the U.S. was 292.2% of GDP. Because of the huge drop in nominal GDP, this was actually up from 283.0% when the recession began in Q4 2007. For households, the number was 96.8% in Q2 2009, up slightly from 95.9% at the end of Q4 2007. What this shows is that deleveraging has yet to begin in earnest as debt levels have remained relatively high even while GDP had collapsed.

Ed makes an important observation that debt to GDP levels are not improving, but I don't agree with his definition of deleveraging. Lets call our disagreement a 'chicken or the egg' problem:

• Did deleveraging NOT occur because GDP declined more than the level of debt outstanding?
• Or... Did deleveraging occur, which caused GDP to decline more than the debt outstanding?

There are many examples of this paradox in economics (I detailed Paul Krugman's Paradox of Thrift back in the summer... i.e. the more people save, the less overall savings is in the short run as the whole savings pie shrinks). As it relates to deleveraging, lets go back to Paul McCulley:

At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed. Put differently, not all levered lenders can shed assets and the associated debt at the same time without driving down asset prices, which has the paradoxical impact of increasing leverage by driving down lenders’ net worth.

Deleveraging has the ability to drive down GDP as well as asset prices. Our economy is heavily dependent on consumption, which in itself is dependent on debt financing, which in itself is dependent on asset prices that serve as collateral for the financing (or in the case of banks, improve their capital requirement ratios so they can put more capital to work). This is the reason why the Fed has intervened in an attempt to re-inflate asset prices with a wide assortment of initiatives.

Will it work? If the goal was to reinflate these assets back to 'fair value' following the deleveraging of 2008 than these new prices may be sustainable. The issue (in my opinion) is that the goal seems to be to reinflate asset prices (i.e. homes, financial assets, etc...) to pre-crisis "bubble" valuation levels. So far we've seen subsidized financing, tax incentives, private/public partnerships (i.e. TALF and PPIP), purchases by the Fed, etc... to make this happen. I am of the opinion that whenever these initiatives roll off, prices will once again (absent inflation), fall.

Is this bad? For GDP in the short run... absolutely. But in the long run we need debt levels as a percent of GDP to rebalance. There are only two ways to do this... decrease the numerator (i.e. delever) or increase the denominator (through growth or inflation). Thus, absent atrong growth and/or perfectly timed and scaled inflation, we need to accept the inevitable pain before we pump up prices to even more unsustainable levels.

Source: Federal Reserve

Civilian Hours vs. Real GDP

In response to my post detailing the decline in the per capita civilian hours worked per week by a member of the population (we need a better name for this), an anonymous reader points out that:

the graphs have basically been declining since 1999

He/she is right. Comparing that ten year period over the historical data series, we do see an unprecedented (going back to available data from 1964) decline. Below is the chart of the rolling ten year change in hours, along with corresponding annualized change in real GDP over the same 10 year time frame.



And we see the hours worked isn't alone... in looking at the data, ten year rolling real GDP growth is at an end of WWII low.

Source: BLS / BEA

EconomPics of the Week (11/6/09)

Opinion
Importing Goods for IOU's
Did We Learn Anything? Carry Trade Edition
Health Care Bill Passes House. Politics Still SUCK

Employment
Broader Unemployment to 17.5%
Civilian Hours per Week Cliff Dive Continues
ADP Job Loss at 203,000
Stay in School...
Job Losses... Again, Worse than Reported
Retail Sales... "Low-End" Bias Dissipating
Who Needs Workers Anyhow?

Assets
Anyone Ready to Ride the Golden Bubble?
Correlation Across Stocks Spikes w/ Sell-Off

Economic Data
ISM Services Slowly Expanding
Auto Sales Stabilize
Euro Zone Producer Prices Continue to Decline
What Goes Down... Must Come Up... Factory Orders Edition
ISM Manufacturing Points to Upside Surprise
Problem Banks on a Parabolic Rise

And the video of the week... MGMT's Weekend Wars:

Health Care Bill Passes Through House. Politics Still SUCK

As I've previously stated, I am all for revamping a broken (make that disaster) of a health care system. So, while I am pleased by the results, the results show how broken the political system is AND how much it SUCKS.

First, take a look at the votes. 218 votes were needed and a "whopping" 220 were received.



But that is not why the system SUCKS. The vote was close... fine. BUT, the divide between parties on an issue of this importance is. How can Democrats (across the board) be so for the idea and Republicans (across the board) be so against? And how is it remotely possible that only one Republican can think this is a good idea?

Actually, it looks like that Republican may not even have voted for the bill because it was a good idea. Shocker... the vote by Rep. Joseph Cao of Louisiana may help him get reelected. Per Salon's pre-vote article:

Cao is in a unique position, because he's a first-term congressman who represents a heavily Democratic district. As a result, he'll have a hard time getting reelected as it is, and though the GOP base would undoubtedly rise up against him, Cao can use a little bipartisan credibility with the Democrats in his district. The only reason he was able to win election in the first place is because he was running against Rep. William Jefferson, who was under indictment on federal corruption charges at the time of the vote.

And that... is another reason why politics SUCK.

Importing Goods for IOU's

Before we dive into the chart, let me explain what it shows....

I took the average 'real quantity index' of GDP and its components* (Table 1.1.3) throughout each of the past six decades to determine the "average" annual 10 year growth rate (i.e. not just Q3 2009 vs. Q3 1999, but Q3 1999 through Q3 2009 vs. Q3 1989 through Q3 1999). The result is the "average decades" performance of each component with the thought that this would allow us to see broader trends without the recent noise.

The way to interpret the chart is to view the absolute levels of each component (to see which areas are growing faster / slower) AND to compare those levels with that of GDP as a whole (if an area is growing faster than GDP, it is becoming a larger share of the economy).



And the Economic Trends Are?

Consumption and investment have grown faster than the broader economy as a whole over the past 50 years. In the past, this was mainly due to government spending becoming a relatively smaller part of the economy, which had continued to be the case until the most recent downturn. This trend has continued throughout this decade, with consumption and investment growing at an even faster pace than that throughout the 1980's or 1990's. All else equal, this should have meant a large jump in GDP, but all else was not equal.

Why Not?

The difference over the past decade has been that we've produced significantly less goods for the world (we've consumed them all ourselves), BUT continue to show strong demand for the world's goods and services (i.e. we're consuming those too). In other words, we're consuming at a greater rate, but not producing at a greater rate. This can be seen in the chart above... imports have grown 7% per year over the past two decades to meet our consumption demands, but while exports were able to keep up with that 7% pace throughout the 1990's, they slowed to 4% per year over the past decade.

The result?

Consumption and investment grew by 4% and 4.5% respectively over the past decade, but the economy only grew by a little more than 3%. Prior to this past decade, growth in imports was offset by growth in net exports, or in other words... the world was just becoming global. We produced goods/services for the world and they produced goods/services for us. Then, this past decade saw a sea change... on the margin we produce "IOU's" (i.e. debt or currency) for the world and they continue produce goods/services for us.

And that is not sustainable.

Source: BEA.gov

* C = Consumption; I = Investment; G = Government Consumption; Ex = Exports; Im = Imports; GDP = GDP

Stay in School...

Source: BLS

Civilian Hours per Week Cliff Dive Continues

Employment to population ratio (i.e. percent of the population working) cliff dive....



Multiplied by the number of hours worked per week cliff dive...



Equals the least amount of hours worked (19.3 hours from 19.4 hours in September) per population member since... well ever recorded (since 1964)...

Source: BLS

Job Losses... Again, Worse than Reported

Forget about the 190,000 job loss seen in the establishment survey, the household survey lost a whopping 558,000 jobs in October. The difference per The Big Picture:

As we have discussed all too many times, the Household survey measures:

• Agriculture and related employment
• Uncompensated Workers
• Unpaid Family Employees
• Part Time Workers
• Workers absent without pay from their jobs
• Self employed, Work-at-home Contractors

None of which are counted in the Establishment (Non-Farm Payroll) Survey.

Yes, a jump of almost 4% in the number unemployed in one month after employment had already reach 9.8%... frightening.

Source: BLS

Broader Unemployment to 17.5%

Source: BLS

Retail Sales... "Low-End" Bias Dissipating

Same store retail sales were up 1.9% from the same period of 2008. Interestingly enough, the bifurcation between low-end (outperforming) and high-end (underperforming) is dissipating. Below we can see strength not only in "low-end" retailers like TJX (parent company of TJ Maxx and Marshalls), but in high-end retailers (i.e. Nordstrom) for the first time in a LONG time.



Those underperforming now? Those stuck in the middle of the road (i.e. JC Penney) and those with idiotic management (i.e. Abercrombie, which is just NOW abandoning its "we won't reduce prices in the worst consumer led recession in 50 years" mantra).

Who Needs Workers Anyhow?

Marketwatch reports:

U.S. companies increased their output in the third quarter even as they slashed working hours, driving productivity up at a 9.5% annual rate in the quarter, the Labor Department estimated Thursday.

Unit labor costs - a key measure of inflation - dropped at a 5.2% annual rate in the quarter. Productivity is output divided by hours worked. Output rose 4% annualized, while hours worked plunged 5%. Real hourly compensation increased at a 0.2% annual rate.

With productivity high and real compensation low, companies captured the lion's share of the benefits of higher productivity in the form of profits. Inflationary pressures remained very low.

The huge increase in productivity explains why the U.S. economy could grow at a 3.5% annual rate in the third quarter even as jobs were being lost at a rapid pace.

Obviously at some point we'll need to get everyone back in the labor force to support end user demand . That is unless we create a welfare state in which the working class supports the non-working class... or is that what we already have?

Source: BLS

Did We Learn Anything? Carry Trade Edition

In theory, it does look like hedge funds are BACK, though it is a bit concerning that EVERY strategy (except those neutral or short equity beta) has been a winner. Back to this in a moment...



While many hedge funds make claims that they don't have any equity beta and the returns are alpha driven, as a group that is certainly not the case. That said, over the long term these funds have done exceptionally well, providing equity like returns when equity markets were up and dampening the downturn when equities sold off.



The problem for hedge funds comes when the correlation among all risk assets approaches one (i.e. the EVERY strategy performing in line issue - see the reverse of the top chart from last November). When 'all assets' sold off in the Fall of 2008, leverage became an investors worst enemy as it meant forced selling to meet liquidity needs. It was only the MASSIVE injection of liquidity from the Fed that stopped the risk asset sell-off downward spiral that had the potential to take out any and all levered investors (along with hedge funds, we can throw banks, endowments, and even homeowners in the mix).

My concern now is that it appears we haven't learned anything from the turmoil that happened all of 8-12 months ago. As Nouriel Roubini recently pointed out, the correlation of all risk assets has approached one as all assets have all moved in one direction... up.

Why? One reason is the world's investors are turning to the US dollar for their carry trade currency of choice (if you haven't read it yet... READ IT). At a high level it goes like this... the dollar's decline is a one way bet. So why wouldn't a foreign investor:

• Borrow the dollar at a 0% rate
• Plan to pay the dollar back at some point in the future when it is worth 10-20% less in their local currency
  
• Use that money to invest in ANY risk asset (as long as the asset doesn't lose more than the gain on the dollar short, the investor wins... so why not ratchet up the risk?)

The issue is that at some point the dollar will stabilize (or gain in value), increasing the "real" cost of borrowing the dollar.

BUT... if the correlation of assets purchased is near one on the way up, it is sure as hell going to be that high or higher on the way down. And what happens to all these investors that are attempting to leave the same exit door at the same time? Massive re-purchasing of the dollar and massive selling of any risk asset... joy.

Source: Barclay Hedge

ISM Services Slowly Expanding

No upside in employment in the ISM Services data that we saw in ISM Manufacturing on Monday. Per the ISM:

WHAT RESPONDENTS ARE SAYING ...

• "General economic tone is still 'wait and see.' Capital outlays are postponed for durable goods." (Health Care & Social Assistance)"Cost-cutting efforts continue." (Transportation & Warehousing)
• "Overall business activity increasing — forecast even better market conditions in the coming months." (Construction)
• "Business climate remains encouraging, but recovery will remain slow in rebounding." (Professional, Scientific & Technical Services)
• "The weakening U.S. dollar contributing to upward pressure on commodity prices." (Wholesale Trade)

Source: ISM

ADP Job Loss at 203,000

The Good News
Job loss is slowly decreasing.

The Bad News
We are still losing jobs at a historically alarming rate even with unemployment approaching 10% (i.e. "low hanging fruit" were already laid off) and the figure for manufacturing seems to indicate that the ISM manufacturing job gain may have been an aberration.



Source: ADP

Euro Zone Producer Prices Continue to Decline

Substitute 'United States' for 'European Union' and you'll get an idea of why the Fed will not be raising rates this afternoon.

Forbes details:

Producer prices in the 16 countries using the euro fell 0.4 percent against August, leaving them 7.7 percent lower than a year earlier, European Union statistics agency Eurostat said.

Cheaper oil served as the main reason behind the monthly and annual declines as energy costs fell 1.9 percent against August and 17.6 percent compared with September 2008.

Producer prices are important to the European Central Bank because they show inflationary pressure, or the reverse, early in the pipeline. Economists say many companies cannot raise prices because of excess capacity and intense competition.

The ECB, which meets to decide on interest rates on Thursday, wants annual consumer price inflation to be just below 2 percent but it was at -0.1 percent in October, the fifth straight month of falling prices.

Source: Eurostat

Auto Sales Stabilize

iStock Analyst with the details:

With the exception of Chrysler, most major automakers saw improved U.S. sales performance in the month of October. Despite analysts expectations of declining sales, Ford (F) and General Motors both surprised to the upside with gains of 3.1% and 4.1% respectively. This was GM's first year over year gain since January of 2008. Nissan reported sales grew by 5.6%, and luxury brands like Mercedes Benz (DAI) and Porsche also had better results than last year.

Of course, we are aware that these results are compared to some pretty wretched sales from the post Lehman collapse a year ago. For example, GM sales fell 45% in October of 2008 largely due to a lack of available financing in the midst of the credit collapse. However, it appears that this does show that perhaps the sales trends are starting to improve for automakers. According to a survey of analysts by Bloomberg, the annual sales rate for the the month of October topped 10.3 million vehicles. The 10 million vehicle benchmark is an important one and October is the first month of 2009 to top this benchmark without government incentives skewing sales results.

Click for Larger Chart

Source: Autoblog

Anyone Ready to Ride the Golden Bubble?

Gold is now up more than 4% over the last two trading days and showed strength during last week's equity and commodities sell-off. BUT, looking at the below chart, it is possible that "we ain't seen nothing yet".



As I detailed back in March, I have been "Ready to Ride the Golden Bubble", not on logic, but on the frenzy.

I've learned my lesson with the Internet Bubble (and recent housing bubble) that most people are illogical and invest based on fear (sometimes fearing loss, sometimes fearing they will miss out on the next big thing) and money can be made even if the premise makes absolutely no sense in the long run. As long as fear reigns supreme and equity markets remain volatile, there will be plenty of people convinced gold is the only "safe" investment.

So if the train is leaving... is anyone else on board?

What Goes Down... Must Come Up... Factory Orders Edition

Marketwatch details:

Orders for U.S. manufactured goods increased a seasonally adjusted 0.9% in September on gains in machinery, autos, defense goods and chemicals, the Commerce Department estimated Tuesday.

Factory orders have risen in five of the past six months, but are down 13.9% in the first nine months of 2009 compared with the same period a year ago.

Factory orders fell 0.8% in August and rose 1.4% in July. Read the full report. September's 0.9% gain was stronger than the 0.6% increase expected by economists surveyed by MarketWatch.

The report is consistent with other data showing the factory sector bouncing back from the worst recession since World War II. On Monday, the Institute for Supply Management reported that its purchasing managers' index rose to 55.7% in October, the highest in two years.

Source: Census

Update:

Reader / Blogger GetYourselfConnected asks:

Any ideas on why the machinery component was so large? I am not aware of any seasonal factors, so why the big jump?

The Business Insider provides an answer and repeats the question (bold mine):

It's worth noting that new orders growth for Machinery was a strong 7.9% (far right column, below, which shows September vs. August growth), driven by a massive 47.4% jump in orders for construction machinery. Yes, the data is seasonally adjusted, and there appears to have been a large jump even on the non-adjusted numbers. Thus while data can be volatile, one wonders what exactly caused the massive jump here.

One has to remember how low a point we're rebounding from. Even with this jump, machinery orders were down 28.8% YTD through September and construction machiney is still down 64.5% YTD through September.

In $$ terms, the $23.5 billion in new machinery orders means new orders total $80 billion less YTD than the same period in 2008.

ISM Manufacturing Points to Upside Surprise

Or at least a bottoming in the manufacturing downturn. Credit Writedowns with the bullish details:

If you have been wondering whether a statistical recovery is at hand, today’s ISM manufacturing report should be the clincher. The report was definitely bullish with the ISM index rising to 55.7 and sub-components supporting the understanding that the manufacturing sector is expanding. This is quite a contrast to last month’s weak data and demonstrates that last month was a one-month aberration in what should now be seen as a full-blown technical recovery.

One can easily see the huge jump in production, but importantly there was still a decline in inventories. The importance? Back to Credit Writedowns:

But, from my perspective, it is inventories which are the most bullish data points. The inventories data show that inventories in the manufacturing sector were still being purged in October even while production is increasing. That means that inventories are likely to make a huge contribution to GDP going forward in Q1 and Q2 of 2010. GDP could again surprise to the upside.

But that's not all... look at employment. In positive 'expansionary' territory. Lets go to Calculated Risk to see how that equates to this Friday's employment report:

According to the BLS, manufacturing employment has declined by about 50 thousand per month for the last 3 months. The ISM survey suggests that manufacturing employment might have increased in October. The equation suggests an increase of about 4,000 manufacturing jobs in October (with significant variation) - not much, but that is far better than losing 50,000 jobs per month.

While any bottoming in manufacturing is nice to see, the sector is a small (and shrinking) component of our overall economy, thus it will be interesting to see how Wednesday's ISM Services data plays out.



Source: ISM / GPOAccess

Update:

Reader Charles adds to the confusion, explaining why the strong ISM report which initially resulted in equity markets rallying, may have sold off from highs:

Probably bad news then for the bulls of financial assets - stronger economy means weaker QE and money printing in the near future - no wonder stock market rally lasted on 2 hours. Market is playing out the reverse of the last 7 months' rally, when the worse news are accompanied by more rally in anticipation of more stimulus and QE. Upside down world as always.

Don't fret Charles, looks we may have another stimulus to take care of any down market. Lets just hope the "target" of this stimulus is related to long-term growth of the actual economy...

Correlation Across Stocks Spikes w/ Sell-Off

Zerohedge shows an interesting chart, though the explanation of what it is... is well, wrong. Zerohedge states:

The implied correlation reading between all asset classes has hit a 6 month high at 65.50, a jump which mimics the surge in the VIX. High implied correlation readings are indicative of crash risk/expectations.

Actually the ICJ index they detail does not show the implied correlation between all asset classes, just the narrower sectors that make up the S&P 500. Per the CBOE:

The CBOE will disseminate two indexes tied to two different maturities – January 2010 (“ICJ”) and January 2011 (“JCJ”). Both ICJ and JCJ are measures of the expected average correlation of price returns of S&P 500 Index components, implied through SPX option prices and prices of single-stock options on the 50 largest components of the SPX.

That said, the chart is interesting in that it shows the correlation of the various sectors of the S&P 500 approaches one during sell-offs (important for those who believe they are getting diversification by investing in an index vs. individual stocks). In addition, the recent sell-off has been slightly more broad than previous "mini-corrections" we have experienced over the previous 6-7 months.

Source: Bloomberg

Problem Banks on a Parabolic Rise

According to ProblemBankList.com (there really is a website for everything) details what a problem bank is:

The Problem Bank List is the FDIC’s internal list of financial institutions that the FDIC believes are in danger of failure.

Calculated Risk reader surferdude808 with the details:

The Unofficial Problem Bank List crossed a major threshold this week as 500 institutions are now listed.

The list grew by a net 18 institutions this week and nearly $44 billion in assets were added. Most of the increase comes is a result of the FDIC finally releasing its actions for September 2009. It will take another month to get their actions for October 2009.

And the chart...



Source: Calculated Risk