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RAPID RESPONSE Comments (Normally available by subscription)...
HERE ARE A FEW ECONOMIC NEWS ITEMS ABOUT WHICH I RECENTLY COMMENTED.
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CV Econ re PI and PCE for August 2011 (9/30/11)
1. The numbers. Personal income fell 0.1% for August while total personal consumption expenditures grew just 0.2%. These are nominal numbers. In inflation-adjusted terms, disposable (after-tax) personal income contracted 0.3% and consumer spending went unchanged.
2. Uh, let me restate that. Inflation-adjusted, after-tax income for July was reduced one notch, to -0.2%; real consumer spending was also taken down one-tenth of a percent, to 0.4%.
3. The job-income connection. It’s easy to understand the August PI and PCE results: no jobs = no income. Wage and salary disbursements—the largest piece of personal income—contracted $11.8B in August. For August, payrolls went unchanged and the workweek declined. And another corollary: no income = no spending. Corollary 3: no income gains = no tax revenue gains. Current taxes paid retreated $2.3B in August and contributions for social insurance dipped $1.3B. This is pre-Econ 101 (in other words, accounting).
4. Indulgent consumers. Maybe the only bright spot of this report was the fact that the personal saving rate fell from 4.7% in July to 4.5% in August. If consumers were really running scared and decided to throw in the towel on this economy, they would have raised their saving rate—which would have crushed consumer spending. But the patience of consumers and businesses is not infinite. Policymakers had better get their acts together and start doing things to inspire (versus destroy) consumer and business confidence.
5. Profit surprise, interest shock. The profits of nonfarm proprietors grew $5.7B in August, the largest increase since February. Maybe their large corporate brethren are doing as well in Q3. On the other hand, interest income plunged $11.8B for August after the same decline in July. This easy money policy is not costless—ask any retired person who depends on the fixed income from deposits or money market funds.
6. When is low inflation still too much inflation? When it still exceeds income growth. The price index for all consumer spending advanced 0.2% in August; ex food and energy, it edged 0.1% higher. But this still surpassed the growth of after-tax income, which was zero.
7. Arithmetic. August real consumer spending stood just 1.1% (AR) above the Q2 level of spending. This is about 70% of the economy, so this is a lock that Q3 GDP growth will again be very disappointing.
8. Final comment. This is not the stuff of which expansions are made. There is now precious little buffer between growth and decline, expansion and recession. Maybe with the debt ceiling debacle and Hurricane Irene behind us, and with lower gasoline prices at the pump, things might now perk up a bit.
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CV Econ re FOMC (9/21/11):
1. What they did. On the level of the federal funds rate—nothing. (The target federal funds rate is 0 to 25 basis points. There were no requests for action on the discount rate, which now stands at 0.75%.)
2. For as long as the eye can see? Well, at least through mid-2013, the Fed expects an “exceptionally low” level of the fed funds rate to persist.
3. The Fed does a Chubby Checker! A new wrinkle—Operation Twist. This is a policy throwback to the mid-1960s, where the Fed then tried to give a little boost to the economy by concentrating some of its Treasury purchases on the long side of the maturity spectrum. This was expected to lower long-term Treasury rates a bit, and other rates that price off these Treasuries. In turn, housing and capital spending might be spurred by the reduction in mortgage rates and corporate bond yields. Hence, in principle, monetary policy becomes “more accommodative.” Between now and next June, the Fed expects to buy $400B of Treasuries with terms of 6 to 30 years. To fund these purchases, the Fed will sell an equivalent amount of Treasuries with maturities less than 3 years. Note to emphasize: this policy does not expand the balance sheet of the Federal Reserve. There is no QE here.
4. All together now? No! Three voting members of the FOMC opposed the policy, saying they did not support additional policy accommodation at this time. Let’s turn this around: by implication, three members of the FOMC believe (even if they won’t say) that this policy raises the risks of inflation.
5. The Fed’s economic assessment. Economic growth remains slow; the unemployment rate remains elevated; and some pick-up of business is expected, but there are “significant” downside risks to the economy. Implied message to business: with significant downside risks to the economy, don’t hire now. (What? Are you going to bet against all those smart people in Washington?) Gee, doesn’t that negate the purpose of the policy accommodation?
6. Blinders? Nothing was said of the deteriorating financial situation in Europe, which in terms of the world economy, is now the 800 pound gorilla in the room.
7. ClearView’s assessment. This is benign desperation.
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CV Econ re Housing starts (9/20/11):
1. The numbers. Housing starts fell 5.0% (to a 571k annualized rate) for August, but building permits grew by 3.2% (to a 620k pace).
2. Range-bound. The pace of housing starts in August fell in to the middle of the range of building rates seen over the last year. Hence, nothing has changed. The industry continues to be plagued by the huge overhang of foreclosures and distressed properties.
3. Hint, hint. By far, the greatest weakness in starts (-29.1%) was suffered in the Northeast—which hints at some adverse effects from Irene (and I’m not talking about my 100-year old Aunt Irene).
4. Multi-family mambo. Some people have suggested that the multi-family portion of new home construction could see a surge of activity as displaced, former homeowners need to resettle in apartments. That thesis did not pan out in August, as starts of multi-family structures contracted 12.4% in August.
5. Downstream. Total units “under construction” in August dipped 1.2% and “units completed” decreased 2.7%. This suggests that residential investment will not make any significant contribution to Q3 GDP growth.
6. Summary. There IS another demographic demand-driven housing boom out there, but it is maybe 2 years off…
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CV Econ re Industrial Production (9/15/11):
1. The numbers. Industrial production for August edged 0.2% higher. July’s results, showing a 0.9% gain in output, were not revised. Capacity utilization inched up 0.1%, to 77.4%.
2. But wait! Utility output reversed course in August, dropping 3.0% (some adverse hurricane effects?). That took more than three-tenths of a percentage points off total industrial production. The real news for August: manufacturing production expanded 0.5%, and this follows a 0.6% July increase. These are good numbers. Manufacturing output in August stands an annualized 4.5% above the Q2 level of production.
3. NBER view. “Recession” is a technical concept, not a touchy-feely thing. Industrial production is one of the four main economic measures the National Bureau of Economic Research (NBER) uses to judge whether the economy is expanding or in recession. “Industrial production” says the economy is still expanding.
4. Are all oars pulling? No. Output in August expanded in 7 of 11 durable goods manufacturing industries, but only 2 of 8 nondurable industries. Doing well: primary metals = +1.2%; computer/electronic products = +1.3%; motor vehicles/parts/ = +1.7%; aerospace = +2.2%; furniture = +1.2%; and petroleum refining = +1.1%.
5. Investing in “America.” Capital spending appears to be continuing to ride high. The output of business equipment grew 0.7% in August after a 1.1% July gush. In inflation-adjusted dollar terms, business equipment production is up 7.3% (AR) versus Q2—which will help hold up Q3 GDP.
6. Autos to rev up? Motor vehicle output is probably still being constrained by supply chain problems originating in Japan. As production comes back on line in Japan, auto output should see further gains by the end of the year.
7. Well, well! Oil and gas oil well drilling is doing great—up 2.2% in August, following a 2.4% July increase. Y/y = 21.8%. It should be doing well at these prices. (Just think how well it could be doing—producing good, high-paying jobs--if there were not so many stumbling blocks put in front of the industry!)
8. Back on course. “Selected high-technology industries” suffered an unusual 0.9% reduction in output in July, but bounced back 1.5% in August.
9. Overall take. This was a good report—reflecting an economy doing better than all the gloomy headlines we are bombarded with almost daily.
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CV Econ re CPI for August (9/15/11):
1. The numbers. The Consumer Price Index (CPI) for August jumped another 0.4%, sequentially. This is on top of a 0.5% July surge. The latest rise puts the y/y change at 3.8%. Core prices (ex food and energy) advanced 0.2% in August, which lifted the y/y change to 2.0%.
2. Memo to Fed. The Fed has proclaimed the “optimal” inflation rate to be a “bit less than 2%.” Well, even core inflation is beyond that level. Inflation is now sub-optimal. I like to remind people that since inflation for the next year will not be -4%, so as to negate last year’s rise, Americans have forever lost another 4% of their dollars’ purchasing power. That’s significant. The Fed, by design or not, keeps debasing the value of the dollar.
3. Nondiscretionary spending. Energy prices (9% of the market basket) grew 1.2% in August while food prices (14% of the basket) swelled 0.5%. These increases are faster than the rate of income growth, so they are crowding out other spending.
4. No more zero bias. “Owners’ equivalent rent of primary residence,” (the “cost” of renting your own home, even if you own it) which makes up 25% of the market basket, advanced 0.2% in August. At this rate, THIS creates a bias towards 2.4% annual inflation, which as per above, is “sub-optimal.” Should the Fed now tighten??? (Of course, it won’t! Rates will remain “exceptionally low” until mid-2013, according to the FOMC. What will THAT do to inflation???)
5. Tamed tiger? Medical care costs went up only 0.2% in August, and the y/y is just 3.2%. Are medical care costs now under good control? Why are health insurance costs going up much faster? Does it have something to do with Obama-care?
6 Bonus. Weekly initial claims for the week ending 9/10 rose 11k, to 428k. The 4-week moving average went increased 4k, to 420k. Claims are moving in an unfriendly direction. Weekly initial claims figures above 400k are typically associated with a disappointing degree of new job generation. We need to see claims drop well below 400k to get excited about employment increases, and what follows the attendant income generation—consumer spending. We are not there yet.
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CV Econ re Retail Sales and PPI for August (9/14/11):
1. The numbers, part 1. Retail sales for August went unchanged. Ex autos, sales inched up 0.1%. Retail sales for July were revised lower, now showing a 0.3% rise, as compared to a 0.5% increase, as originally reported.
2. Political toll? Might as well throw in some bad weather, too. Big Government and Mother Nature both took some wind from the spending sails in August. Consumers clammed up, fearing negative consequences from a possible partial government shutdown, as an agreement on the debt ceiling was hashed out. At the end of the month, hurricane weather conditions temporarily shut down many retailers in the mid-Atlantic and northeast states. Deferred purchasing and storm damage repair could spur a rebound in September sales.
3. Back-to-school. A wash-out? Sales at apparel stores = -0.7%; general merchandise stores = +0.1%. (But be cognizant of the arithmetic. One day of sales, if sales were equally distributed across a month, is 3% of totally monthly sales. Maybe one-fifth the U.S. population is concentrated in hurricane-affected states. So when you do the math, being closed for one or two days can clearly move the needle in the national retail sales tally.)
4. Cruising along. Motor vehicle sales dipped just 0.3% in August, despite all the political drama and stormy weather. These sales are poised to accelerate, once Toyota and Honda restock dealer lots, which will occur during Q4. We should expect to see sales rise to, or even slightly above, a 13 million unit pace.
5. Overall assessment. Weak, but with extenuating circumstances. Given those circumstance, not consistent with “recession.”
6. The numbers, part 2. Producer prices for Finished Goods also went unchanged for August (y/y = +6.5%). Core (ex food and energy) Finished Goods prices advanced 0.1% (y/y = +2.5%). More detail:
Intermediate Goods total = -0.5% (y/y = +10.3%); core = -0.1% (y/y = +7.6%);
Crude Goods total = +0.2% (y/y = +18.4%); core = +1.6% (y/y = +24.1%).
7. Pass-through a thing of the past? Well, not totally. But the pressures in the supply chain are now diminishing. The y/y changes are now starting to diminish. In fact, ALL the y/y changes of total and core goods, at all stages of processing, decelerated in August. The inflation tide is now going out. This should be the story for the rest of the year.
8. I like these! Wholesale passenger car prices for August = -0.4%. Capital equipment prices = -0.1%. Electronic computers = -2.6%. Crude petroleum = -11.3%.
9. I don’t like these. Finished consumer foods for August = +1.1%. Intermediate foods/feeds = +1.7%. Crude foodstuffs = +4.7%.
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CV Econ re Employment for August (9/2/11):
1. The numbers. Nonfarm payrolls went unchanged (zero!) for August. To add insult to injury, July’s stated payroll gain of 117k was pared back, and now shows an increase of 85k. The unemployment rate for August remained unchanged, at 9.1%, but another 165k persons dropped out of the labor force.
2. “You may not get your Social Security check.” This is what happens when the politicians scare the hell out of the public with their gamesmanship over the debt ceiling, and installing a fix that merely kicks the can down the road. (The spending cuts are back loaded.) This is a vote of “no confidence” in government. It will not be the last such vote.
3. For the record. The numbers on the economy just get worse. Part-time employment increased 430k. The under-employment rate (U-6) increased to 16.2%. This is big, because it applies to the entire workforce: average weekly hours dropped one-tenth of an hour, to 34.2 hours. (This may not sound like much, but it is a 0.3% reduction in the labor input into the economy, and an equivalent reduction in pay to workers.) Average hourly earnings fell 3 cents. Hence, average weekly earnings, which takes into account the wage rate and the workweek, receded 0.4%. That certainly won’t help the case for back-to-school sales. Expect to see another month of weak personal income and possibly weak industrial production
4. Details. Manufacturing jobs = -3k; construction = -5k; retail trade = -8k; government = -17k. The strike by Verizon workers took 45k off the August payrolls. Even “temporary help” increased a very slim 5k. But the health care sector of the economy continues to expand; in August, it added 36k workers.
5. Is there ANYTHING positive in this report? Well, yes. The Household Survey (which is used to determine the unemployment rate) found there to be a 331k rise of employment! IF this were the payroll number, we would all be jumping for joy.
6. Recession? A recession is a broad based decline of the economy lasting more than a few months. Even with no change in employment, the economy can advance with productivity increases. Another thing: employers are NOT laying off workers in increasing numbers; they are just not hiring. So we are probably not in another recession at this time. But we are uncomfortably close to one, with very little buffer.
7. Policy prescriptions? QE3? Pleeezze! You want to see the price of gold zoom to $2500/ounce? A big spending program for infrastructure? Pleeezze! You mean to tell me you are going to help the economy by creating a bunch of temporary construction jobs and pay for it by BIG future tax increases? The only comprehensive solution to re-energize business and new job creation I’m aware of, at virtually no cost to the budget, is the ClearView Economics Plan.
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CV Econ re ISM for August (9/1/11):
1. The numbers, part 1. The summary “Purchasing Managers’ Index (PMI)” from the Institute for Supply Management (ISM) slid to 0.3 points for August, to a level of 50.6. The ISM says a figure of “50” is consistent with “no change” of manufacturing. The August reading of 50.6, however, would also be consistent with a 2.8% rate of increase of real GDP, according to the ISM.
2. “Ain’t no cure for the summertime blues.” BOTH the new orders (49.6) and production (48.6) components of the survey showed modest degrees of contraction. The backlog of orders (46.0) contracted more. Apparently, the same factors that devastated consumer confidence in August (sliding stock market prices and political turmoil?) took their toll on factory executives, as well. There are a lot of consumers and business execs sitting on the fence.
3. “See you in September?” The stabilization and moderate rebound of stock prices could help firm up confidence. And now, the Administration is talking about creating job-stimulating policies. So I would not throw in the towel yet, either for manufacturing or the economy.
4. Time out. Aside from vicious shocks to the economy, recessions do not tend to be random events. They tend to be the reactions to built-up excesses in the economy in the areas of credit, inflation, and the labor markets. But these areas are not exhibiting the kind of excesses normally associated with recessions. That’s probably why the PMI did not plunge below 50. While there is no doubt that the economy is struggling, I nevertheless think a return to recession—absent some shock—is not the best guess.
5. A good sign, a better sign, and a bad sign. According to the purchasing managers, their companies are still hiring. (The employment component of the survey was 51.8 for August.) Price pressures are continuing to wind down, as the Prices component of the survey fell 3.5 points, to 55.5. Last year’s bubble of prices pressures has nearly worked its way all the way through the supply chain. National inflation should moderate in this second half of the year. Perhaps most troubling in today’s report is indication of a loss of world growth momentum. The Export component of the survey almost went flat (50.5, down 3.5 points). Meanwhile, imports apparently picked up steam (55.5, up 2 points), suggesting a growth sapping increase in the trade gap. The U.S. economy needs good export growth to keep its head above water.
6. The numbers, part 2. July construction spending retreated 1.3%, but this follows a big upward revision for June (which now shows a 1.6% increase). Private residential construction spending dropped 1.4%, and public construction spending—constrained by budget difficulties—contracted 2.1%. Private nonresidential construction spending in July edged 0.4% lower, but July still stood an annualized 11.7% above its Q2 level.
Bonus # 1. Nonfarm business productivity contracted 0.7% (AR) during 2011:Q2. This follows a 0.6% (AR) loss of productivity during Q1. Simply stated, what these figures show is that the hours of labor input into the private economy grew faster than the output of the private (non-government) side of the economy. A loss of productivity often accompanies very sluggish economic growth—which was the case for the U.S. economy during the first half of 2011. Over the last full year, productivity growth was a positive 0.7%. Hourly compensation expanded at a 2.7% annualized rate during Q2 after a 5.6% pace in Q1. This lifted “unit labor costs” (labor costs adjusted for productivity) 3.3% in Q2 and 6.2% in Q1. Significant increases in unit labor costs can create a bias towards higher inflation.
Bonus #2. Weekly initial claims for the week ending 8/27 dipped 12k, to 409k. The 4-week moving average inched up 2k, to 410k. In recent weeks, weekly initial claims have bounced around a level just above 400k. We are not seeing any continuing trend downward. This suggests that both job growth and overall economic performance is likely to continue to disappoint.
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