The Washington Lobotomy Factory Is In High Gear

From the NY Times:

As Mr. Obama made his comments at the announcement of the pay freeze, the bipartisan commission he established in February to propose ways to reduce the growth of the national debt entered a final two days of negotiations over combinations of spending cuts and revenue increases. In a sign of the struggle to find a compromise that could attract Democratic and Republicans votes, the commission chairmen — Alan K. Simpson, a former Senate Republican leader, and Erskine B. Bowles, a chief of staff to President Bill Clinton — decided to meet privately with members one at a time on Monday and Tuesday instead of convening all 18 members.

The Republicans on the panel are generally opposed to raising taxes and the Democrats to big changes in Medicare, Medicaid and Social Security.

The above emboldened words illustrate the stupidity of Washington. Simply put there is no way to balance the budget without two things happening: taxes going up and some kind of compromise on health care spending. There is just no way for meaningful change to happen without both parties compromising on their key issues. So, expect the problem to continue.

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State Tax Revenues improving -- but not enough (w/ update)

- by New Deal democrat

In terms of the normal progression of leading/coincident/lagging data, the Great Recession and the recovery thereafter have almost completely given the lie to the proposition that "it's different this time." But one thing that has been different about this recovery, and has had a very important effect on the generation of jobs, was the abysmal failure of the Congress to extend further aid to the states. Faced with nearly a 20% decline in revenues since the peak of the economy, the "50 little Hoovers" that Paul Krugman has mentioned so often had little choice but to cut into sinew and bone to come up with balanced budgets. To visualize the difference this has made in the jobs recovery, here is a graph of job growth since the bottom last December, in private industry (blue) vs. government (green) and the composite nonfarm payrolls (red).



While the census added and then subtracted 500,000 jobs between February and September, its net affect was zero. Thus the loss of 250,000 government jobs this year is real, and its effect on overall job growth is obvious.

One important question is, whether there is further bloodletting in store for the states, or have their budget woes hit bottom? The Rockefeller Institute reported several months back that overall state tax revenues probably bottomed out at the end of the first quarter or beginning of the second quarter this calendar year. But a crucial test - the holiday season - is upon us. The Tax Foundation reports, citing the Rockefeller Institute, that

November and December are the crucial months for state sales tax collections, which make up a third of state revenues.

Although the Rockefeller Institute has yet to report on third quarter state tax revenues (not just sales tax, but personal and corporate income taxes, and other miscellaneous taxes), the following report by Stateline (a nonprofit, nonpartisan online news site funded by the Pew Foundation that reports on state issues) suggests that the improvement in state tax revenues won't be able to make up for continuing shortfalls even next summer:

[S]tate officials are reporting steady although modest gains in monthly tax collections, a sign that the nascent economic recovery is gaining strength after three years of plunging sales tax revenues that decimated state budgets.

In recent days, officials in 27 states have said that year-over-year monthly revenues are increasing and some are forecasting a rise in tax receipts in state budgets for the fiscal year that begins July 1.... Improved sales tax receipts are leading the revenue recovery in most states.... Corporate tax revenue also is up in many states, consistent with the rise in business profits nationally. ...

Still, there is a flip side to [states'] recovering revenue picture that puts the situation in all states in perspective. [States] may appear to have ... extra cash next year, but most of that will be needed to make up for the loss of federal stimulus money and mounting Medicaid and public pension costs....

Most states do not have surplus revenues, which means they will have to cut spending, raise taxes, borrow or tap reserves to balance their budgets for the fiscal year that begins July 1. NCSL is projecting that states will have a total of $72 billion in budget gaps in 2012.... Many states with revenue increases still are confronting huge budget shortfalls that guarantee years of fiscal turmoil. [For example,] California may have escalating sales tax receipts, but its budget shortfall will exceed $25 billion for the fiscal year starting July 1....

In other words, if Stateline's report is correct, it appears that the combination of the total expiration of federal government assistance (a given at this point), mounting costs, and the ending of one-off tax gimmicks mean that the states (and in particular California) are likely to need to make further cuts next summer, a very depressing prospect, even if the level of those cuts are nowhere near what has been necessary in the last year.

UPDATE: As if they were reading my mind, the Rockefeller Institute released their preliminary report for the third calendar quarter of 2010 today. From their news release:

Tax collections increased by 3.9 percent in the third quarter of 2010, compared to the same period a year earlier, based on data from 48 states. Of states reporting, 42 showed gains in overall tax revenues. Collections improved for the two largest revenue sources — personal income and sales taxes — while corporate income tax revenues declined slightly.

The growth in overall collections is partly driven by new tax laws in several states, but is also due to a slowly recovering economy, according to report authors Lucy Dadayan and Donald Boyd. Yet they cautioned that difficult times for states’ fiscal conditions have not ended.

“The state tax revenue picture in the first three quarters of calendar year 2010 represented significant improvement from the collapse of the preceding quarters,” they write. “Still, the immediate outlook is for revenue collections significantly below prerecession levels, and growing spending pressures. The overall picture remains: States will face continued, significant budget challenges in fiscal 2011 and beyond.”

The full report notes that total state tax revenues were 7.0% below the third quarter of 2008 - which was the last quarter of YoY growth. Since the Rockefeller Institute only gives YoY figures and does not attempt seasonal adjustments, it is impossible to know absolute, seasonally adjusted or even annual numbers, but my best back of the envelope estimate is that with this quarter, state sales taxes have made up about half of their percentage shortfall from peak.

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U.S. Economic Status, Part II: Manufacturing

Manufacturing activity was one of the primary drivers of the latest expansion. It was one of the first economic areas to show a rebound. However, over the past few months it has since slowed a bit, although it is hardly crashing. I believe the best description of the growth in this sector is "moderating."





Overall industrial production has bounced back from its post recession lows. While the last four months have shown slower growth, note that periods similar to this were evidence in the previous expansion and are also evident from a longer view of the data (which goes back to 1910).


Capacity utilization cratered during the recession, printing its lowest level in almost 40 years. However, it too is bouncing back.


The ISM national manufacturing numbers have been consistently printing about 50 for over a year, indicating the manufacturing sector is doing well.



The ISM new orders index was approaching 50 -- the line that delineates between expansion and contraction -- but bounced back strongly in the latest report:

"The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."

The durable goods new orders numbers have been near stagnant for the last 4-6 months:


However, this number is extremely volatile. As the chart below shows, long periods of near stagnation and volatility occur during expansions.


Let's look at the regional indicators.


The NY Fed's latest numbers were horrible:

The Empire State Manufacturing Survey indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. The indexes for both prices paid and prices received declined, with the latter falling into negative territory. The index for number of employees remained above zero but was well below its October level, and the average workweek index dropped to -13.0. Future indexes generally climbed, suggesting that conditions were expected to improve in the months ahead, although the capital spending and technology spending indexes inched lower.

However, this report was balanced out by the Philly Fed's numbers:

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 1.0 in October to 22.5 in November (see Chart). This is the highest reading in the index since last December. Indexes for new orders and shipments also improved this month, and each index increased 15 points. Indexes for both delivery times and un-filled orders changed from negative to positive this month, suggesting improvement.

And the Richmond Fed also printed an improved number, although not as strong as the Philly Fed's numbers:

In November, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — rose four points to 9 from October's reading of 5. Among the index's components, shipments rose four points to 7, new orders edged up two points to finish at 10, and the jobs index increased six points to 10.

Other indicators also suggested generally stronger activity. The index for capacity utilization moved up three points to 9, while the backlogs of orders contracted at a much slower pace, gaining nine points to −3. The delivery times index added one point to end at 6, and our gauges for inventories were somewhat higher in November. The finished goods inventory index increased ten points to 16, and the raw materials inventory index advanced five points to finish at 15.

Overall, the Eastern seaboard looks to be in fair shape. This is important, as this geographical area was a problem area in the latest Beige Book. While this region is not out of the woods, it is in a clearly better position than a few months ago.

The Chicago Fed was up slightly in its latest report, but has been printing a horizontal number for the last few months:

Here is the relevant information from the latest report:

The Kansas City Manufacturing index has printed three strong months:

While this index was near 0 in August, it has since bounced back, printing a very strong reading last month.

The net percentage of firms reporting month-over-month increases in production in November was 21, up from 10 in October and 14 in September (Tables 1 & 2, Chart). The increase in production occurred among both durable and nondurable goods producing plants, with a sharp rise in machinery, high-tech, printing, and transportation equipment activity partly due to higher export orders. All other month-over-month indicators also improved from the previous month. The shipments, new orders, and order backlog indexes climbed higher, and the employment index reached its highest level since late 2007. The new orders for exports index rose from 0 to 11, and both inventory indexes moved into positive territory.

Texas area factory activity has been bouncing near 0 for the better part of this year:

Texas factory activity increased in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, was positive for the second consecutive month and slightly higher than its September reading.

Despite the rise in output, several other manufacturing activity indicators fell again. The new orders and shipments indexes were negative for the fifth consecutive month. The capacity utilization index dipped below zero, with more than one-quarter of respondents reporting a decrease.

Measures of general business conditions improved markedly in October, suggesting the broader economy strengthened. After four months in negative territory, the general business activity index rose sharply from –18 in September to 3 this month. The company outlook index also jumped up, rising from –4 to 13. The advance in the index was largely due to a sharp decline in the share of manufacturers reporting a worsened outlook, falling from 25 percent to 13 percent.

The above numbers show a sector that is slowing as demonstrated by the moderating pace of industrial production growth over the last new months. In addition, capacity utilization is still low and several regional federal reserve manufacturing numbers (New York, Richmond and Texas) show clear signs of slowing. While the durable goods numbers have been near stagnant for the last 4-6 months, this is typical of this particular data series. On the positive side, the ISM number's latest number showed a strong pick-up in the latest report, the overall number has been positive for over a year and the Philly and Kansas City Fed showed strong improvement. In addition, the Chicago Fed manufacturing index is still printing a positive number, although at a moderating pace.

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Yesterday's Market

The dollar's rebound has been the most important story over the last few weeks, which illustrates that the dollar is still a safe haven in troubled times. Yesterday's price analysis is still solid: the shorter EMAs are moving higher (a) and we have two price targets: the 61.8% Fibonacci level (b) and the 200 day EMA (c). I've added the underlying technicals to show the strength of the rally. New money is clearly flowing into the market (d and e) and there is clear upward momentum (f).


Over the last five days, we've seen a strong rally with several gaps higher (a, b, and c).



Yesterday, the market gapped lower at the open (a), but then traded sideways for most of the day, consolidating losses (b). Prices broke out of this range near the close (c), rallied, but found resistance near the previous days close (d).


On the oil chart, notice that the mid 80s area (A) is still a key price area. Prices moved through this area strongly a bit ago (B), but moved back through the area just as quickly. Now prices are making strong moves through this area again (C). The key question is will the rally stick?


Corn is still in a strong uptrend (A), although prices have recently fallen (b) to that trend for support. Also notice the EMA picture now: the 10 has moved below the 20 and the 10, 20 and 50 are all moving more or less sideways. Also note that momentum has decreased (d), although it too is moving sideways right now.



Gold is an interesting chart. First, it has clearly broken its primary uprtrend (a). However are prices forming a head and shoulders topping pattern (s, h, s) or are the forming a triangle consolidation (lines b and c)? The EMAs aren't offering much help, as the 10 and 20 day EMAs are close together and moving sideways and the 50 day EMA is moving higher, albeit at a low angle.

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Euro Worries Persist

The Euro continues to take a battering, as markets focus on the structural problems of the Eurozone.

The focus is now on the Spanish and Italian economies, and their ability to roll over their debt.

Were either Spain or Italy to need a bailout, the ability of the Eurozone to provide the necessary funds is in doubt. Needless to say the real danger is that the requirement for a bailout of these two countries, now that the markets are focusing on them, is becoming a very real possibility.

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Well, at least "DrDumb" picked the right screen name ...

- by New Deal democrat

One rule of netiquette as that you're not supposed to "feed the trolls," but how can I help it when they're so stupid???

After I posted about the initial jobless claims last Wednesday, I got an email from a troll named "drdoom" which read, in its entirety:

Hey Bozo you can take your charts and shove them up your ***....

followed by a link to a post on the right wing political site "hotair" claiming that durable goods orders and new home sales "tanked" in October (no, I'm not going to link to it, and yes, I deleted the expletive).

Well, although I guess I should be shaking in my boots because of those terrible, horrible, awful numbers, there's just one problem -- they weren't.

As I said Friday, durable goods were down, but the previous month's orders number was revised up by almost the exact same amount, meaning that October durable goods orders were only the second best since the recovery began. Here's the graph:



Does that trend look down to you?

Now here is a graph of new home sales:



Looks like flatlining since May, doesn't it?

Here's the actual data:

2010-05-01 282
2010-06-01 310
2010-07-01 283
2010-08-01 275
2010-09-01 308
2010-10-01 283

Apparently "tanking" means "not as high as two of the last 6 months."

Who knew? Well, except for drdumb_5@hotmail.com ....

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Will This Be A Better Holiday Season?

From Bloomberg:

The average shopper in the U.S. spent 6.4 percent more over Thanksgiving weekend than last year as more people picked up jewelry and toys, heartened by the economic rebound.

About 212 million shoppers went to stores and websites over the holiday weekend, on average spending $365.34, the National Retail Federation said yesterday. The proportion of sales online rose to more than one-third of the total, according to the Washington-based trade group.

Retailers lured people into stores with promotions like Wal-Mart Stores Inc.’s $5 Barbie and J.C. Penney Co.’s $10 diamond-accented earrings. Customers such as Barb Capa, shopping at Saks Inc.’s flagship store yesterday in New York, said they’re ready to buy again as their fortunes improve.

.....

“Consumers are more comfortable spending again, and that trend has held up,” Maggie Taylor, a vice president at Moody’s Investors Service in New York, said yesterday. “I don’t think people are as worried about losing their jobs anymore.”

On a purely anecdotal note, I noticed this weekend that in our neighborhood the Christmas decorations went out right after Thanksgiving. Part of that was really nice weather, but I also think some of it is improved sentiment. The country has had two holiday seasons in a row with a dour outlook; maybe people have settled into the fact that we are no longer falling off a cliff.

As I will show this week, most of the fundamental indicators in the economy are in pretty good shape. Consumer spending has been increasing for the last five quarters, investment is up, manufacturing -- although slowing -- is still positive, and services are still growing. The main problem is the employment picture. However, that is (regrettably) behaving in a manner similar to other expansions with high unemployment: it's taking a long time to heal. However, the last few data points (the drop in initial unemployment claims and the latest employment print) are encouraging.

In addition, the consumer is in a better position to spend this year. First, there is the higher savings rate, indicating people have been putting away money for a rainy day. Secondly, I'm guessing there is a fair amount of pent-up demand. While PCEs have been increasing for the last five quarters, they have been doing so at a smaller rate than is normal for an expansion.

What the economy needs right now is a kick in the pants (economically speaking, of course). I had thought that would come from an improving employment picture. Maybe the holiday season will provide it instead.

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U.S. Economic Status Part I: the Consumer

As we get near the end of the year, it seems appropriate to start looking at a macro view of the US economy to see just exactly where we are in the recovery. Today I'll start by looking at the consumer. I'll also be looking at the manufacturing and service sectors along with employment, gross domestic investment and the export/import balance. There are two purposes to this overview. The first is to simply take a year end appraisal of the overall economy. The second is to demonstrate that the overall economy is actually in pretty good shape despite the continued negative spin we're continuing to hear from a variety of commentators. So, let's start with the consumer. All of the figures below are in real (inflation-adjusted) terms.



Real PCEs are now above their peak from the previous recession.


Real service expenditures (which account for about 65% of PCEs) dropped during the recession, but are now right at their previous highs from the previous expansion.


Real non-durable PCEs (which account for 22.18% of PCEs) are now at levels above previous highs. Also note they have bounced back strongly from their lows.


Real durable goods (which account for 12.61% of PCEs) are now approaching their highs from the previous expansion.

Let's look at this data from another perspective: real retail sales:


As this chart shows, real retail sales have also been increasing at a strong rate. Let's compare this expansions recovery rate to other recoveries:


At the end of the 1990s to after the beginning of the previous expansion, real retail sales moved sideways. They started to increase about a year or so into the last expansion. Notice that in this situation, real retail sales dropped to the level of the last recession, but have bounced back faster.

Simply put, the numbers indicate the consumer is bouncing back. PCEs are near peaks seen from the previous expansion. Real retail sales are mirroring fairly closely their performance from the previous expansion as well.

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The Irish Bailout

Ajai Chopra, the head of the International Monetary Fund's mission in Ireland, has been forced to defend the terms of the Euro 85BN bailout agreed with Ireland over the weekend.

Ireland will be paying 5.8% interest on the loan which, according to the IMF, is a better deal than Ireland would have secured elsewhere.

The short term reaction of the markets has been cautiously positive. However, it is clear that the structural problems within the Eurozone remain. Until these issues are addressed, the pressure on the Euro and weaker members of the Eurozone will continue.

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Yesterday's Market

Actually, as I was out of the market for last week on vacation, this is a great opportunity to look at the market and see where all the markets are.


First, the overall trend in the SPYs is one of consolidation. Prices have broken an uptrend (a), but are now consolidating in a triangle pattern (b).


Notice that prices are consolidating between lines (a) and (b). At (c), notice the 10 and 20 day EMA are moving more or less sideways, with the 10 still above the 20. This adds further credence to the argument that we're consolidating; if we were in the middle of a further downside move, at the very least the 10 day EMA would be moving lower at a far faster pace. Prices are also above the 50 day EMA (d).


The technical also tell us we're consolidating. Money is note flowing out of the market (a and b). Instead we're seeing a reversal of momentum (c) -- a standard sell-off after a big gain.



There are three areas of downside support: 118.00 (a): a round number and an area around which we've seen prices cluster. The 50 day EMA (b) and the 38.2% Fibonacci level (c): 115.78


Regarding the Treasury market, notice the long end (the TLTs) started lower first. They broke trendline (a) and are now is a clear downward sloping channel that is moving sharply lower (b).


Now we see the IEFs (the 7-10 year Treasury market) following suit. Prices have broken two trend lines (a and b) and are now clustering in the area marked with (c). Also note the EMA picture (d): all the shorter EMAs are moving lower, with the shorter below the longer. This indicates the trends are clearly lower for now.



The dollar continues its rebound. Note the EMA structure (a): the shorter EMAs are rising and the 10 day EMA has crossed over the 50 day EMA. The 20 is about to do the same. There is upside resistance at the 23.34 Fib level (61.8% retracement) and the 200 day EMA.

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Weekly Indicators: Black Friday Edition

- by New Deal democrat

This week's big number, without doubt, was the drop in initial jobless claims to 407,000, the lowest reading in two and a half years. At long last layoffs have broken to the downside from this year's stagnation, boding well for nonfarm payrolls. In other news in a truncated week, personal income and spending both rose nicely in October, as did PCE's (see Calculated Risk for a nice trend graph). New and existing home sales declined to their summer levels. This really just shows bottom bouncing since April - certainly not good, but not doom either. Durable goods declined over 3% in October, but only with September's data revised upward to over +5%. In other words, October's durable goods orders were only the second best reading in two years. The upward trend is firmly intact.

As you let your turkey and dressing slowly digest, let's take a look at this week's high frequency data:

As I indicated above,BLS reported 407,000 new claims. The 4 week moving average fell to 436,000. Next week could easily see this average fall under 430,000 (because a reading from 3 weeks ago of 459,000 will be replaced).

Gas at the pump declined one entire penny to $2.88 a gallon. A barrel of Oil increased to $83 this week. While the trend has been upward in the last several months, we have declined from a couple of weeks ago and did not cross the $90 threshold (that we did cross in April). Gasoline usage reamins lower than last year, 8.829 B gallons vs. 9.092 a year ago. Gasoline stocks are back into their normal range for this time of year. Over the longer term, gasoline usage has remained about 5% below its rate from the first half of the past decade.

The Mortgage Bankers' Association reported that its seasonally adjusted Purchase Index increased 14.4% last week, rising to a new post-April high, and only 7.4% less than a year ago. Meanwhile, the Refinance Index decreased 1.0%, the lowest since June, due to increased mortgage rates (to which this index is, not surrisingly, very sensitive).

The ICSC reported same store sales for the week ending November 20 decreased -0.6% week over week, but were up 2.8% YoY, down from +3.4% the last two weeks. Shoppertrak once again failed to report this week.

Railfax for the third week in a row showed a decline in the advance over last year's loads for all sectors, although this week's decline was mild.

The American Staffing Association reported for the week ending November 13 a very slightly decline of 0.04%, remaining at 100.0. This is typical for this time of year. In the next few weeks this index will decline substantially, but the question will be how far in comparison with last year.

M1 and M2 were not updated this week due to the holiday.

Weekly BAA commercial bond rates increased 0.08% last week to 6.03%. This compares with yields on 10 year bonds up +0.21%. This does not indicate any stress on corporate bonds.

The Daily Treasury Statement showed $112.1 B in receipts vs. $103.1 B a year ago, a gain of 8.95% for the first 16 days of November. For the last 20 days, receipts are up $130.1 B vs. $120.2 B a year ago, a gain of about 8.2%. Since the absolute recession bottom in withholding taxes was no later than October 2009, this month marks the first YoY advance over an advancing underlying real number.

With the exception of Railfax, which is probably showing the same industrial pause we saw with durable goods this week and industrial production last week - an inventory correction telegraphed by the ISM data in the LEI over the summer and early autumn - the rest of the high frequency data is showing continued economic advance.

In the coming week we get our first look at November, including payrolls. Will the good news in initial jobless claims show up there? We'll see.

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Contagion

The fears of the contagion, from the Irish sovereign debt crisis, spreading appear to be justified. Spain is now the target of the market's fear and greed.

Spanish bond prices are rising, and the Euro is falling.

The EU's bailout fund of Euro 1 Trillion will not be enough to prop up Spain, Greece, Ireland and Portugal.

Something has got to give.

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No Risk!

The EU, seriously spooked that the Euro remains under siege, has issued a statement insisting that the Euro will not collapse.

Klaus Regling, CEO of European Financial Stability Facility (EFSF), told the Bild:

"There is zero danger

It is inconceivable that the euro fails."

Nonsense, it is perfectly conceivable that the Euro will collapse.

The pressure on Greece, Ireland, Portugal and Spain is increasing day by day. At some stage, if these countries are to avoid total political and social collapse, they will have to free themselves from the constraining yoke of the Euro.

Whatever the Europhiles would like to believe, the markets simply do not see it the same way. The markets know that the the current situation is unsustainable and that something has to give.

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Happy Thanksgiving

With the exception of weekly indicators on Friday, we'll be back on Monday. Have a good and safe weekend.

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Initial Jobless Claims GREAT: Durable Goods Numbers Very Bad

From Bloomberg:

Applications for unemployment benefits in the U.S. fell more than forecast last week to the lowest level since July 2008, reinforcing evidence the labor market is healing.

Jobless claims declined by 34,000 to 407,000 in the week ended Nov. 20, Labor Department figures showed today in Washington. The median projection of economists surveyed by Bloomberg News called for a drop to 435,000. The total number of people receiving unemployment insurance decreased to the lowest in two years, and those on extended payments also fell.

Fewer firings lay the groundwork for a pickup in job creation that will generate incomes and spur consumer spending, which accounts for 70 percent of the economy. Even with companies firing fewer workers, unemployment will be slow to decline, according to the Federal Reserve’s latest forecast in which policy makers also lowered their growth projections.

This is -- without a doubt -- the best data point I've seen in some time. This number has been stuck in the 450,000 range for the better part of this year. While the length of this elevated number has been consistent with the last two recoveries, their elevated level has been an extremely concerning number. However -- this number is really good and the best print all year. While this is only one data point, it's a really good one.

However,

Orders for U.S.-made durable goods fell 3.3% in October -- the largest decline since January of 2009 -- as transportation orders fell, the Commerce Department reported Wednesday. Economists polled by MarketWatch had expected a decline of 0.2%. Excluding transportation, new orders fell 2.7% in October - the largest decline since March of 2009. Core durable-goods orders, which are orders for capital goods excluding defense and aircraft, fell 4.5% in October after a 1.9% rise in September.

This number was bad across the board; most sub areas of the report showed a decline. The slowdown in the manufacturing sector continues.

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Personal Savings & Spending as precursors to Economic Expansion & Job Growth

- by New Deal democrat

One of the best short-term precursors to job growth (besides real retail sales) is GDP growth. Generally it takes 2% YoY GDP growth to generate job growth, so normalizing for that, there is a very clear relationship:



Among the best longer-term precursors, as I explained back in July, is the "real personal savings rate." To update this overview, first let's look at real, i.e., inflation-adjusted, saving. As you can see from this first graph, it is at the highest level in at least half a century:



Now let's take this same data and translate it into the real, inflation-adjusted, savings rate.


This too briefly was at half-century highs at the very bottom of the recession. Since then the savings rate has declined, but is still in the higher range for the last several decades.

Now let's take the real personal savings rate (blue) and compare it with real GDP (red). Here is the relationship between 1959 and 1984:



and here is the same relationship from 1984 to the present (note: this is before this morning's data):



The relationship isn't perfect, but the lagged correlation is clear. A substantial change in the real personal savings rate is mirrored by a similar substantial change in real GDP about 6 to 18 months later. The logic of this isn't hard to follow: increased savings serve as the "tinder" that ignites subsequent spending. Once the spending starts, an economic boom begins. When the savings rate declines substantially, the fuel available for subsequent spending declines, and so does spending itself, with a lag.

Since (1) the real personal savings rate leads real GDP; and (2) real GDP leads employment; let's put those two together and show the real personal savings rate (blue) and employment (red).

First, here is 1959 to 1984:



and here is 1984 to the present:



In summary, the real personal savings rate is a very good precursor for employment in a range of 18 to 30 months later. We are now 17 months past the June 2009 peak. This relationship predicts further increases in YoY job growth beginning about now and continuing in 2011.

Needless to say, I am very encouraged by this morning's drop in initial jobless claims to 407,000, and the decline in the 4 week average to 436,000. Here is the trendline I drew on Monday comparing initial jobless claims with employment in the recoveries from the last two severe recessions:



Between real retail sales, declining jobless claims, a positive surprise in GDP, and a wellspring of fuel in the real personal savings rate, almost all engines are "GO" for a takeoff in robust job growth. Let's hope this is the beginning.

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Productivity Increases Slowing Employment Growth

From Bloomberg:

Not far from where Federal Reserve Chairman Ben S. Bernanke grew up, a revolution inside a Campbell Soup Co. plant explains why U.S. corporations are piling up profits -- with little need to hire more people.

Workers such as “Big John” Filmore, a 28-year Campbell veteran, huddle every day with management in situation rooms before their shifts to find ways to save money for the company. Rising productivity is helping boost profit margins here in Maxton, North Carolina, where 858 workers turn out a billion meals a year, and at most of the 243 non-financial companies in the Standard & Poor’s 500 Index with rising profit margins.

Companies slashed 8.5 million jobs during the worst recession since the Great Depression, while also slowing capital investment plans. Campbell, the world’s largest soup maker, DuPont Co., the third-biggest U.S. chemical maker, and United Parcel Service Inc., the world’s largest package-delivery business, are asking workers to help save cash by working smarter with existing technology. A potential cost: Efficiency gains reduce the chances recession-casualty jobs will come back.

“When the productivity growth comes, then watch out because that is when companies start not needing so much labor,” Edmund Phelps, a Columbia University economist and Nobel laureate, said in an interview.

Some 142 non-financial companies in the S&P 500 had improvements in operating margins of three percentage points or more from the final three months of 2007, when the previous expansion peaked, compared with the most recent quarter, according to data compiled by Bloomberg as of yesterday.

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GDP Increases 2.5%

Note -- I'm traveling with an old computer, so the daily charts won't be up until I return home next Monday.

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimate issued last month. In the advance estimate, the increase in real GDP was 2.0 percent (see "Revisions" on page 3).

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending that were partly offset by a negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports.

First, note there is a breadth of help for GDP: people are spending money, exports are increasing and the inventory investment cycle continues. This is a good smattering of the various economic sectors that can contribute to growth, indicating we're not as bad off as some pundits claim. Additionally, the negative whack from imports decreased.

PCEs accounting for 1.97 of the 2.5% increase, which places them on pace with their traditional role as the 70% driver of the economy. Overall fixed investment added 1.51, with non-residential adding .96 while residential subtracted .75. Expect some harping on the 1.31 contribution from inventory stocking (which for some unexplained reason has become an invalid economic activity). However, I personally don't think this is bad at all. Net exports took 1.76 off growth, indicating the trade balance is once again an issue going forward for the economy.

I'm particularly impressed with the continued improvement in PCEs, which were up 2.8% from the preceding quarter. Service expenditures were up 2.5% and durable goods purchases were up 7.4%. Consumer are still spending money, although at a slower pace than in previous expansions when PCE month to month growth was usually above 3%. Gross investment increased 12.4%, which is a decrease from the 26.2% pace of the previous quarter. This deceleration is to be expected, as the previous pace of expansion was unsustainable. Imports increased 16.8% and exports increased 6.3%. While the pace of import increases decreased, they are still increasing at a far faster pace than exports -- a trend which needs to change.

Overall, this is an encouraging report going forward. While it's not a barn burner, the upward revision is a good and welcome development.

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Irish Hold All The Cards

Irish households are coming to grips with the true cost of accepting the EU/IMF bailout, and of remaining in the Euro (nothing in life comes free), if the Irish accept the terms dictated by the EU.

It is estimated that the austerity package that the government will have to force through, in order to receive the bailout on the EU's terms, will cost the average Irish household £3K in increased taxes.

What people don't seem to realise is that the Irish government can, to some extent, stick two fingers up to the EU wrt the terms and conditions being placed on the bailout package.

The EU is desperate to avoid the contagion spreading, and to prop up the faltering Euro. Come hell or high water it will do evreything it can to keep the Euro afloat.

The Telegraph quotes Wolfgang Schaeuble, the German finance minister, who let the cat out of the bag:

"The uncertainty puts the future of our currency at stake.

If we cannot defend our common currency as a sustainably stable currency the consequences would be incalculable."

The Irish should dictate the terms of the deal to the EU, not the other way around.

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US Agriculture Leading Exports

From Bloomberg:

The unemployment rate in North Dakota is 3.7 percent, and “if it wasn’t for cable news, we probably wouldn’t have any idea that the rest of the country was any different,” said Doug Johnson, co-owner of crop insurer TCI Insurance in West Fargo, who added six new employees this year.

As businesses across the U.S. struggle to recover from the deepest recession since World War II and the national jobless rate remains stuck at 9.6 percent, Johnson has benefited from his location in the northern Great Plains, where a boom in commodities, such as wheat and soybeans, is helping to create jobs, lift farmers’ incomes and fuel demand for goods ranging from Deere & Co. tractors and Agco Corp. combines to dinners at local restaurants.

The agricultural Midwest -- particularly North and South Dakota, Kansas and Nebraska -- has been leading the U.S. economic recovery as its banks, businesses and households avoided the worst of the housing bubble’s collapse and the financial crisis that followed. Now the region is getting a further boost from record exports of commodities, driven by demand in China and Russia and a declining dollar. U.S. farm shipments next year may surpass the 2008 record of $115.3 billion, Joe Glauber, the U.S. Department of Agriculture’s chief economist, said last month.

“This has been the brightest spot in the U.S. economy throughout the recession, the only part of the country that has held up reasonably well,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

This is a very interesting development -- and something I'll be looking into more over the next few weeks.

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The Story you're *not* reading about here

- by New Deal democrat

This blog has been totally silent on the "Foreclosuregate" crisis - and after this post, likely will continue to be. That isn't an oversight or a blind spot on our part. It is intentional, and for a very good reason -- there's no public data available to back up an objective assessment. Bonddad recently added a tagline from Jon Stewart to this blog's title. For my part, I'd choose "The Data, the Whole Data, and Nothing But the Data." In short, we have made a conscious decision (that we are constantly revisiting!) to keep this blog focused on data, and in the case of foreclosuregate, there is virtually none.

Broadly speaking, foreclosuregate occurs right at the intersection of law and the economy. On the one hand, it is a matter of due process, of access to and alleged wholesale fraud upon the courts -- and the remedies and punishments for violations. On the other hand, there are massive amounts of financial transactions and wealth potentially at issue. But the two parts of foreclosuregate are generally separate.

The legal issue -- of "robosigners," of incidents where the wrong bank may have foreclosed on a property, of foreclosing where homeowners rightfully or wrongfully believed they had negotiated forebearance through HAMP, and even one or two cases where a homeowner had no mortgage whatsoever but had foreclosure proceedings initiated against them anywhay -- has been ably and throughly covered by Barry Ritholtz at The Big Picture, with the appropriate sense of outrage. I am in full agreement with those feelings and have nothing significant to add.

But the legal issue has little effect on the economy. Virtually all of the due process concerns are that while the homeowner is in arrears on their mortgage, the plaintiff has failed to proceed in accordance with the law, and may have committed fraud or something close to it in order to hurry the proceedings. In other words, in the vast, vast majority of cases, the ultimate legal outcome would be the same -- the house would be foreclosed upon. In those situations where a homeowner was current on their mortgage, or had no mortgage at all, the bare minimum of judicial competence will resolve the issue in the homeowner's favor. While the homeowner may have had to hire a lawyer (although homeowners appearing on their own in this circumstance are likely to be given a great deal of deference by judges), but aside from that there is no economic harm. And of course, if a house without a mortgage or a current mortgage were foreclosed upon, you can expect that the media would be only too happy to publicize the case, with predictable immediate results.

In short, the legal issue, while potentially large in the judicial and possibly even criminal sense, is almost certainly not going to have a significant economic impact.

The second portion of Foreclosuregate are the economic issues. Generally, there are two parts to this impact. The first is whether there will be clouds upon the title of thousands if not milions of properties, because of the possibility that the wrong party plaintiff foreclosed upon the property. The second issue is that of "putbacks" -- where, because the originator failed to live up to its covenants when it sold and securitized the mortgages, ginormous amounts of bazillions of dollars in transactions are "put back" to the originator, which is frequently a large Wall Street entity, which means it is insolvent and so Wall Street is insolvent and We're All DOO ... !!!

(Oh, sorry, sometimes I get ahead of myself in all the excitement.)

Let's look at each of these in turn.

The "cloud upon title" issue simplifies to this: Bank A was the rightful owner of the mortgage note, but Bank B erroneously or fraudulently foreclosed on the property. Innocent Buyer C thinks they own the property free and clear when along comes Bank A who says, not so. Faced with perhaps tens if not hundreds of thousands of properties falling into this category, the title insurance system freezes up, and nobody will buy a foreclosed property.

Except it is not unreasonable for a legislature or a court to ask Bank A, "Did you record your mortgage note at the courthouse? You didn't??? Well then, if you couldn't be bothered, we can't be bothered either. You have no rights against Innocent Buyer C, but only a cause of action against Bank B." This solution is so obvious that I have to think courts and legislatures will immediately adopt it if and when the "cloud upon title" issue ever becomes significant.

The "putback" issue is potentially much more serious. If originators in wholesale fashion violated their conenant with the buyers of mortgage backed securities to ensure that the securities were as represented, then the possibility exists of tens or hundreds of billions of dollars worth of securities being forced down the gullet of some very big and very vulnerable banks.

But again, this is subject to legislative action and judicial interpretation. For example, Judges can impute a duty of "due diligence" to the allegedly sophisticated buyers, and refuse putbacks if they failed to verify the status of the goods they were buying. Legislatures or the Judiciary could also by law or decision impute a Statute of Limitation or Doctrine of Laches to putback covenants. For example, if Congress were to pass a law interposing a 4 year Statute of Limitations for private lawsuits to enforce putback covenants (meaning that, if you failed to assert your rights within 4 years of the execution of the contract, your right has expired and no longer exists), then no covenants from 2006 or before would be at risk (although in my example criminal actions, and actions by the state and federal governments could still be undertaken). Even without legislative action, a court could accomplish the same thing via the equitable doctrine of Laches (simply put, you slept on your rights).

Even without any legislative or judicial action, you can expect that both sides to any putback action will arm themselves with batteries of lawyers and accountants, and ultimately make a dollars-and-cents decision about settlement, potentially after years of litigation. In other words, there are an awful lot of factors militating against the worst case scenario.

Finally, for the worst case scenario to unfold, Congresscritters and Presidential candidates who have scored $$$ Millions in grift - er, donations - from the financial industry would have to decide to, figuratively speaking, "let it burn," regardless of the impact on the economy. Now, it is one thing to accuse them as being dumb as toast or even malicious - as they have already proven a number of times this year - but it is another thing entirely to expect them to act to destroy their campaign contributors.

In summary, Foreclosuregate has the potential to be a financial catastrophe - but only if a lot of poor choices, chiefly political and judicial, are made. Or it could have the economic impact of a mild nuisance. Or somewhere in between. There is no data, only opinions, and as the saying goes, just like a*******, everybody has 'em.

How will it turn out? I don't know. And neither do the people loudly and hysterically proclaiming DOOM!

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Industrial Production Unchanged

I didn't get to this last week, but wanted to go into detail now while I've got time:

From the Federal Reserve:

Industrial production was unchanged in October after having fallen 0.2 percent in September. For the manufacturing sector, output gained 0.5 percent in October after having risen 0.1 percent in September. Factory production in September was initially reported to have decreased 0.2 percent, but incoming data on steel, fabricated metal products, machinery, and chemicals helped boost the index. The output of utilities dropped 3.4 percent in October, as unseasonably warm temperatures reduced demand for heating. Production at mines fell 0.1 percent. At 93.4 percent of its 2007 average, total industrial production in October was 5.3 percent above its year-earlier level. The capacity utilization rate for total industry was flat at 74.8 percent, a rate 6.6 percentage points above the low in June 2009 and 5.8 percentage points below its average from 1972 to 2009.

Notice that a big reason for the neutral was a a 3.4% drop in utilities, caused by warm weather. Also note that manufacturing increased .5% and September's number had stronger inputs from other manufacturing components.

Let's look at some smaller components of the index:

The output of consumer goods was unchanged in October. The production of consumer durables rose 0.8 percent. Within durables, the indexes for automotive products and for appliances, furniture, and carpeting each increased 1.1 percent. Gains in the production of miscellaneous goods and of home electronics were smaller, at 0.2 percent and 0.3 percent, respectively. The production of nondurable consumer goods declined 0.2 percent; a fall of 3.2 percent for the energy category, which primarily resulted from a decrease in the index for residential utilities, more than offset an increase of 0.7 percent for the non-energy category. Within non-energy nondurables, the index for clothing advanced 2.0 percent, and the indexes for foods and tobacco and for chemical products moved up at lesser rates; the index for paper products moved down.

First, notice there were big increases in the consumer non-durables number, and that increase was due to large increased in auto and housing related appliance production. In addition, consumer non-durable goods also saw increase, which were masked by the fall in energy production.

Let's look at this data from another perspective:

Production in manufacturing rose 0.5 percent in October, and the factory operating rate moved up to 72.7 percent, a rate 6.5 percentage points below its average from 1972 to 2009. The output of durable goods increased 0.9 percent, with increases in most major categories. After having declined the previous four months, the output of wood products jumped 2.5 percent; the indexes for nonmetallic mineral products and for electrical equipment, appliances, and components also increased by 2.0 percent or more. Within durable manufacturing, only the index for primary metals fell, at a rate of 0.4 percent.

The production of nondurable goods moved up 0.2 percent in October after having risen 0.4 percent in September. The output of apparel and leather increased by the largest proportion, and the production of food, beverage, and tobacco products, of paper, and of plastics and rubber products also rose. The indexes for printing, for petroleum and coal products, and for chemicals declined. The index for other manufacturing (non-NAICS), which consists of publishing and logging, was unchanged after having declined in the previous four months.

Mining production edged down 0.1 percent in October, and its utilization rate fell to 87.9 percent, a rate 0.5 percentage point above its average from 1972 to 2009. The index for utilities dropped 3.4 percent; the output of electric utilities declined for a third consecutive month, while the output of natural gas utilities fell for a second month in a row. The operating rate for utilities decreased 2.8 percentage points, to 76.6 percent.

Notice again the large number on increases that exist in the index -- and both durable and non-durable manufacturing increased overall. The main drawback was a drop in utilities production and not goods.

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The Sea of Hope

Now that Ireland has formally admitted that it will accept a bailout from the EU/IMF, the real game can begin.

Irish banks, despite the fact that they will receive a capital injection, are now effectively up for sale - all bidders welcome.

The EU has warned the Irish government about the possible deal breaking problems of an election (to be held early next year). However, the Irish know full well (as does the EU) that the name of the game is "contagion avoidance". The EU cannot afford for this bailout to fail, if it did the risk of contagion spreading (already very high) would rise even further.

Once the bailout is agreed, and short term stability of the Irish economy restored, the speculators and markets will focus their attention on the next in line for a bailout (Portugal).

Make no mistake, the game is not over. One by one the weaker members of the Eurozone will be targeted, and the EU will have to continue to stump up more cash until either its patience runs out or the money does.

The final result will be one of the following:

1 The Euro collapses.

2 Some members of the Eurozone leave the Euro.

3 The Euro is split into two, a weak floating Euro for poorer countries and a strong stable Euro for the rest.

None of these prospects is exactly what the "founding fathers" of the Eurozone had in mind when they floated the Euro on a sea of hope and hubris.

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China is Holding Up Loan Growth

A quick note: I'm traveling this week, and the computer I brought has now taken one trip to many. Keeping multiple programs open at the same time (like Firefox and Quote Tracker) is a bit dicey. So, for the next two days, there won't be a Yesterday's Market piece. That will be back on Monday.

From Bloomberg:

China’s biggest banks are close to reaching annual lending quotas and plan to stop expanding their loan books to avoid exceeding the limits, according to four people with knowledge of the matter.

Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and Agricultural Bank of China Ltd. are only extending new loans as existing ones get repaid, the people said, speaking on condition of anonymity. Lenders are also cutting holdings of discounted bills to make room for longer-term debt, they said.

Regulators are monitoring banks’ loan balances on a daily basis to ensure the official target of 7.5 trillion yuan ($1.1 trillion) in new lending for 2010 isn’t exceeded, the people said. China’s government in the past month stepped up a campaign to limit credit expansion after inflation quickened and property prices surged.

The Chinese central bank has been very good at using various monetary tools at its disposal. They have been especially good at using various bank policies -- reserve requirements, loan quotas, etc. -- as a way of targeting smaller segments of the economy without slowing down the rest of the economy too much.

This has important implications for the U.S. as China is basically the driver of the world economy now; the U.S. is essentially the caboose. Also note the Chinese market is now a leading indicator of U.S. economic and market activity.

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Ireland Gets Bailed Out

From Bloomberg:

Ireland applied for a bailout to help fund itself and save its banks, becoming the second euro member to seek a rescue from the European Union and the International Monetary Fund.

Irish Prime Minister Brian Cowen said he expects talks on the package to be completed in the “next few weeks.” Finance Minister Brian Lenihan said the loan will be less than 100 billion euros ($137 billion), though he refused to give any further details at a press conference in Dublin today.

“A small sovereign like Ireland faced with an outsized problem that we have in our banking sector, cannot on its own address all those problems,” Lenihan said. Ireland may not draw down on the entire loan, he said.

There are a few points that should be made here.

1.) Ireland tried austerity. I've linked (several times) to the NY Times article on the topic. What's illustrative is that austerity is a essentially cutting off your nose to spite your economic face. Government spending is part of the GDP equation (which is C+I+X+G). You can't lower a part of the equation and expect to get growth; it simply violates the basic concepts of additive math.

But most importantly, government spending can help the economy grow with expenditures like infrastructure, education and social safety net expenditures (which have a high multiple). The idea behind government spending in a downtrend is to 1.) limit the downside damage, and 2.) provide investment to enable the economy to start growing sooner and preferably at a faster pace. Ideally, the government spends appropriately and in a manner that allows the economy to grow its way out of the debt. BTW -- corporations do this all the time.

2.) Despite the politicking involved with this (will they take the deal, won't they take the deal, what will the deal look like) it should come as no surprise that Ireland eventually asked for help and it was eventually given. Allowing a sovereign to declare bankruptcy or fall apart would have catastrophic implications for the economy going forward.

3.) This should be euro positive and dollar negative.

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Initial Jobless Claims vs. Payrolls -- where to next?

- by New Deal democrat

Fourteen months ago, I wrote that

Some time ago, Prof. Brad DeLong of Berkeley, thinking aloud with graph, drew a line across the 1991 and 2001 recessions and recoveries, making a "note to self" that it appeared that Initial Jobless Claims post those recessions had to decline to 400,000 or less before payroll jobs were added. Thus, mused Prof. DeLong, it must be so as well, post this "Great Recession." This "note to self" was subsequently repeated by Bill McBride at Calculated Risk, from which it has now been picked up and repeated at Prof. James Hamilton's site, Econbrowser....

IT IS WRONG.
....
I am utterly confident that there will be job growth long before jobless claims fall to 400,000.

Well, we know how that turned out, enabling me to do a little victory dance in March.

With initial claims finally falling below 440,000 in three of the last four weeks, on Friday I posted this graph, showing initial jobless claims in blue, left scale, and private nonfarm payrolls, inverted, in red, right scale :



Over the weekend, I decided to take a little more sophisticated look at what might be in store if jobless claims are truly breaking out to the downside, and continue to decline to 400,000 or even less, which seems increasingly likely as real retail sales in the last four months have grown at a rate of 10% annualized.

Exactly as I did in my analysis last year, I am comparing this jobs recovery against the job recoveries from the two least severe recessions (1974 and 1982) and using that as the template.

Here is a scatter graph comparing the decline in initial jobless claims from peak to trough (y axis) following the 1974 recession with nonfarm payrolls (x axis):



Here is the same scatter graph for the jobs recovery from the peak of the 1982 recession (note I have deleted two months in 1983 where a strike caused a loss of 1 million jobs in one month and a similar gain the next when the strike ended):



Here is the same graph for our jobs recovery so far (note I am using private jobs only to eliminate distortions due to the census):



Putting the three jobs recoveries together, here is the scatter graph we get:



Focusing on that part of the graph that only shows the correlation of payrolls for jobless claims under 450,000 gives us this:



While I don't have the software to do this scientifically, the trend line averaging the data from the three jobs recoveries is probably very close to the curved trend line I have drawn in light green:



This suggests that at a monthly average of 440,000 initial jobless claims a week, the average monthly payrolls gain is about 175,000 to 200,000, and gradually increases as initial jobless claims decrease. But there is an awful lot of variance, so that - as the graph immediately above the last one shows - at until such time as jobless claims drop below 360,000, even excepting a few outliers, any given month may give a number as low as ~75,000 or as high as ~350,000.

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