Bonddad Linkfest

1. Congressional leaders near budget deal (WaPo)
2. Some at Fed are urging preemptive strike (NYT)
3. India hit by second major power outage in two days (NYT)
4. Jobless generation puts brakes on US (FT)
5. Taiwan's economy shrinks (FT)
6. Columbia cuts interest rates (FT)
7. EU unemployment holds at 11.2% (Eurostat)
8. India holds rates steady but lowers GDP projection (Marketwatch)
9. US economy stuck in a rut (Marketwatch)
10. EU inflation estimated at 2.4% (Eurostat)

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Real retail sales and the onset of recession

  - by New Deal democrat

Yesterday I referred to the business cycle analysis of Prof. Edward Leamer of UCLA, who wrote in 2007 that:

The timing [pre-recession] is: homes, durables, nondurables, and services. Housing is the biggest problem in the year before a recession... durables is the biggest problem during the recession

He found that housing typically begins to decline 5 quarters before recession, with durables and nondurables hitting their peak 4 quarters before the recession, and gently declining until the recession hits.

Retail sales include both durable goods (like cars and appliances) and non-durables, so it is a mix of consumer purchases.  Although it is one of the 4 series believed to be tracked by the NBER in dating recessions, it actually has a slight tendency to lead, and in particular to lead employment.

So what kind of decline, if any, is expected from real retail sales in advance of recessions?  Usually, but not always, at least 2%.

Here are the immediate post- World War 2 recesssions:



Note that in three of them, the actual peak was reached at the outset of the recession, which is what you would expect from an NBER coincident indicator.  But 3 of the 4 experienced at least a 2% decline within 6 months prior to the onset of the recession.

I neglected to include the 1970 recession in the above graph, but there was also a 3% decline from the November 1968 peak prior to the onset of that recession as well.

Here are the 1970's and 1980's.  In all 4 of these cases there was a decline of 2.5% in real retail sales before the onset of the recession:



Now here are the last two recessions up to the present:



There was a 2% decline in the year leading up to the recession of 2001, and a 2% decline in 2007 before the peak was made in the 3 months before the onset of the "great recession."  Notice that we have had slightly less than a 1% decline in the last three months.

But a 1% or even 2% decline in real retail sales doesn't necessarily imply contraction.  For example, note from the below graph that there was a 3% decline in 2005, and 1% or greater declines in both 2006 and 2010 without triggering contraction.



To summarize, 9 of the 11 recessions since World War 2 have been preceded by a 2% or greater  decline in real retail sales in the months immediately preceding the recession.  The two others only experienced a 1% decline, although the decline quickly accelerated to more than 2% once the recession began.

So our present situation does not preclude being in recession by this metric, but it is more likely from past experience that as of mid-year, real retail sales only indicated a slowdown rather than an actual contraction.

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This Is What A Global Slowdown Looks Like

Below I've assembled the annualized GDP growth rates for various regions of the world. Note one common trait: they're all slowing or already in recession:

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The Never Ending Story

Whilst the world sits "agog" watching the Olympics (apart from in India where their power system has crashed), Greece is just about to run out of money again!

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Morning Market Analysis

Despite all of the reports coming from the markets about the East and the EU, the overall position of the equity markets is one of contained action; the IWMs and QQQ are trading in a range while the SPYs have just barely broken out. 

We're starting to possibly see a few cracks in the Treasury rally.  Notice the SHYs broke a short term uptrend (although they're at previous highs).  The IEFs and TLTs are right at support.

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Bonddad Linkfest

1. Signs of coordinated action boost markets (FT)
2. Global warming now incorporated into crop price projections (Agrimoney)
3. South Korean business confidence at 4-year low (Beyond Brics)
4. Japanese industrial production deceases (METI)
5. India faces inflation threat, making the RBIs job harder (BB)

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Vehicle sales and the onset of recession

- by New Deal democrat

A lot of the recent economic data has been weak, but weakness does not necessarily equate with actual contraction.

It's well to keep in mind the sequence of events that typically leads both recessions and recoveries, as identified by the research of Prof. Edward Leamer. First housing turns, then durable goods like cars, then nondurable and consumer goods.  To some extent that was violated in the 2009 recovery, as housing simply stabilized in spring 2009 at the same time as vehicle sales bottomed.

Since the beginning of 2011, housing permits and starts have increased in a trend that is presently about about 200,000 a year, which on average translates into growth of about 4% a year within 2 years thereafter.

So what about vehicle sales?  Here we have an even more limited data set than in other cases, so extra caution is required, but the data we do have is reasonably consistent once we measure quarterly to smooth out some of the month to month variability:  for the 5 recessions since the data starts in the mid-1970s, at least a 10% decline in vehicle sales since the quarterly peak has taken place before a recession started.

Here's the data from 1976 to 1992 (note sales never totally recovered following the 1980 recession):



And here it is from 1999 to the present:



So far there has only been about a 3% decline from the first quarter's peak of 14.5 million annualized vehicle sales.  If the past pattern holds, it would take a quarterly number of 13.1 million or fewer  vehicle sales annualized to be compatible with the onset of a new recession.

It's also worth noting that with the exception of the 1981 recession where the Federal Reserve suddenly and dramatically raised interest rates, where the next recession began only two quarters after the peak, no recession has begun until at least 6 quarters later.

In other words, based on admittedly limited past data the decrease in auto sales has not gone on long enough or deeply enough to be consistent with a renewed recession.

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Please Learn the Definition of the Word "Socialism" Before You Use It

One of the most common words used to describe President Obama is "socialist."  If that were true, then this chart wouldn't exist:

Above is a chart of the percentage change is GDP and the contributions to that change from both federal and state and local spending.  In the last 8 quarters (two years) we see negative contributions from federal spending in six quarters and negative contributions from state and local spending in all 8.  Also note that in only two quarters (2Q02 and 2Q10) do we see any meaningful federal contributions to overall growth.

And then there is government's share of the economy:

Government's percentage of GDP has been shrinking.  Also consider this:

Taxes as a percent of GDP are near 60 year lows.  And finally, there is this:

The total number of government employees has decreased sharply over the current administration's tenure -- as compared with others.

Look, there are plenty of legitimate reasons not to like or vote for the current president --- with a slow economy being a good first point, followed by very little knowledge of the private sector and a complete inability to lead.   But, please, socialist? 

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Dammit, now I'm gonna have to change the design of my backpack nuclear bomb

- by New Deal democrat





The Wall Street Journal reports on a Fox News interview with Justice Antonin Scalia:

Fox’s Chris Wallace asked about weapons that can fire off a hundred shots in a minute, in reference to the recent mass murder in a movie theater in Aurora.




“We’ll see,” said Justice Scalia, referring to the need to wait on a court case that gets at the question. He then volunteered that the second amendment refers to the right to “keep and bear” arms, so that it “does not apply to arms that cannot be hand-carried…It doesn’t apply to cannons.”




Then the justice asked himself about “hand-held rocket launchers that can bring down airplanes.” About that, he ventured only, “it will have to be decided.”

I figure if I just change the design to a briefcase with a shoulder strap, I'm good to go.

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Secret Bankers' Meeting

Apparently, last Tuesday, there was a secret meeting of the CEO's and Chairmen of some the UK's leading banks.

The purpose of the meeting was to address the reputational damage from the industry's ongoing spate of scandals.

Mark Kleinman of Sky News reports that the meeting at HSBC's head office discussed Liborgate, as well as the payment protection insurance and interest rate swaps mis-selling.

It is regrettable that it has taken the banks so long to start to try to address issues that have been in the public domain, and the source of much public contempt, for such a long period of time.

The meeting also discussed the appointment of a successor (an outsider) to Marcus Agius as chairman of the British Bankers' Association (BBA).

Given the BBA's dismal reputation it would be better that they simply shut it down and set a new organisation up.

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Morning Market Analysis; Asia To the Rescue?

The Chinese market led the world lower, but now may be in a position to help the world markets break out of their weakness.  First, prices have been trading between 32 and 34.5 for the last month and a half.  Second, note the rising CMF -- a sign that money is moving into the market.  Third, prices gapped higher on Friday on strong volume.  Fourth (and this is  weak fourth point) the MACD has given a buy signal (but is has done so several times in the last month with no resulting rally).  The EMA position is still neutral to slightly negative.

The Australian market broke out of an upward sloping channel on Friday.  Also note the bullish EMA picture: prices are above the 200 day EMA, the shorter EMAs are moving higher, the 10 day EMA is above the 200 and the 20 is about to cross and all the shorter EMAs are rising.

The Singapore market is already at six month highs, having rallied through resistance last week.  However, the MACD has tapered off over the last week, indicating some weakness might be ahead.  However, given the strength of the underlying fundamentals (rising CMF and EMAs, prices above the 200 day EMA) I would expect a profit-taking correction, rather than a sell-off.

The Hong Kong market has risen from a bottom established in early June.  Prices are now above the 200 day EMA, and the shorter EMAs are caught in the 200 day EMA level.  We see money moving into the market.  However, momentum is weak.

The South Korean market has twice tested the 51-52 price area over the last two months.  But on Friday, prices rose through two key resistance lines.  In addition, prices are now above the 10, 20 and 50 EMA, making the 200 day EMA the next logical target.  However, momentum is low and longer EMAs are moving lower.

Looking at these charts, there are a few points that stand out.

1.) Notice the strong CMF readings on all, which indicates volume is flowing into the market. 

2.) All the momentum readings (MACD) are readings you'd expect from a market that is consolidating; all are moving sideways or slightly lower.

3.) Prices are now above all three, shorter EMAs.

I'm assuming the traders are thinking we'll start to see rate cuts from Australia and South Korea, along with some type of stimulus from China.

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Weekly Indicators: pervasive coincident weakness, some leading strength edition

  - by New Deal democrat

In the rear view mirror, the big number reported this past week was 2nd quarter GDP. The initial throw of the dart came in at +1.5%.  This is poor but still positive and not as poor as many had feared.  Stay tuned for the revisions over the next several months.  Monthly data reported included new home sales, falling from an upwardly revised May number.  Durable goods taken as a whole rose, but core capital goods fell.  Both measures of capital goods spending have been stalled since February.  Consumer sentiment declined to its low of the year.  This continues the recent slew of weakly positive or even negative news.

My weekly look at the high frequency weekly indicators are not meant to be predictive at all.  Rather, if monthly or quarterly data is "looking in the rear view mirror," weekly data is much closer to observing events in real time.  Although weekly data can be noisy, turns will show up here before they show up in monthly or quarterly data.

Let's start again this week with Same Store Sales, which remained mixed but positive, and Gallup was negative.

The ICSC reported that same store sales for the week ending July 21 rose 1.0% w/w, and were up +3.3% YoY.  Johnson Redbook reported a 1.3% YoY gain.  Shoppertrak, which has been very erratic, reported a +3.4% YoY gain.  

The 14 day average of Gallup daily consumer spending,  at $68 was $3 under last year's $71 for this period.  This is the sixth week in a row in which consumer spending has weakened significantly, and the second worst YoY comparison in two months for the Gallup report.  One year ago, sales were building to a good "back to school season" that peaked in early August. Since the beginning of June, however, sales have been in decline.  This remains a red flag showing that consumers have turned cautious and that caution has continued through July.

Employment related indicators were also mixed to strongly positive this week:

The Department of Labor reported that Initial jobless claims fell 33,000 from the prior week's unrevised figure, down to 353,000.   The four week average fell 8250 to 367,250.  The lowest 4 week average during the entire recovery has been 363,000.  This number does not appear to be compatible at all with further economic weakness.  

The Daily Treasury Statement for the first 18 reporting days of July was $124.7 B vs. $123.3 B a year ago, a very slight +1.1% improvement.  For the last 20 days ending on the third Thursday in July, $134.4 B was collected vs. $129.7 B for the same period in 2011, for a gain of 3.6%.

The American Staffing Association Index rose by 4 to 92.  This is simply a rebound from the July 4 reporting week. This index has been generally flat for the last three months at 93 +/-1, mirroring its 2nd quarter flatness last year. If this index does not rise back to 93 next week, that would indicate further weakness.

The energy choke collar remains close to re-engaging:

Gasoline prices rose again last week, up .06 to $3.49.  Oil prices per barrel feel slightly for the week, down close to $2 at $90.13.  Gasoline usage, at 8660 M gallons vs. 8999 M a year ago, was off -3.8%  The 4 week average at 8802 M vs. 9088 M one year ago is off -3.1%, still a significant YoY decline; however, June and early July of 2011 were the only months after March 2011 where there was a YoY increase in usage, so the YoY comparison now is especially difficult. This will definitely change in a week or two. 

Bond prices and credit spreads both decreased again:

Weekly BAA commercial bond rates fell ..05% to 4.85%.  These are the lowest yields in over 45 years. Yields on 10 year treasury bonds  were flat at 1.52%.  The credit spread between the two declined to 3.33%, but is still closer to its 52 week maximum than minimum.  The recent collapse in bond yields shows fear of deflation due to economic weakness. 

Housing reports remained mixed:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index declined -2.8% from the week prior, and were also down approximately -3.2% YoY, back into the middle part of its two year range.  The Refinance Index rose 1.8% to another 3 year high. 

The Federal Reserve Bank's weekly H8 report of real estate loans this week fell -0.1%.  The YoY comparison rose to 1.1%.  On a seasonally adjusted basis, these bottomed in September and are up +1.2%.  

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up + 2.4% from a year ago.  YoY asking prices have been positive for almost 8 months, and remain higher than at any point last year.

Money supply was positive despite now being compared with the inflow tsunami of one year ago:

M1 rose +0.1% last week, and was up +3.1% month over month.  Its YoY growth rate rose to +17.4%, so Real M1 is up 14.6% YoY.  M2 rose 0.4% for the week, and was up 0.7% month/month.  Its YoY growth rate increased to 8.9%, so Real M2 grew at +7.0%.  Real money supply indicators after slowing earlier this year,  have increased again,  and YoY comparisons are holding generally steady.

 Rail traffic turned mixed again, and the diffusion index was quite poor:

The American Association of Railroads  reported a +1.9% increase in total traffic YoY, or +9,700 cars.  Non-intermodal rail carloads were down -1.9% YoY or -5600, as coal hauling once again turned negative positive, and was joined by agricultural commodities and also some mining and metallic commodities, so negative comparisons are up to 13 of the 20 carload types, a new high.  Intermodal traffic, however, was up 14,300 or 6.2% YoY.  

Turning now to high frequency indicators for the global economy:

The TED spread declined .02 to 0.35, another new 52 week lows. The one month LIBOR declined very slightly 0.2460. It has risen significantly above its recent 4 month range, it remains well below its 2010 peak, and has still within its typical background reading of the last 3 years.  Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell another 96 to 933. It is still 263 points above its February 52 week low of 670, although well below its October 2011 peak near 2200.  The Harpex Shipping Index fell for the eighth straight week from 423 to 414, but is still up 39 from its February low of 375. 

Finally, the JoC ECRI industrial commodities index fell from 118.73 to 117.10. This is still near its 52 week low.  Its recent 10%+ downturn during the last few months remains a strong sign of all that the globe taken as a whole is slipping back into recession.

Once again we have weakness, now almost pervasive, in the coincident indicators such as rail traffic, shipping prices, commodity prices, and most especially Gallup's measure of consumer spending.  The negative consumer sentiment and core capital goods orders could mean a 3rd negative LEI report in 4 months, which does not bode well for the near future.  At the same time the long leading indicators of housing (especially refinancing), real money supply, and corporate bond yields continue to be positive, joined this week by initial jobless claims.

This coming week, real income, auto sales, payrolls and average wage data will give us further hard information as to how far the weakness goes, and whether real consumer income is positive  YoY for the first time in 1 1/2 years.

Have a nice weekend!

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Weekend Weimar, Beagle and Pit Bull

It's that time of the week. NDD will be here over the weekend. I'll be back on Monday. Until then.....

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Initial jobless claims and the onset of recession: updated

  - by New Deal democrat

Last week I wrote that, compared with the onset of previous recessions, in which a rise of initial claims of 10% or more off the bottom was almost always required, the current situation only appeared to support slow growth but not actual contraction.

This week's number makes for an even more dramatic comparison.  As of now initial claims are less than 2% higher than their lowest point in the recovery:



Suffice it to say that we are now well below the lower bound of the past conditions required for consistency with the onset of actual economic contraction.

With the addition of this week's data, once again last year's pattern of an increase during the second quarter which subsided in the third quarter is so far being repeated this year:



When we measure weekly, as opposed to by the 4 week average, we see that the two lowest weekly claims reports of the entire recovery have been this month:



If, despite new lows in weekly claims being made and the 4 week average being only 1%+ off its bottom, we are in a recession anyway, then initial jobless claims have lost almost all use as leading indicators.

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So -- Where We We Economically?

Over the last week, I've taken a look at the various sectors of the US economy, using the Beige Book and Ben's Congressional statements as the basis of my analysis.  Here's are my thoughts:

Employment: why this isn't a daily issue on everybody's tongues is absolutely beyond me.  We've been over 8% for a long time, and yet, no one is doing anything.  Here's the bigger problem.  There are three sectors of employment: government, manufacturing and service.  While manufacturing jobs have increased, they've done so at a slow pace.  This is part of a longer trend in US manufacturing, where the amount of labor inputs has been declining for the better part of ten years -- a trend which is occurring as a result of automation and an aging population.  This means the trend will not abate.  So, even if we have an increase in manufacturing employment (which we have), we're not gong to have a big increase.  Service sector jobs are increasing and are almost at pre-recession levels.  The problem is government jobs, which have been cut by 600,000.  I realize that many people think the US government is in a bloated state etc.., but the reality is government provides necessary services to the population -- services like education, policing, fire prevention, public health, etc...  As an example, in Texas, we've cut $4 billion from education in the latest legislative session.  That will eventually come back and bite the state in the ass, but only after the current administration is out of office and probably dead.  These cuts are short-sided and ridicules.  Overall government job cuts are a prime reason why the unemployment rate is over 8% still.

Manufacturing: here, we're treading water, as evidenced by the industrial production and capacity utilization charts.  While these indicators have stalled over the last few months, we haven't seen an outright decline.  We are seeing weakness in some of the regional numbers -- notably the Richmond and Philly figures -- but these numbers are contained in the Atlantic regions (at least, so far).  The durable goods numbers have a slight downward trend, but not an absolute decline.  The ISM number has only shown one month of contraction -- although the report attributed that contraction to the EU situation which is not getting better.  So, again, we're treading water with a slight downward bias, but not an imminent collapse.

Consumer Spending: here, the overall personal consumption expenditures are OK.  We see increases in service and non-durable spending, but a declining trend in durable goods purchases.  However, as pointed out by Tim Duy, the three month retail sales figures are abysmal -- especially when we take out cars and gasoline purchases.  Clearly, the US consumer is concerned about the future, and is cutting back on spending at the retail level.  While this is a smaller data set than PCEs, they are incredibly important and need to be watched.  

Housing: here, I think we've reached bottom in the overall market.  Over the last 6 months, we've seen positive reports from the home builders in their respective 10-Q statements, an increase in their respective stock prices, a stabilization of sales, a decrease in inventory, a continued and fairly disciplined clearing of shadow inventory, a stabilization of prices, and an increase in housing permits.  The big problem that will probably prevent this sector from taking off is the employment situation, which obviously decreases the number of buyers.

Services: here the economy is chugging along.  This sector is not going to break any growth records soon, but it does appear to be pretty decently in the positive growth mode.  However, the latest ISM report's anecdotal section had several statements to the effect that growth was slowing, meaning the slowdown could be hitting this sector as well.

So, we're about where we've been for the last few years -- an economy that is going to grow somewhat positively (0%-2%), bit has just enough internal and external weakness to prevent growth from really taking off.  

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Bundesbank Shoots Draghi's Fox

Yesterday Mario Draghi, head of the ECB, was making all sorts of rash promises about the ECB doing whatever was needed to prop up the Euro etc.

I noted:

"Draghi then reverted to type, and promised that the ECB will "do whatever it takes to preserve the euro".

This of course is patently untrue."

Today the Bundesbank has verified my conclusion, by stating that it remains opposed to further bond buying by the ECB.

Whatever Draghi might like to do, the Bundesbank won't allow him to do it; ie they have shot his fox.

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Morning Market Analysis

The entire US treasury curve is still rallying; there is no sign of any sell-off.  All the prices are still above the EMAs (all of which are rising) and momentum is still bullish.  We're not going to see any major move from the equity markets until money flows out of the safe haven markets.

The entire US corporate curve is in the same situation.  The only different is the short and intermediate charts both have an MACD that has either given or is about to give a sell signal.  This may indicate investor sentiment is changing.  However, once we see a big change in that area, the next move indicating a change of trader's hearts will be a break of the EMAs.

 

After rallying last week, oil retreated from the 200 day EMA to the 50.  Also note the 10 and 20 day EMA are caught in the 50 day EMA.  Momentum is positive and prices are strengthening,  I'd expect another run at the 200 day EMA fairly soon.

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Don't Expect Any Relief in Grain Prices

Notice that most of the bread basket is under some type of drought warning right now.  Here's the report from the NOAA:

The Great Plains to Midwest:   Unrelenting heat and lack of rain continued the downward spiral of drought conditions.  D0 to D2 expanded across parts of the Plains from Texas to North Dakota, from Missouri to Minnesota, and in the southern Great Lakes.  Extreme drought (D3) was introduced in Nebraska, Missouri, and Wisconsin, and D3 expanded in Arkansas, Oklahoma, Kansas, and Indiana.  The city of Indianapolis, Indiana, implemented mandatory water restrictions for the first time ever with many trees dropping their leaves and going dormant months early.  Exceptional drought (D4) expanded in Arkansas and was introduced in western Kansas.

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Where We Are: Employment

From the Beige Book:

Employment levels grew at a tepid pace for most Districts since the last report. The Boston, Cleveland, Atlanta, Chicago, and Dallas Districts said employment levels were flat to up slightly, with most contacts citing U.S. fiscal policy uncertainty or weak demand for their conservative approach to hiring. Kansas City said employers were reluctant to increase wages or hire full-time staff until economic uncertainty diminishes. A Richmond District employment agency contact noted an increase in temporary employment turning into permanent positions since the last report. The Atlanta District noted some smaller chain stores with low price points were expanding and hiring at a significant pace. Several Districts noted that employers were having difficulty filling highly skilled positions

From Ben's Testimony:

Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent.

There really is little more to say about the US employment situation, except to say it's terrible.  However, let's look at the data to get a clear picture.

The top two charts show the 4-week average of initial unemployment claims.  The top chart places this number into historical perspective.  Overall, the series isn't too bad, but it certainly could be better.  However, the middle chart shows that this data series is -- instead of dropping sharply -- is actually meandering lower.  This, in turn leads to a chart of the overall unemployment rate, which is still stubbornly and persistently high 4 years into a recovery.

The above chart shows the median weeks unemployed.  While this number has moved lower over the last few weeks, it is still far too high by historical standards and has remained incredibly high for the duration of the recovery.

The above four charts are a great data series; the percent of the unemployed who have been unemployed and for what period of time.  The real crime in these charts is the lowest chart, which shows that over 40% of the unemployed have been that way for over 27 weeks.  In addition, there has been little, meaningful movement in this number.  Also note that in the top numbers, we've seen a little spike up over the last few weeks -- not a healthy development, as it indicates more people are entering the ranks of the unemployed.

Finally, in breaking the jobs market down into the government, manufacturing and service sector, we see that government job losses are by far the primary reason for the weak unemployment picture.

What more can anyone say that hasn't already been said about employment?  It's terrible and needs improvement.  Of course, note that Congress has done absolutely nothing to improve this picture.  

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