bizzXceleration: Performance, Value and Profit

Previous Posts

• Real GDP: How Good are the Numbers ?

• Crossing the Ripping Point: Breaking Down GDP Components

• Current Economic Outlook: HF Indicators vs the Business Cycle
  

Economy

Buffett sees "long, deep" U.S. recession The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investor Warren Buffett said in an interview published in German magazine Der Spiegel on Saturday. He said the United States was "already in recession" and added: "Perhaps not in the sense that economists would define it" with two consecutive quarters of negative growth. "But the people are already feeling the effects," said Buffett, the world's richest man. "It will be deeper and last longer than many think." But he said that won't stop him from investing in selected companies and said he remained interested in well-managed German family-owned companies. "If the world were falling apart I'd still invest in companies," he said.

• Feldstein Says U.S. Economic Indicators `Pointing Down': Video -- Martin Feldstein, an economics professor at Harvard University and president of the National Bureau of Economic Research, talks with Bloomberg's Kathleen Hays in New York about U.S. first-quarter gross domestic product released today, the outlook for Federal Reserve monetary policy and potential legislation to help homeowners avoid foreclosures. The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.
• Bernanke Optimism on Growth Rebound, Inflation Dashed by Oil-Price Surge

NT Week in Review: But the latest inflation data suggest that there is some degree of moderation in inflation underway (see chart 1 and discussion under personal income and consumption expenditures). On a year-to-year basis, sales of new single-family homes fell 43.4% in April, which is the largest drop since September 1981 (see chart 4). The mild improvement in sales of new single-family homes seen during April raises expectations of a quick turnaround in the housing market. However, the stock of unsold homes, the pace of home foreclosures, weak employment conditions and tightening of mortgage underwriting standards leaves us wary of an optimistic outlook. The Conference Board’s Consumer Confidence Index fell to 57.2 in May, the lowest since October 1992. The Present Situation Index dropped to 74.4 in May from 81.9 in the prior month. Moving on to the details of revisions, they paint a slightly different picture of the economy than estimated a month ago. Inventories subtracted from real GDP for the second quarter in a row (-$14.4 billion vs. +$1.8 billion in the advance estimate). The trade gap (-$480.2 billion vs. -$495.9 billion in the advance estimate) is narrower than the advance estimate not because exports were stronger but due to a drop in imports (-2.6% vs. +2.5% in the advance estimate). Business capital spending is weaker (-0.9% vs. -0.7% in the advance estimate), but outlays on structures rose (+1.1% vs. -6.2% in the advance report) compared with the first estimate. Consumer spending was left unchanged at a 1.0% annualized increase. Private sector demand -- the sum of consumer spending and fixed investment (structures, equipment and software spending, and residential investment expenditures) declined at an annual rate of 0.6% in the first quarter (see chart 15). Essentially, after revisions, demand still remains significantly weak. On a year-to-year basis, inflation adjusted consumer spending rose 1.63% in April, the smallest increase in around five years (see chart 17). This is the impact of the housing market slump and overall weakening of business activity. In the first quarter, real consumer spending rose at an annual rate of only 1.0%. We expect consumer spending to show a marginal contraction in the second quarter. Initial jobless claims rose 4,000 to 372,000 during the week ended May 24. Continuing claims, which lag initial claims by one week, rose 36,000 to 3.104 million, the largest number since February 2004 (see chart 26). The sharp upward trend of continuing claims in 2008 is supportive of the position the doves in the FOMC are holding. On a year-to-year basis, continuing claims rose 25.6%, the highest since May 2002

• Continued Unemployment Claims Continue to Rise

Incomes and Spending Both Slow in April Consumer spending barely budged in April and growth in personal income slowed sharply, even though the government started sending out billions of dollars in economic stimulus payments.The Commerce Department reported Friday that consumer spending edged up a small 0.2 percent in April, just half the 0.4 percent rise in March. Excluding inflation, the performance was even weaker, showing no gain in spending after excluding price changes. Incomes rose by just 0.2 percent in April, just half of the March increase. That performance would have been even weaker without the boost it got as the government began mailing out the first of $106.7 billion in economic stimulus payments. Consumer spending, which accounts for two-thirds of total economic activity, is being closely watched at present for signs that the economy could be slipping into a recession.

Business Outlook

Capital Goods Yesterday’s Census Bureau report on orders and shipments of durable goods confirmed, once again, that new orders for business equipment are flat and have been flat for some time. That’s troubling for two reasons. First, it seems that the expansion is over. This series is a leading indicator of business investment in new equipment. If it’s flat, that’s a signal that industry has stopped building its productive capacity. Second, if we are in a recession and this series begins to head south as business expansion turns into business contraction, then this will have been one of the weakest expansions on record. Note that new orders doubled in most decades since 1960 and also doubled between recessions except for the back-to-back 1980 and 1981 - 1982 recessions. This time new orders barely exceeded their earlier peak. True, the decade is not over. But if the series fades it will soon fall below its 2000 level. April Durable Goods: Beware of One-Off Events

Will Corporate Profits Deliver in 2008? Corporate profits have advanced entirely due to earnings from abroad resulting from the weakness of the dollar (see chart 2). On a year-to-year basis, corporate profits from the rest of the world grew 34.9%, the sixth consecutive increase in double digits. At the same time, corporate profits from domestic industries fell 6.2%, marking the fourth decline in the past five quarters. Moreover, within the domestic sector, corporate profits of the financial sector declined 12.2% from a year ago and corporate profits from the non-financial sector fell 2.6%. The bottoms up First Call S&P 500 earnings forecast for 2008 is a 10.5% gain. In light of these details, is it not legitimate to question the validity of the strong corporate earnings forecasts for 2008? Moving on to the details of revisions, they paint a slightly different picture of the economy than estimated a month ago. Inventories subtracted from real GDP for the second quarter in a row (-$14.4 billion vs. +$1.8 billion in the advance estimate). The trade gap (-$480.2 billion vs. -$495.9 billion in the advance estimate) is narrower than the advance estimate not because exports were stronger but due to a drop in imports (-2.6% vs. +2.5% in the advance estimate). Business capital spending is weaker (-0.9% vs. -0.7% in the advance estimate), but outlays on structures rose (+1.1% vs. -6.2% in the advance report) compared with the first estimate. Consumer spending was left unchanged at a 1.0% annualized increase. Private sector demand -- the sum of consumer spending and fixed investment (structures, equipment and software spending, and residential investment expenditures) declined at an annual rate of 0.6% in the first quarter (see chart 4). Essentially, after revisions, demand still remains significantly weak.

Profits drop by record amount Before tax profits of domestic companies dropped by $167 billion this quarter. Eclipsing the old record of decline of $104 billion set last quarter, that's $272 billion in just six months an astounding drop in profits that is being excused away by many experts.  By contrast the worst decline in profits during the 6 months of the 2001 recession was $105 billion, placing today's experience in stark contrast. In percentage terms the profit loss this time is very similar to the profit drop in 2001. Today profits are down more than 20% from the peak. What else is similar? Profits always lead the stock market.  Back in 2000, profits hit a peak exactly 9 months before the S&P 500 hit it's peak, and 2007 that was repeated, profits peaked exactly 9 months before the stock market did. Of course the same is true for market bottoms.  Profits rebounded a year and half before the stock market. What will happen this time around?  Hard to say of course, but a 20% drop in profits last time equaled a 40% drop in the stock market.  Today's 20% drop in profits will not see an equal 40% decline in the stock market but a 20% sell off in stocks is certainly possible. So most likely the stock market still has a ways to drop. And the economy will follow stocks.

Housing

On Wall Street: Drastic action may be needed if housing slump worsens The US has already faced its black swan event. A roughly 15 per cent slump in house prices across the country since the boom ended is something that many senior risk managers and, clearly, rating agencies thought could never happen. It helped turn credit markets upside down during a dramatic repricing of risk, before they regained some semblance of normality. But what if the swan turns out to be an even rarer shade, say pink - and home prices continue to slump even beyond the levels that bruised investors have priced in? In that case, the economy could take a nasty hit as consumers feel more pain and the banks take bigger bad debt hits on their loan portfolios. Meanwhile, credit markets could be in for another dose of volatility as investors reset their house price expectations even lower. Think what might happen if mortgage giants Fannie and Freddie started taking even bigger losses. A further leg down in housing could also tip Bank of America (NYSE:BAC) into losing its nerve and looking to find a way to avoid buying troubled Countrywide (NYSE:CFC), formerly the country's biggest mortgage originator. Long View: Fall in US house prices heralds problems for all

• April Existing Home Sales , More on April Existing Home Sales and Inventory , (4*)Historical Housing Graphs: Months of Supply, Sales and Inventory
• Dropping a brick  House prices are falling even faster than during the Great Depression
• Lawrence Lindsey on Housing: It's Only Going to Get Worse
• Number of Foreclosed Homes Keeps Rising
• Construction Crisis May Be Building

In Housing, the Strong Turn Weak America’s home-buying season, when for-sale signs sprout like dandelions, is shaping up to be even worse than expected this year, with prices falling, sales slowing and few signs of a turnaround emerging. Two reports released on Tuesday captured the bleak picture. One showed that home prices nationally fell 14.1 percent in March from a year earlier. The other showed sales of new homes, although up slightly in April, remained mired near their lowest levels since 1991. While Wall Street is growing hopeful that the economy may dodge a recession, many economists warn that the pain in the housing market may last for several years. Even markets that once seemed immune to the slump, like Seattle, are weakening. Prices nationwide might fall as much as 10 percent more before a recovery takes hold, economists said. As the home-buying season enters what is traditionally its busiest period, there are simply too many homes in many parts of the country, and too few people with the means to buy them. The situation is likely to get worse because a rising tide of foreclosures is flooding the market with even more homes, while a slack economy and tight mortgage market are reducing the pool of potential buyers. Home Prices Across the Nation (NYT interactive graphic).

Keeping Families Above Water  Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom. Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue

Central Bank Policy

No more 'Fedspeak' on further interest rate cuts Sounding a gong couldn't have made it clearer. Federal Reserve officials are putting out the word that further interest rate cuts are unlikely. Fed Governor Kevin Warsh ditched the central bank's cryptic word tangles and actually waxed poetic. "Even if the economy were to weaken somewhat further, we should be inclined to resist expected, reflexive calls to trot out the hammer again," Warsh said, referring to the Fed's key interest rate. Speaking more central-bankerly, the Fed's No. 2 official, Vice Chairman Donald Kohn, said the current stance of interest-rate policy "appears to be appropriately calibrated for now." Janet Yellen, president of the Federal Reserve Bank of San Francisco, called the current level of rates "appropriate." They are amplifying a signal sent by Chairman Ben Bernanke and his colleagues last month that the Fed's most aggressive rate-cutting campaign in two decades may be winding down — finally. The cuts started in September and take months to work their way through the economy.

Trichet Says 'Shocks' Aren't Over The president of the European Central Bank, Jean-Claude Trichet, said potential economic fallout from the turmoil in financial markets, coupled with pressures from rising food and commodity prices, add up to "an accumulation of shocks that is clearly not over." Mr. Trichet's comments echo broader worries about a European economic slowdown as oil prices top $130 a barrel. The fallout affects the U.S. and Asia, because Europe is a key source of demand for the global economy as U.S. growth slumps. As European consumers buy less, demand for U.S. imports is slowing. On Friday, a measure of sentiment among purchasing managers fell, while European inflation hit 3.3% in April. That's well above the ECB's preferred range, which is just below 2%. The relentless surge in oil and food prices is dealing Europe's economy a double blow -- making it harder for the ECB and Bank of England to cut interest rates, and undermining consumer spending on other items.

World Economy

Europe's Economic Growth Accelerates More Than Estimated, Led by Germany European economic growth accelerated more than initially estimated in the first quarter as investment and construction spending in Germany helped the region weather record oil prices, the euro's gains and market turmoil. Gross domestic product in the 15 countries that use the euro increased 0.8 percent from the fourth quarter, compared with an earlier estimate of 0.7 percent, the European Union's statistics office in Luxembourg said today. Investment jumped 1.6 percent in the first three months of this year, the most since the second quarter of 2006. Both the German and European economies are set to slow in the current quarter as oil prices boost costs for consumers and companies and the euro's advance makes exports less competitive. The slowdown, signaled by declining measures for manufacturing and services activity and consumer confidence, may not be as sharp as in the U.S., reinforcing the European Central Bank's case for holding off lowering interest rates as it tries to tame inflation.

• ·         European Producer Prices Rise the Most in 7 Years, Keeping Pressure on ECB

U.K. Consumer Confidence Drops to Lowest Level Since Thatcher Quit in 1990 A gauge of sentiment declined 5 points from April to minus 29, the lowest since November 1990, the same month Thatcher quit as prime minister, the London-based market researcher said today, citing its survey of 2,003 people for the European Commission. All five components of the index declined.

German Retail Sales Unexpectedly Fall for Second Month on Faster Inflation Sales, adjusted for inflation and seasonal swings, fell 1.7 percent from March, when they dropped 2.2 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a gain of 0.6 percent, the median of 29 estimates in a Bloomberg News survey shows. In the year, sales fell 1 percent. The German economy is losing momentum as faster inflation erodes consumers' spending power just as companies grapple with a global slowdown. The country's economy had grown the most in 12 years in the first three months of the year, driven by investment and exports. At the same time, consumers increased savings.

Japan's Economy Is Under Pressure Japan's economy showed further signs of deterioration, with industrial production and the housing sector continuing to slide and consumer spending falling sharply as the job market weakened in April.

India's Economic Growth Holds as Weakest Pace Since 2005 as Spending Slows India's economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment.Asia's third-largest economy expanded 8.8 percent in the three months to March 31 from a year earlier, matching the revised gain of the previous quarter, the statistics office said in a statement in New Delhi today. Lehman cut India's growth forecast to 7.3 percent for this year from 7.6 percent. As industry slows, demand for services such as travel and banking, which make up 55 percent of the economy, may also wane. Airbus SAS, the world's largest planemaker, said this week that India is among the weakest airliner markets right now and the country's carriers may cancel or delay plane orders in the next 12 months.

Optimism Wanes on Trade Growth Optimism about growth in trade, especially between Asia and the U.S., has eroded among executives of small to midsize enterprises in Asia, an annual United Parcel Service survey found. Only 39% of the executives surveyed foresee an increase in trade with American companies this year, compared with 51% in 2007. More than half of the executives interviewed in Indonesia, Hong Kong, South Korea and Singapore worried that their businesses would suffer from a U.S. economic downturn…

China Leads Asia in Retreat From Inflation Battle, Risking a Hard Landing Plummeting currencies did in the first Asian economic miracle. The second may fall victim to surging inflation. Central banks from Beijing to Bangkok are losing their bets that a global slowdown would temper price increases. While export demand from the U.S. and Europe may have eased, it has been replaced by rising domestic consumption that has helped push inflation rates in Asia as high as 26 percent. The result: In China, Thailand, the Philippines and at least eight other Asian economies, benchmark borrowing costs are lower than the rate of inflation, resulting in negative real interest rates, according to data compiled by Bloomberg. The risk is that prices will spiral even faster, leading to overheated economies and an eventual bust.

China Central Bank Dismisses Threat of `Hard Landing' From U.S. Slowdown China's central bank rejected predictions that exports will collapse because of the U.S. economic slump, signaling policy makers are unlikely to relax lending curbs or stem the yuan's appreciation. ``Some think drastically weakening external demand may lead the economy to a hard landing and that we should loosen policies,'' the bank's financial research institute said in a report e-mailed to Bloomberg News yesterday. Analysis of exports should be objective and ``not exaggerated,'' it said, adding that a ``drastic'' slowdown in shipments won't come soon. China has allowed the yuan to gain 5 percent against the dollar this year and told banks to set aside more reserves four times as it battles inflation near a 12-year high. The report shows that the People's Bank of China regards rising prices, exacerbated by last month's earthquake, as a bigger threat than cooling export demand.

Energy

Oil’s Not Well in the US Since the US is a net importer of oil, higher oil prices hurt our economy. The United States produces about 8 million barrels of oil a day, but we consume over 20 million barrels. That means that we are net importers of 12 million barrels of oil a day, which, at $130 a barrel, comes to about $1.5 billion. This is the amount that we fork over to foreign oil producers every day. At current prices our yearly oil purchases will total $570 billion this year and account for the lion's share of our trade deficit. Because US GDP, the total value of what we produce in a year, is about $14 trillion, the cost of importing oil at current prices is just over 4% of our total output. Since a year ago oil was about $70 a barrel, the extra amount we pay for oil will eat up an extra 2% of our GDP. To put this in perspective, the long term rate of productivity growth in the US is just over 2% a year, so rising oil prices will negate a whole year's improvement in our standard of living.

Oil Industry I (Readings): Prices, Fundamentals, and Big Oil Futures The basic structure of the oil industry is that the major cost drivers are exploration and production; then distribution and processing (refining). As oil has gotten more scarce in inexpensive and readily (politically) accessible areas of the world there are non-linear rising costs to the two fundamental drivers. That's lead to a fundamental and long-term supply-demand imbalance as new oil production hasn't been keeping up with new oil demand and consumption. A partial result of that long-term dynamic of skating on the margin is that the system has been and is increasingly vulnerable to shocks as its' fragilities grow.That's been the basic dynamic for at least three decades only it's gotten much more pronounced in this century. HOWEVER....there is another fundamental shift well underway that is greatly exacerbating all these innate structural characteristics.

Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions The bottom sub-chart shows oil prices, real oil prices and YoY% changes in real prices since '64. A couple of "small" surprises. While we did our own calculations of real prices, so they're at odds with the official ones, our guesstimate is that they are as high as they've ever been and climbing. The surplus of S>D has shrunk abruptly but the rate of growth in Demand has now shrunk below that of Supply ! If that were the long-term trend we'd be pretty happy. That reinforces many of the arguments we made.After the break we look at the bigger picture strategic issues but here's the bottomline, again. Oil is economically and affordably available but is increasingly controlled by non-market decision-making. And we are increasingly hostage to that decision-making almost entirely thru our own choices. Until we have a major national commitment to a national energy policy that is pragmatic, workable and realistic these trends will continue. And will likely accelerate.