bizzXceleration: Performance, Value and Profit

After the break you'll find this week's collection of readings in three categories: General Economy, Housing, and Credit Conditions. We've sampled some of the first group's headlines to kickstart our explorations of the tipping point and the consequences for market outlooks. But the bottom line is this - there is a widespread consensus developing that there's no second half recovery and '09 is looking worse. There's also a bit of better reporting on some of the data, and some not. In Housing what's started to dawn on folks is that the sub-prime mess is moving into Alt-A and Prime, or as the Great Tanta has it, "we're all sub-prime now". The number of homeowners under-water and the new wave of defaults lead to CR's discussion of strategic themes for Housing for '09 - which is a must read. And all that naturally leads us to tightening credit conditions, more bank writeoffs and even the best banks (JPM of all people) hiding more surprise write-offs and losses in obscure reports. Read away - we urge you. In the meantime we want to take a deeper dive into some of today's data to set the stage - having already covered Retail Sales (Dismal Headlines, Worse Realities: Retail Sales and Economic Outlook).

 But just for fun let's quote you two different headlines on Industrial Production - both reporting on the same data and both given entirely opposite impressions.

Industrial Output Growth Slows U.S. industrial production slowed in July, pulled back by a drop in output at utilities as the weather turned fairer. Industrial production increased 0.2%, following a revised 0.4% climb in June, the Federal Reserve said Friday. Previously, June output was seen rising 0.5%.

Industrial output up 0.2 percent in July Industrial output rose in July at a slightly better pace than expected as a further rebound in the auto industry offset a big plunge in output at the nation's utilities.

After the break we provide a couple of excerpts from our accumulating weekly readings on the economic news - and can we just say reality is slowly creeping in. We tried to make that point with the prior post and translate the implications of a rapidly slowing economy into the earnings outlook. Since that argument didn't fly very well we'll pick it up again later and concentrate on today's headlines. Not un-representative of which would be:Retail Sales Drop for First Time in 5 Months. Or these:Economic Slide to Extend Into 2009: Blue Chip, Economy Seen Slowing More Sharply: Philly Fed.

 Fortunately, or not, we consider the MSM reporting to be improving but still not quite there yet. Sadly for our market positions the markets got it right the first half of the day but schizophrenia returned in the second, as they recovered. But if Mr. Market is listening let us correct your mis-apprehensions. They are indeed out to get you and here's the proof.

As always  if you'll click on a chart  you'll get an enlarged version in a seperate window.

Retail Sales

 The headlines have it that Retail sales dropped after an upward revision for last month, not mentioning the downward revision for May :). More interestingly our preferred YoY change was 2.9%, 5.8% x-Autos. Which sounds good until you look at the chart and realize it's downtrending. MUCH more important though is real retail sales which was -1.9%, negative for the eight month in a row and at an increasing rate. Let's zoom in and get a little more granular so you can see the more recent data.

Real Retail Zoom-In

I'm afraid the headlines and MSM reporting still hasn't absorbed the power of YoY reporting or of looking at the inflation-adjusted data but at least they're improving a little. When you get more granular, as in this chart, you can that we turned negative in Dec07. In other words when energy prices started going crazy people did the rational thing. CalculatedRisk's continued emphasis, supported by minor analysts like Marty Feldstein, that we most likely enterred a recession in then is looking better and better. 

 Real Sales Energy-Adjusted

Thought if you just looked at retail sales x-Autos you'd think things weren't really that bad. As a big picture sidebar observation we urge you to recall our comments from a while back that the GDP numbers and component breakdowns tell us that indeed we crossed, or are crossing the tipping point into a more serious downturn. (Tipping Points, Blindsides, Ouches: Tough Times Getting Tougher) An observation obviously NOT absorbed into the markets as yet. Where you can see this is by netting out gas station sales - a statistic you can get nowhere else since it's a painful manipulation of the data, at least so far.

 When you do that it turns out real retail sales turned negative in Oct07 ! And of course that's the same month when real (estimated) gasoline sales jumped and have kept climbing. In other words real retail sales has been negative for 10 months. And the rate of decrease is increasing. Tipping points indeed. And nobody is factoring that into their pricing, valuations or business planning that we can tell. There are some very unpleasant surprises lurking in the wood work for a lot of people as the normal cyclic lags start to work themselves into view.

Just put another big picture point on it what we've seen is the air going out of the leveraged financial bubble over the last three quarters. In other words the consequences of the credit bubble bursting and destroying the Housing market and sucking out the "vital bodily fluids" from the markets. What we have not seen is the consequences of a downturn in the business cycle. But IOHO we're about to. (News Alert: Vicious Credit, Economy, Market Cycle Spotted, Markets Drivers 2 (Buyouts): the Carry to Cash Economy, Market Drivers: Liquidity, Liquidity(Buyouts) and Buyouts (Buybacks)

Continue reading "Dismal Headlines, Worse Realities: Retail Sales and Economic Outlook" »

Posted by dblwyo at 05:00 PM | Permalink | Comments (0)

To continue the dissection of whether or not we're in the process of crossing the "Tipping Point" we're going to take another perspective and dive deeper into the major components of GDP and relate them to the Business Cycle. Let's start by reminding ourselves about how the total system works with the accompanying graphic. As everybody now recognizes Consumption is 70% of a developed economy and the engine that drives everything else. In other words as consumer spending goes so goes the economy. Businesses will then look at trends in such spending, run thru their own decision process as to expectations, outlook and returns and come to a conclusion on hiring and capex spending based on where they think things are going. We come full circle when Consumers evaluate their own future prospects based on hiring, their "animal spirits" impressions and the availability of spending power.  The little sideboxes on "credit" are really short-hand for a very complex  decision analysis process that each player in the economy goes thru...but we're going to dodge  diving into the details thereof if you please.

GDP Components

 Take a look at each of the major components and look at the time-trend for each - bear in mind what we're looking at here is the absolute YoY change in each component. For example Consumer Durables were running along at about a $60B/quarter increase then it fell of a cliff. Then it dove underground. What does that say about demand prospects for those industries, e.g. Autos ? Non-durables were following the same lemming-path until the stimulus - but what a small impact ! Especially when you consider that MEW was pumping $600-800B/quarter into consumer spending. What was holding up was Services but that's dropped significantly as well. Then the theory was that capex would hold things up - WRONG. Which is EXACTLY what the business cycle model would predict. Res. Invest. is abysmal. There was a BIG drop in inventory production. By the time you're all done the only thing keeping the wheels on was Int'l Trade. And how long will that hold up ?

GDP Impacts

 Let's look at the same data and match it to the increase in GDP. YoY GDP increase about $202B, which is the smallest increase in six quarters and a severe drop from the last two in aggregate. What we're looking at is the % contribution of each component to the total overall change, i.e. NonDur change over GDP change. So the bottomline here is that all the components of Consumption are dropping, some rapidly. And all the components of Investment are as well, obviously RI the worst but the others increasingly so.  The accelrator is definitely  not being pressed, where as in the late '90s  Tech boom is was pressed to the floor and driving the engine and the car too  fast.

Aggregate Changes

 A third way to look at this data is add up the running total of absolute increases to see what the contribution of each component is to the overall change. One of the first things that we noticed was that "so much for the stimulus" - consumption increased in aggregate by only $15B !! And even with services added back in there's still a severe and serious drop in Consumer spending. Now this is something  you won't find readily perceivable in other data analysis and is critically important. And the same thing is true when you add back Capex - look at total spending thru the first four components - OUCH !! In fact by the time we add in RI and Inventories the economy shrank. Talk about Trade being our salvation.

% Contribution to GDP

 In fact on another view of the data in the first seven major GDP components that are the heart of the domestic economy shrank by -3% !! And over 80% of the aggregate impact was again Trade.

To put the point on it with the Dollar stabilizing foreign demand for US exports will shrink. And with ALL the world's economies slowing, in some cases much faster than ours, there will be a drop in Net Exports in the next several quarters. Which ones and how much we don't know as yet but you can see it coming.

To put a second point on it all those companies who's earnings were saved by currency translation benefits combined with increase in foreign sales are going to face a real uphill battle. Can you spell Technology ? What're the chances that earnings will in fact hold up ? That the optimistic analysts outlooks will come to pass ? On the basis of this evidence they aren't very good at all. At least IOHO !

So at the end of the day - it sure looks like a weak economy, that's weakening faster and in fact beginning to cross over the tipping point into a serious downturn. But enough of our parsing the data - hopefully it's presented clearly enough and with enough explanation that you can come to your own conclusions. If you think we're off base now would be the time to speak up. And if you think we've got it right now would be the time to start positioning yourself if you haven't already. 

Posted by dblwyo at 01:24 PM | Permalink | Comments (0)

The immediate prior post on the state of the economy ran up one of our redder red flags because we thought it indicated that recent GDP and other data told us we were beginning to tip ove into a more rapid downtrend. The last chart in that post talked about pressures on future Consumer demand from falling real wages and dropping employment. Here we're going to dig into that further by taking a deeper dive on the elements of consumer demand, particularly Employment and Real Wages.

Current Situation

Let's start with the existing situation and take a look at the multi-chart which brings all these elements into view. The top sub-chart shows the YoY% change in Employment combined with the total Payroll employment number. Notice the latter has been flattening off for some time, which you see in the gradual slowing of the former. Which has now for the first time touched zero. Given the Birth-Death adjustments this is likely to be revised severely downward as better sample data becomes available. The bottom sub-chart shows Real Wage, Employment and their sum on a YoY% basis. Notice the real spike due to falling oil prices and the return to a zero or slightly negative growth rate. If W+E continues to fall watch out below in the economy - even if it just stays were it is that'll mean severely tepid demand for a very long-time. So much for a V-shaped recovery and 50% earnings growth in the 4th quarter, eh ?!

Employment Trends

One of the things that surprised everybody was the jump in Unemployment, which means that more people who want to work aren't finding jobs. Part of the anemic and non-organic recovery was that lots of folks got discouraged and gave up...these are the folks who're still optimistic. Nonetheless changes in total employment and unemployment mirror each other. The top subchart looks at a shorter-term horizon for the YoY% changes in Employment and Unemployment (on an inverted scale). Everybody got really scared three months ago when the increase in Unemployed jumped over 20% but it has now remained over 20% for three months. That's a real, big ugly canary and lies at the heart of the health of the economy. The bottom sub-chart runs back to 1980 and tells you lots of things but two are important here. First there's a standard, predictable, cyclical pattern and the current data fit right in. Second all these different employment indicators have some wider swings in the short-term that are useful to look at but in the long-term they tend to move - trend and cyclical-wise - together. A third thing that caught our eye....the increase in Unemployment looks to be as steep as any past downturn !

Long-term Malaise

Have you ever wondered why the general feeling has been downright depressed despite the apparantly good employment and economic news over the last several years ? And why, despite the resilience of the economy so far, that everyone seems to be getting depressed (we're all whiners now) ? Well we keep talking about poor job creation, non-organic recovery and so on and this chart composite puts some evidence behind that. There's a rule-of-thumb that says we need about 150K jobs/month to keep up with population and labor force growth and offset productivity increases. You can debate that but the debates are in a pretty narrow range (130-170) so we use 150K, or 450K/quarter as our strategic bogie for neutral job creation. With that in mind the top chart puts it all in a nutshell - monthly job creation (Jobs-150K) only briefly rose over zero and has been negative ever since. If you wonder why labor costs are not rising or why everybody's not been happy there it is.

Actually if you wonder why all the companies have been buying back their stock and not either hiring or investing there it is. You don't add capacity when there's no future demand growth. The apparent. The bottom sub-chart makes this entirely clear by running the analysis back to 1980 and letting you see the cycle in aggregate new job creation, i.e. the running total of net new jobs. Basically we're over 4 million jobs in the hole - talk about demand destruction !

Consumption Demand

Which brings us back full circle to where we lead into this. The accompanying chart shows the long-term changes in Real Wages, Employment, W+E and Consumtion going back to 1980. It should reinforce our assertion that W+E ==> Demand, that they are cyclical, that there was an oil-price anomoly in late '06 and that we're in real trouble now and it looks to be getting worse. But decide for yourself - here's the evidence !

Posted by dblwyo at 06:38 PM | Permalink | Comments (0)

We'd thought about jumping back into the performance and earnings fray with more kicking the Auto dog scheduled and readied but these two days economic news deserve more attention. So we're going to follow up yesterday's quickpost on GDP with a deeper dive on GDP, it's components and on employment, wages and the demand outlook. With a couple of very strong motives and warnings. First of it's no mystery that we've been experiencing a slowdown for some time, which many suspect is a recession. We've argued that slowdown is accurate but recession was not just yet. With the latest data it's possible, even likely, that we've crossed the tipping point. This becomes further important because almost everyone has confused the explosion of the credit crisis with the underlying economy. We're thru the crisis and into the crunch where we shift from serious risks of structural collapse to "mere" severe credit tightening in a downward trending economy. Where a feedback loop between tight credit, acclerating economic weakness and loan losses will further weaken financials and credit availability. And where the mainstream economy will experience growing strains. A final key point - as best we can tell nobody's parsing the charts and data and factoring this into their thinking in the investment community or among business decision makers though some very good macro-economists (Feldstein, Summers, Krugman, Rubini, et.al.) have got it and have for months. At least you can't say you weren't warned and provided the tools to come to your own judgements. Let's start by framing the basic cyclical situation.

GDP, Consumption, Employment and Investment

 Both of these sub-charts show quarterly data on a YoY% basis with the top showing GDP, PCE (consumption) and Employment from today's data. The bottom looks at investment with GDP, Industrial Production and Investment. On a GDP basis the slowdown continues after an anomolous uptick in late'06 and early '07 (note that we'll come back to it) with a sharp downturn in PCE that showed up with the most recent revisions. Investment has been terrible because of Housing but notice that IndProd has turne down now as well.

After the break you'll find a bunch more chart collections that break all this down into further detail. In effect what we're doing is walking around the business cycle by following the Consumption => GDP => Investment + Employment => Future Demand chain of cyclical linkages. All that is traced out below. The bottomline is, IOHO, that we're beginning to cross a tipping point where the real recession is beginning to be visible. 

Continue reading "From Slowdown to Tipping Point I: GDP and the Business Cycle" »

Posted by dblwyo at 01:31 PM | Permalink | Comments (0)

Speaking of interrupt driven we were going to continue on with our orderly dissection of various enteprise earnings reports and performance outllooks. Judging by the readership stats more than one person was interested to see that sort of thing. Hopefully this won't be too much of a digression but this morning's headlines on preliminary GDP numbers, markets reactions and mis-interpretations call for it. After the break you'll find some more charts that we recommend for your consideration - translation, really study those suckers 'cause the headlines only got part of it this time and we're starting to cross the tipping point. We'll dig more into this coming weekend hopefully but let's start with a couple of headlines and snippetts for now.

• Economy gains less than expected The economy grew at a faster pace in the spring, but not quite as fast as expected, according to a government reading likely to spur further debate over whether the economy has fallen into a recession.
• Weekly Applications for Jobless Benefits Hit 5-Year High The number of people filing claims for unemployment benefits jumped last week to the highest level in five years, reflecting in large part a new government outreach effort to locate people eligible for benefits. 

 There's a little good news here, some worse/bad news and some missed signals, which are the really important part. Let's start with the smidgeon of good news. The headline got it right but remember this is very noisy weekly data. And for another thing there was a special effort made to make people aware of their benefits which caused a surge. When you do a little de-constructing, herein defined as taking the 4-week MA and looking at the YoY% changes you can see continuing claims continuing to creep up but the big jump is filterred out. Just for the record btw we did a comparison on Initial vs Continuing claims vs Payrolls vs Unemployment and guess what ? On a YoY% basis they're synchronous and follow the same business cycle patterns. You can use one just as readily as the others.

On the other hand, despite the market's being down, we don't think people understand what they saw in today's GDP numbers. The headline was for a 1.9% increase vs an expected 2.3% which isn't good. And Q4 was revised to a -.2% from .6% which tells you what happens as the data get better and more based on real samples than guesses. The real news IOHO is that YoY% was 1.82% and Consumption for Q1 was 1.45% and for Q2 1.34%, YoY using the real data. With the revisions in the data it looks to use as if Consumption slowed more abruptly than anybody knew, we're in the process of crossing the tipping point and nobody's blown any Rubicon-crossing bugles. In other words the number of people who'll have that information is pretty minimal. Check out the charts below and see if we make our case. 

Continue reading "News Interrupt: Real GDP and a Tipping Point ?" »

Posted by dblwyo at 01:30 PM | Permalink | Comments (0)

We're going to interrupt the previously scheduled discussion on dashboards, data, and decisions to focus on some real data and what it means. Oh wait....is that an interruption or a continuation ? In any case we will be a broken record with a brief interlude on something we seem to do every month - compare and contrast the headlines on retail sales with the reality of the underlying data. And as usual the cast of usual suspects (CalculatedRisk, BigPicture) had something to say on these lines. The good news is we found another sorta blog (CEO Economic Update) who really gets it and dug beneath the headlines to look at the de-construction of same:Inflation wipes out the Retail sales report.

Last time we talked about HF Indicators (Behind the Misperception Veil: What's that Data Behind the Curtain ?) it was with an unusual set, i.e. slightly different from our standard dashboard (Current Economic Outlook: HF Indicators vs the Business Cycle) focused on Consumption, Investment, & Future Demand. This time we're going to focus, after the break, on the other 1/2 of the standard set - the Monetary, Inflation and Interest Rate indicators.  What's that  Harry Potter phrase about mischief  ?  Well here it's Mischief  Discovered as we try to unravel the linkages between  rate  spreads,  shrinking money bases, the CPI/PPI gap,  inflation, the dollar and oil prices.

Real Retail Sales - Deconstructed: 

As you've no doubt heard Retail Sales was up a whopping 1% MtM ! Glory Alleluia !! And core inflation was flat. Of course sales was up 2.5% YoY, which is really a continuing downturn. And core inflation was 2.3% - higher than the Fed's upper limit - while overall CPI continued over 4% YoY. BUT this was the month that the rebate checks that we're going to save us all went out. How is that nominal Retail Sales continues to slow ? This is good news ? Is that all there is ? Take a good look at the rather busy little multi-part chart (sorry - trying to over-compress my dashboards ?). On the top is our standard nominal vs real Retail Sales, the latter being down -1.4% !!

We got curious so we hand-transcribed gas sales, deflated it ourselves and backed it out of retail sales and created some quarterly numbers (another first hear btw :) ). That's the middle chart which is worth some careful scrutiny. First off since 1992 real Retail Sales and xGas sales have move in tandem - and Gas sales have followed along the cyclic pattern, with a lag. Until the last two quarters when gas has turned into a moon rocket while sales looks like an Acapulco cliff-diver.

When you shorten the horizon and dial-up the granularity that latter pattern comes out even more clearly in the 3rd sub-chart (sorry about label/color switch). Notice that the two are definitely opening out like the jaws of a set of clippers (pun & metaphor with Freudian overtones intended) about to snip something off. Two more things to notice at the monthly granularity level that could be really important. YoY Retail Sales xGas is now pulling away from Retail at an accelerating rate. Think about that for Retail Stores, Consumer Discretionary spending or even Staples (ding, ding what's the XLP doing ?) and future demand ? Here those blades a swishing, swishing 'round the bend, they're coming...never mind. Big build up .....real Gas sales on a monthly YoY basis are also slowing !!

People are diverting their spending as best they can into gas and energy and it's still going down ! BtW real Sales xGas was down -2.6% and has been negative since Oct. Wow, what a surprise. Levels last seen since, and lower than, the downturn of '01 - and here's the real rub. The length of negative real sales declines is already exceeding by several months the one during the downturn. 

Continue reading "HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption" »

Posted by dblwyo at 05:50 PM | Permalink | Comments (1)

It occurs to me that if all you're able to do is read the headlines the world has to be a tad confusing right now. It takes some time and effort to dig into the various economic, market and business indicators and make some sense of them. Our plan for this weekend as the markets reacted wildly and positively to mildly "good" economic news was to focus on what the actual data said instead of what the headlines made it say. And then Friday arrived....whee. Was that fun or what ? Now as it happens it was personally gratifying in the sense of being consistent with our many months held stance. It was actually puzzling and non-gratifying in other ways because, when you dig into things, Friday's payroll numbers were part of a consistent set of trends and patterns that have been building for months now. And are consistent with many...many data points. So we're going to circle round back to the plan and review some of the weeks economic indicators.

But this headline problem deserves some thought. Barry Ritholz inadvertently highlight's the dilemma with his Sun. morning post pointing to a Floyd Norris (chief financial correspondent NYT) post on the YoY change in unadjusted private sector jobs, which was -125K, as a major recession indicator. Actually that's true....but YoY% change works as well, is consistent with seasonally adjusted data on either a quarterly or monthly basis; and all those data setii are entirely consistent with the trends and patterns of the others we're going to look at. At the bottom of Barry's post is another pointer to James Pethokoukas who has a similar job at US News and also blogs away. Hallucinogenically according to Barry's claims since he's in the "Dude, Where's My Recession ?" camp. Actually he's in the real optimist wing of commentators arguing that the economy is accelerating albeit slowly.

Having established, respected, well-positioned observers make such contradictory observations creates enormous cognitive dissonance for the casual observer. On the other hand it does make a horse race. Your problem is to sort it out. And that's where we try to make our modest contributions: by making comments that are grounded in the data, in the real structure and patterns, and doing it in such a way that the reasoning is clear, easily observable and verifiable. In other words we try to provide you with an easily decoded "dashboard" of indicators who's accuracy you can check for yourselves, either by inspection since we report the data just as it is in context. Or by replicating our approach.

When you do that for the data series we looked at this week here's what you'll find (charts and more detailed discussion after the break). We've run across a few other bloggers btw who take similar approaches. Beyond BigPicture and CalculatedRisk - the big gotos - we highly recommend BeYourOwnEconomist. 

1. Durables goods orders and PMI/ISM were reported as growing MtM, which they did. And both have been showing an anomalous uptrend in the very short-run which turns out to be export demand. Both have now turned back down and never violated a longer-term downtrend in any case. 

2. Hours, Pay and Unit Labor Costs are all showing downturns consistent with the early stages of the beginnings of a recession. And there do not appear to be any anomalies either. In fact on a quarterly YoY% basis Hours are decelerating much more rapidly than Employment ! Can you spell canary. 

3.Initial vs Continuing Claims are both showing continuing downward declines, entirely consistent with downward trends. Though that trend is accelerating. Again the headline was about how Initial Claims dropped but even restricting our view to it there's no trend violation. Continuing Claims though is particularly interesting since on an absolute numbers basis it's patterns were almost completely synchronous with initial claims until this weak and poor recovery. NOW continuing claims have remained at an anomalous high. Really stop and think about the implications of that for a minute, please. Do the words "boiling frog" mean anything ? And it's been going on since '02. That really doesn't bode well for the long-term outlook at all, does it ?

4. Employment, Hours and Unemployment: it was Unemployment that scared the markets so badly. As in a way it should since YoY it jumped from an 11% increase last month to approx. 25% this month ! But when you look at the data and the charts again the patterns are consistent, continuing and no surprises. That is, if you believe the downtrend acceleration thesis we're arguing.

We haven't put in another of our favorite and more often used HF indicators, Real Retail Sales, since we updated the set of HF indicators last week. Though the headline reports of same-store sales were so "good" this week and also supported earlier in the week market surges. But we did use it to kick off the discussion of the Retail Sector (Retail Industry: Plus Ca Change...or Bend Over and Kiss...) and pointed out that it too is accelerating downward, has been for some time and the rate is picking up. Again we'd ask you to link back, at least in your minds, to that detailed dive on Retail, and earlier on Autos, for investment, employment and outlook implications. This all keeps coming full circle indeed. 

Continue reading "Behind the Misperception Veil: What's that Data Behind the Curtain ?" »

Posted by dblwyo at 08:36 AM | Permalink | Comments (0)

Well we've seen a bunch of economic data come out in the last couple of weeks, including revised GDP numbers which showed QtQ growth at 0.9 vs 0.6% growth. Yippee.... We also got income and consumption monthly data which is even more interesting. The only remaining major data set due is Employment...coming this next Friday. The puzzled meme continues to be of course, "where's the recession ?". A point we've waxed on before several times. After the break we dive into the High-Frequency indicator data (our version of a basic monthly economic dashboard) but we want to start by reminding everyone of how the Business Cycle works and where we're at.

So we'll start with this graphic which compares several conceptual version of the business cycle and locates our current status. And, oh btw, answers the original question. Business cycles don't move on the news cycle they occur over several years and take months to show how they're moving. It is after all a $13T economy. Thru the Fed's actions we've likely avoide the catastrophe of the major collapse (red) cycle. On the other hand the sanguine outlook(purple) of the Street for a mild, shallow and short downturn was, IOHO, unlikely from the get-go. So now we're debating between the yellow and black lines, hoping for the yellow but hopefully positioning ourselves for the black.

Consider what the real data tells us overall and by major component. This next chart is drawn from our last post on the GDP numbers and there's been so little change we haven't updated it. Nonetheless it's still current, accurate and translates the conceptual into the factual. We've gone to the trouble of going clear back to 1980 so you can get a clearer picture of timing, patterns and lags. Once that's sunk in notice that the slowmotion slowdown continues but is deteriorating, especially with regard to employment. Now add on the fact that Housing has a long way to go, that the Credit Crisis has morphed back into a Credit Crunch and the surge in Energy is taking 1-2% out of our growth and ask yourself where we might be headed.

There are a couple of bottomlines that pop out of this data and the charts below. First off we're not NOW in a recession but a creeping slowdown. Next ALL the major HF indicators are gradually weakening, rather exactly in-line with where we place ourselves in the Business Cycle graphic. Third all the harbingers of future demand are both weakening, and at what appears to be slightly accelerating rates, but other economic data,e.g. oil/gas prices, housing, credit standards, foreclosure rates, and so forth, indicate that the pressures are continuing to mount. In any case even if everything stayed the same this would be a very weak economy.

And we don't see that reflected in any headlines, MSM discussion, business planning or market pricing. Instead what we see is a retained believe the mild and done outlook. But make up your own minds - 'cause here's the data and charts in as simple a form as we can manage. 

Continue reading "Current Economic Outlook: HF Indicators vs the Business Cycle" »

Posted by dblwyo at 05:34 PM | Permalink | Comments (0)

The title is a bit of a play on Gladwell's "Tipping Point" and the historical "crossing the Rubicon", hopefully suggesting the crossing of a potentially decisive barrier or cusp point. Which, as we dig into the structural changes in the most recent GDP, seems like a reasonable but slightly scary, and growing, possibility. Before we dig into that though let's set the table by looking at what the consensus appears to be and see if we can fix some of the conceptual mis-understandings about business cycles built into much of the discussions. Here's a column from Fortune online that perfectly captures much of the thinking that we see as well as an online survey.

 Dude, Where's My Recession? Out: Recession. In: Expansion. That's my quick take on today's first-quarter gross domestic product number, which showed that the economy grew 0.6 percent in the first quarter. Now that's not a robust number by any means, but it's not so bad given all the worry out there that the economy is headed off a cliff. Before you declare a recession, as many economic pundits have, shouldn't the economy, well, actually recess a bit—if only for a quarter? As a movie buff, I keep looking for the right cinematic analogy for the American economy. Try this one: It's like the Terminator. Not the Schwarzenegger one—the other one, the Terminator from the second film. You could empty a shotgun—or in this case, an imploding housing market, credit crunch, and high oil prices—into that morphing metal dude, and before you know it, the thing's all healed and chasing you again.

When asked where the economy would be in six months 30% though it'd be better, 50% thought worse and 20% the same. IOHO the folks voting thumbs down have got it right. The mis-conceptions, about which we've waved our arms a bunch, seem to be largely about the nature of the cycle and where we're at in it. Just to refresh your memories a bit recall that what comes 'round goes 'round. As consumer demand drops so does business output which then leads to declines in hiring and capex. Which then further depresses spending and demand.

When you look at the cycle over time you get a sine-curve that moves up and down around a trend, with the exact timepaths dependent on circumstances and history. Since we're very early days in this cycle you wouldn't expect to see serious downturns in spending or hiring yet. But the answer to "where's my recession" is that it's coming and, when you break apart GDP it is, for the first time, very clearly visible. 

If we remember where we're actually at this has been a weak recovery, and a very poor generator of either jobs or real wage increases, which began slowing down way back in '06 without achieving organic growth. We missed a major downturn in consumption in '01 and beyond because spending was held up by the Housing ATM but that's long since becoming history. So one would normally expect a slowdown and at least a mild recession. But the housing boom was floated on a vast pool of funny money and perverse structured debt. When housing began to crater it took out the mortgage related instruments but then metastasized into a contagion that almost over-whelmed the entire set of worldwide credit markets and could have led to a severe downturn indeed. As we said back in March we've fixed the mechanisms but still have to face the unwinding of terrible debts and the re-pricing of risk. Meanwhile the slowmotion slowdown is beginning to tip over. On top of which inflation and energy costs are, in effect, a very serious tax on consumer spending that'll further depress it.

Much of which you can begin to see in the further discussion of GDP component charts below. In some ways we'd like to argue that this might be some of the more important economic charts you look at. What we will argue is that after looking at them your decision as to whether or not we're beginning to cross the "Ripping Point" will unavoidably be critical. One way or another you'll have to decide whether the sanguine consensus is right. Or these and similar views (Summers, Feldstein, Krugman, Roubini, G-S, Merrill, Buffett, ....) You have to read on down to get our bottomline conclusion of course :) !

 BUT....if our take on where we're at and what's ahead is accurate the current sanguine views are very mis-placed indeed. We'll have to see of course. But think about what this all means for earnings, outlooks, valuations and the market as well.

Continue reading "Crossing the Ripping Point: Breaking Down GDP Components" »

Posted by dblwyo at 09:09 AM | Permalink | Comments (0)

the  opinion of the markets, they aren't very ugly either. And nowhere near as ugly as was apparently feared by all and sundry. When you look at the YoY% changes they actually don't appear to be too bad. At least until you dive into them. The table at right shows the QtQ% changes and their annual equivalents. As you likely know we prefer the YoY% changes as being more revealing. So here and after the break we're going to dive in quite a bit more. Actually in two separate passes. This one looking at the time series and a follow-up, in a reasonable time, taking apart the major component changes. Cutting to the bottomline when you look at the numbers we'll say that the slowmotion slowdown appears to continue. It's when you look at the indicators of future demand that it starts to get ugly. And when you break down the component changes it gets real ugly.

Overall GDP

Let's start with an overall look at GDP, Consumption and Employment. Just looking at this chart it doesn't look so bad, does it ? Except of course for Employment which, at least to our eyes, looks to be beginning the kind of significant downturn that we've seen in past recessions. Again the difference between our interpretation of the data and the market's would seem to be a difference in understanding cycle patterns and time lags. As the economy slows consumption turns down and then GDP which leads to downturns in employment and investment. Which further lowers consumption and the cycle starts reinforcing itself. So we'll repeat - this is early days yet. The recession isn't here. But boy do the red flags look like they're going up the flagpoles all over the place. Some of which are RI continuing to fall off a cliff and Capex turning negative ! OOPs !!

The bottomline is an overall continued slowing of the economy with increasing weakness in Consumption and Investment being an increasing drag, especially of course Residential Investment. But even Capex is turning down. The indicators of futre demand, job and wage growth, are (as we've mentioned in detail before) really showing severe strains which you can expect to see in future demand decreases. And to ripple thru the rest of the economy over time as the downturn accelerates. Below you'll find more specifics on Employment, Consumption and Investment that's consistent with this view. Take a look. 

Continue reading "Real GDP: How Good are the Numbers ?" »

Posted by dblwyo at 09:24 AM | Permalink | Comments (0)

Well the markets are just roaring ahead today, and really thruout the week, despite the fact that not only was there no good economic news it was uniformly bad. One possible interpretation is that we're so jaded that our awareness has gone numb. Another, of course, is that the recession is already priced in. A third would be that that there's a lack of grasp of how serious this is, how long it might go on and what the faultlines are that open us up to other risks. If you've been reading along you know we're in the third camp. The natural consequences of this is we view this uptick as a bear market sucker's rally. And that we haven't begun to price in what's coming. What we think is going on is that, despite an excess of R-word reporting there's a pretty complete lack of grasp of the structure, patterns and timing of how a recession plays out. As we pointed out in the prior economics post (Econ Indicator Update: Real Sales -2%, No Recession, Yet !) we're definitely not in a recession yet but real sales and other indicators have turned sharply....sharply down. In another context a friend asked me why the MSM media wasn't reporting on the facts as they are and interpreting the context. Aside from having no good answer we'd guess it's because reporters report not analyze; and they report on that day's simple news. The trick is to build a set of filters that sorts and aligns all this flood of raw data into a coherent whole so you get an idea of where everthing fits together. Taking a systemic view in other words and then being systematic about executing against that view in data collection, analysis and interpretation.

With that in fact, since there's no more major economic news below the break is our collection of excerpts for this week. As you'll guess there's continued weakening in the core economy (Beige Book, et.al.) particularly in real sales and in indicators of future demand (wages + employment). beyond that Housing indicators continue abysmal and worsening with more to come. In particular we point at CalculatedRisk's dissection of the March selling season which has gotten off to a worse than abysmal start. The excerpts end with three stories on strategic factors that you need to take a deep breath, step back and really think about. Commodities pressures will continue for years (and as we pointed out in the prior post on the In'tl Economy there are major cracks metastasizing around the world). Further it turns out that we're far from out of the woods on the credit crisis. And the NYT put up a great article on how we're already seeing severe reductions in hours in employment - the classic harbinger of doom to come.

Continue reading "WRFest 18Apr08(Economy): No Good News in Sight" »

Posted by dblwyo at 09:00 AM | Permalink | Comments (0)

Let's take a quick look at this week's economic news, which is quite revealing. Yesterday's markets jumped up on great Intel results, which tells us that hope continues to triumph over analysis. The conundrum lies in a combination of mis-reading the data and not grasping the lag structure of company performance. Earnings are backward looking as indicators, based not only on the previous quarter obviously but because sales turn down for many/most of these companies after the economy begins to turn down. And oh yeah, btw, futures are down on Merrill's loss and further write-offs. Well guess what we've got a long way to go to sort out the credit mess and the re-thinking of the Finance Industry. Which'll mean bad news for a long time. But that's not the most important thing to think about - it's that we're headed into a recession, we're not there yet. Remember that lag structure and think of this as a dashboard update. Let's take a look at the real data, not the headlines.

After the break you can see charts and short discussions on Industrial Production, Real Retail Sales, Inflation and Consumer Demand. Let's try to summarize it though.

1) Industrial Production (IDP): flat but weak and with a slight downtrend indicating that we're not in a recession now. In other words despite all the angst, arm-waving and media coverage of the Recession we're a long way from it's being here. 

2) Real Retail Sales: is down -2% on a monthly YOY% basis. NOT what you heard. And the downtrend started in Q407 and is deccelerating. 

3) Inflation: adding insult to injury the CPI is up 4% and the PPI 11% YoY. And this is not something we control because it's being driven by external factors but it is ripping the heart out of consumer demand. 

4) Consumer Demand: we use the combined YOY% changes in Wages and Employment. Real wages have dropped rapidly back to a much longer-term downtrend because of the return of inflation. With the deccelerating downturn in Employment (Employment Outlook: Where Have All the Jobs Gone ?) W+E doesn't look very favorable. 

Continue reading "Econ Indicator Update: Real Sales -2%, No Recession, Yet !" »

Posted by dblwyo at 07:42 AM | Permalink | Comments (0)

Gone to a downturn everyone ? Well not quite yet but for the third month in a row the economy lost jobs in total. Some -80,000 of them, not counting the downward revisions in the prior months. Interestingly the markets held up well last week and futures are up this morning despite these realities. There are a few more realities we ought to be concerned with as well. Which we can begin to see in the chart at right, who's construction and implications we've certainly discussed. Here we look at YOY% growth in payroll employment since Jan00, which as you can see continues the downtrend established in '06. BUT, that downtrend looks like it's beginning to accelerate a bit. The other number is Unemployment which is graphed on an inverse scale and it's been rising for a while now. Not good news in either case.

UPDATE: BigPicture has an interesting, and accurate, observation that the Birth/Death adjustments are providing a significantly too optimistic view on the employment numbers:More NFP: Worse than Reported .

"As we have discussed ad nauseum, prior to 2002, the B/D adjustment had a minor impact on total BLS reported job creation. Since 2003, the B/D adjustment has been part and parcel to BLS' Current Employment Statistics (CES) program, the official measure of US employment. In brief, the Birth Death adjustment hypothesizes how many jobs were created by companies too new to participate in the CES survey.Since this major change in modeling was effected, Birth Death jobs are much more significant, rising to the point where in 2007, the B/D accounted for over 80% of all BLS reported jobs. Thus, comparing the two periods is an apples & oranges affair."

Continue reading "Employment Outlook: Where Have All the Jobs Gone ?" »

Posted by dblwyo at 07:24 AM | Permalink | Comments (0)

With the release today of the Personal Consumption data we now have the complete suite of H.F. economic indicators thru Feb. available so we're going to update them all and the associated charts. As you'd expect, at least in our views of the world, there were no real surprises and consumption continued its' downtrend. Now if you pay attention to the headlines spending edged up 0.1% and was flat after adjusting for inflation. But in real consumer spending was up ~ 1.7% YoY, which sounds like good news until you understand that it ran above 3.0% for most of the last two years and began slowing in the Fall. And further that real Retail Sales has turned negative. After the break we'll go into that as well as the investment indicators, the outlook for consumer spending and the monetary, price and interest rate indicators. By and large all of which showed continued deterioration.

What we want to jump off with those is a deeper dive into the things that show where Consumer spending is going. There are three primary drivers: real Wage growth, Employment growth and the ability to borrow. As we've discussed the latter held up consumer spending thru the downturn thru MEW but is rapidly going away for the obvious reasons. So let's take a look at a longer baseline for Wages and Employment. In some ways the charts almost speak for themselves but let's add a few words. In the first sub-chart you can see where real Wages have actually been trending down except for two blips since Jan00. The latest and biggest blip was the god's gift of lower oil prices and inflation in late '06 which probably held things up thruout '07 and staved off a recession then. That's all reversed. Employment growth was never very robust and has slowly been deteriorating the middle of '06 in a very steady downtrend. The latest YoY numbers were ~ .6% which is recessionary in and of itself. As we proceed along the cycle you can anticipate further declines in both these numbers. So as you look at the charts below, which cover a shorter timeframe, keep all this in mind.

Continue reading "Economic Dashboard: Current High-Frequency Indicators" »

Posted by dblwyo at 03:06 PM | Permalink | Comments (4)

In the spirit we're pursuing here of asking what are the facts, no matter what headlines or denials seem to obscure them, we'd like to focus on this week's Housing data. Which is about as bad as it gets but NOT as bad as it's going to get. Over the last few months we've shifted from denial to contained  to serious (though one still is croggled by the uptick in Homebuilder stocks !) to more and more accurate grasps of the breadth and depth of the problem. However now that Paulson, the Fed, and market commentators are starting to mumble things like 2010 those harsh realities still don't seem to be reflected in anyone's thinking about the economy, business cycle or market outlooks.

So in the spirit of letting the data speak we're going to borrow some charts from CalculatedRisk and put them in our framework. On the grounds of why do something badly that an expert has done extremely well. The key questions are where are we at and where are we likely to end up. First off we've obviously been in the most unusal Housing bubble in the post-war period. Home construction is a major driver of Investment spending directly and Consumption indirectly. As you can see on the bottom sub-chart a boom above trends started in the late '90s but turned into a real bubble after '03 and is now in a steep and precipitous decline. CR's other key point is that such drops always lead to a recession. If the general economic downturn mirrors the Housing decline we've got serious problems ahead. The top sub-chart is even more interesting because it starts to tell us, being inflation-adjusted, how far we went in prices, how far we need to come down and how long the adjustment process might last. The Composite-10 national averages peaked in 1990 and took 7 years to adjust, find bottom and then begin climbing out. And on that measure we're only about a year into this downturn. All that unsinn you heard about a bottom this year or even in '09 looks wildly misplaced. Even finding a bottom in '10 looks very optimistic, at least for prices, though sales may bottom earlier.

Continue reading "More Dialog: Facing Harsher Realities in Housing" »

Posted by dblwyo at 09:30 AM | Permalink | Comments (0)

As most folks who follow the busines, or any other news, know Feb. Payroll data showed a surprising drop of -63K jobs instead of the expected increase of 34K. For those of you following along neither number is really too big a surprise as they'd both be well within the trends we've seen in previous data. And within the sampling error/estimation limits. Nonetheless this is a weak jobs report. More interesting still is that Unemployment dropped to 4.8% from 4.9% ! What's going on. Well in fact under hidden pressures people are leaving the market, otherwise known as joining the Not In Labor Force (NILF) contingents. A finding that dovetails very nicely with our long-term findings that this isone of the weakest, if not THE, weakest job-creating "recoveries" on record. Let's take a short look at the headlines and then a harder look at what the data actuall tell us. After the break you'll find some interesting other blog posts on the underlying realities. If you keep reading you'll find one our patented multi-part charts taking a look at what the real data has to see.

Continue reading "Rational Responses: Current Employment Picture" »

Posted by dblwyo at 02:18 PM | Permalink | Comments (0)

Well the Markets have bounced up three days in a row, at the last minute and on some fantastic (and the emphasis is on the "fantasy" part) news that Ambac was going to be rescued, save it's rating and, today, that IBM is buying back $15B. Given that Ambac apparantly has several '00s of $Bs in exposure a $3B rescue doen't seem like it saves the day. As for IBM it throws off so much cash that what else is it going to do ? It's not growing the company in either revenue or profitability after all. A tightly run ship who's financial health is beyond impeccable so it won't need those funds when the crap really hits the fan but we still have to wonder if that's the best use of it.

Meanwhile back in the real world the economic news is unremittingly bad and accleratingly worse from inflation to Housing. Here's an interesting interview by Barrons/WSJ with Robert Shiller which we strongly urge you to watch. Below the line you'll find both some other charts that put what he's saying in context (courtesy of our e-colleague CalculatedRisk of course) plus some collected readings.

Schiller had a lot of simply fascinating things to say about both how bad it is and how much worse it's likely to get, in that low-key and restrained academic fashion that makes it hard for the intervier get soundbites. But this one really....really tried. We counted at least four major times where the question is what our lawyer friends call leading, i.e. a setup, telling the interviewee what the expected comment is. The first setup which we couldn't believe it was so distortionate was asking whether we werent' seeing price declines slow or stop. What Shiller replied was a) in fact the rate of decline was accelerating as b) people's psychology and expectations come more into line with reality. And c) that all he hoped for was that not that they'd stop declining but that the rate would stabilize or slow. He went on to add d) that housing was way overbuilt, the peak was like nothing we'd seen since '51 (remember WW2, vets and the VHA ?). And as a consequence e) we likely had a long way to go since this boom had been going on since the early '90s and would have as far to run down. Now stop and think about all that for a moment, a K-R Moment as in Kubler-Ross. You know denial, anger, acceptece. These days I'd settle for getting as far as anger since everybody keeps looping back to denial.

If this is the thinking on the street you know why were're trapped in a sideways market looking for the Messiah of the 2nd Half Recovery to come save us while the news just keeps going on. In the sense that bad news is being ignored and teensy, tiny little pieces of good news push up the market you'd have to say that it's all priced in, right ? Of course what's priced in is not the realities that some of us see all around us though. 

Continue reading "More K-R Moments: Housing Realities and More States of Denial" »

Posted by dblwyo at 12:42 PM | Permalink | Comments (0)

Well it's New Years Day, traditionally a time for celebration, football and convivial congenialty. Let me wish everything for you then that you wish for yourself, now and in the New Year. It's also traditionally a time to look back (retrospect) look forward (prospect) and resolve - that is to decide where things are headed and you'd like to be.

Perhaps the key thing in retrospect we'd like you to think about is two critical points:

Continue reading "Housing: Retrospect & Prospect" »

Posted by dblwyo at 10:08 AM | Permalink | Comments (0)

The other interesting economic data that came out was the current PPI and CPI readings where even core consumer prices showed significant upticks. The prior post on Retail Sales talked about the differences between real and nominal retail sales and established that real sales was nowhere, and we mean nowhere, as good in terms of either raw numbers or trends as the headlines would have had us believe. This is really important (puns unintended but appreciated) though sometimes it feels like shouting in the forest. Actually most times. On the other hand the YOY change analysis meme has spread faster as a graphical analysis tool than anything we've seen. And the last WSJ entries do a very nice job, with the exception of not depicting real retail sales, which is what you really needed to see.

Below we look first of all at inflation using the approach and updating some earlier charts that looked at the long-run trends in PPI, PPIx, CPI and CPIx. Especially the cumulative changes since Jan00. Along with that we also bundle in the associated look at the relationships between PPI and energy (Oil) prices. And pretty well confirm the prior analysis with the caveat that it appears to be acclerating.

The last set of charts borrows and compounds the retail and consumption charts so you have Inflation and Real Retail Sales are together for comparision. The bottomline is that PPI is up very sharply, it's due to a spike in energy prices AND (again the most important real reality) it's beginning to propagate into consumer prices. Last year at this time everybody expected consumer spending to slow but it didn't, much. What recent commentators are forgetting is that that was a Fall06 Xmas present from an abrupt downturn in energy prices, partly thru supply/demand balances and partly thru a reduction in speculation.

Well this time that driver has reversed direction, inflation is up and real consumer demand is not only slowing but is vulnerable. 

Continue reading "More Reality Bites: Inflation Trends and Outlook" »

Posted by dblwyo at 10:31 AM | Permalink | Comments (0)

In the midst of what can only be described as market chaos this last week the inflation and retail numbers didn't get the attention they deserve so we've refreshed our data and charts with a view toward looking into that.

As many people suspected while the headline Retail Sales number was up tremendously when adjusted for inflation it wasn't. Below you'll find a comarison of Retail vs Real Retail sales using YOY% changes on a monthly basis. You'll also find a comparsion on a quarterly basis of Real Consumption vs Real Sales.

While Consumption has held up, both on a monthly and quarterly basis it is slowing (discussed in the prior GDP assessments here and here). Those prior posts clarify how important Real Consumption is to the overall health of the economy, what the trends and drivers are (along with Investment) and why the retail sales and consumption data is so critical to understanding the outlook. If that's not real clear may we suggest a brief review of the argument ? :)

Continue reading "Reality Bites: Real Retail Sales and Consumption" »

Posted by dblwyo at 10:08 AM | Permalink | Comments (0)