bizzXceleration: Performance, Value and Profit

Here's hoping you had a great Christmas and are enjoying the weekend. It's time for a quick update and snapshot of the markets and economic information from the last week or so. It being the end of the year, and the decade, a lot of look-backs are starting to show up and some of them are interesting. Not least of course being that this last decade had negative returns and the worst performance of any decade since the Great Depression. On the economic side of things Durable Goods came out, and the MtM change wasn't what the forecast was expecting but doesn't look too bad on a YoY basis. But, not to dampen your season's spirits, our preferred indicator of future demand (the change in Wages + Employment) isn't looking so encouraging. And, this being a time for reflection, we've also included a couple of decade look-back/look-aheads and associated deep attitudinal shifts. In particular the radical change in attitudes toward equities. So let's see if we can find some signal in the noise.

Current Market Situation

Here's four views of a market composite (UL - last few months, UR - the "carry trade" indicators [$ & Gold], LR - decade view and LL - 2Yr view). Recently the markets have been in a narrow trading range (UL) but broke above it slightly. Interestingly despite dollar strength and gold weakness. If all the myths floated over the summer and fall were true that shouldn't happen. We think it's telling us that the carry trade WAS the driver, it's coming off (or being displaced by the Yen) and, fascinatingly, stocks and the $ went up together! We take that as a sign of an optimistic outlook, combined with end of year dressup.

On the other hand the (LL) shows there's still a ways to go to break above our infamous down-channel. When we go with the flow and look back over the decade it really is kind of depressing. Stocks are still lower than they were in mid-98, have a ways to go and will face stiff resistance at the next Fib level. If the Fall was the end of the world, March was the banks are/aren't failing, spring and summer - oh, we guess they aren't then the Fall was carry-funded fantasies. As Ritholz says in the readings we may still have some upside but we're really facing a range-bound and volatile market for at least the next decade (especially if you believe all the evidence we piled up on structural challenges).

Continue reading "Markets & Economy: Noise, Signal, Some Worrisome Signs" »

Posted by dblwyo at 04:51 PM | Permalink | Comments (0)

Two posts ago we took a quick slapshot at the state of the economy (Slapshot in Time: Economy Status and Appalling Military Metaphors) and the outlook to set up a deep dive on the underlying structural foundations, this post. And interrupted ourselves to divert on all the amazing news coming out of the Financial Sector (The Business of Banking: Challenges, Issues & Outlook) with regard to the smoldering firestorm of reform being fanned into life. Strangely enough the two are completely related, as we'll show here, but we're going to start with long-term employment trends. Lest, however, you think this is just boring economic data take a look at this story from tomorrow's WSJ on the Lost Decade in the markets (Stocks' 'Nightmare' Decade) or CalculatedRisk's comments on that and Employment (The Lost Decade). After we're done, if not before you should be convinced that they aren't unrelated. The accompanying chart shows New Jobs, Net New Jobs (New-450K/Qtr needed for breakeven) and cumulative job creation from 1980 to now. We may have "lost"7+ million jobs during the downturn but according to our calculations we're actually 12.2 million in the hole. The point being that for our economy to be prosperous and growing where wages go up and drive investment and new hiring, thereby in turn driving profits, earnings and markets, we need jobs, jobs, jobs. And, if you recall the last econ post we estimated that over the next decade we needed 46 million of them and were going to be lucky to get 20 million (the BLS has since estimated that we'll create 15 million over the next decade). Welcome to the new normal.

Continue reading "Jobs, Debt & Growth: Level Setting the New Normal" »

Posted by dblwyo at 08:52 PM | Permalink | Comments (0)

Before we get back to dissecting other aspects of business performance let's take a break and look at a snapshot of the current state of the Economy, pulling together recent data plus stuff we've been scattering around other posts. It might be a slapshot depending on how you take it, of course, but we think the news is good. Applying our appalling but all too accurate Eastern Front metaphors we compared last Fall to the Battle of Moscow when only last minute emergency action saved things from collapse. That makes this last winter thru summer the Battle of Stalingrad when great sacrifices were able to stem the tide of attack (notice we don't say German or economic 'cause the darm metaphor is too accurate, almost close enough to be a model). Continuing to abuse it because it works that means we're now facing the Battle of Kursk, when the Russians turned the momentum in their favor. By that analogy we're going to define the business cycle equivalent of Kursk as when we start to seriously create jobs again, no matter how weak it is. (NB: Moscow (1941/Fall08, Stalingrad 1942/Winter-Fall09, Kursk 1943/ Winter09-2010). If you expand the composite map you can see the ebb and flow of these battles which pretty much exactly mirrors the last year+ that we've struggled thru.

Recalling the Nature of the Business Cycle

Of course these aren't giant military battles but in some wasy the stakes are as high. We are "debating" the prospertiy and health, and to some extent, the survival of our economies and soceities. Certainly we are wrestling with the attempt to help ourselves, and get the economy back on its feet. As part of that this snapshot is intended to place us pretty exactly the flow of the business cycle so you can improve your own planning and decision-making, as well as judge that of others. Just to put a point on that last observation the slowdown downturn was visible from 2006 forward and certainly clear thruout 2007 and early 2008. The metastasis of the credit crisis and the near collapse of the markets was unexpected in extent but was also predicted (and not just here). The good news is that more people are paying a lot more careful attention and getting it right. The bad news is that it's not clear how much that's sinking in around town or influencing decision-making.

Continue reading "Slapshot in Time: Economy Status and Appalling Military Metaphors" »

Posted by dblwyo at 08:23 PM | Permalink | Comments (0)

One of the things we try and do around here is find the right data, put it thru the right filters and interpretative frameworks without torturing it to say what we want and then use to reach the conclusions and make the right decisions. Over the last five years that approach has served us very well by and large and hopefully helped those who've read this blog or seen our newsletters or other communications. Beyond that when we don't understand something we try and dig into until we find the right data, a useful explanation and even a framework for thinking about it. The last several posts have all served that "tradition" but rather than get back to our knitting we're going to take another example and then try some big picture lessons from it. The example, which is vitally important for its own sake, is the Employment Data. The important lesson is understanding the data sources and interpretations but the critical lesson is the implied one about letting your thinking be distorted by your pre-dispositions. Which we'll come back to you in a bit. Let's dive in on the Employment data.

There are three OMG look at the data ideas floating around the memosphere (meme+MSM+blogosphere) about the Employment data. Now we'll just say that in the last few years this is not the first such tempest that's blown up from conspiracy theories to mal-adjustment in inflation data to....on and on. EVERY single one of them on being checked out was somebody not looking at the data, charting it out and seeing whether or not it made sense or if they had a workable suggestion for making it better at an affordable cost. NOT a single OMG moment has held up in five years. There are three related ones floating around about the Employment data that we want to test in the process of learning something about what's really going on. One is that the Non-seasonally adjusted data shows job increases so it's not as bad, another is that the two different sources of data - the Establishment survey which talks to businesses directly and has a more limited but more accurate sample and the Household Survey which picks up freelancers, consultants, farmers and other n'er do wells like ourselves have a huge disparity and the third is because this economy "is so different this time" that you can't rely on the employment data as a lagging indicator because it's actually a leading indicator. Putting these to rest is almost as important as understanding the data per se.

Three Gotchas in the Employment Data

Let's start with looking at the Establishment employment data, both seasonally adjusted and unadjusted, and comparing it to the Household survey data and seeing what we see. As usual and always click to enlarge the chart please! The top chart shows SA and NSA Establishment vs Household Employment. The thin red line is the NSA and notice especially that a) it's very noisy constantly wiggling around the SA data and b) there's a constant gap of around 10 million jobs between the two surveys, which once you adjust for the difference in data sources, turns out over the last several decades to yield the same answer as to the state of Employment. At least according to the Fed in several repeated looks they've taken at the issue. If you get what we just said all three of the OMG shibboleths just died on the facts. We could spend the rest of this blog explaining in detail but will pass on.

The second sub-chart shows new jobs, from which we've dropped the NSA data which is SO noisy that the repeated and useless up & down spikes result in a chart too noisy to read and interpret. By and large over nearly three decades the two surveys yield exactly the identical number of new jobs, though there is a slight discrepancy on this quarterly basis in the last quarter. Which is not out of line with previous discrepancies. The third sub-chart shows YoY% changes - SA and NSA are so close that the red and blue lines overlay and turn purple. Compare that inadvertently created line with the Household survey and guess what - again the YoY changes give us just about the same answer again. Though the Household survey is nosier and therefore it tends to be harder to rely on period to period. The bottomline therefore is that YoY SA data gives us the cleanest, most reliable indicator of trends, patterns and turning points.

Continue reading "Turbulence vs Chaos: the Buddha's Lessons on Data, Distortions & Decisions" »

Posted by dblwyo at 06:36 PM | Permalink | Comments (0)

The headlines over the last six weeks or so have been that green shoots are breaking out all over. That's wrong and badly so for at least two reasons, if not three. A typical headline would be this one from the AP: U.S. sheds fewest jobs in 6 months.Compare it this chart which compares private job losses between ADP and the BLS on a MtM vs YoY basis, where MtM is annualized and the YoY is on the r.h. scale. Over the last three months the MtM change for BLS where -7.1%, -7.2 and -6.4 and for ADP they were -7.0%, -7.4 and -5.2. That indeed shows some improvement in that the rate of decline is slowing but still terrible. BUT.....BUT on a YoY basis they are -3.8%, -4.3 and -4.7% for BLS and -3.4, -4.0 and -4.3%. In fact looked at properly with the seasonal noise filtered so you can see the structural pattern emerge more clearly the downturn continues to accelerate. The gap between the headlines and the realities would appear to be widening and about as far apart as this time last year when de-coupling was all the rage and a V-shaped recovery would begin at the end of '08 ! The problem is, even if they are green shoots, that's not a harvestable field. The other problem, as this data makes clear we hope, is that they aren't very green nor big. Finally there's serious risk of them turning out, or into, yellow weeds.

In this rest of this post, boring as it may be, we want to lay down some more stuff building on yesterday's foundation that walks thru the major components of the economy and compares the QtQ to the YoY numbers (or the MtM where appropriate).

An Overview of the Economic Situation: GDP, Consumption & Investment

In this next chart GDP, real PCE and Investment are shown on the two basis in what we hope are nice clean, simple charts that make our fundamental points. The last post had a pretty complete data table of the real data so we'll try not to bore you will repetition of the numbers. The top sub-chart here shows real GDP which went down -6.3 and -6.1% QtQ, which hardly strikes us as green shoots, other than the rate of decline has stopped increasing. And doesn't represent much of a difference IOHO. BUT (again) on a YoY basis the actual numbers to pay attention to are the drops of -0.9 and -2.6% in Q408 and Q109, respectively. If anything the economy went farther in the tank faster ! The second sub-chart shows real Consumption (PCE) which went down QtQ by -4.2% in Q4 but went up 2.2% in Q1. On the surface that's great news which we'll come back to shortly. The real "shocker" was investment which, in the third sub-chart, went down -23 and -53%. OMG - that's terrible, ain't it ? It also explains why GDP continues to deteriorate - back to normal business cycle structure, where Investment lags changes in Consumption and GDP (as we explained yesterday). We'll need to break down Investment into it's components since the behavior of real estate investment and corporate capital spending are driven by such different things and behave differently as a result. In particular real estate investment has always led the cycles where business capex is the lagging variable.

Breaking Down Consumption

Before we get too excited about Consumption we need to tunnel down for a more granular view, though the data is only available thru March. When you do that the underlying realities get a lot clearer. On a MtM basis real PCE increased 0.6% in Feb but dropped -2.6% in March. Now THAT hardly seems like cause for celebration or green shoot harvesting. Again, it looks to us, as if the news is abysmal but you wouldn't know it from the headlines. But MtM can be pretty noisy so what happened on a YoY monthly basis - which is also a compare and contrast to the quarterly charts above. Well, it turns out both months went down by -1.0 and -1.5% respectively. Again the rate of decline accelerated, and again that hardly seems to justify the headlines or the market's reactions. The thing we'd urge you to do is think thru the consequences for revenues, profits, earnings, PEs and stock prices for the consumer-related sectors, industries and companies.

There is NOTHING in these charts to indicate that good news is on the horizon for anybody.

Breaking Down Investment

Now let's look at Investment which is Residential Real Estate, Commercial Real Estate (Structures) and business spending on Equipment and Software. The news on either a QtQ or YoY basis is a lot less open to ambiguity or misinterpretations but hasn't received any coverage whatsoever that we've seen. In fact Cisco just announced it's earnings this week and was guardedly optimistic though declining to look ahead very far because of a lack of "visibility". Well let's try and give them some and repeat our two key warnings. Investment is a lagging indicator and Capex spending will drive the Tech, equipment and commercial real estate sectors. Let's do that by just eye-balling the charts (which as usual if you click they should enlarge). Starting with real estate it looks, par for the course, as if things got a lot worse. QtQ RE investment looks to have dropped almost -12% but to be down almost -23% YoY. Worse, on both measures, the rate of decline doesn't appear to be slowing. The second sub-chart looks at capital spending and there's NO ambiguities there at all. Again eyeballing the QtQ drop looks to be -40% while the YoY looks like -15% to us. That sorta explains why the GDP number was so terrible. Let's hope that the rate of decline slows down in the next couple of quarters. Tunneling down specifically on equipment and software (which we've labeled Tech) in the third sub-chart the QtQ number looks like -40% and the YoY number looks to be worse than -20% ! Taken all together real estate is still getting worse and capital spending is cliff-diving now along with it. The first means that Homebuilders and housing related industries and retailers are going to continue to take it in the neck. The latter means that the Tech and equipment industries as well as commercial real estate are also. In fact our friend CalculatedRisk guestimates that now that the collapse of Commercial real estate has begun it will go on for the next two years.

Coming Full Circle: Future Demand

As we explained yesterday in the great circle of life that is the economy Consumption => GDP => Investment + Hiring => future consumption. A feedback loop that can be virtuous or vicious depending on how it's running. When the Housing ATM was holding up consumer spending, on debt admittedly, it helped us all out. Now it's running in the other direction. Consumers make their current consumption decision on the basis of future expectations and resources which depend on the job outlook, real wages, assets and borrowing conditions. Or expectations and experiences thereof. We've found that a good way to judge, proxy if you will, these expectations for future demand are to look at changes in real wages and employment and add them up. We dove into employment a bit above, and it's continuing to get worse. In the top sub-chart QtQ Employment looks to have continued dropping on an annualized basis and be about -6% while YoY it appears to have about -3%. Worse, on both measures, the rate of decline is accelerating. That's actually the normal response since Employment is another major lagging variable. Like Investment it too is likely to get worse in the months ahead. The spot of good news, in the second sub-chart, is real wages which jumped up on both a QtQ and YoY basis. Now here we're back to a bit of a puzzlement. On a YoY basis the increase is unambiguously positive but the rate of increase QtQ dropped considerably. This results from two opposing forces. The increase was the result of a huge drop in inflation beginning in Q3 last year and accelerating in Q4. That resulted in the big Q4 jump in real wages. But as employment continues to be bad, and possibly continues to worsen as we expect, the pressures on wages will mount and it's likely that they too will start dropping.

WHICH MEANS THAT FUTURE DEMAND WILL START DROPPING !

There's one other thing you need to factor into your thinking on the real data, it's interpretation and it's application to investment, business and personal decisions:

NONE OF THIS UNDERLYING REALITY IS REFLECTED IN THE GENERAL AWARENESS.

In other words most folks are still flying along dumb and blind and could easily get side-swiped by something they don't see coming. Think about...eventually they will too.

Posted by dblwyo at 12:51 PM | Permalink | Comments (0)

Now even Schwab has called March 9 as a market bottom (we'll revisit that) and suggested buying the dips; all based on the hypothesis that we've seen so many green shoots that the worst is over. As we keep saying there's at least two huge problems with telling the difference between them and yellow weeds. First off is what does the data really say and second what's the long-term outlook. When everybody from Bernanke to the CBO to the acronymics (OECD, IMF,World Bank) tells us that the long-term outlook is very week for years somethings wrong. We visited this point in a prior post on deconstructing GDP (Will The Real Economy Stand Up? : GDP, Consumption, Investment) but thought we'd take another detour into the real data and try and offer up some foundations. Just for the record YoY GDP dropped much worse in Q1 than in Q4, as you can see from the table below.At this point in case you're wondering why do I care - we'll let the cartoon composite speak for us and our arguments subliminally. Judging from friends, neighbors and acquaintances it pretty well captures the general response. The sad fact is that much of this was avoidable but that's a long-term structural statement so never mind. The sadder fact is that most of it was dodgable if you'd paid attention to the warning signs. And that didn't require major national policy changes - just a good dashboard of properly filtered and structured indicators.

ADP Private Employment: Real Trends

Also just for the record everybody got all excited about ADP's private employment report but the reality is that, again YoY, it went down -2.4, -2.9, -3.4, -4.0 and -4.3% YoY in the last five months. Not only wasn't that good news from last month to this but that looks like an accelerating downtrend to us.The key problem is quick hit headlines and sounds bites that report on the MtM instead of the YoY changes. To try and show you what the reporting covers vs. what we think you should be looking at we've built this chart of the MtM changes annualized vs. the YoY% changes. Take a moment and see how warm and fuzzy you feel about all that; us, we go back to the cartoon as capturing the spirit of the moment. The Zeitgeist is shock and awe but we're probably all too burned out by adrenaline surges to panic anymore. So we thought we'd dig thru the real data and trying and frame the situation a little better in a couple of posts. This one will give you some background on the structure and components of the economy and we'll follow it up for each of these components with a post comparing QtQ vs YoY as soon as tomorrow's employment numbers come in.

Surveying the Real Data

But before doing the graphics thing for the components let's at least start with this summary table of the major elements to be watching. Pretty dry and boring right - just a table of meaningless numbers ? Maybe, but look around you, talk to your neighbors, ask yourself about your job and your kids futures and the meaing may get clarified and more important. We jokingly said one time that economics was the largest experimental science in the world...and we're all the lab rats. Some of the key things to watch (think of them as the scientists anal thermometers if you like) are red-highlighted and reinforce points we've been making for a long....g time. The only slightly bright spot is Real Wages which is up because Inflation has dropped so far and fast. We expect the continuing decline in Employment, which went down -3.1%, to reverse that trend. Employment is yellow highlighted because it was one of two early warning signs of the slowmotion slowdown (try a search on that term here to see how many times for how long it's been showing up) and the beginnings of a downturn. The other being the obvious Residential Investment, which leads the cycle, has been bad going to worse since early '06 and got worse this last quarter - despite the headlines. Take a look at the last columne where, except for Wages, every single number got much worse than in the prior quarters. Real GDP dropped -2.6% vs .9%, Capex and Industrial Production went in the tank and so on.

The Economic Ecology: Structure and Components

Before we get to the YoY vs QtQ debate de-construction let's put some foundations in place. So much of what you hear not only misses the real trends but isn't set in any kind of context, let alone an accurate one. The top sub-chart shows each major component as a % of the economy with Consumption on the r.h. scale, for about three decades. Notice that it ran about 67% until the investment boom of the Tech Bubble but actually went up to about 73% after the crash on the back of the Housing ATM. Talk about a House of Cards or building on sand - the economy tanks and you spend more by borrowing ? Notice the evil twin that resulted - Net Exports were about 0% as Imports balanced Exports until the Consumption Borrowing Bubble led to a huge surge in imported consumer goods. The bottom sub-chart zooms in a little to a shorter timeframe and breaks out some of the detail. After the break we'll break down each of these components yet again and you might want to pay attention because some of the results could surprise you. For example Gov't spending is a big chunk but it's not the welfare queens. The other little item of interest to note is that it went down during the '90s which led the reduced deficits and boom times of the Clinton Era. What was behind that.

Continue reading "Real Data Interlude I: Econ-ecostructure (GDP to Trade)" »

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

We haven't done a pure economics data update, refresh and discussion in some time but the confusions, mis-interpretations and reactions to yesterday's advanced GDP numbers would seem to call for it. A couple of things to bear in mind - first off GDP numbers come out in three releases: Advance (which we just got), Preliminary, and Final. Prior quarters are usually revised in future releases as well so, for example, the data for the last two quarters was revised downward. The other thing to bear in mind that the headlines and press coverage are about quarter-to-quarter changes annualized. Finally it's always largely about nominal, not inflation-adjusted, real data. That latter distinction hasn't been as important as it was up until these last three quarters when inflation has turned into deflation but it's still worth bearing in mind. As you may (hopefully) recall we prefer YoY% changes based on real data since it makes seeing the trends, patterns and turning points so much easier that you can literally see the business cycle in operation by eyeball-check. Which means you're a better economist than about 90% of the folks who missed all the calls. For the record our little "borrowed" toolkit has been calling things accurately for at least 3+ years now, in such a way that you can justifiably reach your own conclusions. Which doesn't mean of course that anybody's paid attention to the approach, least of all the markets, but....the YoY meme has gotten widespread adoption in the last 12-18 months. Which is all to the good. BtW - anytime you want to create your own insta-chart the St. Louis Fed provides much of this data in downloadable form and it comes with a great graphics program. Most of what we do you could duplicate entirely by yourselves. While we'd like to keep plowing ahead on business analysis we thought we'd lay out a baseline or three for you to have as a handy reference.

QtQ Comparisions

Let's start with the QtQ data in straight and annualized form for GDP, major components and some breakdowns for Investment. Here we show GDP (two flavors), Consumption and Investment, both QtQ and annualized on the left and Investment (Capex, Eqp/SW and Real Estate) on the right. The embedded tiny table shows the annualized numbers for the last two quarters. Notice the excitement's all about the jump from -4% to +2% on PCE (Consumption). Also notice that the numbers change but the pattern remains the same. Consumption did improve in the sense that it flattened out but Investment fell off a cliff big time. Which is what you'd expect given the normal cyclic structure of the business cycle. One other note - GDPx is GDP net of trade impacts which is something called Purchased GDP, gets away from some of the distortions associated with exchange rate accounting and tells us what happened in the domestic job-creating economy. When inflation and the fall in the dollar was distorting oil prices focusing on GDPx told you what was really going on. Second note - the little table is GDP, PCE, Invest, Capex, Eqp and RE. Notice that business investment is now as bad as RE - tech recovery what tech recovery !

YoY Comparisons

Now let's contrast that with the basis YoY% changes in the real data, and see what that tells us. First off, as you'd hope, the interpretations are not inconsistent but it's far easier to see the pattern and the underlying structural realities. But GDP and Employment have now dropped as badly as at any time since 1980, more steeply and for a longer time. There was indeed an "improvement" in Consumption, it flattened out. Which gets back to the level vs rate distinction that's so critical (Green Shoots vs Self-Arrest: Back to Economic Realities (UPDATED)). But Investment fell off a cliff, driven by a major decline in Industrial Production; nor does it look like it's coming back anytime soon. The bottom sub-chart contrasts GDP and GDPx - you can see that generally they track each other very closely, except for two periods of significant diversion. One of which we've been and are still living in.

For the record real GDP on a YoY basis dropped -2.6% in Q1 compared to -.8% in Q4. For GDPx the numbers are -3.8% and -1.8% respectively. In other words there couldn't be a bigger contrast between the headlines, based on QtQ changes and the realities of the YoY cyclic patterns. For Consumption it was -1.2% in Q1 and -1.5% in Q4 while for Investment it was -24% vs -10% ! This is good news !!??!!

Business Cycles and Alternatives

Just to do a little refresh on the conceptual toolkit we'll repeat a couple of business cycle concept charts so you can re-orient yourselves. This is our version of the Great Circle of Life(Business Cycle) which we've taken apart a couple of times before. Consumption is the engine but people's decisions to buy are based on current income and their views on future income and wealth (that future evaluation happens in the black box we've named confidence, which ironically depends on credit - what it really is is a futures evaluation algorithim !). The result of current situation and future expectations is consumer spending, the primary engine of the economy. Business then goes thru a similar current and futures evaluation process, again involving credit decisions, and decides whether or not to invest and hire. In other words investment and employment are lagging variables that will keep going on down much longer until they begin to recover. But Consumers then factor hiring into their evaluations, looking primarily at real wages and employment changes to reach a judgment about prospects and future spending. Right now we're trapped in a vicious feedback loop where bad news begets more bad news. That consumer spending is getting less worse doesn't mean business will begin hiring and buying equipment or buildings any time soon. The real recovery won't start until those start picking up and that's a long...long way away.

In fact here's where policy enters the picture. (Re-building On A Rock: Policy, Economy & Values, Peace in the Public Square: the 100 Days and Re-emergence of Civitas) We were in a serious recession until September when it almost turned into a Depression with the collapse of the credit markets. Now we're back in the Great Recession which is NOT going to be V-shaped but will at best be U-shaped, with continuing downside risks of turning into a Japanese-like malaise or L-shaped recovery. The shallow V-recovery (purple) is a dead idea, so far policy has been aggressive, massive and skilled so the Depression (red) is off the table though a malaise is still a risk (shallower red). The extended semi-mild downturn (Yellow) is probably out of reach so we're looking at an extended period of low and slow recovery with poor investing and terrible hiring (Black). We probably at this point could move the "You Are Here" market farther along into the "bottoming" process and be accurate but the rest of this chart holds up well.

Readings and Introductions

If you'd like to beef up you background we have three books to recommend:

1. Ahead of the Curve: A Commonsense Guide to Forecasting Business And Market Cycle by Joseph H. Ellis

2. The Irwin Guide to Using the Wall Street Journal by Michael Lehmann

3. Macroeconomics by N. Gregory Mankiw

As well as these prior posts that explore the Business Cycle in more depth:

Key Postings I: the Economic Assessment & Outlook Toolkit.

That's a comprehensive listing of a whole bunch of posts on the cycle, economic data, current situation as of posting date and outlooks. And, just to put some points (of data) on this discussion, here's a table of the last five quarters of GDP data. YOU decide whether those numbers match the headlines !

Meanwhile you might want to keep reading as we've tunneled down into some more breakdowns on the economic situation and outlook after the break. One of the benefits of taking that deeper dive is that you'll learn that ALL of our current problems were explicitly visible months, quarter and even years before the crap hit the impeller and the headlines went to doomsday. Gee, what lessons can we draw that apply to yesterday's ? One can only wonder.

Continue reading "Will The Real Economy Stand Up? : GDP, Consumption, Investment" »

Posted by dblwyo at 06:02 AM | Permalink | Comments (0)

Well let's take another little trip into economic reality. After the break you'll find three sets of readings excerpts collected: Overall Domestic Economy, Key Data and the International Economy. After two major economic posts earlier this week (GDP, Jobless Claims, Markets, Oh My: Still Tipping Over !,Tech Trends II (Analysis): What're the Drivers and Outlooks) we should be in a position to build on them and move forward. The single most important economic number that came out this week, IOHO, was the consumption and personal income data, which we'll dive into in a minute. The other thing though is that we need to take a careful look at this giant data conspiracy theory about distorted GDP numbers that's going around. So we're going to spend some time on that. The other thing we want to mention is the international news which we've been covering extensively, and apparantly popularly. While the world's economies continue to slow and the only thing that kept us out of a recession was growth in exports the factor that's really getting neglected is the return of really ugly geo-politics. And not just the point we made earlier that Russia's Georgian foray cuts off Central Asian oil, nor the fact that Iran, Syria, et.al. just got more room to maneuver because the chances of coordinated world policy against there adventures just went out the window. No...the OTHER thing you need to start worrying about is cold war-like tensions in the international economy as Russia starts retaliating for all the perceived slights it's received and starts trying to damage its' trading partners in pursuit of nationalist mercantilism, ala the 17thC ! Which has already started BtW. Think about it - and then remember however painful you think globalization has been remember that cheap WMT lamp from China wouldn't have been possible without international trade agreements and stability & peace. Let's hope this doesn't get to damm ugly indeed.

GDP and the Anti-Conspiracy

There's the most amazing meme that's circulating about the GDP numbers are bogus because the estimate of inflation built bears no resemblance to what people experience. The issue is a tad complicated and we'll do our best to de-construct it here (having just spent five hours on data collection and analysis). What's really scary is how widespread and virulent the attacks are getting from normally sound sources who pride themselves on being data-grounded: Alan Abelson on Barron's front page(Sizing Up Sarah), Barry Ritholz at BigPicture (GDP: Lowest Inflation Rate in 5 Years)and Jeff Saut in a BNN interview. It doesn't get more sound, data-driven and respectable mainstream than that. And unfortunately as best we can tell they are all grossly in error thru failing to exercise a little due diligence. Menzies Chin of EconBrowser (Why Does It Feel Like a Recession?)put us on the right track and we'll take our shot at an explanation. This should be a tempest in teapot if everybody were looking at real GDP on a YoY basis and ignoring the headlines. Instead it's turning into a Cat5 storm making landfall, at least in terms of noise obscuring understanding. So without further ado...we give you

Output, Purchases and Trade 

 The key difference lies between what we make and what we buy. GDP is the sum of all domestic economic activity. When you add in what we sell abroad and subtract what we purchase the result is Gross Domestic Purchases. Now we bet the data to death and ran it back to 1929 and the root of the apparent discrepencies lies in the fact that GD Purchases are now much larger than GDP and the difference has never been this large in history (which btw explains trade balances, doller weaknesses, savings shortfalls and on and on...this exercise is worthwhile just for that understanding !). The top chart in this composite shows GDP vs Purchases the difference. Notice that it confirms everything we've been saying, and the readings reinforce, about exports having been our salvation. The real catch here in the arguments over inflation is that domestic inflation is under control - this is not a wage-spiral. It's an import largely due to rising commodity prices, and potentially from bad monetary policies abroad. For the first time in our history the rate of inflation domestically vs foreign purchases is not only seperating. It is diverging in magnitude and direction. Fortunately the BEA does us the favor, which is hard, time-consuming and expensive, of developing price indices and deflators for every major component of the national accounts including these. Which leads us to the third part of the chart - the YoY% changes in GDP and Purchases. Like we've been saying GDP weakened from Q1 to Q2 with growth dropping from 2.5% to 2.2%, which doesn't yet meet our definition of a growth recession. Oddly enough, right about the time oil prices rode the rocket, it was in lock step with Purchases right up until 2007. When it began to diverge, i.e. the economy we experience day-to-day, began to weaken faster and more than GDP was telling us. And from Q307 it's been getting much worse much faster. For the last four quarters the respective growth rates are GDP (2.8,2.3, 2.5 and 2.2%) and GDPurchases (1.7,1.4,1.1 and 0.4%). A growth recession by any measure. Too bad that all the sturm und drang that's floating around will cause so many to miss what's really going on but at least you read it here ! :)

Consumption and Recession

While the GDP data may not fit the definition of growth recession just yet it will. As we can pointing out, it's trade (exports) you-know-what :). And as this little sidetrip make crystal clear enormously more so than even we were arguing. It should be beyond question that domestically we're in or headed for a real recession and, as the rest of the world tanks, well...you know the rest. The real key indicator is what happened with real consumption. Here's our normal comparisons of Consumption and Real Consumption - monthly back to 99 and, given the seriousness of the situation, quarterly back to 1960. Notice that the drop in real spending is seriously below the '01 recession, almost as bad as the '90 recession and appears to be headed for a drop as bad as the 1980 or 1975 recessions ! Now that's scary. And notice that the whole Tipping Point argument is reinforced by how steeply and rapidly it's dropping on that scale.

This has been a very unusual cycle in many ways with a prolonged slowdown, that many ignored, a lack of organic, self-sustaining growth in the aftermath of the Tech Bubble's investment bust and the Leveraged Liquidity Bubble, which is now managed but not finished. Unfortunately that slowmotion slowdown is beginning to turn into a real cyclic downturn. Now our best guess was that we were looking at growth around 1% in Real GDP thru 2010. But if we seriously cross this tipping point and a self-reinforcing consumer-driven downturn gets going things could get seriously ugly. 

Continue reading "Conspiracy Theory vs Real Data: Another Sidetrip to Realities" »

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

Well the markets are just roaring ahead this morning in combination with yesterday's durable goods numbers and today's surge in GDP and drop in weekly jobless claims. Lest you think we're absolutely nuts we're going to parse out the revised GDP data so you can see what's going before resuming the scheduled dissection of the Tech Industry outlook. Since our assessments there were based on slowing growth, declining domestic capital spending, a slowing worldwide economy and the disappearance of huge declines in the dollar they're rather intimately coupled, indeed !

Now as you probably now by this time we prefer YOY% changes because it steps away from seasonality and makes patterns and trends much clearer. But we're going to start with a slightly more traditional view which is closer to what you'll see in the media. But first let's let someone else set the stage for us - and note that this isn't the only person to make these observations.

U.S. Economy Grew Faster Than Estimated in Second Quarter on Export Gains The U.S. economy expanded at a faster pace than previously estimated in the second quarter, helped by surging exports and a smaller decline in inventories. The 3.3 percent annualized increase in gross domestic product from April through June was higher than forecast and compares with an advance estimate of 1.9 percent issued last month, the Commerce Department said today in Washington. The economy grew 0.9 percent in the first quarter. Record exports and the temporary stimulus from the tax rebates prevented the economy from stalling as housing slumped and companies cut expenditures. Consumer spending is now waning and slower growth abroad dims the outlook for foreign sales, signaling last quarter will be the year's highpoint. ``The overwhelming story is that the export numbers have offset this domestic weakness in consumer spending and business investment,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. Outside of exports, ``we have a domestic recession.''

As it happens we entirely agree with this assessment and will also point you to EconPics for a detailed breakdown ("Export Driven" Q2 GDP Revised Up to 3.3%) and CalculatedRisk to get the straight skinny on the unemployment claims picture (Unemployment: Continued Claims over 3.4 Million ). Between them they may help disabuse you of some the notions being put about by the headlines. Though, to be fair, the various commentators and stories have gotten it more right this time than in years....which is a major indicator in itself. EVERYBODY is starting to see the weakness in the domestic and international economies and we're no longer shouting in the wind. Taking a look at the traditional QtQ growth annualized a few points - yeah, we did grow, notice that we also were kissing cousins to a recession in late '06. And investment continues to tank, largely due to real estate BUT capital investment is slowing rather abruptly as we spent a whole bunch of time arguing yesterday.

If we go back to our preferred YoY% change charts what you see is pretty much what we've been saying - GDP is slowing, there was no big YoY jump but just a continuation of the slowdown, employment continues downward and Consumption doesn't look good at all. Though the rate of decrease may have stopped accelerating. We'll see how the revisions work out and what the trend turns into. With declining real wages, dropping employment and no stimulus you can expect future Consumption to start hitting real negative numbers. So, rather as usual around here, the headlines were fun but there's no real change in the patterns or trends and therefore we stand by our outlooks.

Speaking of which what about the Investment picture - which we're so concerned about for its' own sake as well as for the impacts on the Tech Industries. Well, repeating a chart from yesterday but using the revised data, again no surprises. Investment continues to head south on the back of terrible real estate spending and slowing business investment. Sorry no joy there either.

As Mr. Silvia noted it was the surge in Net Exports that saved us this time around and we are more than likely in a domestic recession. What do you think happens when the worldwide slowdowns catch up with us ? Or, alternatively, what's going on in the structure of the GDP numbers ? That's a question we take apart quite a bit more after the break by looking at the YoY changes in each of the major components. And, we would argue very strongly, something you need to understand for your own job, business and investment planning and decision-making. Does the tipping point still show up in the data ? We think so but check it out for yourselves. Please. 

Continue reading "GDP, Jobless Claims, Markets, Oh My: Still Tipping Over !" »

Posted by dblwyo at 11:27 AM | Permalink | Comments (0)

Consider this a direct continuation of the prior post on Technology since there was too much ground to cover in one post, even one of mine. :). Which also provides a great opportunity to debunk the received wisdom for today - obviously the markets took off and the only possible explanation was, of course, the surprise jump in durable goods orders. Let's parse that out a little because it sets the table for so much else that we need to dissect. First off on the markets - judging from sector ETFs the real news was Finance (XLF +1.9%), Homebuilders (XHB +3.7% !!) and Energy (XLE, 1.6%). Now if capital spending were the thing that'd be some different sectors. In reverse order you've got a hurricane - likely temporary, fantasies about a surge in mortgage applications and the fact that Fannie fired three top execs today. Sometime likely in the middle of the day when the markets surged "for no observable catalyst" before falling back at the end of the day. And bear in mind Finance is still 21% of the SPX and Energy about 10%. There you have it folks - unsinn as usual.

So moving away from nonsense what we'd like to do is trace thru the outlook for Technology spending by asking what's the outlook for capital spending, under which it falls. Bear in mind the prior discussion about the severe earnings jeapordy we see coming from the disappearnce of currency conversions on foreign revenues as well as falling international demand. And the fact that the markets seem to be getting nervous, i.e. aware of, that little fly in the ointment. So that boils the question down to what's investment going to look like ? And in parallel how's that going to impact demand in each of the major Tech sub-industries, in line with our "Dumbbell Ecology" discussion about who plays at what level of the layers and in which markets (yes, I'm afraid this may mean reviewing the prior post:Tech Trends I (Readings): Big Picture to Key Players).

Durable Goods and the Tech Outlook

So what did the DG numbers tell us this time ? Well take a gander at the accompanying chart. YoY% changes in new orders for durables, capital goods ex-aircraft and industrial production, montly to Jan04 and quarterly to Jan99. Which should clearly establish it's a business cycle related data series, that they three of them move together with the cycle and, recently, some interesting things have happened. IndProd is headed down - so much for domestic industrial activity and therefore future domestic cap spending. Reflected in a flattish Durable orders curve. Notice that capital goods have jumped short-term, though not noticeably in the longer timeframe. Can you spell exports and oil equipment ? We thought so and think that pretty well explains things. If you'd like a more detailed breakdown a superb one is on EconomicPic Data:Durable Goods - July.Well worth your time.

IBM as Earnings Exemplar

 After the break we continue this line of inquiry by diving deeper into investment in the business cycle big picture, looking specifically at Software & Equipment and then look at stock price performance for some bellweather tech companies. But we want to conclude with a dissection of IBM's last earning report just to close the loop on the currency conversion and foreign revenue issues. You've got to give IBM enormous credit for the clarity and honesty of their materials - this lays things out so explicitly we can analyze and comment on it. And that's not true in many cases. Since we can, we did. And take a look at the major comments. And then think about the fact that almost every other Tech company is exposed to the same pressures and risks. In other words what we have to seay about IBM applies to everybody else as well !!

Continue reading "Tech Trends II (Analysis): What're the Drivers and Outlooks" »

Posted by dblwyo at 07:34 PM | Permalink | Comments (0)

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 (1)

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)

We occaisionally like to take a deeper dive on the data and have done so previously on Investment and Employment to try and analyze the longer-term trends and structure that so heavily influence the current activity. Given the reactions to Friday's payroll employment data it seemed like it was about time to renew our acquaintences with that particular data in a couple of ways. At the right you'll see the monthly total employment numbers from the Establishment Survey, both adjusted and not-seasonally adjusted as well as the comparative figure on Civilian Employment from the Household survey. They don't quite measure the same thing but are close and when you put them on an apples-to-apples basis they are very consistent over time.

You hear a lot of conspiracy theories about Big Brother government trying to manipulate and manage these and other economic numbers. Now we ask you - if Big Brother can't control the CIA and intelligence analyst communities to get the party line how do the conspiracists expect to get a bunch of "on-the-other-hand" economists to go along ? Month after month and keep consistent in the big lie ? :). Answer: don't spoil a good theory with a confrontation with realities.

What makes all this more than interesting or fun is that there are problems with the data as the monthly surveys can come up with slightly different answers. More importantly a major problem for a long-time with the Establishment survey was that it didn't accurately survey small businesses. In response to that the analysts built a Birth/Death model to estimate these otherwise missing numbers and it's been a good plugin. BUT.....by its' very nature it doesn't do well at turning points and needs to be re-calibrated and revised from time-to-time. Unfortunately some 70-80% of the new jobs projected to have been created come from the B/D model and we won't get a refresh until the regular quarterly surveys are done next year.

What makes all this further relevent and important, other than that jobs are likely being seriously over-estimated, is that all of a sudden and for the first time in my memory over the last several years the talking heads on MSM TV and ALL their guests are talking about the data problems, and relatively knowledgably and accurately. Now major parts of the blogosphere have been hammering on these data problems for a long....long time (NFP: Birth/Death Adjustments) and certain economists (especially Paul Kasriel and his team at Northern Trust) have also and gone into the magnitude of the problem this is all new news.

Let me put that another way - this is the first time in my memory that this level of careful attention has been paid. A major old meme on employment data has suddenly been replaced just within the last month or so with an entirely new, and more accurate one, on understanding employment. It wasn't that long ago that 94,000 new jobs was being treated as a very healthy number. Now the talking head community and, judging by the markets' reactions, the finance community have absorbed all this.

Wonders of wonders....progress is definitely being made.

Just to take a deeper dive the YOY% changes are compared below the line in some of our normally attractive charts :). And we visit the last remaining meme, or we should say revisit, on what constitututes healthy employment. We've gone down this path before () but the figure of merit of a NEUTRAL economic situation is 150K/jobs per month, give or take and changing somewhat over time. So below we also update the longer-term quarterly charts to refresh that view. The earlier post provides more detailed discussion.

The other thing to bear in mind, as the charts below reinforce, is that Employment is NOT a leading indicator. It is at best a conincident indicator and is more than likely a lagging on. If YOY% changes contineu to fall, never reached a healthy number and if new jobs created in a period and cumulatively aren't healthy they economy's not healthy. If these are lagging numbers then further decreases are already in train. And if we've never had a recovery of jobs back to a cumulatively healthy level then this entire cycle hasn't shown organic growth nor been healthy. Think about that for a while. Two major discussioins that go into this more deeply are Jobs, We Don't Need No Stinkin Jobs: Long-term Employment Trends and What Are They Smoking ? : Latest Payroll Data. Might be worth your time to check back and review them if you're curious.

Continue reading "More on Payroll Numbers: Employment vs Employment" »

Posted by dblwyo at 04:12 AM | Permalink

The prior post took our standard look at GDP YOY% changes and dug a little deeper into  Consumption and Investment. What we found, inspite of the headline numbers, was that the downtrend in GDP & Consumption continues while Investment in general has fallen off a cliff due to Real Estate with Commercial investment likely to follow. And that business capex spending on equipment and software is also slowing, as you'd expect, given that capex spending is derived from the business outlook on consumer demand in a normal business cycle. This is important, perhaps critically so, from two perspective both of which will be highlighted by looking at the changes in the major components of GDP and what exactly the sources of the headlines are. One perspective is the broad, general one of understanding what's driving the economy and how important it is. The 2nd, and in some ways more important one, is understanding what the demand for the major sectors will be. You may take a minute and watch the accompanying CNBC interview with IDC which, suprise, suprise, now sees a significant slowdown domestically and internationally in tech spending. A point we concluded the prior post with, including links to earlier discussions.

Just to reinforce that consider the following excerpt:

Tech spending: Get ready for slowdown Weakness in the U.S. economy figures to take a bite out of the technology industry's growth rate in 2008, when analysts expect tech spending to slow around the world. The picture is not exactly dire: A forecast released Thursday by analyst firm IDC calls for the worldwide information-technology market to grow 5.5 percent to 6 percent in 2008, the lower end of what has become a usual range. In the U.S., the market is expected to expand 3 percent to 4 percent. Those growth rates are softer than this year's 6.9 percent worldwide expansion and 6.6 percent growth in the U.S., according to IDC. Just a few months ago, IDC was expecting the U.S. tech market to grow 5.5 percent in 2008. The company pushed its estimate down to 3 percent to 4 percent as the mortgage crisis heightened and rising high oil prices enhanced the prospect of a recession next year.

In other words as you look at the charts below it'd be a good idea to translate the structural trends in each of the major GDP components into their impacts on the outlook for major industry sectors and individual companies. Just to a little more stage setting, and perhaps continue our alarmist traditions, we'd point you to an earlier posting on the very long-term structural outlook for industries in general:

On Being a Boiled Frog: the Strategic Outlook for US Industries

Hopefully that'll also help provide some conviction on why understanding component change AND industry outlook AND individual enterprise performance (our shibboleth) are critically important :) ! 

Continue reading "Pieces of Change: GDP Components" »

Posted by dblwyo at 03:21 PM | Permalink

America's Grand Deleveraging  The U.S. economy is succumbing to a number of pressures that are themselves being amplified by a dysfunctional market for credit. That one-two punch seems to be giving way to a "Grand Deleveraging."

What's with all the gloom about the U.S. economy? The problem is that we have two problems. One is that the economy is slouching toward recession or, at best, slow growth. It's the consequence of falling house prices, higher energy prices, flagging consumers and shrinking profits. The other is that the market for credit, the lifeblood of a modern economy, isn't functioning well. That problem is amplifying the pain caused by the first. Just a few weeks ago, a lot of folks were arguing that the worst was behind us. Housing was still ailing. But after a big wallop, markets for credit seemed to be moving toward normalcy. The Federal Reserve ended its Oct. 31 meeting declaring that the "upside risks to inflation roughly balance the downside risks to growth." If Fed officials truly believed that then, they no longer do. They'll likely cut interest rates again on Tuesday. Only the most optimistic observers expect the U.S. economy to rebound quickly from its fourth-quarter slump. The argument now is between those forecasters who expect growth to be so slow in early 2008 that the unemployment rate climbs a little, and those who see a recession in which it climbs more. In ordinary times, this would be unpleasant, but not so frightening. The Fed knows how to treat this condition: cut interest rates. But these aren't ordinary times. For years, banks and investors lent freely. They took big risks for surprisingly little reward (known as "low risk premiums" in the patois of the trade). Now, they're shunning risk. Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash. In a symptom that the financial fever hasn't broken, interest rates for one- and three-month loans among banks are up sharply. At best, the economy has a hangover, and will feel better in a couple of months. But this may be more like a case of mono, an ailment in which the patient doesn't return to normal vigor for a lot longer.

 And just to flavor the sauce of what's the best short synthesis I've seen in the MSM here are my comments:

Excellent high-level summary of the situation - very glad to see it making this sort of bully pulpit. Let's extend the review of the bidding - the economy's in a slowmotion slowdown as the Housing ATM comes under pressure and consumer spending looks to drop. The rest of the developed world now appears to be following that pattern while the BRIC's will keep growing they don't represent a large enough demand for our economies and if indeed we get a recession they will (remember the lags) get badly hurt as well. Meanwhile in the last few weeks the scope and extent of the credit problems are becoming more apparent with what was sub-prime percolating into all mortgage markets and taking the associated structured debt instruments with them, including SIVs. Worse other asset classes, e.g. buyout debt, corporate debt, etc. are beginning to show severe stains, oops mean strains, but we have no idea how bad it is. This isn't a lower rate problem but a regulatory breakdown as appropriate due diligence wasn't done on the underlying value. This will take a lot longer to work out than is currently recognized - and one can judge by the Fed's below potential growth outlook thru '10 - otherwise known at best as a growth recession. Compounded by the threat of a capital crunch in the financials and a credit squeeze as that dries up. None of which is really reflected in outlooks as yet.
Beyond those 2nd level impacts the 3rd is to ask how well will our major and small companies perform ? If you carefully examine EPS growth it's from buyouts and buybacks not from organic growth in revenue, profit or earnings.
None of this bodes well, none of it's being discussed and it's not clear, at least to me, that the escalating performance pressures on every industry and company are being planned for.
Perhaps one can be sanguine and view that as a buying opportunity once this all works thru and is accepted but my own take is that it's more "sanguinary" in the older sense of very bloody.
If y'all will forgive the pointer these things have bothered me enuff to work them thru in some detail on my blog, with pictures and everything.

None of those comments are new news on this blog of course - in fact they represent our sustained assessment for many months now as well as the views of my list of usual suspects (Ritholz, CalculatedRisk, Jubak, Rubini, et.al.) but represent the best bully pulpit airing of those views to date IMHO. More ammo below the line here... 

Continue reading "Slowmotion Slowdown in Review: Wessel Takes Notice" »

Posted by dblwyo at 01:19 PM | Permalink

Speaking of other shoes dropping one that hasn't yet are any of the major economic indicators. In fact last week's GDP preliminary numbers and payroll jobs reports were so good as to be described as stunning. At least on the surface. As we mentioned one little trouble, among several, was the question of how good the 3.9% annualized growth in GDP was given the extremely low price deflator. We walked thru that and put it to bed in the Weekly Reader 5Nov07: Economy, including comparing real to nominal GDP and YoY to QtQ changes. The bottomline is, as we've argued, that real & nominal track each other closely and quarterly numbers do as well, they're just noisy and hard to judge. So now we'll concentrate on YOY% changes in real GDP.

If you'll look at the accompanying chart it has two sub-sections. The first shows GDP, PCE, Industrial Production and Investment. A couple of things to notice - GDP upticked a tad but not so much as to do more than return to the longer-term downtrend (the Slowmotion Slowdown) while PCE remains low and flat. BtW - actual GDP growth was 2.6% when you look at this way instead of extrapolating a single quarter to full year and end up with 3.9%. PCE is running at 2.9%, that is 3% YoY.

Industrial Production(r.h. scale) is about 1.8% for the 2nd quarter in a row after slowing fairly sharply in earlier quarters. Investment upticked as a combination of an improvement in capex plus a decrease in the rate of drop in residential investment. 2.6% moves us up out of the growth recession range of < 2% but the real question is not how we did. It's how we'll be doing. One of the things the punditocracy forgets is that these aren't financial markets - there's a clear set of inter-connections, adjustments take time and there's a pronounced lag structure. In other words the Housing downturn hasn't spread to PCE or GDP, yet ! But it will

The key is Consumption (PCE) which drives the rest of the economy. And what it looks like in the future. Consumption in turn is driven by the combined impact of job growth, real wages and opportunities to borrow. Mortage-equity Withdrawl (MEW) has been a major supporter of Consumption - which is good because neither job growth nor real wage growth have been strongly positive.

In the 2nd sub-chart you can see the YoY% change in Employment as well as compare it to GDP. Notice, again, that the turning points and timetrends follow predictable patterns. With the caveat that employment is a lagging variable and depends on how the economy overall is doing. So that while GDP has been slowing since '04 its' downpath steepened in Q106 and employment growth, which has NEVER been strong having peaked around 2.0% briefly and headed back down, and has also been trending down since then. In fact YoY growth was only 1.3%, down from the prior 1.4%.

Bottomlines here is that the economy continues to slow no matter what the headlines said, is not exposed to the most damaging impacts of Housing and Credit market problems yet but will be as the time lags work into the system. 

Continue reading "Slowmotion Slowdown: More On GDP" »

Posted by dblwyo at 02:32 PM | Permalink | Comments (0)

Seeing the elephant is an old phrase borrowed, I think, from the British Army and used by many armies now and refers to one's first experience of something new and shocking. In their case combat - which is about as shocking as it gets. Fortunately our experiences aren't going to be on anything like that level. But still the Elephant here is learning that for the first time the old linkage between GDP, Profits and organic economic growth appears to be frayed to the breaking point (Dr. Pangloss Treating Goldie: Markets, Profits & Earnings, The Heart of the Matter: Profits vs Earnings ? ).

But first a small confession. My early religious training was in economics and after spending several years as a novice and then a few more in monastic retreat (otherwise known as grad skul) I went apostate and joined the real world. Now economics would tell us that any industry or product that gets a large return/profit must be serving someone somewhere. Yet as the share of Financial companies in profit has gone from 10% to 20% to, in just the last few years, 30% I begin to find myself turning into a modern Physiocrat. They were some of the earliest formal economists and started with the argument, in late 18th C France, that the only true source of wealth was Agriculture. Given the structure of the economy at the time they had a point if not a case. But other sectors like trade, manufacturing and finance were important contributors who's outputs made the functioning of the agricultural sector more efficient - thereby raising overall output and producitivity. Nonetheless I still find it difficult to believe that Finance contributes so much to the effective functioning of the economy that a 30% share of returns is warranted. Oh well...

Back to the Elephant and this time we'll go to the central cathedral of capitalism the Wall St. Journal - specifically it's recent reporting on quarterly profits and earnings. Which, BTW, they report as net operating income, NOT EPS ! 

Continue reading "Have You Seen the Elephant ?: More on Earnings" »

Posted by dblwyo at 08:53 PM | Permalink | Comments (0)

If you look back over the last two Weekly Readers they both might be said to converge on key question - where will earnings go ? Or broken down a little more will businesses continue to generate profits and will those turn into reasonable earnings ? And earnings growth in particular ? Earlier (Dr. Pangloss Treating Goldie: Markets, Profits & Earnings) we'd taken a pretty hard look at that question and found that Profits were strongly correlated with GDP growth and Earnings (ala S&P reported earnings/EPS) were strongly correlated with Profits. It might be worth your time to re-vist those charts and arguments because they lay a foundation for this discussion.

But we're presented with yet another conundrum - if the economy has been slowing why have earnings been growing ? As a partial answer let me quote from the earlier posting:

We can only conclude that with the lid screwed down on spending companies are making plenty of money, grabbing a growing share of the economy and, one guestimates, spending it on buybacks to keep the stock prices up and help out with EPS numbers. Which doesn't lead one to a great deal of confidence in organic growth of revenue, profits and earnings.

Stop and think about that for a minute - earnings may be going up but it's not because the economy or business is doing better. Somewhere under all the large pile of stock prices and reported earnings is a very large elephant. And he wouldn't appear to be a very well-groomed, well-behaved or benign one either.

We're definitely not in Kansas any more - so much for fundamentals. It's all about the finances and cash flow ?

 If you believe that argument, or at least think it raises some serious questions, then we thought it'd be worth looking into some more. Basically when we say growth is not organic what we're arguing is that EPS growth is NOT the result of growth in revenue or profits - rather it results more from throwing cash flow and borrowings at buybacks while screwing down the lid on expenses, hiring and capex spending.

Having set the table let's take a look at what some National Income accounts can tell us about the shares of profit from various sources. An idea we stole from Paul Kasriel and the Northern Trust economics team in their last US Economic Outlook (which we highly recommend reading for this and other reasons). 

So let's go elephant hunting. 

Continue reading "The Heart of the Matter: Profits vs Earnings ?" »

Posted by dblwyo at 01:39 PM | Permalink | Comments (0)

Earlier we took a kinda deep dive on inflation and found that for both CPI and PPI, as well as for Core and Total (i.e. including food & energy) things were fairly benign.Fighting the Wrong Fight: Inflation Real & Imagined

In other words the YoY% change in each didn't indicate any big uptick in inflation. What we did find that was alarming was that over the last couple of years there's been a wide and accelerating divergence between CPI and PPI. Which indicates two strategically important things:

1. As the divergence continues the pressure on profis and earnings will increase thereby lowering the outlook for business performance and, this being a rational world for the sake of discussion and posting, stocks have an increased risk.
2. And the chances of PPI increases, particularly with China making a major structural shift from an exporter of deflation to an exporter of inflation, the chances of the PPI growth spreading to consumer prices increases. And of course the recent re-accleration of oil prices just adds fuel to that fire (sorry, pun unintended but left because it amuses me anyway).
   

You can see all these points in the accompanying chart which shows the YOY changes as being benign and apparantly downtrending but the PPI vs CPI gap growing.

One key thing though: notice that the traditional view of core vs total was valid until Jan04. And that the accelerating divergence between PPI and CPI began at the same time. That seems to me that the argument that we're seeing a major structural shift in things because of the changes in the worldwide energy markets might be very well grounded indeed ! 

Having re-set the table, so-to-speak, it was extremely interesting that Uncle Alan made some similar points on CNBC today. And also that Prof. Jim Jubak said something pretty close and they discusses Wall St.'s sanity quotient. You'll have to watch the vids to find out what but you can probably guess. 

Continue reading "Inflation Re-visited: Uncle Alan & Prof. Jim Chime In" »

Posted by dblwyo at 02:46 PM | Permalink | Comments (0)

Well from the headlines Sept. retail sales were surprisingly good though a few reports dug beneath their own headlines to point out the areas of weakness, including the fact that much of the jump was in Auto sales. Let's take a look at the headlines & reporting, a brief glance at the actual data and then try to put it in context. Which for us means looking at the trends over time, in particular the YOY% changes, and see if we feel better about things. Of course this is all irrelevent if you're betting on the markets which react to headlines and not analysis. Taking a look at the headlines:

• Retail Sales in U.S. Climb More Than Forecast, Reducing Recession Concerns (Bloomberg)
• Retail sales beat expectations (Marketwatch)
• Retail Sales Jumped Up in September (Yhoo/AP)
• Retail sales beat forecasts but ...

(CNN/Money) Last month's better-than-expected 0.6 percent jump in total sales was helped by auto purchases. But clothing, department stores and furniture sales remained weak.Retail sales saw a surprisingly better-than-expected bounce, helped by a surge in auto purchases in September, although many merchants complained that unseasonably warm weather hurt demand for fall merchandise last month. "This report is weaker than it appears," Ian Shepherdson, chief U.S. economist with High Frequency Economic, said in a report Friday. "Auto sales lifted the headline [number] and sales ex-autos were boosted by a 2 percent rise in gasoline sales." The Commerce Department said that total sales rose 0.6 percent last month after a gain of 0.3 percent in August. A strong 1.2 percent jump in auto sales drove much of that increase. Economists surveyed by Briefing.com had forecast a rise of 0.2 percent for the month. Stripping out volatile auto sales, retail sales also saw a slightly better-than-expected 0.4 percent increase versus a 0.4 percent decline in August.  Economists, on average, had forecast a gain of 0.3 percent. But excluding both auto and gasoline station sales, retail sales rose just 0.2 percent.

The CNN/Money coverage is accurate but the real data shows that Sept. sales were $380B or $301B x-Autos while Aug. were $378B and $300B respectively. MtM% changes were .58% in Sept. and .3% in August - a definite improvement. But the YoY changes were 5% and 3.8% - still good news, though the 3MoMA of the year-over-year figures were 4.1% and 3.8% in general and 4.6% and 4.3% x-Autos in Sept & Aug. Not quite as encouraging but still positive, right ?

Well, what about the trend ? If you take a look at the accompanying chart which shows the YoY% changes for Retail Sales, Real Retail Sales and Sales x-Autos along with trendlines you might have a different answer. The real sales data isn't available as yet but we'll post updated charts when they are. In the meantime it doesn't look like the trend has turned up; at best we'd interpret the charts to suggest that they might be flattening out. Back to our point (and Paul Kasriel's) about the US economy being in a growth recession, where real GDP growth is in the < 2% range ( QR Mary: a Little High-Frequency Data and the Outlook).

While retail sales isn't deteriorating further so far it's also not indicating any liklihood of an uptake that would grow the economy, profits or earnings.

UPDATE: Northern Trust has published it's weekly review and it's worth reading, in particular the assessment of the underlying realities of retail sales, from which we quote:

Retail Sales – September 2007
September Retail Sales: Gasoline Prices Exaggerate Headlines, Other Items Were Less Impressive
Retail sales increased 0.6% in September after a 0.3% gain in the prior month. Excluding the 2.0% jump in gasoline sales and 1.2% increase in auto sales, retail sales moved up 0.2% in September after a 0.1% drop in August. The increase in gasoline sales reflects higher prices. Unit auto sales, which matters for consumer spending in the GDP report, were nearly flat in September and declined in the third quarter (15.9 million units vs. 16.1 million units in Q2). In the third quarter, total nominal retail sales rose at an annual rate of 4.0% compared with a 5.4% increase in the second quarter (see chart 1). Also, on a year-to-year basis (see table 2 and chart 2), retail sales are decelerating. In September 2007, total retail sales rose 2.9% compared with a 4.9% gain in September 2006.

It was recently accounced that Goldilocks, who's rumored terminal illness brought world-wide panic to her many fans, was successfully treated by the famous French therapist Prof. V. Pangloss. He was pleased to announce that rumors of her death were greatly exaggerated and in fact treatment has been so complete and successful that a whole new Goldie is in the house. Dr. Pangloss was quoted as saying, "in your modern terms think of this as Goldie 2.0....a highly successful course of sentiment and psychology obviates any risks due to fundamentals, or even technicals".

At least it seems the only reasonable course for a simple man like myself to follow - assume a miracle has occurred. If you examine the accompanying medical chart it's hard to conclude that the good Professor has achieved anything less. Six weeks ago Goldie was threated by the Wings of the Angel of Credit Death but today, she's not only recovered but doing better than ever. One can only wonder why and how ? Of course Volume's a little below average, and Relative Strength tells us Goldie is talking to herself a bit though not loudly and the momentum of MACD is just upticking now but's distorted as a weekly chart. Ignore those flashing lights on the monitor.

The answer appears to lie in that new miracle treatment of ever-rising earnings which seem to keep growing no matter wat the underlying state of the economy which grows them. Which, logically anyway but who's using logic these days, one could then ask what are earnings likely to be and how are they related to the underlying performance of the economy ? 

Being greatly puzzled, even wondering myself, by this miracle it seemd a sensible thing to do to investigate a bit. It's not clear that we've resolved my/our puzzlements but perhaps a little light can be thrown on things.

Continue reading "Dr. Pangloss Treating Goldie: Markets, Profits & Earnings" »

Posted by dblwyo at 03:14 PM | Permalink | Comments (0)

Well the latest monthly payroll data is in and we gained 110K jobs and the market and the talking heads are euphoric. Supwise, supwise,.... amazing, startling even. 110K is far below the breakeven point of 150K/month required just to keep our heads above water and even farther below the 225-250K/month required to grow the economy, let alone make up for all the jobs lost during the downturn. If you've ever wondered why people have had a general feeling of malaise about the economy and our prospects on the one hand the weak...weak jobless recovery goes a long way toward explaining it. And if you've wondered why there's been no new hiring or capex spending, well guess what - businesses are rational and if demand isn't growing they won't invest in expanding capacity.

Our esteemed exemplar Barry Ritholz does an excellent job of dissecting the details and weaknesses of this month's report over at TheBigPicture:NFP WTF ? He also appears to share our shock at the euphoria and document it as well.

So we'll concentrate on poking underneath that with a few graphics examinations of trends - here immediate and below both longer term as well as put the ADP vs Gov't stats debate a bit to bed. The "soundness" of this report should be immediately apparant - YoY growth was 1.2% (healthy growth is > 2% and approaches 3% in a robustly growing cycle). Worse yet the trend is very definitely down, and you can see the relationship to the longer-term of this current business cycle in the sub-chart. So much for the stock-market as a forward-looking and prescient discounting mechanism. It looks more like an extrapolation tool based on whatever, in this something funny in those cigars perhaps ? :) !

Continue reading "What Are They Smoking ? : Latest Payroll Data" »

Posted by dblwyo at 08:04 AM | Permalink | Comments (0)

There's been a running debate in the blogosphere for some time now, particularly for example on BigPicture (There's No Inflation (If You Ignore Facts)). Otherwise one of my single favorite Econ/Mkt blogs and one of the few (two actually) times where the data leads me to argue with my so-respected exemplar Mr. Ritholz. Where it becomes more interesting is not just the support and picking-up of the argument in the financial and finecon communities but in the MSM business press. Don't get me wrong - it's an issue that deserves a careful look AND continuing, on-going attention because it changes and evolves.

So we thought we'd take a closer look at see what that data is actually telling us. The debate is over whether or not the Fed's been worried (enough, too much ?) because they've been looking at inflation without inflation; that is at core CPI ex-Food & Energy. My argument has been that CPI is volatile enough that looking at core makes a lot of sense, unless there's a major and sustained divergence. An argument that hasn't been kicked around enough yet IMHO. Yet we can sidestep that whole debate by looking at YoY% changes (my favorite analytic tool where it works) and see what we see. Interesting enough inflation was getting to be a problem, getting over 4% and headed for 4.5%. The even more interesting question was what impact would PPI getting ahead of CPI mean but we pick up the arguement below. But take a look and decide for yourself - the whole point is to present the data in as clean and simple a form as possible for you to see the trends and structure for yourselves. To my eye, while not where we'd like it, the whole CPI vx x-CPI debate is moot because total inflation is a) approaching 2% and b) headed downward.

But there are other, more interesting, questions to investigate. In particular what the long-run trends are, whether the argument we've just made on a few years data holds up and what the strategic outlook and issues might be.  

Continue reading "Fighting the Wrong Fight: Inflation Real & Imagined" »

Posted by dblwyo at 04:35 PM | Permalink | Comments (0)

Judging from the talking heads of the pontificate the upside surprises of Durable Goods orders and New Home sales are the 2nd coming of either a recovery (which was only talked about as the markets and credit markets seized up in the last week or so) or of the soft, soft-landing. Goldilocks saved and reborn anyone ? Actually orders were pretty good for total orders - up 8.1% YoY or 3.0% on a 3MoMA of the YoY data. Which is very nice after watching a downtrend since last summer. On the other hand orders ex-Aircraft which is the number more representative of actual capital spending plans is up only 0.2% YoY and the 3MoMa is -0.8%; furthermore the downtrend doesn't appear to be broken. So we can argue that the 2nd coming of Goldilocks doesn't lie in these numbers. And housing - well the headline number was 879K on an annual rate which is good news only in that it's so much better than expectations, admittedly. But two years ago the number was about 1.4 million ! So it's good news only if you're happy that the rate of rapid decceleration is slowing. We've got a long....long way to go. Below we're going to dive into New Home Sales a bit and then tackle Durable Goods Orders but the source, and I mean that canonically, is Calculated Risk who's been THE astute observer, analyst and assessor of Housing and it's inter-actions with the economy. His latest detailed dissections (from which we borrow a single key chart) are here, here, and here. Highly...highly recommended for anybody who believes that a bottom is nigh, visible or somesuch. My amateur guess is that we're barely, at best, 1/4 of the way thru the sub-prime mess with most of the mortgage resets to come. That we're about 1/8th (optimisitically ?) into the adjustment in existing home sales and prices and who knows from a real turn-around in the housing market. BtW CR also points out, repeatedly, that Commercial construction follows Residential and, further, that a downturn in RI always preceeds a slowdown(Recession) in the economy. Rather than my bad attempts to cover this space when CR does it so well and completely please check there for regular and powerfully useful analysis. Just to put things in perspective before diggin into the details let me share the following excerpt from the WSJ. Note that the numbers are positively discussed but wrapped in a fairly negative headline and discussion - appropriately so and the first time in the last several years the devil is getting his due. BTW - it might also make a little sense to review the prior posts on the overall economic situation and outlook which, despite some upward revisions in the GDP numbers being anticipated, is still holding up well enough to be worth taking seriously (that's a strong hint :) ).

• Reality Checks: the Latest GDP Report and Outlack ?

• Foggy Market Breakdown: GDP Component Changes

 Here's our friends from the Journal:

Economic Strength May Not Last -- Factory orders and housing may have been picking up momentum before the latest turmoil in credit markets clouded the economic outlook. Orders for durable goods, those expected to last more than three years, surged in July, and an important gauge of capital spending turned up, according to government data released Friday. Sales of newly built homes perked up, too, though that could be a temporary flicker of life in a sagging market. Orders for cars, appliances and other durable goods gained 5.9% in July over June to a seasonally adjusted $230.7 billion, the Commerce Department said. Nondefense capital-goods orders excluding aircraft, a closely watched barometer of business investment, rose 2.2%. Sales of new homes, meanwhile, showed a surprising rebound of 2.8% in July from June as average prices fell. But declines are expected in coming months as the housing sector works through high inventories and weakening demand. July's strength in orders and new-home sales came ahead of a sharp stock-market downturn and turmoil in some credit markets. Concerns over rising defaults in the subprime-mortgage market -- that is, loans targeted at borrowers with less-than-stellar credit -- have stoked caution in the debt markets, leaving companies encountering difficulty in obtaining short-term financing such as commercial paper. Consumers are having more trouble getting mortgages, too, as lenders tighten standards.

Continue reading "Praise Be, the Data Has Saved Us (NOT): New Homes & Orders" »

Posted by dblwyo at 02:44 PM | Permalink | Comments (0)

In all the fascinating & wild gyrations of the markets in the last week plus we've seen the recent GDP and Employment numbers get far less attention than they normally get. Or than they deserve. On the other hand, as an interesting contrast, in that same week the sub-text of many columns, MSNBC coverage, etc. is that the Economy is indeed slowing and the Fed "NEEDS to Do SOMETHING, Right Now !". (Emphasis not added, cf. Mr. Cramer's last Fri. outburst). This would be amusing were it not sad - one suspects the emphasis is less on the general health of the economy and more on the short-term un-ravelings of the markets but why would one be supicious of non-disinterested commentary from such sources ? Moral hazards, ill-founded leverage, commuppances and schadenfreude aside.

Be all that as it may - and the serious consequences restrains one's sense of humor - we covered the nature and structure of the GDP trends in two prior postings (YoY changes and major components) but haven't said much about Employment. Given the significances it seems like it might be time for another deep data dive similar to prior posts.

So below we'll cover short-term and long-term trends in Employment patterns, relate those to GDP and Profts and, an especially interesting looksee, take a look at the l.t. creation of aggregate new jobs. This last is particularly important because it looks at Net New Job creation since 1980 and helps explain a lot of the low wage pressures and relative roles of Earnings and Jobs. 

Continue reading "Jobs, We Don't Need No Stinkin Jobs: Long-term Employment Trends" »

Posted by dblwyo at 02:17 PM | Permalink | Comments (0)

Continue reading "Pass 4: Residential Investment & Housing" »

Posted by dblwyo at 09:04 AM | Permalink | Comments (0)

Investment is reported as Residential and Non-Residential Investment with the latter broken down into Structures (the buildings) and Equipment & Software (the stuff in the buildings). They move to very different rhythms sometimes. In the downturn of the early 90s all three had dropped significantly and then eventually moved together throughout most of the 90s. Notice also that Investment, looking at the scale, is very volatile. If Consumption is the engine then Investment is the turbo-charger of the economy, only this one isn’t just On/Off it also has a reverse switch. The ‘slight’ drop in GDP in ’00 and ’01 lead to major drops in business spending – the action vs reaction of an investment-driven boom & bust. Yet Residential spending kept going and even had a sharp upturn until Q304 when it abruptly slowed. From Q1/Q206 however the word cliff comes to mind.

However for those expecting business investment to pick up the slack of slowing consumer spending and offsetting the implosion in residential investment notice that Equip/SW is also slowing noticeably. Nor is the % jump in facilities that encouraging because it is both the smallest portion of GDP investment and has been decreasingly steadily for over two decades as a significant factor. As highlighted here Equip/SW followed the business-cycle while Housing followed it’s own rhythm until low rates drove it up over the long-term 4.5% average – which raises the fascinating (scary) question of will the 13 quarter bump over 5% (Q303-Q306) have to be an offset by a decline below 4.5% for another thirteen. Which would take the real estate downturn into and thru the end of 2009 ! Meanwhile Structures has shown a long-term secular decline from 4% of GDP to 2.5%.

Just as a little side note if we notice that in 1990 Structures, Equipment & Software and Residential investment were all roughly equal portions of the total Investment pie while in 2006 the proportions were widely and wildly different we might come to think we're looking at a much structural change in the economy. It turns out there might really have been a "New (Information) Economy" after all. Even more interesting Investment as a percentage of GDP grew substantially - from about 13% of the economy to about 17%, give or take a cycle stage or three. 

PREVIOUS POSTINGS:

A Little Finer Detail On GDP, et.al. (Why Investment is so important)

Posted by dblwyo at 11:26 AM | Permalink | Comments (1)