Aggregator • MaxedOutMama • ID=61916 |
Still In The House Of The Unexpected - MaxedOutMama Feb 25, 2010, 12:01 pm
Only Wall Street economists can listen to The House of The Rising Sun and think it's a paean of optimism. On Main Street, the interpretation is perhaps more realistic. I may seem to be harping on this theme, but I saw some very remarkable research reports from Persons Who Should Know Better in the fall of last year.
Anyway ... if you will look back, you'll note that for the last few months I kept whining that all the large companies were still in cutting mode. Perhaps this has something to do with another "unexpected" rise in initial unemployment claims. This week's 496,000 SA number is less important than the continuing rise in the four-week average, which is now at 473,750. Still, for some perspective, we should remember that the comparable week in 2009 had initial claims of 656,000. There is a strong improvement. But it is very hard to look at a four-week average over 450,000 and think that we are going to be gaining much in the way of net jobs without a further step up in the economic cycle, especially once the Census jobs filter out and the full impact of the state and local fiscal situation hits this summer.
It is not that the larger company cuts are at all unprecedented. In the wake of the 75-82 cycle, large corporates cut for years. But at that time, much of the slack was taken up by small businesses which took over a lot of the cut functions and hired like crazy (and bought stuff like crazy). Thus it is the combination of an extremely depressed small business sector and large corporates still retrenching that make the 2010 picture so doubtful.
My guess is that the US will pull out at least a net +1.8% for the year, but that will not feel very wonderful if we end the year in another contraction. Sad to say, policy choices probably are determinant. I wish I felt more confident about policy-makers.
There is still some good left in this picture. Overall companies managed to make the Schumpeter turn in Q4 (according to tax receipts) which provides us some breathing room.
Today's durable goods report seems to show that we are nearing the end of the inventory clearing cycle. Specifically, look at metals. New orders for fabricated were up 2.2% Oct/Nov, down 2% Nov/Dec, and were flat Dec/Jan. Over the same period, new orders for primary metals went +2.6%, +10.1%, +1.9%. Shipments of primary metals peaked and dropped to a pace of 1.1%. The sequence on an inventory recession is dropping sales > increasing retail/wholesale inventory > slowing wholesale orders > slowing production > inventory builds down to crude materials. It reverses in order, and when the surge in crude materials passes, you have gone through the clearance cycle and ongoing production will reset to a pace equivalent to current sales flows. So we are mostly there.
New machinery orders confirmed by falling 9.6%. Motor vehicles new orders dropped 2.2%. There is still a hefty defense bulge in, but one wonders how long that can continue, and capital goods new orders ex defense and aircraft came in at -2.9%. The electronics/computers jump is still there and will provide another couple of decent months along with defense.
I also cannot stress enough that the durable goods report is currency based, not volume based. It should always be read in light of PPI trends for crude, finished and final goods. Since the 12 month change in prices for crude goods in January was +25.2%, YoY changes have to be seen in that light. The month over month changes are less affected.
Finally, oil inventories and prices do not make sense together. Inventories for every category are still above the upper bound of the average stock except for propane.
Gasoline demand is still turning in a YoY decline, which is not an indicator of economic improvement. In general gas consumption rises strongly in the early stages of recovery as jobs pick up. We have gone through a cycle where gasoline consumption did improve, and now that has retracted.
We are essentially dependent on overseas demand for improvement in corporate margins. That is why I am spending so much time on the Chinese situation.
Last, but not least, we have definitely reached the point at which gas consumption is strongly affected by prices. From the PPI report:
The Producer Price Index for the Net Output of Total Trade Industries fell 0.5 percent in January, its second consecutive decline. (Trade indexes measure changes in margins received by wholesalers and retailers.) About two-thirds of the January decrease is attributable to a 9.3-percent drop in margins received by gasoline stations. Margins received by general merchandise stores and home centers also fell in January, contributing significantly to the decline in the total trade industries index.The reason gasoline stations drop margins is because they are fighting to keep business up. It's a dead giveaway that there's potential consumer economic trouble ahead. Once consumers are tight on gas, they are very unlikely to be spending freely on non-essentials.
