The Latest Indicators Confirm: The Economy Is Still In Growth Mode

In the rear view mirror, 2nd quarter GDP was revised up to 1.7%. With the exception of consumer sentiment, which continued to sour, all of the other monthly data from July came in positive. Personal income and spending were up significantly both nominally and in real terms. The savings rate declined slightly. Factory orders were up more than expected. The Chicago PMI slowed but still showed expansion.

The high frequency weekly indicators are as close as we can reasonably get to observing economic trends in real time, as turns will show up here before they show up in monthly or quarterly data.

The energy choke collar has now re-engaged, and gasoline usage may be slightly weak.

Gasoline prices rose yet again last week, up $.04 from $3.74 to $3.78, and are now higher than a year ago.  Oil prices per barrel also rose slightly, up $0.45 for the week at $96.47.  Gasoline usage looks a little weak. On a one week basis, it was 9064 M gallons vs. 9227 M a year ago, down -1.8%. The 4 week average at 9073 M vs. 9169 M one year ago, was off -1.1%. This is actually slightly weak compared with a year ago, when gasoline usage had already plummeted on a YoY basis.

Employment related indicators were again mixed this week.

The Department of Labor reported that Initial jobless claims rose 2000 to 374,000 from the prior week’s unrevised figure.   The four week average rose 2,250 to 370,250, about 2.5% above its post-recession low. If higher oil prices are again acting as a governor preventing fast economic growth, then this number, unfortunately, should continue to rise in coming weeks.

The Daily Treasury Statement showed that for the first 22 days of August 2012, $137.6 B was collected vs. $135.2 B a year ago, a slight $2.4 B or 1.8% increase. For the last 20 days ending on August 30, $115.8 B was collected vs. $110.5 B for the same period in 2011, a solid gain of $5.3 B or +4.8%.

The American Staffing Association Index remained stalled at 93. This index was generally flat during the second quarter at 93 +/-1, and for it to be positive should have continued to rise from that level after its July 4 seasonal decline. That it has not done so is a real concern, as it is now performing worse than it did in 2007 and 2011.

Same Store Sales and Gallup consumer spending were again positive:

The ICSC reported that same store sales for the week ending August 18 gained +0.5% w/w, and rose +3.4% YoY.  Johnson Redbook reported a 1.5% YoY gain. The 14 day average of Gallup daily consumer spending as of August 30 was $75, up $7 over last year’s $68 for this period. This is the fifth straight week of real strength after six weeks in a row of weakness. This is very encouraging.

Bond yields fell as did credit spreads:

Weekly BAA commercial bond rates declined .06% to 4.96%. Yields on 10 year treasury bonds only .02% to 1.74%.  The credit spread between the two narrowed to 3.22%, which is about halfway between its 52 week maximum than minimum, and a significant improvement from several monthsa ago.

Housing reports were modestly positive:

The Mortgage Bankers’ Association reported that the seasonally adjusted Purchase Index rose 1.4% from the prior week, and were also up about +2.2% YoY. Generally these are in the middle part of their 2+ year range. The Refinance Index fell -5.7% for the week due to higher mortgage rates, to a 4 month low.

The Federal Reserve Bank’s weekly H8 report of real estate loans this week fell 3 to 3512. The YoY comparison rose to +0.9%, which is also the seasonally adjusted bottom.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up + 2.0% from a year ago.  YoY asking prices have been positive for 9 months now.

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

M1 was off a -0.9% last week, and was up a slight +0.2% month over month.  Its YoY growth rate declined slightly to +10.0%, as comparisons with last year’s tsunami of incoming cash are in full progress. As a result, Real M1 fell to +8.6%. YoY.  M2 also fell -0.3% for the week, and was up 0.2% month/month.  Its YoY growth rate declined slightly to +6.3%, so Real M2 grew at +5.0%.  The growth rate for real money supply has slowed, but is still quite positive as the tsunami of cash arriving from Europe last summer disappears from the comparisons.

Rail traffic was positive while its diffusion index remained steady:

The American Association of Railroads  reported a 1.8% increase in total traffic YoY, or +9,900 cars.  Non-intermodal rail carloads was off a slight -0.8% YoY or -2,300, once again entirely due to coal hauling which was off -9,000.  Negative comparisons remained at 10 types of carloads.  Intermodal traffic was up 12,300 or +5.2% YoY.

Turning now to high frequency indicators for the global economy:

The TED spread remained at its 52 week low of 0.33. The one month LIBOR declined to 0.230, setting a new 52 week low. It remains well below its 2010 peak and is lower than at all time during the last 3 years with the exception of about 5 months. Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell from 717 to 703. It is now only 33 points above its February 52 week low of 670.  The Harpex Shipping Index fell 2 from 398 to 396, and remains only 21 above its February low.

Finally, the JoC ECRI industrial commodities index rose slightly from 120.51 to 120.61. While it remains a strong sign  that the globe taken as a whole has slumped, the suggestion albeit from one week’s data only is that the slump may be bottoming, and so bears watching to see if the new uptrend continues.

Several recent themes remain dominant. While global shipping rates suggest weakness, the US data remains generally positive. The long leading indicators of bond rates and housing are slightly to signficantly positive. Consumers have rebounded from their early summer slump, despite higher gasoline prices. But those same higher gasoline prices may be impacting new staffing and initial jobless claims for the worse, and gasoline usage is slightly down. Given the positive YoY and growth rate reading for the ECRI Weekly Leading Index, recession concerns are abating, but the Oil choke collar remains a threat for near term weakness.

The last summertime beers and brats await me. You have a nice long Labor Day weekend too!

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It’s Not Just Case-Shiller: Almost Every House Price Index Everywhere Has Bottomed

This morning’s Case Shiller report for June showed prices in the 20 city composite rising YoY for the first time since 2007, with the exception of a few months during the $8000 home buying tax credit in 2010. Prices were up +0.5% YoY, and were also up +0.9% month over month from May to June on a seasonally adjusted basis. This is the fifth straight month of seasonally adjusted price gains. In other words, this increase in no way is a reflection of seasonal buying patterns. It is confirmation that housing prices bottomed earlier this year.

But the Case Shiller index is only one house price index. There are a dozen such indexes, all relying on different methods. There are asking prices indexes, median and mean sales price indexes, and repeat sales indexes. Within each type there are seasonally adjusted and non-seasonally adjusted metrics. Back in April I reported on slew of house price indexes, and concluded that March may have marked the turn in the market. With the Case Schiller index turning positive YoY, now is a good time to check those indexes again. Do they contradict the Case Shiller turning point, or do they confirm it?

Let’s look at each of the three groups of indexes – list prices, mean and median prices, and repeat sales indexes – in turn.

List prices 

The theory here is that sellers have to price to meet the market. If they are doing so, then the trend in list prices will lead the trend in sales prices, since sales are consummated months after the property is listed. There are three of these, two non-seasonally adjusted and one seasonally adjusted.

Housing Tracker is a non-seasonally adjusted index of 54 markets with data back to the peak of the housing bubble. This index began turned positive on a YoY basis last December and has remained positive ever since. Yesterday they reported that asking prices continued to be positive YoY by +2.0%.

The NAR recently began to publish its own a non-seasonally adjusted index made up of all of its listings. The NAR’s index showed that asking prices were still negative, down 2.5% in December 2011, but turned positive YoY by February, up 6.82%. Their report for July showed prices flat from June, and up 2.6% YoY.

Earlier this year the Trulia asking price index debuted. This is a seasonally-adjusted index. In their inaugural report for March 2012, they indicated that asking prices had bottomed in January. Their July report showed that prices had now risen for 6 months in a row. The most recent monthly advance was +0.5%, and prices are now up YoY by 1.1%.

 Median and mean sales prices

There are three of these indexes.  The first only takes into account new home prices.  None are seasonally adjusted, so we have to look at YoY trends.

Each month the Census Bureau reports on new home sales. The report includes both mean and median home prices on a non-seasonally adjusted basis. Both the YoY median and mean prices turned positive in February and remained positive in March. This continued through May. In their July report, they show prices down -2% YoY.

The NAR‘s existing home sales report also includes sale prices. According to the NAR, sales prices for existing homes on a non-seasonally adjusted basis turned positive YoY in March. Their July report indicated that sales prices for existing homes were up for the fifth month in a row.

Radar Logic is another non-seasonally adjusted index of sales, based on prices paid per square foot. They reported earlier this month that prices had turned up +2.0% month over month from April to May and also +0.7% YoY.

Repeat sales indexes

There are six sources of repeat sales and other indexes which control for price or quality of house.  The first is not seasonally adjusted, so we must look YoY.  The other 5 are seasonally adjusted, so a turn in trend can be spotted without waiting for the YoY metric to turn.

CoreLogic makes use of repeat sales transactions to create a House Price Index which is not seasonally adjusted. Excluding distressed sales, month-over-month prices increased 0.7 percent in February from January. This trend has continued, as for June their House Price index was reported up 2.0% month over month, and 3.2% YoY.

The FHFA, which gathers seasonally adjusted house prices,  reported a month over month gain of 0.7% in June and YoY gain of 3.6%”.

FNC is not actually a repeat sales index but FNC “has developed a hedonic index based on the data collected from public records and blended with data from appraisals.” It is reported for 10, 30, and 100 metropolitan areas. In their most recent report, for June the index was up for the fourth consecutive month, up 1.1% month over month non-seasonally adjusted. Further, their hedonic repeat sales index was down only -0.2% YoY. The index was down -0.6% in April, and =0.4% in May. If the trend this year continues, their report will turn positive YoY in the August report if not in July’s.

Lender Price Services (LPS) has a House Price Index which controls for houses for sale in a variety of price brackets in order to avoid problems with the median result based on the mix of houses for sale. Their last report of August 3rd showed that house prices were up 0.9% month over month and up 3.2% YoY.

Finally, Zillow has also started reporting its own index of house prices. For July, they reported that prices had turned positive YoY for the first time since 2007, up +1.2%. This was the eighth consecutive month of price gains in that index. Prices in July rose +0.5% from June.

At this point, every single asking price index has turned positive. So have mean and median sales prices of existing homes as reported by both the NAR and Core Logic on a non-seasonally adjusted basis. Since both of these have turned positive YoY, it is not a matter of seasonality. So have 5 out of the 6 repeat sales indexes, including Core Logic, FHFA, Lender Price Services, Zillow, and as of this morning on a YoY basis, Case Shiller. Only the FNC repeat sales index, which is down -0.2% and likely to turn positive YoY within a month or two, and the very erratic Census Bureau mean and median new home sales price index, are not positive on a seasonally adjusted or YoY basis.

In June of 2011, relying on Housing Tracker’s stabilizing asking price data, I wrote that:

To put it bluntly, an examination of the newly available aggregate US asking price data from Housing Tracker contradicts the conventional wisdom above that, as “the housing market … ha[s] another 15% downside to go,” and that “reasonable expectations for asset price stability, if not appreciation [a]ppears unlikely to happen any time soon.”

To the contrary, housing prices have already “faced the brunt of market forces” without support for a full year, as a result of which they have been falling closer and closer to equilibrium, the rate of decline is abating, and actual real time data shows that nominal if not inflation adjusted stability may indeed be reached as soon as early next year.

While the permabear Doomers will stamp their feet, the simple fact is that there is now overwhelming evidence that the housing market has bottomed exactly when I said it would. The only question now is whether it is a long term bottom, or whether it might still be undone by the long-fabled but yet to appear foreclosure tsunami.

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Almost All Of The Data In The Last Week Was Good

The monthly data for July released last week was almost all quite positive. Retail sales, industrial production, capactity utilization, and housing permits all rose quite strongly. Consumer sentiment rose slightly. As a result of permits, the Conference Board’s Leading Index increased, exactly reversing June’s decline. Consumer prices did not rise at all. Producer prices rose +.3. The only significant negative news was that both the Empire State and Philly regional manufacturing indexes both contracted.

I report on high frequency weekly indicators because they are as close as we can reasonably get to observing economic trends in real time.  Turns will show up here before they show up in monthly or quarterly data.  Recently I’ve been focusing on consumer purchases and the effects of the Oil choke collar as the keys to the economy for the second half of this year.

So let’s start once again this week with Same Store Sales and Gallup consumer spending, which were again positive:

The ICSC reported that same store sales for the week ending August 11 fell -0.3% w/w, but rose +3.6% YoY.  Johnson Redbook reported a 2.0% YoY gain.  Shoppertrak did not report.

The 14 day average of Gallup daily consumer spending as of August 16 was at $78, $7 over last year’s $70 for this period.  This is the third week of real strength after six weeks in a row of weakness. This is very encouraging but we will still have to see if consumers are regaining their footing.

On the other hand, the energy choke collar has now re-engaged, while there is some enocuraging news agout gasoline usage.

Gasoline prices rose yet again last week, up $.07 from $3.65 to $3.72, and are now higher than a year ago.  Oil prices per barrel also rose for the week, from $92.87 to over $95..  Gasoline usage, at 9308 M gallons vs. 9195 M a year ago, was up for a change, +1.3%  The 4 week average at 8907 M vs. 9163 M one year ago is off -2.8%. August last year is when the precipitous YoY declines in gas usage began to be registered. That we have a positive 1 week YoY comparison is encouraging, but it must continue to not signal further weakness.

Employment related indicators were mixed this week.

The Department of Labor reported that Initial jobless claims rose 5000 to 366,000 from the prior week’s unrevised figure.   The four week average fell by 4,500 to 363,750,, only 750 above the lowest 4 week average during the entire recovery.  Needless to say, this number does not appear to be compatible at all with further economic weakness.  -

The Daily Treasury Statement showed that for the first 12 days of August 2012, $85.0 B was collected vs. $85.1 B a year ago.  For the last 20 days ending on Thursday, $131.6 B was collected vs. $126.1 B for the same period in 2011, a gain of +4.3%.

The American Staffing Association Index held steady at 93.  This index was generally flat during the second quarter at 93 +/-1, and has returned to that level after its July 4 seasonal slump. It nevertheless is not rising from that range and so indicates significant weakness.

Bond yields rose while credit spreads shrank:

Weekly BAA commercial bond rates rose another .09% to 4.89%.  These remain close to the lowest yields in over 45 years. Yields on 10 year treasury bonds also rose 0.11% to 1.65%.  The credit spread between the two declined to 3.24%, which is about halfway between its 52 week maximum than minimum, and a significant improvement from one month ago.  Tightening credit spreads are a good sign.

Housing reports remained mixed:

The Mortgage Bankers’ Association reported that the seasonally adjusted Purchase Index declined -2.0% from the week prior, and were also down -4.9% YoY, back into the lower to middle part of its two year range. The Refinance Index fell -5.1% but is still near its 3 year high.

The Federal Reserve Bank’s weekly H8 report of real estate loans this week rose +0.8% for the week.  The YoY comparison rose to +1.2%.  On a seasonally adjusted basis, these bottomed last September and are also up +1.3%.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up + 2.3% from a year ago.  YoY asking prices have been positive for over 8 months.

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

M1 was off -0.6% last week, and was flat at 0.0% month over month.  Its YoY growth rate fell from +13.9% to +10.7%, as comparisons with last year’s tsunami of incoming cash are in full progress. As a result, Real M1 declined to +9.3%. YoY.  M2 fell -0.2% for the week, and was up 0.3% month/month.  Its YoY growth rate fell from 7.4% to +6.5%, so Real M2 grew at +5.1%.  Real money supply indicators are now declining as the tsunami of cash arriving from Europe last summer disappears from the comparisons.

Rail traffic was slightly positive while its diffusion index declined:

The American Association of Railroads  reported a +0.8% increase in total traffic YoY, or +3,800 cars.  Non-intermodal rail carloads declined -1.2% YoY or -3,800, once again entirely due to coal hauling which was off -7,300.  Negative comparisons rose back from 6 to 8 types of carloads.  Intermodal traffic was up 7,400 or +3.2% YoY.

Turning now to high frequency indicators for the global economy:

The TED spread rose from its 52 week low of 0.34 to 0.37. The one month LIBOR declined to 0.237, an 111 month low.. It remains well below its 2010 peak, and has still within its typical background reading of the last 3 years.  Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell from 774 to 714, only 44 points above its February 52 week low of 670.  The Harpex Shipping Index fell another 2 points to 398.  It is up only 25 from its February low of 375.

Finally, the JoC ECRI industrial commodities index fell from 119.10 to 117.89. This is still near its recent 52 week low.  YoY comparisons for this number will shortly improve (or get less worse) as its August 2011 swoon will leave the comparison period.  Nevertheless, its decline remains a strong sign  that the globe taken as a whole has been slipping back into recession.

Like the positive monthly indicators for July, most of the weekly indicators were at least slightly positive this week, including sales, the 4 week average of jobless claims, the 20 day sum of withholding taxes paid, credit indicators, housing prices and real estate loans, and money supply. The most significant negative is gasoline prices which have risen back into the choke collar zone. Mortgage applications declined. Staffing services were weak.

Global indicators of shipping and industrial metals prices continue to indicate a downturn. By continuing to expand moderately, the US remains the world’s least worst economy.

Have a nice weekend!

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Dude, Where’s My Recession?

Two piece of economic data released this morning make it considerably harder for bears to argue that we are slipping into, let alone already in, a new recession.

Housing permits rose to 812,000. This is the first time over 800,000 and the highest level in 4 years. Permits have risen over 200,000 on an annualized basis over the last year. The now-strong upward trend in permits, generally consistent in the past with GDP over 3% in the near future, ia evident on the updated graph below, showing permits in blue, private residential construction spending in red, and residential construction employment in green:

image

You can see that permits lead spending, which in turn leads construction. Needless to say, the rise in permits is bullish for both residential construction spending and future employment.

Also this morning the four week average for first time unemployment claims fell to 363,750, only 750 or 0.2% above its lowest reading during the entire recovery:

image

No recession has ever begun within 2 months of such a reading.

There are certainly major problems with the expansion, most notably the plateauing of consumer retail spending since this year began, and the completed stalling and perhaps slight contraction in manufacturing. But this morning’s releases put an exclamation point on the proposition that the expansion hasn’t expired yet.

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It Was Another Week Of Positive Data, But Energy Prices Are Getting Scary Again

There was little monthly or quarterly data this past week.  Productivity increased in the second quarter, as did unit labor costs.  The US trade balance got less worse.  The wholesale inventory to sales ratio ticked up.  Both import and export prices declined.I report on high frequency weekly indicators because they are as close as we can reasonably get to observing economic trends in real time.  Turns will show up here before they show up in monthly or quarterly data.  Recently I’ve been focusing on consumer purchases and the effects of the Oil choke collar as the keys to the economy for the second half of this year.

So let’s start once again this week with Same Store Sales, which were positive, and Gallup very so:

The ICSC reported that same store sales for the week ending August 4 rose 0.6% w/w, and were up +2.4% YoY.  Johnson Redbook reported a 2.0% YoY gain.  Shoppertrak, did not report. 

The 14 day average of Gallup daily consumer spending  continued an upward spike that started at the end of July and as of August 9 was at $83, $6 over last year’s $77 for this period.  This is the second week of real strength after six weeks in a row of weakness. This is very encouraging but we will still have to see if consumers are regaining their footing.

On the other hand, the energy choke collar remains close to re-engaging and renewed declines in usage signals weakness:

Gasoline prices rose significantly last week, up $.14 from $3.51 to $3.65.  Oil prices per barrel rose slightly for the week, from $91.40 to $92.87.  Gasoline usage, at 8839 M gallons vs. 9244 M a year ago, was off -4.4%  The 4 week average at 8737 M vs. 9122 M one year ago is off -4.2%, also a significant YoY decline.  The renewed decline in energy usage compared with last year must be considered a sign of weakness unless there is some new surprise level of efficiency compared with one year ago to explain the discrepancy.

Employment related indicators were also positive this week.

The Department of Labor reported that Initial jobless claims declined 4,000 to 361,000 from the prior week’s unrevised figure.   The four week average rose by 2750 to 368,250 (as the comparison week of 350,000 dropped out).  The lowest 4 week average during the entire recovery has been 363,000.  This number does not appear to be compatible at all with further economic weakness. 

The Daily Treasury Statement showed that for the first 7 days of August 2012, $51.7 B was collected vs. $52.8 B a year ago.  For the last 20 days ending on Thursday, $133.4 B was collected vs. $128.1 B for the same period in 2011, a gain of +4.1%. 

The American Staffing Association Index rose to 93.  This index was generally flat during the second quarter at 93 +/-1, and has returned to that level after its July 4 seasonal slump. It nevertheless is not rising from that range and so indicates some weakness.

Bond prices and credit spreads both decreased again:

Weekly BAA commercial bond rates rose .03% to 4.80%.  These remain close to the lowest yields in over 45 years. Yields on 10 year treasury bonds  rose 0.7% to 1.54%.  The credit spread between the two declined to 3.26%, which is about halfway between its 52 week maximum than minimum, and a significant improvement from one month ago.  Tightening credit spreads are a good sign. 

Housing reports remained mixed:

The Mortgage Bankers’ Association reported that the seasonally adjusted Purchase Index declined -1% from the week prior, and were also down -12% YoY, back into the middle part of its two year range.  Mortgage applications declined precipitously in August 2011, so this YoY comparison is likely to change in the next few weeks.  The Refinance Index fell -2% but is still near its 3 year high.

The Federal Reserve Bank’s weekly H8 report of real estate loans this week rose +0.1% again.  The YoY comparison rose to +1.1%.  On a seasonally adjusted basis, these bottomed last September and are also up +1.1%. 

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up + 2.1% from a year ago.  YoY asking prices have been positive for over 8 months.

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

M1 was off -0.8% last week, but was up +2.6% month over month.  Its YoY growth rate fell to +13.9%, so Real M1 is up 12.2% YoY.  M2 rose +0.1% for the week, and was up 0.6% month/month.  Its YoY growth rate fell to 7.4%, so Real M2 grew at +5.7%.  Real money supply indicators after slowing earlier this year,  have increased again,  although YoY comparisons are now declining as the tsunami of cash arriving from Europe last summer disappears from the comparisons.

Rail traffic was positive and its diffusion index improved:

The American Association of Railroads  reported a +1.7% increase in total traffic YoY, or +8,700 cars.  Non-intermodal rail carloads were up +0.4% YoY or 1000, despite coal hauling being off -8000.  Negative comparisons fell from 8 to 6 types of carloads.  Intermodal traffic was up 6700 or 3.3% YoY. 

Turning now to high frequency indicators for the global economy:

The TED spread fell .02 to 0.34, at a 52 week low. The one month LIBOR declined to 0.240. It has back to its April – May range, it remains well below its 2010 peak, and has still within its typical background reading of the last 3 years.  Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell from 852 to 774. It is now only 104 points above its February 52 week low of 670.  The Harpex Shipping Index fell another 14 points to 400.  It is up only 25 from its February low of 375.

Finally, the JoC ECRI industrial commodities index rose from 116.70 to 119.10.  This is still near its recent 52 week low.  YoY comparisons for this number will shortly improve (or get less worse) as its August 2011 swoon will leave the comparison period.  Nevertheless, its decline remains a strong sign  that the globe taken as a whole has been slipping back into recession.

While the global data remains very weak, this was a very good week for US data generally, although due to the withering corn crop, ethanol prices and therefore gasoline prices have increased smartly.  There was an air pocket of sudden weakness last August, and so many of the YoY comparisons should improve in the next few weeks.  That the consumer is spending again after a two month hiatus is especially a relief.

Have a nice weekend!

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Why Global Growth Is Grinding Lower

Over the last few weeks, both NDD and I have taken a pretty exhaustive look at the world’s economies.  It started with my look at the Beige Book (see here for conclusion with links to various sub-parts) and NDDs look at the 2012 situation.  I also looked at Asia and the EU.   All of these reports had the same conclusion: growth was grinding slower.  There is no sign of immediate or imminent collapse, but there is also no sign of any period of rapid growth.  In short, we’re stuck in the mud with no apparent way out.  However, the question to ask is this: how did we get here, why is it happening and how do we get out?

It’s first important to understand that we’re in the middle of a post credit bubble expansion.  That means we’re dealing with a very different set of economic variables than a fed induced recession and recovery.  In the latter, the Fed raises rates to squash inflation, and then lowers rates to stimulate growth.  This is part and parcel of basic central bank theory and has been occurring for the better part of the our post WWII economic history.  However, now we’re dealing with a credit deflation recovery, which is characterized by far slower growth.  The reason for this is actually pretty simple: consumers (who account for about 70% of US economic activity) are trying to pay down debt in addition to spending for various items.  As such, consumer growth is lower, creating a demand vacuum.  Until the total debt level reaches lower levels, lower consumer spending will be the norm, leading to slower growth.  This fact-pattern was outlined in the Debt Deflation Theory of the Great Depression.

But there are two other contributing set of facts.  The first is Europe.  More has been written on this than I care to link to, but the basic problem is one of economic union without fiscal union.  Put another way, goods and services now move in a far freer manner throughout the region, but each geographical unit still has tremendous fiscal control over its own affairs.  It is this latter situation creating the problems as some countries (Greece) have been very reckless, while others have simply been in the wrong place at the wrong time (Spain).  However, each country has just enough autonomy to make resolution incredibly difficult.  Moreover, in order to realistically solve the problem, countries in general are going to have to give up a certain degree of fiscal sovereignty — not exactly the kind of platform any politician wants to run on.  But the easiest way to solve the problem (breaking up the union) is also not really in the cards as union has already come too far to stop now.  And just to make the situation that much more convoluted, the politicians who should be solving the problem don’t really seem to have any desire to step up to the plate and, well, solve the problems (see this commentary from Tim Duy as an example).  I think the best analogy I can think of is to the US under the Articles of Confederation. 

The second problem is that the BRIC method of expansion is running out of steam.  It used to be that the BRIC’s used their cheap labor (China and India) and abundant raw materials (Russia and Brazil) to rapidly grow, expanding the middle class and raising the respective country out of third world status.  However, this model is running out of power, largely because of its overall success.  China’s labor costs are rising to the level where they are no longer as competitive on the world stage.  India and Russia have political problems of the highest order.  India’s central bank has refused to lower rates despite slower growth partially because of inflation, but more so because of the government’s overall intractable inability to solve big problems.  Russia is still deeply corrupt to such a degree as to make expansion into the market a very dicey affair.  And Brazil is slowing because its raw materials are needed to a lower degree than before because of slower growth.  In short, the BRICs need to find a new model of expansion, and no one seems to be forthcoming with the next big thing.

To sum up, all major economic regions are now dealing with incredibly difficult and nuanced problems, none of which offer easy solutions.  The US consumer still has to pay down his debt; Europe needs to politically integrate further (meaning each country has to give up a certain degree of sovereignty) and the BRIC countries need to find a new model of growth.  None of this situations will be resolved quickly, leaving us where we started: stuck in the mud.   

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The Latest Look At The High-Frequency Economic Data

The big monthly numbers this week were obviously the addition of 163,000 jobs in July and the uptick of the employment rate to 8.3%.  July car sales held steady.   Construction spending increased, especially private residential spending, yet another good sign for the housing rebound. The Case Shiller repeat sales housing price index also improved again month over month, and is very close to turning positive YoY.  The ISM services report showed a slight uptick in expansion as did the Chicago PMI.  Personal income rose 0.5%, as did second quarter median employment costs.  Consumer confidence rose.

On the negative side, ISM manufacturing showed a very slight contraction for the second month in a row. Personal spending was flat.  Factory orders declined -0.5%.The high frequency weekly indicators are meant to be as close as we can reasonably get to observing economic trends in real time.  Turns will show up here before they show up in monthly or quarterly data.

Let’s start again this week with Same Store Sales, which were quite weak but remained positive:

The ICSC reported that same store sales for the week ending July 28 rose 1.8% w/w, and were up +1.7% YoY.  Johnson Redbook reported a 1.1% YoY gain.  Shoppertrak, did not report. 

The 14 day average of Gallup daily consumer spending  showed an upward spike at the end of July and at $77 was $2 over last year’s $75 for this period.  This is the first week of real strength after six weeks in a row of weakness. This is encouraging but we will have to see if this is just a one week outlier or if consumers are beginning to regain their footing.

Employment related indicators were also mixed to negative this week:

The Department of Labor reported that Initial jobless claims rose 12,000 to 365,000 from the prior week’s unrevised figure.   The four week average fell another 2250 to 365,500.  The lowest 4 week average during the entire recovery has been 363,000.  This number does not appear to be compatible at all with further economic weakness. 

The Daily Treasury Statement showed that for July 2012, $144.0 B was collected vs. $132.2 B a year ago, an +8.9% improvement.  For the last 20 days as  of this Thursday, $130.6 B was collected vs. $132.1 B for the same period in 2011, an actual loss of -1.1%.  It’s possible that this is still being affected by the artifact of the July 4 holiday, but this will disappear next week.

The American Staffing Association Index remained at 92.  This index was generally flat during the second quarter 93 +/-1. Having stayed at 92 for 2 weeks when in past years outside of the recession it was rising indicates some weakness.

The energy choke collar remains close to re-engaging:

Gasoline prices rose again last week, up .02 to $3.51.  Oil prices per barrel rose slightly for the week, from $90.13 to $91.40.  

Gasoline usage, at 8820 M gallons vs. 9215 M a year ago, was off -4.3%  The 4 week average at 8756 M vs. 9065 M one year ago is off -3.4%, still a significant YoY decline.  From here on in declines in energy usage compared with last year have to be considered a sign of renewed weakness unless there is some new surprise level of efficiency compared with one year ago to explain the discrepancy. 

Bond prices and credit spreads both decreased again.

Weekly BAA commercial bond rates fell .08% to 4.77%.  These are the lowest yields in over 45 years. Yields on 10 year treasury bonds  fell 0.5% to 1.47%.  The credit spread between the two declined to 3.30%, which while still closer to its 52 week maximum than minimum, is still a significant improvement from one month ago.   

Housing reports remained mixed:

The Mortgage Bankers’ Association reported that the seasonally adjusted Purchase Index declined -2.1% from the week prior, and were also down approximately -1.5% YoY, back into the middle part of its two year range.  The Refinance Index rose 0.8% to yet another 3 year high.

The Federal Reserve Bank’s weekly H8 report of real estate loans this week fell -0.1% again.  The YoY comparison declined to +0.9%.  On a seasonally adjusted basis, these bottomed last September and are up +1.1%. 

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up + 2.2% from a year ago.  YoY asking prices have been positive for 8 months.

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

M1 was flat last week, and was up +3.6% month over month.  Its YoY growth rate fell to +16.5%, so Real M1 is up 14.8% YoY.  M2 fell -0.1% for the week, and was up 0.9% month/month.  Its YoY growth rate fell to 8.4%, so Real M2 grew at +6.7%.  Real money supply indicators after slowing earlier this year,  have increased again,  and YoY comparisons are holding generally steady.

Rail traffic was mixed again, but the diffusion index improved:

The American Association of Railroads  reported a +1.0% increase in total traffic YoY, or +5,400 cars.  Non-intermodal rail carloads were down  -1.5% YoY or -4400, due once again to coal hauling.  Negative comparisons fell from 13 to 8 types of carloads.  Intermodal traffic was up 9800 or 4.1% YoY. 

Turning now to high frequency indicators for the global economy:

The TED spread rose .01 to 0.36, still close to its 52 week low. The one month LIBOR declined to 0.2440. It has retraced about 1/2 of its rise from its recent 4 month range, it remains well below its 2010 peak, and has still within its typical background reading of the last 3 years.  Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell from 933 to 852. It is still 182 points above its February 52 week low of 670, although well below its October 2011 peak near 2200.  The Harpex Shipping Index was steady last week after falling for eight straight weeks at 414.  It is still up 39 from its February low of 375.

Finally, the JoC ECRI industrial commodities index fell from 117.10 to 116.70. This is still near its 52 week low.  Its recent 10%+ downturn during the last few months remains a strong sign of all that the globe taken as a whole is slipping back into recession.

Weekly indicators were quite mixed.  Initial claims, especially as measured over 4 weeks, are sending a good signal.  Housing prices are firming.  The long leading indicators of housing (especially refinancing), real money supply, and corporate bond yields also continue to be positive.  Consumer sales were weakly positive.  On the other hand, gasoline prices and sales are a negative.  Railroad data was mixed, as were purchase mortgages, and real estate loans were negative.  Shipping rates are slipping, and industrial commodities resumed their slide.

I believe we are going to see a very weak July real retail sales number.  Going forward the issue as to whether we actually tip into contraction or rebound is probably going to hinge on energy prices and whether real wages turn positive enough to assist in consumer spending.

Have a nice weekend!

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What Auto Sales Say About The Odds Of A Recession

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

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

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

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

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

image

And here it is from 1999 to the present:

image

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

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

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

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According To Initial Jobless Claims, We’re Nowhere Near A Recession

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

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

image

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

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

image

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

image

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

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Consumer Spending Is Becoming A Big Red Flag

Monthly data reported included very poor June real retail sales, off -0.5%.  Consumer prices were flat, meaning -0.3% deflation for the 2nd quarter.  Housing permits declined, although still at the third highest level in 4+ years.  This contributed to a -0.3 decline in the June LEI, the second decline in 3 months.  Existing home sales also dropped to a 6 month low.  Housing starts, which usually follow permits by about a month, did rise to a 4+ year high, and industrial production also rose 0.4.

A reminder about my weekly look at the high frequency weekly indicators:  they are not meant to be predictive at all.  Rather, while reporting on monthly or quarterly data is “looking in the rear view mirror,” by using data that is reported every week we are glancing out the side windows at what is happening virtually in real time.  Although weekly data can be noisy, turns will show up here before they show up in monthly or quarterly data.

And indeed, a significant turn did show in consumer spending.  Last year the smoothed Gallup daily consumer spending data showed that, despite concerns of an imminent recession from some last September, consumer spending was holding up.  Meanwhile same store sales were almost uniformly running at over +2% YoY.  Last winter, I identified this as a metric to watch.  Beginning in May, this level was being frequently breached to the downside by at least one of the reporting services.  By late June, Gallup spending in particular was basically flat YoY.  All of this presaged the poor June retail sales number.

This week, Same Store Sales were decidedly mixed and Gallup was negative.

The ICSC reported that same store sales for the week ending July 14 were flat w/w, and were up +2.6% YoY.  Johnson Redbook reported a 1.7% YoY gain.  Shoppertrak, which has been very erratic, reported a +3.6% YoY gain.  The 14 day average of Gallup daily consumer spending,  at $67 was $4 under last year’s $71 for this period.  This is the fifth week in a row in which consumer spending has weakened significantly, and the worst YoY comparison in two months for the Gallup report.  One year ago, sales were building to a good “back to school season” that peaked in early August. Since the beginning of June, however, sales have been in decline.  This is now a red flag showing that consumers have turned cautious and that caution has continued into July.

Employment related indicators were also mixed to poor:

The Department of Labor reported that Initial jobless claims rose 36,000 from the prior week’s unrevised 350,000, reversing all of its decline and then some from last week.   The four week average fell 1000 to 375,500.  

The Daily Treasury Statement for the first 13 reporting days of July was $97.5 B vs. $96.9 B a year ago, a very slight +0.6% improvement.  For the last 20 days ending July 19, $135.0B was collected vs. $135.8B for the same period in 2011, an outright decline.  This decline may be an artifact of the July 4 holiday, since an extra Monday is included in last year’s number.  Moving the average by one day either way results in a +$4B or +$7B gain.

The American Staffing Association Index fell by 5 to 88. This index has been generally flat for the last three months, mirroring its 2nd quarter flatness last year. The big decline this week is due to the July 4 artifact that happens every year.  It should rebound next week.

The energy choke collar is close to re-engaging:

Gasoline prices rose again last week, up .02 to $3.43.  Oil prices per barrel rose sharply during the week, and settled Friday up another $5, closing Friday at $91.83.  Gasoline usage, at 8628 M gallons vs. 9028 M a year ago, was off -4.4%.  The 4 week average at 8848 M vs. 9154 M one year ago is off -3.3%, still a significant YoY decline; however, June and early July of 2011 were the only months after March 2011 where there was a YoY increase in usage, so the YoY comparison now is especially difficult.  

Bond prices and credit spreads both decreased:

 
Weekly BAA commercial bond rates fell .13% to 4.90%.  These are the lowest yields in over 45 years. Yields on 10 year treasury bonds  fell .09% to 1.52%.  The credit spread between the two declined to 3.38%, but is still near its 52 week maximum.  The recent collapse in bond yields shows fear of deflation due to economic weakness, as does the recent increase in credit spreads. 

Housing reports remained mixed:

The Mortgage Bankers’ Association reported that the seasonally adjusted Purchase Index declined a slight -0.1% from the week prior, but remained down approximately 3% YoY, back into the middle part of its two year range.  The Refinance Index rose 22%, again at its 3 year high. 

The Federal Reserve Bank’s weekly H8 report of real estate loans this week rose +0.1%, and the YoY comparison remained at +0.9%.  On a seasonally adjusted basis, these bottomed in September and is up +1.2%.  

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up + 2.7% from a year ago.  YoY asking prices have been positive for 7 1/2 months, and remain higher than at any point last year.

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

M1 rose +2.7% last week, and was up +1.8% month over month.  Its YoY growth rate rose to +16.0%, so Real M1 is up 14.4% YoY.  M2 was flat for the week, and was up 0.8% month/month.  Its YoY growth rate remained at 8.5%, so Real M2 grew at +6.%.  Real money supply indicators after slowing earlier this year,  have increased again, but YoY comparisons are starting to wane as expected.

Rail traffic turned solidly positive:

The American Association of Railroads  reported a +3.9% increase in total traffic YoY, or +20,300 cars.  Non-intermodal rail carloads were up +1.7% YoY or +4600, as coal hauling turned solidly positive for the first time in months, up 3000 carloads YoY.  Intermodal traffic was up 15,600 or 6.8% YoY.  Negative comparisons, however, continued for 10 of the 20 carload types. 

Turning now to high frequency indicators for the global economy:

The TED spread stayed at 0.37. In the last few weeks it has established new 52 week lows. The one month LIBOR declined slightly 0.2468. It has risen significantly above its recent 4 month range, it remains well below its 2010 peak, and has still within its typical background reading of the last 3 years.  Even with the recent scandal surrounding LIBOR, it is probably still useful in terms of whether it is rising or falling.

The Baltic Dry Index fell another 73 to 1037. It is still 367 points above its February 52 week low of 670, although well below its October 2011 peak near 2200.  The Harpex Shipping Index fell for the seventh from 430 to 423, but is still up 47 from its February low of 375. 

Finally, the JoC ECRI industrial commodities index rose from 116.13 to 118.73. This is still near its 52 week low.  Its recent 10%+ downturn during the last few months remains a strong sign of all that the globe taken as a whole is slipping back into recession, and its increase in the last two weeks is probably primarily due to the price of Oil.

While as I have said for the last several weeks, weakness has grown widespread, the most positive signs are in the long leading indicators of bond yields, money supply, and housing.  Labor indicators remain weak, and it is particularly ominous that the Oil choke collar is close to re-engaging just when consumers appear to be rolling over. 

This post originally appeared on The Bonddad Blog.

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