Why is Gas Demand Dropping?

Let's look at this from an economic perspective: 

     The length of time that people have to respond to price changes also plays a role. A good example is that of gasoline. Suppose you are driving across  the country when the price of gasoline suddenly  increases. Is it likely that you will sell your car and  abandon your vacation? Not really. So in the short  run, the demand for gasoline may be very inelastic.   
     In the long run, however, you can adjust your behavior to the higher price of gasoline. You can buy  a smaller and more fuel-eficient car, ride a bicycle, take the train, move closer to work, or carpool with other people. The ability to adjust consumption patterns implies that demand elasticities are generally higher in the long run than in the short run.

Samuelson, Paul A (2009-04-08). Economics (Page 66). Business And Economics. Kindle Edition.

First, consider this chart:

Look at this chart as a time series; start with the line at the far left, move to the right and than when you reach the farthest point on the right, go back and start with the red line.  Put another way, gas prices have been high for about a year -- and that's before we take the 2008 price spike into consideration,

which would lengthen the time out a bit more.  That means that consumers have had several years to adapt their behavior to the reality of high gas prices.  As professor Samuelson observes, over time demand becomes more elastic as people have the opportunity to change their behaviors.  Hence we get this:

Dropping demand.

Weekly Indicators: it's the annual May Europanic, but US growth remains intact edition

- by New Deal democrat

Monthly data reported in the last week was mixed, due to revisions in the prior month's data. Retail sales were up, just barely. There was no consumer inflation. Housing permits fell sharply, but only because the prior month's numbers were revised even more sharply higher. This caused the Index of Leading indicators to record a slight decline. Housing sales are in a definite uptrend. Industrial production rose strongly, but less so taking into the negative revision to the prior month. Regional manufacturing reports were mixed with NYS up strongly, and Philly in contraction.

The high frequency weekly indicators this week, with one exception, were neutral to positive as the Oil choke collar disengages due to the now-annual ritual of late spring Europanic.

Let's start with the exception. Rail traffic was mixed again this week. The American Association of Railroads reported a -1.3% decrease in total traffic YoY, or -8,100 cars. Non-intermodal traffic was down by -15,200 cars, or -5.2% YoY. Excluding coal, this traffic was up 5,800 cars. Ethanol-related grain shipments were also off, as were chemicals, metals, and scrap. Intermodal traffic was up 7,100 carloads, or +3.1%. Railfax's graph of YoY traffic continued to show that the YoY improvement in hauling of cyclically sensitive materials remains strong. Oddly, it remains baseline, non-cyclical shipments that are declining, and declining ever more sharply.

Housing was mixed but at slightly higher recent levels:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index fell -2.4% from the prior week, and was down slightly, -1.0% YoY. The Refinance Index jumped 13.0% with record low mortgage rates. This index continues to be near the upper end of its 2 year generally flat range.

The Federal Reserve Bank's weekly H8 report of real estate loans, which had been negative YoY for 4 years, turned positive over one month ago. This week, real estate loans held at commercial banks was flat w/w, and their YoY comparison declined -0.1% to +0.9%. On a seasonally adjusted basis, these bottomed in September and remain up +1.6%.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were up +2.4% from a year ago. YoY asking prices have been positive now for almost 6 months. Median current list prices are now higher than at any point last year. Either this indicator will turn, or the Case-Shiller repeat sales index is likely to turn within the next several months. I do not see how the divergence between the two can continue much longer.

Employment related indicators were also neutral to positive:

The Department of Labor reported that Initial jobless claims rose 2,000 to 370,000 last week. The four week average fell 4000 to 375,000. It seems more likely that in April we saw a quirk of seasonality rather than a more ominous sign.

The Daily Treasury Statement for the first 13 days of May showed $87.7 vs. $95.6 B for April 2011. This has everything to do with the month starting on a Tuesday rather than a Monday. Compare Monday through Wednesday in the equivalent period and this year is $4.0 B ahead of last year. For the last 20 reporting days (4 x each day of the week), $132.7 B was collected vs. $129.6 B a year ago, an increase of $3.1 B, or +2.4%. This reverses last week's decline, but is still a weak advance.

The American Staffing Association Index remained at 93 for the third week. It remains two to three points below the all time records from 2006 and 2007 for this week of the year.

Same Store Sales continue to be solidly positive.

The ICSC reported that same store sales for the week ending May 12 fell -0.8% w/w, but were up +4.5% YoY. Johnson Redbook reported a 3.7% YoY gain. Shoppertrak reported a gain of 12.0% YoY after last week's YoY decline of -2.7%. The 14 day average of Gallup daily consumer spending turned positive again this week at $71 vs. $68 in the equivalent period last year.

Money supply was mixed:

M1 fell -1.5% last week, and also fell -0.6% month over month. Its YoY level increased to +16.5%, so Real M1 is up 14.2%. YoY. M2 was flat for the week, and was up +0.4% month over month. Its YoY advance rose slightly to +9.6%, so Real M2 increased to +7.3%. Real money supply indicators continue to be strong positives on a YoY basis, although they have had a far more subdued advance since September of last year.

Bond prices rose and credit spreads were flat:

Weekly BAA commercial bond rates fell .07% to 5.08%. Yields on 10 year treasury bonds also fell .07% to 1.88%. The credit spread between the two remained even at 3.20%. Strongly falling bond yields mean that fear of deflation is strong. Spreads have been widening for the last month until this week.

Finally, the energy choke collar is disengaging:

Gasoline prices fell for the fourth straight week, down another .04 to $3.75. Oil fell almost $5 this week, $96.13 to $91.48. Oil prices are now below the point where they can be expected to exert a constricting influence on the economy. Since gasoline prices follow with a lag, we can expect gasoline to fall to that point in about a month as well. The 4 week average of Gasoline usage, at 8692 M gallons vs. 8864 M a year ago, was off -1.9%. For the week, 8971 M gallons were used vs. 9048 M a year ago, for a decline of -0.9%. Gasoline usage is moving to parity with the reduced levels that began to be established one year ago.

Turning now to high frequency indicators for the global economy:

The TED spread remained at 0.390, near the bottom of its recent 3 month range. This index remains slightly below its 2010 peak. The one month LIBOR rose slightly to 0.240. It is well below its 12 month peak set 3 months ago, remains below its 2010 peak, and has returned to its typical background reading of the last 3 years.

The Baltic Dry Index rose slightly from 1138 to 1141. It is about 1/3 of the way back from its February 52 week low of 670 to its October 52 week high of 2173. The Harpex Shipping Index rose another 5 points from 440 to 445 in the last week, and is up 70 from its February low of 375.

Finally, the JoC ECRI industrial commodities index fell sharply for the second week in a row, from 122.82 to 120.25. This indicator appears to have more value as a measure of the global economy as a whole than the US economy.

When the US is in a recession, that doesn't mean that every single state's economy is contracting. Texas or Washington state might be doing well, for example. The sharp declines in the JoC ECRI index and treasury bond yields seem to be all about Europanic. The global economy as a whole might be slipping into contraction thanks largely to austerian stupidity in Europe (but note that global shipping rates appear to have bottomed).

But when we look at the up to the moment indicators for the US, we see a slow improvement in housing, refinancing of mortgages at lower rates, consumer purchases remaining strong, payroll taxes modestly improving, the Oil choke collar loosening, and both industrial and retail consumers of energy focusing like lasers on efficiency. On the other hand, rail traffic is an actual drag, even if there are very good reasons for the decline that are longer-term economic positives. In short, the US economic expansion appears intact.

More Signs of the Global Slowdwon

Last week, the Bank of Korea decided to leave rates unchanged.  Here is the relevant section from their policy statement:

Based on currently available information, the Committee considers some economic indicators in the US to have sustained their trends of improvement, but economic activities in the euro area to have remained sluggish. Growth in emerging market economies has continued to exhibit signs of weakening, due mostly to slowing exports. Going forward the Committee expects the global economy to sustain its recovery, albeit at a moderate pace, and judges that risk factors still exist―including the resurgence of sovereign debt problems in Europe stemming from the heightening of political uncertainty, the deepening economic slowdown there, and the geopolitical risks in the Middle East.

Another report from the bank added this:

The financial and economic conditions at home and abroad that formed the backdrop to these monetary policies are set out in what follows. In the world economy, first of all, the trend of recovery has shown signs of faltering as the negative impacts on the real economy of the continued deterioration of sovereign debt problems in Europe during the latter half of 2011 have spread to emerging market countries

Consider the following chart in combination with the preceding statements:

 

The key here is the slowing of EDEs, largely as a result of slowing exports.  Remember, emerging economies have two primary products: labor and raw materials.  But in order for those goods/services to have value, there must be demand from the emerging world.  If that is slowing, we see a ripple effect more though the world economy.

Consumer price inflation fell to 2.5% in April, and core inflation dropped compared to the previous month as well. The Committee does however recognize the presence of potentially destabilizing factors, such as the ongoing high inflation expectations and the geopolitical risks in the Middle East. In the housing market, the decline in sales prices gathered pace somewhat and the rise in leasehold deposits slowed in Seoul and its surrounding areas, while in the rest of the country both sales and leasehold deposit prices sustained high rates of increase similar to those in the previous month.

And from a second report:

The upward trend of global inflation flattened out, thanks to the stabilization of international commodity prices and the easing of demand side pressures in line with the world economic slowdown. High inflation expectations and a renewed rise ofinternational oil prices, due to geopolitical risk in the Middle East, nevertheless have remained as potentially destabilizing factors to prices

The chart above shows that global prices are decelerating, largely as a result of dropping demand.

Condolences to Mish

- by New Deal democrat

 Mike Shedlock's wife Joanne has passed away.

Bonddad and I have each written any number of pieces critical of some of Mish's economic analysis.  But that is small in the grand scheme of things. We are all human beings with a small and finite time to live.

 Condolences to Mish and his family.  I will be writing a check to the ALS in her memory.
-------
From Bonddad:

From all who write on the blog, our sincerest and deepest sympathies.  

Morning Market Analysis; The Weakness Continues

All of the above charts show that markets are getting hit harder.  MACDs are dropping; Bollinger Band width is increasing which indicates increased volatility.  The IWMs (top char) have fallen through support and are now at the 50% Fib level; The QQQs have fallen through support and are now at a Fib fan level (and are also just above the 200 day EMA); the SPYs are at the 200 day EMA.  Also note yesterday's volume spike. 

This is what a correcting market looks like.

At the same time, money is flowing into the Treasury market as a safe haven bid.  The entire curve is rallying, catching the safety bid. 

This is the direct result of the EU situation, along with a weakening US economy. Put another way; it's getting very ugly.

Inflation -- the Non-Threat

Consider this chart from the latest EU monthly update:

In the EU area, prices changes are stabilizing.  Ini the US and UK, they're dropping.  Japan is seeing a price increase, but they're in desperate need of price increases.

Let's look at some charts from around the world:

While core US CPI is rising, the decrease in total CPI will help to slow the rise.

Australian CPI is clearly dropping

China's inflation rate has clearly dropping, while the EU's rate has stabilized.

Brazilian inflation is also on a downward path.

India remains the primary problem area, with inflation over 8% on average for the last year or so.  In addition, it appears their inflation is picking up, according to the latest inflation report.  However, they're one of the only countries experiencing this.

Why has ECRI stopped discussing their Leading Indicators?

- by New Deal democrat

ECRI's Lakshman Achuthan made the rounds of the business TV shows last week once again reiterating their call that a recession has already begun or else will begin within the next next month and a half.  Curiously missing form those appearances -- as well as his numerous other appearances over the last few months -- was any detailed discussion of what ECRI's leading indicators, especially its long leading indicators, currently forecast. Virtually all of the discussion has been of coincident indicators, and indeed coincident indicators measured on a (lagging) YoY basis rather than their real monthly values.

I do not believe the omission of their leading indexes is an accident. More on that below, but first let's look at the latest evidence cited in favor of imminent recession.

In all of his appearances Achuthan cited three measures -- real personal income, real final sales, and payrolls -- out of the four that typically define expansions vs. recessons. Let's look at them first.

Here is a graph of real personal income YoY since the end of the 2001 recession.  Achuthan points out, accurately, that it is lower than it has been at the start of most prior recessions:



What he didn't say was that it is also at levels seen throughout 2002 and into 2003, and also briefly in 2006, when no recession occurred. In fact, in none of the times when this level has preceded recessions have households been refinancing debt at lower amounts as they have been doing quite robustly for many months now - but exactly as they were in 2002. Further, while payroll growth YoY declined slightly in the last couple of months, income turned slightly up YoY last month.

It is unclear which measure of sales the NBER uses in their determinations. The St. Louis FRED measures real retail sales in their "tracking the economy" series, as opposed to manufacturers and trade sales(h/t thiazole). In the following graph I've plotted both YoY real retail sales (in blue) and manufacturers and trade sales (in red):



Again, it is clearly correct that manufacturers and trade sales have declined YoY quite substantially in the last year -- to a level that is equal to the YoY they held during most of the last expansion (and indeed during much of the 1990s expansion as well). You will also note that real retail sales lead manufacturers and trade sales, and turned negative in advance of them before the last recession - very unlike what they are showing now. In fact, for the last several months YoY growth in real retail sales growth has been increasing.

It is also correct that in the last two months, nonfarm payroll growth as declining YoY (measured against March and April 2011's 250,000 readings, two of the biggest gains in 5 years):



In the next two months, however, the comparisons will be with May and June 2011 which featured payroll growth of 54,000 and 84,000 respectively. If we get less than that, we won't need experts to tell us that we are in trouble, but if we get more, then YoY payroll growth is going to turn north again.

Last but by no means least, the fourth important coincident indicator of recession vs. expansion, namely industrial production, was reported yesterday. Here's a graph going back all the way to the end of the 2001 recession:



Industrial production, to put it politely, does not coincide with the notion that it is declining YoY. To the contrary, the trend for the last year has been increasingly positive YoY. In fact the 2010-2012 trend looks very similar to the 2002-04 trend coming out of the previous recession. As of right now industrial production is growing at a faster rate than at any time in the entire 2002-07 expansion.

In summary, two (and possibly three) of the coincident measures of recession, measured YoY for growth, are increasing, not decreasing.

But what I really wanted to point out here is that while ECRI has been pounding the table about coincident indicators measured YoY for the last few months, they have been almost entirely silent about their leading indicators.

ECRI's public Weekly Leading Index (WLI) is  only one of at least three leading indexes that they use.  Their founder, Prof. Geoffrey Moore, also proposed a Short (monthly) Leading Index and and Long Leading Index.  Up until late 2009, their Long Leading Index (LLI) was also freely available at their site (and a google search will quickly turn up many graphs of the LLI).  But the LLI has disappeared into the black box for the last 2 1/2 years.

ECRI certainly is not afraid to mention the direction of their LLI when it suits them. When ECRI made their recession call in September 2011, they were vociferous that their LLI had been declining since "before the Arab spring." In fact, since Prof. Moore published the components of the LLI in his 1992 book, we can look to see what the components of the LLI have been doing for the last 2+ years. Here they are, normed to 100 for easy comparison of their bottoms:



As you can see, housing permits, YoY Real M2, corporate bond yields (inverted), and corporate profits all hit soft spots at the end of 2010 into the first half of 2011 -- and all have rebounded thereafter:

The decline of the LLI into early 2011 was actually quite similar to their decline in the year 2000:



Aside from which component declined the most (bonds in 1999 vs. housing permits in 2010), the other big difference in the two periods is that it was two years before the LLI rebounded to prior levels after falling in 2000, whereas in 2011 it took only about a  year, with all of the components moving significantly higher in the third quarter.

Whereas I read these indicators as foretelling a slowdown in the first half of this year, with a 2001 style recession being the worst case scenario, followed by renewed growth in the second half, in his recent appearances Achuthan appears to have softened his call to a 2001 style recession being the most likely scenario. It's worth pointing out, however, that in the past ECRI's WLI growth index turning positive has always been contemporaneous with the end of a recession - and it did turn positive for about 5 weeks before declining to -0.1 in the last two weeks:



(h/t Doug Short)(As an aside, it is going to stink again this week mainly because of Europe, which has caused US treasuries to decline strongly in yield thus increasing credit spreads, and also causing commodity prices to tank - but that's another story).

So why has ECRI stopped mentioning their Long Leading Indicators? Perhaps because they are telegraphing growth in the latter part of the year, and ECRI is are looking for definitive confirmation from other indicators as to whether or not the recession that they see will be short-lived. By the way, in addition to the Conference Board, whose latest LEI was just released this morning, the Philadelphia Fed also maintains a Leading Index for the United States, which can be seen here. Neither one forecasts a recession starting in 2012.

Morning Market Analysis: Asia Falling

I'm traveling today and tomorrow, so I'm a bit pressed for time.  However, the charts below are extremely important.  All the markets in the Asian area are falling and are at important technical levels.  Most importantly, the selling has accelerated over the last few days.

The Chinese market has been in a downtrend for the last two months.  Prices moved lower in March, rallied a bit through April and have been moving sharply lower for the entire month after hitting resistance at the 200 day EMA.  The EMAs are now bearishly aligned.  The next level of support is in the 33.5 area.

The Singapore market moved through support in the 12.4 area and is now looking for support at various Fib levels. Momentum is decreasing as is the CMF and volatility is increasing. 

The Taiwanese market is also moving lower on decreasing momentum.  Prices are now below the 200 day EMA.  If prices move through the 12 price handle, the next target is the 11 area.

The South Korean market has dropped sharply over the last few trading sessions as it has moved through the 200 day EMA.  The CMF is dropping along with the MACD.  Also note the volatility is increasing. 

The Australian market has moved through the 22.50/22.75 level and is now at the 38.2% Fib level.  Momentum is decreasing, as is the CMF.  Also note that prices are below the 200 day EMA level.

The Japanese market has moved through support around the 200 day EMA.  The EMAs are moving lower, momentum is declining and volatility is increasing.

These markets tell a a simple story.  Money is leaving risk markets in the Asian rim.

Hiring leads firing: the short term unemployed

  - by New Deal democrat

One of the statistical quirks found by Prof. Geoffrey Moore, the founder of ECRI, is that even though the data is only monthly rather than weekly, short term unemployment (0 - 5 weeks) usually bottoms before initial jobless claims.  At least insofar as the limited data set I've been able to examine, that is true.  Short term unemployment bottomed first prior to 5 of the last 7 recessions.

In view of the theme that the rate of hiring generally leads the rate of firing, that makes sense.  As the economy weakens towards recession, while the rate of firing may not go up, or at least not by much, more and more of those recently laid off are unable to find new jobs quickly.

Beyond that, at least since the 1960s, there is a good measure of how much a deterioration of short term unemployment is necessary before the economy enters recession.  In each and every case, with a lag time of not more than 7 months, and usually much shorter, the number of short term unemployed rises by at least 300,000.  It remained 150,000 or more above its bottom in the month that the economy entered the recession.

This is tough to show graphically, but here it is from the 1960s through the early 1990s:



One thing that's important to point out, though, is that an increase of 300,000 in the short term unemployed doesn't always presage recession.  Sometimes it just shows some weakness (as in 1976 and 1984).  Put another way, an increase of 300,000 is a necessary but not sufficient condition.

Until last year, the maximum increase in the short term unemployed prior to a recession was 500,000.  Now let's look at this same relationship since the late 1990s:



The relationship continues.  But note what happened last year.  Between March and June the number of short term unemployed increased by over 600,000 -- and it remained above 300,000 through September.

As I've pointed out a number of times, the long leading indicators for the economy did hit a particularly weak spot between late 2010 and early 2011.  The short leading indicators plummeted between May and September.  It's no wonder, seeing this spike in short term unemployment, that ECRI believed the US may have already entered recession, or if not, it was "imminent" last September.

There's no doubt that the general trend since then has been down.  On the other hand, we have not established a new low, and this year's numbers have been about 100,000 to 137,000 above the April 2011 low.  Unless and until we establish a new low,  this signal is not giving us an "all clear."

Professor Taylor is Wrong In His Analysis (Again)

Professor John Taylor of the Economics One Blog is currently arguing that policy uncertainty and increased regulation are holding back the economic recovery.  Again, these points are wrong for the following reasons.

First, Professor Taylor uses this chart which indicates there are more regulators over the last few years, hence making it harder for businesses to move forward.

First, the chart assumes that all people involved with the agencies are in fact people directly involved with regulation.  Or, put, another way, that none of the people hired include support staff etc..

Second, we see a sum total increase of about 60,000.  Considering the size of the US population and the size of its business community, this seems like a stretch as well.

Third, Professor Taylor's argument assumes that the previous level of regulator activity was adequate or too high -- that the US was over-regulated before the increase.  I would strongly argue the counter-factual -- that the US was in fact under-regulated.  In support of that, I would suggest Professor Taylor read Bailout Nation of Barry Ritholtz, or the numerous postings on his blog detailing the under-funded nature of the SEC.  In my own experience as a tax attorney, I can tell you the IRS' enforcement division is seriously under-staffed in relation to the level of activity they are supposed to engage in, leading to a very large tax gap. Also note that vast under-regulation -- that is, allowing banks and the like to greatly distort the economy through poor lending standards etc.. -- is what got us into this mess.

Fourth, consider this graph of total government employees:

Notice that total government employees have dropped by over 600,000 over the last 5 years.  This represents a far larger negative impact in the form of decreased demand for the economy as a whole which greatly outweighs the "too many regulators" arguments.

Next, Professor Taylor argues that the following graph indicates there is policy uncertainty created by more expiring tax provisions:

First, let me lay-out my professional credentials.  I'm a tax lawyer with a masters in domestic and international tax from the Thomas Jefferson School of Law (magna cum laude).  I practice in this area of the law on a daily basis and am probably one of the few people who has actually read most of the tax code.

Simply put, the vast majority of tax code (as in over 95%) is remarkably stable; what was a deduction last year is still a deduction this year.  Changes occur at the margin.  And to argue that a possible increase in tax rates is freezing activity assumes that rates are at crucial levels.  In fact, the US' overall tax rate is near 60 year lows, meaning we are hardly overtaxed.  This means an increase in rates will only effect activity at the margins.

In addition, the most likely argument put forward in support of this proposition is that the possible increase tax rates from the expiration of the Bush tax cuts is freezing activity.  However, it rates are going up, activity should be pulled forward into this year, not held back into next.

Finally, look at the vast number of tax code provisions that will change: 150.  And that assumes these are major provisions, which most are not.

In short,  Professor Taylor's arguments are easily dismissed.

Morning Market Analysis

Let's start with the latest big moves in the currency markets.  The euro has broken through support while the dollar has moved through resistance.  This represents a clear flight to safety and exit of risk, as traders move out of the euro and seek safer assets -- hence the dollar.

What's important with this move is that we finally see a move out to the trading range each respective currency has been in for the last three months.  Also remember an old traders adage; the longer the base, the strong the move from the base.

The intermediate and long-term corporate bond markets have also caught a bid. This is interesting, telling us that traders aren't nearly as concerned about corporate credit quality as you would think.

At the beginning of the week, I noted that the SPYs and IWMs were both trading near the lower part of their respective trading ranges.  While the IMWs are still holding (upper cahrt), the SPYs have broken through support and have moved through another important Fib level.  The next logical price target is the 200 day EMA.

The above charts tell the continuing story of the risk off trade.  

Germany Returns to Growth/EU Holding Steady

From the German Statistics Office:

The German economy has returned to its growth curve: In the first quarter of 2012, gross domestic product (GDP) rose 0.5% – upon price, seasonal and calendar adjustment – on the previous quarter, as reported by the Federal Statistical Office (Destatis). In the last quarter of 2011, German GDP had suffered the first slight dip (–0.2%) since the 2009 economic crisis.

In a year-on-year comparison, too, GDP grew in the first quarter of 2012: Price-adjusted GDP was up 1.7% on the first quarter of 2011. In calendar-adjusted terms, the increase was slightly smaller (+1.2%) because, due to the leap year, the reference quarter had one working day more than the same quarter of the previous year.

In a quarter-on-quarter comparison (upon price, seasonal and calendar adjustment), positive contributions were made mainly by the balance of exports and imports: According to provisional calculations, exports – in contrast to imports – rose at the beginning of the year. Also, domestic consumption was higher than in the previous quarter. This in part compensated for the decrease in capital formation.

From the EU Statistics Office:

GDP remained stable in both the euro area1 (EA17) and the EU271 during the first quarter of 2012, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2011, growth rates were -0.3% in both zones.

Compared with the same quarter of the previous year, seasonally adjusted GDP remained stable in the euro area and increased by 0.1% in the EU27 in the first quarter of 2012, after +0.7% and +0.8% respectively in the previous
quarter.

During the first quarter of 2012, GDP in the United States increased by 0.5% compared with the previous quarter (after +0.7% in the fourth quarter of 2011).

Compared with the same quarter of the previous year, GDP rose by 2.1% in the United States (after +1.6% in the previous quarter).

Not great -- but certainly welcome.

The Weakening EU/UK Situation

Over the last few weeks, the economic news from the both the UK and the EU has been decidedly negative.  Consider the following:

From Markit:

The seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) dipped to 50.5 in April, below March’s revised reading of 51.9, but still above the neutral 50.0 mark that separates expansion from contraction. The PMI has signalled growth in each of the past five months.

Manufacturing output expanded for the fifth month running in April. However, the rate of increase eased to its weakest in the year-to-date, partly due to a sharp reduction in new export orders. The latest decline in production was largely centred on the consumer goods sector. In contrast, output rose at producers of intermediate and investment goods.

Where an increase in output was reported, this partly reflected work on existing contracts. Backlogs of work fell for the fifteenth month in a row and at a faster-than-series-average pace.

Here are the two relevant charts:

The top chart shows the overall index.  While it is still positive, it's barely so.  The bottom chart shows overall production , which, while positive, is also declining and has been for about a year.

More importantly, the recent decline is due to a decrease in export orders.  This tells us that the overall global slowdown is hitting exports.

German production is also slowing:

At 46.2 in April, down from 48.4 in March, the final seasonally adjusted Markit/BME Germany Purchasing Managers’ Index® (PMI®) posted below the neutral 50.0 threshold for the second month running. April’s index reading was much lower than the long-run series average (52.2) and pointed to the sharpest deterioration of overall business conditions since July 2009. The drop in the PMI since the previous month largely reflected a renewed contraction of output levels, alongside negative contributions from the new orders and employment components. April data highlighted particular weakness in the investment goods sector, with firms in this market group seeing a rapid drop in their workloads.

Overall production levels in the German manufacturing sector fell at a solid pace in April. This was the first decline in the year to date, and the sharpest rate of contraction since mid-2009. Anecdotal evidence widely attributed the reduction in production volumes to an ongoing deterioration in new order books.

April data signaled a decrease in new business intakes for the tenth consecutive month, with the pace of reduction the steepest since December 2011. Lower workloads in part reflected a sharp decline in new export levels during April, especially in the investment goods sector. A number of manufacturers cited weaker demand from clients in Southern Europe as the main reason for falling export orders at their plants

Production fell at a "solid pace," caused by the reduction of new orders.  Also note the reductions are called "sharp" and are compared to slowdowns from other slower periods of growth -- not a good sign.

Finally, consider this released of the EE region's respective manufacturing output:

The Eurozone manufacturing downturn took a further turn for the worse in April. The seasonally adjusted Markit Eurozone Manufacturing PMI® fell to a near three-year low of 45.9, down from 47.7 in March and below the earlier flash estimate of 46.0. The headline PMI has signalled contraction in each of the past nine months.

The April PMIs also indicated that manufacturing weakness was no longer confined to the region’s geographic periphery. The German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate.

There was no respite for the non-core nations either, with steep and accelerating downturns seen in Italy, Spain and Greece. Only the PMIs for Austria and Ireland held above the 50.0 no-change mark.

The index has been below 50 for the last few months.  According to the report, the weakness is no longer occurring only on the periphery, but is spreading to the interior.

Also consider that overall EU unemployment is increasing:

And all of this is before we consider the medium term implications of the political situation in Spain and Greece.

And consider this release of industrial production:

In March 2012 compared with February 2012, seasonally adjusted industrial production1 fell by 0.3% in the euro area2 (EA17) and by 0.4% in the EU272. In February3 production rose by 0.8% and 0.4% respectively.
In March 2012 compared with March 2011, industrial production dropped by 2.2% in the euro area and by 1.9% in the EU27.

Morning Market Analysis; EU Weakening

The weekly charts for both Italy and Spain are incredibly weak.  Italy (the top chart) shows two rally attempts after last falls drop, but of which failed.  The second ran into resistance at the 50 week EMA.  Now the MACD is in negative territory and decreasing and the EMA picture is extremely bearish.

Spain is at multi-year lows with a declining MACD and EMA picture (which is also bearishly aligned).  Also note the increase in the Bollinger Band width, indicating that volatility is picking up.

While not as weak as the Italian and Spanish markets, Germany and France are weakening.  The German market is approaching support started last fall.  Prices are also right at the 200 day EMA; a move lower would be a bearish signal.  The French market has broken a shorter trend line started at the end of last year.  In addition, prices rallied but hit resistance at the 200 day EMA. 

The emerging market ETF has also broken the trend line established at the end of last year.  Prices are now below the EMAs and the MACD is moving lower and has given a sell signal.

The bottom line is clear: the EU markets are all moving lower.  Some (Italy and Spain) are at or near multi-year lows.  This weakness is bleeding through to other markets.