The big economic news this week was that, in the rear view mirror, 3rd quarter GDP rose +2.0% on an annualized basis. Durable goods rose sharply, but not nearly enough to erase the huge decline in August. New home sales rose slightly. Consumer sentiment declined slightly from its 5 year high earlier this month.
A reminder: I watch high frequency weekly indicators not because they lead the economy, but because they are a snapshot of the virtual present, as opposed to looking in the rear view mirror. While there is plenty of noise, they should show turns or continuations in a trend before they show up in monthly or quarterly data.
Same Store Sales and Gallup consumer spending varied from weakly positive to outright negative:
The ICSC reported that same store sales for the week ending October 19 declined -0.7% w/w but were up +2.9% YoY. Johnson Redbook reported a weak 1.3% YoY gain. Johnson Redbook has consistently been lower than the other series for consumer spending. The 14 day average of Gallup daily consumer spending as of October 24 was $68, compared with $71 last year for this period. This is the first time since July that Gallup's YoY comparison has not been positive.
Bond yields were mixed and credit spreads narrowed further:
Weekly BAA commercial bond rates fell .05% more to 4.55%. Yields on 10 year treasury bonds, however, rose .08% to 1.79%. The credit spread between the two decreased to 2.76%, a new 15 month low. This continues an excellent trend, as it demonstrates a lack of fear of corporate default.
Housing reports were neutral to positive:
The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index fell -8%% from the prior week, but is up 7% YoY. These remain near the top end of their 2+ year range. The Refinance Index fell -13% for the week, retreating further from recent multi-year highs.
The Federal Reserve Bank's weekly H8 report of real estate loans this week decreased by 8, or-.02%, to 3530. The YoY comparison decreased to +1.2%, and is 1.5% above its bottom.
YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker increased +2.4% from a year ago. YoY asking prices have been positive for 10 1/2 months.
Money supply has been mixed in the last month or so but remains quite positive on a yearly basis:
M1 gained +1.2% for the week, and increased +1.1% month over month. Its YoY growth rate rose slightly to 13.1%. As a result, Real M1 also rose to +11.1% YoY. M2 rose +0.3% for the week, and was up 0.8% month over month. Its YoY growth rate also rose slightly to 7.2%, so Real M2 fell slightly to 5.2%. The growth rate for real money supply is still quite positive.
Employment related indicators were neutral to positive:
The Department of Labor reported that Initial jobless claimrowell 19,000 from last week's unrevised 388,000. The four week average rose 2,500 to 368,000, less than 1% above its post-recession low. Averaging the last two weeks' numbers is clearly the correct thing to do.
The American Staffing Association Index was again level at 95. The index is equal to its high reading for the year. The trend in this index is simialr to last year.
The Daily Treasury Statement showed that 18 days into October, $122.5 B was collected vs. $ 118.2 B a year ago, a $4.3 B or +3.6% increase. For the last 20 days ending on Thursday, $133.6 B was collected vs. $129.0 B for the comparable period in 2011, a gain of $4.6 B or 3.6%. The YoY comparison in tax collections has improved markedly since midyear.
Rail traffic remained negative YoY, but still due to coal, while the diffusion index decreased considerably:
The American Association of Railroads reported that total rail traffic was down -0.9% YoY. Non-intermodal rail carloads were again off a huge -4.4% YoY or -13,300, once again entirely due to coal hauling which was off -18,600. Excluding coal, carloads were actually up +13,800. Negative comparisons rose from 8 to 11 types of carloads. Intermodal traffic was up 8,500 or +3.5% YoY.
Finally, the prices of oil and gasoline fell, but gasoline usage was down slightly:
Gasoline prices fell $.13 last week to $3.69. This is nevertheless still very high. Oil prices per barrel declined from $90.05 to $86.28. Gasoline usage turned positive this week on a YoY basis. For one week, it was 8493 M gallons vs. 8501 M a year ago, down -0.1%. The 4 week average at 8611 M vs. 8767 M one year ago, was down -1.8%. The 4 week YoY decline is on top of the YoY decline last autumn.
Turning now to the high frequency indicators for the global economy:
The TED spread continued to fall to year another new 52 week low of 0.21. The one month LIBOR rose slightly from its 52 week low last week up to 0.2120. Both are well below their 2010 peaks and in the middle (TED) or low end (LIBOR) of their respective 3 year ranges.
The Baltic Dry Index rose again from 1010 to 1051, well above its recent 52 week low of 662. The longer term declining trend in shipping rates for the last 3 years remains. The Harpex Shipping Index fremained at 372, its 52 week low.
Finally, the JoC ECRI industrial commodities index fell again from 120.96 to 118.35, and once again turned negative YoY.
Positive comparisons continue to outweigh the negatives. Rail loads are down, but only because of coal. Harpex container ship traffic remains at a low, but open ship traffic continued to rise to nearly a yearly high. Commodities are weak, but this is largely because the Oil choke collar has loosened again. Housing continues to be improved, money supply is positive as are bond rates and credit spreads. Overnight lending rates are at or near 52 week lows. Consumer spending and employment indicators are mixed. This is hardly a strong economy, but it doesn't look like one in contraction either.
There has been a lot of ink (both digital and otherwise) spilled over the current situation in China. However, it's been a bit since I've looked at the overall macro situation. So, let's simply see where the Chinese economy is in terms of its macro-level statistics.
The top chart shows the overall growth rate for Chinese GDP. While it has slowed down over the last few years, it has done so from a very high pace (11.9% at its peak). But, what's also important to remember is that with a very large and growing population, China needs to maintain a fast rate of growth, simply to continue creating enough overall wealth to increase the benefit received by all Chinese.
The bottom chart shows that the overall total amount of GDP -- despite the slowing -- continues to grow as well.
The above chart shows that total GDP per capita is a little over $2500 US dollars/person. This data does not take into account income inequality, but it does give us an idea from the amount of wealth created via the government's overall policies
Like most Asian economies, the Chinese government has based its overall growth rate on exports, which is demonstrated in the top chart. Exports have continually risen over the last four years. The lower chart shows imports -- some of which are used to create goods for export.
The top chart shows the current account to GDP, which peaked at the height of the global crisis, but has since moved to more reasonable levels. This chart shows the net exporting is still central to the overall economic model of the Chinese.
There is good and bad news in the inflation chart. The good news is that it's been moving lower, giving authorities more room to change policy. However, lower inflation usually translates into lower growth, as evidenced by the above discussed GDP charts.
China is in the process of trying to change from an exclusively export driven economy to one with a higher internal demand component. This is actually a lot harder than they thought it would be originally. The good news is they have plenty of space to work with -- their GDP is still high and inflation is low. And, the latest statistical releases shows its happening:
CHINA, you may have heard, announced its latest growth figures on Thursday. The speed of growth attracted most of the attention, but the source of growth is perhaps more striking. At a press conference (in Chinese; see an FT report here), the
National Bureau of Statistics pointed out that in the first three
quarters of this year consumption* contributed over half (55%) of
China's growth, exceeding the contribution from investment. If that
pattern holds, China's growth this year will not be investment-led (let
alone export-led), but consumption-led.**
That hasn't happened for
over a decade. Or so I thought. Until recently, the official statistics
showed that investment made the biggest contribution to China's growth
in every year since 2001. But earlier this week the new edition of the
China Statistical Yearbook arrived on my desk with a thud. Its revised
figures show that consumption contributed 55.5% of China's growth in
2011; investment contributed only 48.8%. (Net exports subtracted 4.3%.)
In other words, China's growth was consumption-led last year as well.
I'll be dealing with this in far more detail next week after I have time to go through the data. For now, I'll say this is about par for the course in the current economy.
In addition, this is the FIRST estimate. There are two more releases which could print revisions that the bulls or bears don't like. From the BEA
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment.
The Malaysian market is close to an important breakout. The weekly chart (top chart) shows that prices broke through long-term resistance and then consolidated those gains. On the chart, this occurred between 14.25 and about 15. The daily chart (lower chart) shows that prices have been making a run at the 15.25 level, but haven't broken through yet.
After recent gains, the homebuilding sector continues to consolidate between the 24.5 and 26 price level.
After breaking support, the Brazilian market in hanging on -- barely. However, the MACD and CMF are weak and the relative strength number is declining. Also note that prices hit the 200 day EMA and moved lower. we see the shorter EMAs in a tight range and bunched together.
The semiconductor sector has been in a decline for the last three months. Prices are now below the 200 day EMA -- as are the shorter EMAs. There is strong support in the 29.5-30 price level where prices will probably find support.
... will be to make sure that every corporatist "democrat" who stabs the middle and working class in the back by entering into any "grand bargain" with the Greedy Oligarch Party - a bargain which will last about 13 minutes into the next Republican Administration - pays for it with their seat. It will overrule every other priority and consideration. I will support any and all primary and general election opponents until the scum is taken out with the trash.
This is an appealing vision. In most areas of the economy, free-market
principles insure that products and services keep improving, and that
consumers get better and better deals. But the free market, though it
may be the best way of allocating new TVs and cars, falters when it
comes to paying for bypass surgery or chemotherapy. The reasons for this
were established nearly fifty years ago, by the economist Kenneth
Arrow, in a classic article entitled “Uncertainty and the Welfare
Economics of Medical Care.” Arrow showed that health care is distinctive
in ways that limit the power of the market. Because people don’t have
the expertise to evaluate doctors, hospitals, or treatments, it’s hard
for them to comparison-shop. Because they can’t pay for major care out
of pocket, they must rely on insurance, thereby often losing the final
say in what to buy or how much to spend. More fundamentally, markets
work only when consumers have the power to say no if the price isn’t
right. Yet it’s very hard for people to say no in the case of things
like end-of-life care or brain surgery.
Let's look at the emboldened points in a bit more detail. I'll use my recent hip surgery as an example.
1.) Lack of expertise to evaluate. I saw three doctors about my hips, with the second two being members of the same practice. The first doctor was a member of my network -- which is why I called him -- and he had all the bedside manner of an SS Trooper. So, I asked my wife's doctor to make a recommendation to another practice. The first doctor was very nice, but he recommended a second doctor because my problem was really more in the second doctor's area of expertise. In all of these examples, I was really going with personality; I have absolutely no ability to evaluate any of their skill sets. And I still don't.
2.) At no point did I ever ask for a price from any of the surgeons. And the reason is it was covered (mostly) by insurance. I assumed it would cost a ton (it does). And I also know I'm responsible for a deductible. But, overall, my out of pocket expense is a small part of the overall cost.
3.) I did not have the ability to say no. OK -- I could have and faced the possibility of a continually deteriorating condition that would eventually leave me crippled. But, that really wasn't an option. In short, I had to have the service -- like everybody else in my position.
The ability to say no is crucial to keeping prices down as it exerts a downward pressure on prices by forcing those who provide goods or services to not charge too much for their services as doing so would drive people out of the market. As such, point number three is crucial and noticeably absent from the health care market. The lack of an ability to say no places service providers in a far more advantageous negotiating position -- one more akin to an oligopoly rather than a pure market environment.
This is just a short example the highlights the basic problems of using the free market to contain health care costs. And, for my money, it's really number 3 -- the fact that health care has to be purchased, placing all the bargaining power in the providers hands -- that really highlights the fundamental problem with this approach.
Oil -- which had been stranded at the 10/20/50 day EMA for the last few weeks -- has finally sold-off below levels established earlier this month. Notice especially the increase in volatility (although it is still at a low level) and the weakening of the overall price level. This is a chart that is moving into correction mode.
After rallying for a little over a week, the Chinese market is consolidating near 5-month highs. The real key to this chart is whether the 10 day EMA holds or not.
Although they have broken through resistance, grains haven't made strong move higher yet. The chart is sending mixed signals in that regard. While the MACD has given a but signal, volume is weak and the CMF is negative.
After breaking through resistance in the 162 area and rallying to 174, GLD prices have fallen back to the 165 price handle -- which is also close to the 61.8% Fib level. Like any correction, we see a declining momentum and weakening CMF readings.
The weekly chart places the price action in needed, long-term perspective. Prices are consolidating, with support a bit above 150 and below the 174 price level.
Cyclical indicators point to ample slack in many advanced economies but to capacity constraints in a number of emerging market economies (Figure 1.9). WEO output gaps in the major advanced economies are large, varying from about 2½ percent of GDP in the euro area and Japan to 4 percent in the United States for 2012 (see Table A8 in the Statistical Appendix). These gaps are consistent with weak demand due to tight financial conditions and fiscal consolidation. By contrast, most emerging market and developing economies that were not hit by the crisis continue to operate above precrisis trends. However, their potential growth rates in recent years are judged to have been higher than indicated by the 1996–2006 precrisis average, and therefore WEO output gap estimates do not signal much overheating.
I realize that we keep hitting on this point over and over again. The question is, why? The answer is simple; lack of supply and lack of demand lead to two different policy prescriptions.
Lack of supply -- in its simplest terms -- means there is insufficient "stuff" at either the individual market level or at the macro level. Take, as an example, computers. Suppose the entire market were clamoring for computers but there was only one domestic company making them. Solving this problem from a policy perspective would involve tax breaks and or credits for the industry (for example advanced depreciation credits or deductions or decreased overall corporate tax rates), backstopping the financial industry to increase loans (creating a federal loan guarantee program) and opening up trade treaties with other countries that also produce computers.
Lack of demand means we have plenty of stuff, but not enough people are buying that stuff. Returning to the computer example from above, suppose we had plenty of computers, but there was a big inventory overhang. Let's assume this doesn't mean the industry has matured and is on the way out. What this means is there is either insufficient income to purchase these computers or insufficient credit to be expanded. That means that at the macro level we need to create income or increase the credit and or lending facility inherent in the overall system. Hence, the policy prescriptions between lack of supply and lack of demand are entirely different.
How do we tell the difference between these scenarios? There are two pretty good indicators -- inflation and employment. Higher inflation -- especially in a particular market -- probably means there is insufficient supply. The reason is simple: supply is constrained and more people are bidding for that restrained resource. Hence -- prices rise. A good example of that currently lies in both the agricultural and energy markets.
High unemployment typically means decreased income and hence a lack of demand. This is simple, macro-level economics. The primary way to deal with this problem is to increase employment. Hence, the standard policy proscription of increased macro-level spending on infrastructure. This increases incomes at the macro level, and thereby increases demand.
So -- where is the US now?
Consumer prices (top chart) and producer prices (middle chart) are tame. Unemployment (bottom chart) is high. It's lack of demand that is driving the market.
While a lot was discussed about yesterday's sell-off, the real issue is that prices gapped lower at the open and then traded sideways for the remainder of the trading session. While there was a big sell-off at the end, prices did not close at their session lows.
The 30-minure (top chart) and 60 minute chart (bottom chart) show that the 142.5 level was a key support level for both charts. Prices moved through this level yesterday at the open and remained at that level for the remainder of the session.
On the daily chart we see several important technical developments. First, the 142.5 price level noted above was a key on the daily chart's consolidation pattern. Prices moved through that level and are now at a key Fib fan level. Second, notice the increase in volume over the last few trading sessions, indicating that overall traffic is picking up. The MACD is moving lower, prices are weakening, and the CMF is negative. All of this points the possibility of a prolonged correction.
The IWMs and QQQs are both in a net selling position as well. However, notice that neither printed a strong, downward sloping candle yesterday. Instead, the IWMs (top chart) printed a hanging man and the QQQs (bottom chart) printed a reverse hanging man.
Thursday marks the 4-week anniversary of my hip surgery. Now, I would love to tell you that I'm a pure iron man and the surgery had little to no effect on me. In reality, I was out for the entire week afterwords and have been making a slow climb back to being fully functional. In fact, this has been the first week since I've been back when I've actually felt pretty good.
The reason I mention this is that I missed about 2-3 weeks of news. I tried to keep up, but it was a losing game. My concentration was weaker and my attention span was shorter. So, there was a bit of a gap in my understanding about where the economy is.
That's where the Financial Times comes in. Over the last few days I've used it as my official "catch-up"news source. And it's been perfect. The know how to cover the financial industry, giving you a world view with the right amount of news and opinion. And they're great at finding the most important story of the day/week to help you understand what is really happening.
I made the decision about 6 months ago to drop the WSJ and go with FT as my paper of choice. Simply put, the WSJ is losing the game post Murdoch. They've just lost their edge and a fair amount of credibility. But most importantly, they just don't realize there is a world out there that needs explaining. Yes, the US is important. But it's tied to Asia, Europe, and the Far East in a myriad number of ways that the paper just doesn't get. The FT does -- and they explain it beautifully.
I've been speculating that the surprise increase in gas prices over the late summer would lead to an increase in initial jobless claims, a test if tge energy choke collar in action. Here's the latest data, whowing gas prices in red (right scale) and new jobless claims in blue (left scale):
It's hard to tell. It does look like there might be a correlation with about a 3 month lag, but if so it doesn't exactly jump out as being a tight relationship. And it certainly didn't lead the last couple of weeks (note this is the 4 week moving average, so the anolomies due to California don't affect the data very much).
If gas prices decline into winter, it will be interesting to see if we finally get a new low in iniial jobless claims - something we haven't had since the end of March.
The yen has been catching a safety bid as a result of all the EU turmoil. This has not helped the country, as a higher yen leads to lower exports. However, the weekly chart of the yen shows that prices have finally broken support and are now trading at the lower Bollinger Bank. Also note the negative CMF reading and sell signal from the MACD.
On the daily chart, we see that yen prices have moved through several layers of support over the last week and are now headed for the lower band of their 6 month trading range.
Industrial metals have taken a nose-dive this month, dropping around 10%. Prices are now at levels established at the beginning of August. Note the very quick way in which the chart turned bearish: the shorter EMAs are now below the 200 day EMA, the CMF is negative and the MACD is declining.
The financial sector is in the middle of a 6 month rally. Over the last month and a half, it has consolidated its gains. The MACD indicates that momentum has stalled for now, but this is usually a signal the markets give when they are consolidating gains. Until we see prices break trend, this is nothing to worry about for the bulls.
The technology sector is also in the middle of sell-off (as are the QQQs). Prices have moved below the shorter EMAs and are headed for the 200 day EMA. Prices are weakening, momentum is dropping and money is flowing out of the market.
the dilemma facing China: that moving to consumption could raise the
cost of capital for investment at a time when investment is needed for
urbanisation and for dealing with demographic change. Why? Higher
consumption means households will have to save less. But household
savings in China have provided a captive and cheap source of capital,
thanks to deposit rates from commercial banks that hover around zero in
real terms. Reducing those savings will mean a higher cost of capital.
the dilemma facing emerging market economies: that there is probably a
trade-off between shoring up growth in the short term and pursuing the
reforms that will bolster longer-term growth. Most emerging market
economies have room for monetary easing, and most have fiscal legroom
too. However, using broad-based easing tends to (temporarily)
reinvigorate the existing model. In 2009, China pushed investment
higher, India raised its consumption and commodity exporters became more
commodity-orientated – all of which made these economies even more
unbalanced. Emerging markets need to resist that impulse.
Third, the dilemma for the emerging market growth model: that
external demand is not available, while adopting a domestically
demand-driven strategy also has risks, as explained in a note by
Harvard’s Dani Rodrik. The manufacturing sector in an emerging market
economy, Prof Rodrik shows, is the one part that can converge towards
its counterpart in the advanced economies. If export-orientated growth
is a thing of the past, then the manufacturing sector is unlikely to
grow rapidly, putting the catch-up with advanced economies at risk.
Emerging markets are then caught between the uncertainty surrounding
external demand and risk to manufacturing convergence from domestic
Last week, both NDD and I were very pleased with the latest building permits number. Let's look in a bit more detail about why that is.
First, housing downturns have preceded a majority of post WWII recessions. Hence, the reason for the concern before the recession about the impact of the housing bubble both on the downturn and the the subsequent recovery.
In addition, consider the following chart of building permits:
We see large drops before the following recessions: early 1970s, mid-1970s, both of the early 1980s, early 1990s and the mid-2000s.
In addition, notice the importance of a rebounding housing sector to subsequent recoveries. We see increasing building permits occur during the following expansions: early 1970s, mid-1970s, 2980s, 1990s and 2000s Correlation does not equal causation, but clearly the two events happening at the same time is very important.
When looking at the leading indicators, we see that building permits are a small component thereof:
However, we see the disproportionate impact of the latest readings on the latest LEIs release:
Although they account for a small percentage of the LEIs, last months number accounted for a .30 increase in the index, leading to a strong increase (.6). Here's the money quote from the Conference Board's release:
The Conference Board LEI for the U.S. increased in September after declining in the previous month. Large positive contributions from building permits and the financial components offset the negative contributions from ISM® new orders index, consumer expectations for business conditions and weekly initial claims for unemployment insurance (inverted). In the six-month period ending September 2012, the leading economic index increased 0.3 percent (about a 0.6 percent annual rate), much slower than the growth of 2.6 percent (about a 5.2 percent annual rate) during the previous six months. In addition, the strengths and weaknesses among the leading indicators have become balanced in recent months.
The US markets are in a correction. The SPYs (top chart) are the last too break trend, but they did so for the first time the week before last and for the second time last week. The QQQs (middle chart) and IWMs (bottom chart) have been in downward sloping patterns for between 3-4 weeks. All major averages now have declining MACDs and negative CMF readings, indicating declining momentum and a flight out of the market. Ultimately, I think the initial stopping point for ths sell-off will be the 200 day EMA of the QQQ or IMF.
The belly of the treasury curve (3-10 years) is consolidating. The top two charts show ETFs that are moving sideways (IEIs) or consolidation in a triangle pattern (middle chart). The longer end of the curve (TLT, bottom chart) is moving lower, but in a disciplined way.
So -- what do these two market tell us? Stocks are selling off largely because of earnings concerns. However, we've not seeing a panic selling situation. Instead, we're seeing traders trim their positions of various holdings. The treasury market tells us there is still generally a safety bid in the market, but the TLT sell-off tells us that a move out of the treasury market is probably eventually in the works. But, that move will be over a long-term.
I'm on Linked In and Twitter (@captivelawyer). Silver Oz's Linked In name is @silver_oz. NDD is a fossil and may be reached by etching a picture in stone on the wall of a cave.
The Bonddad Economic History Project
At the beginning of 2012, I decided to start looking at the actual, statistical history of the US economy starting in 1950. The reason is simple: to find out what really happened. So, when you see title of a post that begins with a year such as 1957, followed by "employment" or "Fed policy: you know what it's for. You can also access the information by typing in BE for Bonddad econ and a year to find information on a particular year.
Here is a link to pages that contain links to all the posts on the years listed.