Weekly Indicators for January 17 - 21 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com .

There has been a rebound to "less bad" readings in a number of indicators, that may or may not be an artifact of year end - start of year seasonality.

Hoarding in plain sight 2016: the importance of Chinese stockpiling

 - by New Deal democrat

Back in 2008, I wrote an article called Hoarding in Plain Sight, making the argument that the tightness in oil supplies was crucially augmented by the decision of the Bush Administration to double the amount of Oil secreted in the Strategic Reserve, at the same time as other countries such as China also decided to start their own such storage facilities.

I suspect an opposite trend is in play now.  After all, very few analysts are taking the position that China's economy is actually contracting, rather than just growing at a lower rate.  If it's still growing, why wouldn't it be using even more commodities, increasing global demand?  A change in stockpiling behavior is an answer that fits the data.     

  

Let me give an example.  Suppose I am a user of commodity Q.  In Year 1 I made use of 1 million tons of Q, *and* stockpile another 250,000 tons.  In Year 2, with my economy growing, I make use of 1.05 million tons of Q, but I cut back on my stockpiling to 100,000 tons. 

What happens to the "end demand" for Q?  It falls.  In Year 1, I demanded 1,25 million tons of Q.  In year 2, I demanded 1.15 million tons of Q -- a decline of 100,000 tons.  

Something like this has happened to the world economy in the last few years.  From 2009 through 2013, China wasn't just growing strongly, it was stockpiling all sorts of commodities.  Here are some examples:

Metals

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.....China's refined copper imports have surged over 70 percent so far this year to 1.1 million metric tons, while demand from Chinese manufacturers was forecast to rise by up to 7 percent. Meanwhile, iron ore shipments have risen 6 percent, with traders reckoning that local demand growth is much lower.

Coal 

If you are looking for an example of China's economic slowdown, visit the country's biggest coal port.The huge stockpiles of coal are growing ever higher as factories and power plants cut back.

Fuel

CHINA, the world's largest coal producer and consumer, plans to build stockpiles of the fuel in the eastern province of Shandong to ensure supplies and help stabilise prices, the nation's top economic planner says.The province would complete the construction of four to six coal stockpile bases within the next three to five years, the National Development and Reform Commission said.The bases would each have a capacity to store more than 20 million tonnes of coal.

Aluminum

Majo r Chinese aluminium smelters met last Thursday in the city of Kunming, Yunnan Province, to agree on how to save the industry.While base metal prices all tumbled in the past year – with copper dropping 26% and nickel 40%, aluminium’s 20% decline means the industry is being hit hard by losses, whereas copper prices are still much higher than the cost of production. At the meeting, the Chinese smelters discussed plans for supply-side reform, production cuts and stockpiling, according to market participants. .... Rumours about stockpiling have been circulating widely in the market, with some saying that 2 million tonnes of aluminium will be stockpiled this time. According to the market talk, major aluminium producers, as well as some large-scale state-owned trading...

More on coal

 China and India [ ] from 2008 to 2013 accounted for 98% of the increase in world coal trade. In the rest of the world, exports and imports of the commodity declined over the same period.

The Chinese economy is opaque.  I do not know  whether it actually has declined, or slowed down, or simply cut back on stockpiling.  But to go back to the example I gave at the beginning of this article, "end demand," which includes both use *and* stockpiling, almost certainly declined.

This doesn't simply mean that suppliers now had to compete for reduced demand.  Because of the vast increase in Asian, primarily Chinese, demand, increased supply was also called forth.  The combination of increased supply and decreased end demand is a recipe for a commodity crash.

And all commodities, not just oil, crashed.  Here for example is the 5 year chart of the Bloomberg Industrial Metals Index:

That not just oil, but all commodities, crashed, pretty much in unison, is strong evidence that the causation went from weakened final demand to a decline in commodity prices, not the other way around.

The aforesaid is all speculation.  But a slowdown in Chinese stockpiling, if true, is a good explanation for why commodities are crashing in the face of a still-growing Chinese economy

A mixed report on December housing permits and starts

 - by New Deal democrat

Housing is the single most leading sector of the economy.  The record warmth in the Northeast in December just added to the difficulty in making a clean interpretation. My post sorting through the mess is up at XE.com .

The consumer is alright

  - by New Deal democrat

The negative deflation report for consumer prices in December confirms that the US consumer is alright, and workers' paychecks in real terms continue to grow.

In nominal terms, retail sales declined -0.1% in December. After adjusting for inflation, we now know they were flat: 

Further, December's decline of -1.0% in general merchandise sales, the 3rd worst in the last 5 years:

was almost certainly weather related, since nobody east of the Mississippi was buying winter goods as they basked in September-like warmth.

The average American is a worker as well as a consumer, and since nominal wages grew +0.1% in December, real wages grew +0.2% to a new 35 year high:

Aggregate real wages also grew,  and are now up +18.7% for this expansion:

[NOTE: That means that, 74 months from the bottom, aggregate real wages have increased more than either expansion in the 1970s, and also the 2000s.  This expansion lags the very strong 1960s and 1990s economies by a fair stretch, and is only slightly behind (by about 1%) the 1980s expansion.]

If there is a fly in the ointment, it is that YoY CPI inflation has gone from 0 to +0.7% in the last 3 months, meaning that YoY real wage growth decelerated in the second half of 2015:

So I don't want to overstate this.  We still have real problems with underemployment and sluggish wage growth.  But the average American is doing better now than they have in nearly a decade, and the consumer economy - 70% of the total - is simply not rolling over.

Has the energy bust helped or harmed average Americans?

  - by New Deal democrat

In the last week, we've seen an emergiing Doomer meme of, "See, we told you, the decline in oil prices has harmed the economy!"

Here's a quick question: would you rather have high commodity prices or lower commodity prices?  It's pretty clear that being able to run an economy on low priced goods is a boon.  That doesn't prevent the pain to commodity producers being concentrated in time, while the benefit to consumers is spread out over a longer time.  It's still a net boon.

And the fact is, average Americans have benefitted from the decline in oil prices.

First of all, here is employment growth measured YoY.  I've marked the month of June 2014 after which the big decline in prices began:

Outside of the last 2 reporting months, we had the best employment growth of the entire expansion coinciding with the big decline in energy prices.

Now let's take a look at real income (red) and spending (blue):

We've had some of the best income growth in the last 16 years due in large part to the decline in energy prices.  

But Doomers still point to the fact that income growth has outstripped spending, as consumers have saved at least some of their gas savings.  True enough, but let's zoom in on the last 5 years. Again, I've tagged June 2014 so it is easy to compare growth since the big decline in energy prices started:

The simple fact is, except for the last 2 months, not just income, but spending also has risen more during the energy bust than before it.

Yes, the energy bust has devastated the Oil patch, and the surge in the US$ has harmed producers in general.  But American families on average have seen their lot improve.

This is still just a commodities recession (with a side of climate)

  - by New Deal democrat

I've been ridiculing Doomers - who always and everywhere only see bubbles, if data is going up, and crashes if it is going down - ever since 2009.  I fully intend to continue doing that, but it is no falsehood to say that in right now they have their most reasonable case since that time.

A good and perfectly reasonable presentation of the recession case was made Friday by Wolf Richter, who pointed out that Industrial Production has declined to a point where it has with 2 exceptions always meant recession in the last 60 years. Here's the supporting graph:

But although industrial production may be something of a "first among equals" of the 4 recession indicators of production, sales, employment, and income, the fact remains none of the other 3 measures are in retreat (h/t Doug Short):

Nocie that it is only in the last two months that industrial productioin really gapped down - keep that in mind.

If we break out sales between wholesale and retail, we do see a downturn in wholesale sales, but retail is still OK (and as I pointed out Friday, real retail sales may only have gone sideways,not down, in December, and even if so, it is only one month and not nearly the downturn we saw in December a year ago.)

Further, as I pointed out Friday, manufacturing production may be going sideways, but it hasn't turned down:

In addition to manufacturing, industrial production also includes mining and utilities.  So here is mining:

This is the commodity sector, and it is absolutely horrrible, among the worst downturns in the last 50 years.

Now here is utilities:

Note these two were going sideways until recently.  How recently?  Here is a close-up on the last 5 years:

Remember what I told you about keeping in mind the last 2 months?  Well, the entire downturn in utilities has taken place in the last 2 months.

And in case you needed a refresher, the autumn months in the US were the warmest on record.  December broke even more records.  So utilities weren't exactly working at breakneck speed to churn out energy for heating.

A final way this is not like the 2001 manufacturing-led recession is that employment is doing pretty good:

There was a big downturn in employment from 2001-03 coinciding with the giant sucking sound of manufacturing jobs relocating to China.

The bottom line is, this remains a commodities recession only at this point. With an assist from climate. If January weather returns to normal, there will be a rebound.

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