The Beige Book: Manufacturing

The Beige Book is one of my favorite economic documents because it provides near real time information on the economy.  It also allows us the opportunity to look at the entire economy on a regular basis.  Last week, the Fed issued the latest BB.  As I really haven't had the opportunity to look at the whole economy in some time, this publishing is fortuitous.

From the BB:

Manufacturing has continued to increase across all twelve Federal Reserve Districts since the previous report. Most Districts reported gains in new orders, shipments, or production. Contacts reported increased capital spending in the Boston, Richmond, Chicago, Kansas City, St. Louis, Minneapolis, and Dallas Districts; contacts in Philadelphia and Cleveland also anticipate higher capital spending. Manufacturing contacts in San Francisco also continued to invest in information technology equipment. Auto-related manufacturers in the Richmond, Atlanta, St. Louis, and Minneapolis Districts reported increased activity and announced plans to expand operations and open new plants. Primary metal manufacturing showed strong growth in the Philadelphia, St. Louis, and Dallas Districts. Fabricated metal manufacturing increased in the Richmond, Kansas City, and Dallas Districts but was essentially flat in the San Francisco District. Steel producers reported that shipping volume was trending higher in the Cleveland District and specialty metal contacts reported solid order bookings in the Chicago District. In contrast to the many positive reports, contacts in some Districts reported plans to decrease operations and close plants. Contacts in chemical and paper product manufacturing in the St. Louis District reported plans to close plants and lay off workers, while manufacturers of household goods and building materials reported soft demand on average in the Chicago District. Manufacturing contacts in the Boston, Philadelphia, and Cleveland Districts expressed concern about the risks posed by the situation in Europe.

Let's look at the "big" picture:

Overall industrial production continues to move higher.  Notice the nice, continual upward trend to this statistic since the collapse in mid-2009.

I've printed the entire series of capacity utilization to short that this statistic has moved above lows from the previous  recession and continues to move higher.

The preceding charts show that on a macro-scale, manufacturing is doing well.  Let's look at some of its subparts:

Industrial production for business equipment is at or just above higher from the previous  expansion.

Durable goods manufacturing also continues its rebound from the recession.

Non-durable goods, however, area languishing.  I'm betting that a fair amount of this is due to the fact that non-durable manufacturing has moved out of the country into other areas with cheaper labor.

The above two graphs are of durable goods on a long-term and short-term time horizon.  We see that the long-term trend line is mirroring the last expansion, while the short-term trend (the lower chart) shows a continual increase as well.

The ISM overall index flirted with contraction at the end of last year, but stayed just above the 50 line.  Over the last 4 months it has moved a bit higher, but is still low by comparison to levels we saw earlier in the expansion. 

The new orders index did show contraction at the end of last year for three months.  It has since risen as well, but it is also at lower levels than we saw at the beginning of the expansion.

Finally, consider these anecdotal points from the latest ISM report:

• "Business is holding steady. Concern over commodity prices ongoing." (Chemical Products)
• "Still somewhat cautious about recovery. Expecting a good year, but not seeing orders yet." (Machinery)
• "Demand remains consistent to strong on all levels." (Paper Products)
• "Demand from auto makers is getting stronger." (Fabricated Metal Products)
• "Manufacturing is busy. Spending money on new equipment to accommodate customer demands. Material prices are staying in check." (Food, Beverage & Tobacco Products)
• "There seems to be a much more positive outlook for the economy. Customers are ordering material for stock rather than just working hand-to-mouth." (Fabricated Metal Products)
• "Global GDP softening and beginning to impact the demand chain." (Computer & Electronic Products)
• "Production is busy — several new large projects." (Primary Metals)
• "Customers [are] lowering inventory levels, anticipating price decrease due to third-party published reports on materials." (Plastics & Metal Products)
• "We are optimistic about the U.S. market this year, a little hesitant about what may happen in Europe and unsure about China." (Transportation Equipment)
• "Shipments are increasing over last year. Waiting to see if the trend continues." (Wood Products)

Overall, the comments are bullish.

The conclusion from the above charts is clear: manufacturing, with the exception of non-durable manufacturing, is doing well.

Are home sellers being reasonable about asking prices?

- by New Deal democrat

First of all, I want to thank Bill McBride a/k/a Calculated Risk for the link noting that I've been watching YoY asking prices since last May.

The key question is whether sellers' asking prices are reasonable, i.e., are they correctly reacting to the most current conditions in the market. I think they are. Rather than appropriate Bill's work here, go back and take a look at his graph of the YoY change in asking prices for the 25th percentile (starter/working class houses, in gold) vs. Case Shiller sales prices (red). You can see that sellers dropped their prices with the market, and continued to drop them even when prices overall stabilized briefly due to the tax credit in 2008-10.

The point is, for over 4 years, house sellers "got it." In the aggregate, they didn't stubbornly hold out for unsustainable prices. They dropped their prices to make the sale. Five months ago, the top of the sellers' side stopped dropping their prices YoY. One month later, so did the median home seller. In January, the 25th percentile sellers also stopped dropping their prices, and their prices have remained firm YoY since then.

What are they seeing in the market that has caused them, in the aggregate, to stop dropping their prices, after nearly half a decade of "getting it"? I don't think they have suddenly gotten stupid or stubborn. If they have, they will shortly be dropping their prices again. If not, the Case Shiller index should be stabilizing. In that vein, please see this report from Clear Capital, reporting that

National home prices fell by the smallest margin in 10 months in light of REO saturation increases, a trend that Clear Capital calls "unusual and encouraging."

Prices declined 1.9% year-over-year, according to the firm's Home Data Index market report. Short-term prices remained stable, falling only 0.6% quarter-over-quarter, highlighting short-term stability over the last few months.

As I said a month ago, something's gotta give. We should have our answer by mid-summer.

Morning Market Analysis

Let's assume that the US market takes its cues from the developing world's markets.  What's happening there?  Well, funny you should ask ..

After breaking through resistance, the Brazilian market is now in an upward sloping channel.  The real issue on this chart is the MACD, which shows that momentum is dropping.  When you see a divergence like this -- falling MACD, rising prices -- it means one of two things.  Either, the market is getting ready to correct or traders are taking a breather.  As such, it's important to keep an eye on resistance level to see if prices hold support.  So far, they are.

The Chinese market is similar to the Brazilian market, except prices are right about the 200 day EMA and are moving sideways.

The Indian market  his resistance and moved lower.  Prices have moved through the 200 day EMA, and are now targeting the 50 day EMA and several Fib levels.  However, note the continual influx of money.  So far, traders are viewing this as a correction.  

After breaking through resistance, the Russian market has trended lightly higher, but in an channel.  The flat MACD tells us momentum is waning a bit.

With the exception of the Indian market, we see the emerging markets are catching their breath.  They've broken through resistance and now traders are re-evaluating their respective positions.

Assuming the US following these markets, the above charts would go a long way to explaining current US market actions.

Gold, which had been in a decent rally since the beginning of the year, dropped sharply last week on very high volume, breaking support and is now trading right around the 50 day EMA.  The shorter EMAs are now pointing toward a lower market.

After breaking two year support, the yen has dropped sharply.  Prices are now below the 10, 20 and 50 week EMAs, and we see the shorter EMAs are now moving below the longer EMAs.  The MACD is showing a huge drop in momentum. 

1954: Investment

This posting is part of the Bonddad Economic History Project.  The purpose of this is to go back sequentially through the US' economic history, starting in 1950, to simply see what happened from the economic side of the equation.  On the right side of the blog, you will see a link to posts that each contain links to the respective years.

The above charts shows investments contribution to GDP in 1954, along with the contribution of various sub-parts of investment.  While we see inventories helping in three quarters, I think the real story here is clear: residential investment was the largest contributor to the overall increase in investment spending in 1954.

Consider  the following chart:

Also consider this chart, from the 1954 Economic Report to the President:

As the Federal Reserve noted in their 1954 report:

Notice the mammoth increase in mortgages for the entire four year period.\\

The Biege Book: The Consumer

From the latest Beige Book:

Retail sales in the Philadelphia, Atlanta, St. Louis, Minneapolis, and Kansas City Districts were higher than year-earlier sales. The Boston District reported strong same-store sales in the last few months of 2011, but mixed results for same-store sales in January. Retail sales increased in the Richmond and San Francisco Districts, but were mixed in the New York and Cleveland Districts and weakened in the Kansas City District. Retail sales growth in the Dallas District was tepid and consumer spending growth slowed in the Chicago District. The Boston, New York, Philadelphia, Cleveland, Chicago, and Dallas Districts noted that mild winter weather had depressed sales of seasonal items. Mark-downs on winter merchandise to clear inventory were reported in the Boston, Chicago, and Richmond Districts. Aside from unsold seasonal items, inventories were more broadly reported to be at satisfactory levels. All Districts reporting sales expectations for the coming months indicated optimism among contacts that sales will improve.

Gains in auto sales were reported in the Philadelphia, Atlanta, St. Louis, and Minneapolis Districts. Chicago also reported sales increases in January, but noted that sales were down slightly in early February. Auto dealers in the New York, Cleveland, and Richmond Districts reported a slowdown in recent auto sales, while auto sales held steady in the Dallas District and contacts in the Kansas City District reported a post-holiday lull in sales. All Districts reporting on sales outlooks conveyed optimism. Dealers in the Kansas City District expect demand for smaller, fuel-efficient cars to spur sales in coming months, while contacts in the Cleveland District were optimistic but uncertain that sales increases in 2011 could be repeated in 2012.

The overall tone of the retail sales comments are tepid.  Sales weren't collapsing, but they were weakening.

First, let's look at the macro level personal consumption data.

Total PCEs have stalled for the last four months.  While they are above the highest level of the last expansion, four months of stagnant PCE growth is not a good development.  The last time we saw this type of trend was last fall when EU fallout depressed sentiment and demand.

 Services comprise about 65% of PCEs.  Last month, see a drop in this area of PCEs.  While not fatal, it again, is not a good development.

Non-durable purchases have been stagnant for most of this expansion.  Considering that factor, their recent drop is not fatal.

This is a bright spot -- the strong rise in durable purchases.  Consumers don't spend money in this area unless there is a real, actual need and they are confident they can take on the financing issues.  As such, this helps to relieve some of my concern about the preceding charts (although not all).

Auto and light truck sales have rebounded from their contraction last year.  They are now at their highest, non "cash for clunkers" level.

Real retail and food service sales show the same pattern as rel PCEs: near stagnant growth for the last four months (there has been a slight increase, but not much).

One of the reasons for the stalling is a decreasing consumer sentiment:

The above chart shows that sentiment is still at incredibly depressed levels, despite two + years of expansion.

The above charts shows that sentiment has been stuck in a low range for the duration of this expansion, and that it recently dropped sharply.

NDD covered this topic recently in which he explains how an "exhausted consumer" could lead to a slowdown.

The good news in the above charts lies in the durable goods numbers, which show a consumer who is confident enough int the future to take on a big purchase.  However, the stalling of PCEs and near-stalling or retail sales for the four months is concerning and clearly needs to be watched over the next few months.

Can you really have a recession if houses and cars (and stocks and bonds and money supply and a bunch of other stuff ) won't play?

- by New Deal democrat

A recession in economic terms isn't synonymous with a period of hard times. Rather, it is a contraction in the economy. Can one really happen if leading sectors don't decline, and with no warning from the usual indicators?

Take housing. Here is a graph of housing permits, an acknowledged long leading indicator, for the last half a century:



Not once during that time has housing failed to turn down in advance of a recession. The weakest decline was from 1.742 million units annualized in December 1998 to 1.542 million annualized in July 2000, a decline of 200,000. The closest comparison in our situation is the decline of 154,000 from June 2010's 688,000 annualized permits to February 2011's 534,000. Since then permits have risen back to 682,000 in January of this year.

There is simply no post-WW2 for a recession happening without housing construction declining first. The only possible precedent is the slight increase in houses built in 1938 vs. 1937, but the statistics are only annual so we have no way of knowing what kind of quarterly or monthly declines may have occurred.

Records of vehicles sold have not been published on that long a basis, but the records we do have suggest that vehicle sales too have almost always declined in advance of a recession:



The only exception here is the Volcker induced recession due to the Fed hiking interest rates to 20% to break an inflationary cycle.

Another statistic getting a lot of attention recently is initial jobless claims. These have continued to fall to new lows:



Never since these statistics began to be kept almost 50 years ago has a recession occurred without initial claims turning up first. The minimum period of time from the bottom to the onset of recession was 2 1/2 months.

Another long leading indicator is bond prices. Since WW2 there has never been a recession without bond prices declining (i.e., bond yields increasing). Here is a graph showing inverted yields of BAA corporate bonds (i.e., prices):



While the above are weekly, monthly BAA bond prices go all the way back to 1919. Here is the graph of monthly prices from then until the 1960's"



Only twice did BAA bond prices not decrease before the onset of recession: in 1927 and in the 1945 demobilization.

Real money supply is also generally thought to be a long leading indicator. Again, since modern records have been published, at no time has a recession occurred without Real M1 turning negative first:



During the deflationary 1920's and Great Depression era, negative real money supply was at very least coincident with the onset of recession.

Stock prices are also at least a short leading indicator. While famously stocks continued to rise for three months after the economic downturn began in 1929, in our era their record continues to be good if not perfect:



Stocks only failed to turn down in advance of the 1980 and 1990 geopolitical Oil shocks.

Average hours worked in manufacturing has long been considered a leading indicator as well, and these records are available since WW2.



Again, there has only been one exception, in this case 2007 right before the "Great Recession."

I have found only two leading indicators that might support the case for an imminent contraction. Nondefense durable goods orders ex-transportation show clear signs of rolling over:



Further, if one believes that Real M2 can signal a recession even after more than a year of improvement, then the precedent of 2007 exists, although just like the 1920s and 1930s, its turning negative was coincident with the onset of the December 2007 "Great Recession."



The increase in Oil prices now, and the relative weakness of wages, are not unprecedented. Yet several of the above leading indicators admit of no exceptions; others only one or two. For a recession to have already started, or even to start now or in a month or two, would represent an unprecedented constellation of exceptions to a host of indicators that typically lead directional changes in output, sales, and jobs by several months to over a year. This is why I am proverbially scratching my head at ECRI's certitude that a recession will begin by the end of June, and their defense of that call by use of a lagging construction of coincident indicators.

Morning Market Analysis

Here is my basic thesis of the market, which I expressed last Monday:

Essentially, the markets have moved through key resistance areas.  But in doing so, they have advanced very strongly and are now in a slightly overbought position.  My thoughts are a correction of 5%-10% is more and more likely, although this correction will hardly be fatal unless the fundamental backdrop significantly changes.

And as I noted on Friday, the IWMs were a market to watch as they were right at support.  On Friday, they broke that support:

Also note the pick-up in volume over the last three days as prices approached support and then broke it.  On this chart, we see support at the 79 level and again at the 77 level.

The weekly chart shows the price action with some appropriate distance.  IWM prices rallied strongly from a triangle consolidation at the end of last year and, for the last three weeks, have been consolidating.  Last week we see prices drop through support.

The lack of confirmation by the transports has been a big concern of mine, and was one of the reasons why I began to think the market was moving towards a correction.  The above weekly chart places those thoughts in more detail.  Prices have broken an uptrend and are now moving toward support.  However, this is hardly a fatal sell-off; it's more of a "traders taking profit" situation.

As the above two charts of the SPYs and QQQs show, the other averages are still firming in an uptrend.

The dollar has been fluctuating around the 200 day EMA for the entire month of February.  In addition,

The weekly chart shows us that the dollar is at the bottom of a two year price range.  It rallied at the end of last year as a safe haven alternative to the euro, and has since fallen off.  But, we haven't seen a cliff diving chart by any stretch of the imagination.  In short, the dollar's long-term prospects are pretty rudderless right now. 

Last week, I noted that the IEIs had moved through support.  They reversed that move on Friday. Additionally, the IEFs and TLTs are still in a trading range.  While some of this is due to the Fed's purchase program, that's not not the entire reason for the range.  There is still a safety bid in the market keeping prices high -- and that bid is keeping money from the stock market.

UPDATE: Regarding the Fed's purchases relative to others, consider this from Bloomberg:

For all the concern that the $10 trillion market for Treasuries is dependent on Federal Reserve purchases to absorb a continually expanding supply of debt, the amount held by investors outside the U.S. has grown even more.

Foreigners increased their holdings of U.S. government debt by $1.84 trillion to a record $5 trillion since the Fed began the first round of Treasury purchases in May 2009, taking their stake to 60.5 percent of the securities not held by the central bank, government data show. The Fed added $1.18 trillion during that period, to $1.65 trillion, or 16.8 percent of the total, from 7.6 percent.

Industrial metals are still below price levels established in mid-January.  We need to see a move through this level it know if the bulls are back in charge of this market.

What we see is a continuation of the basic situation I outlined a few weeks ago.  The equity markets slowly correcting; they're simply in an overbought situation.  In addition, there is little fuel for a further rally as the treasury market is still at high levels.  Finally, the industrial metals chart shows there is still decent demand, so a recession probably isn't right around the corner.

100 False Prophecies by the Pied Piper of Doom: 1-10, the stock market's gonna crash!

- by New Deal democrat

Introductory note: For those of you who aren't aware of the past history of the bloggers here with Daily Kos, or don't want to hear more about it, please pass on. Regular economic blogging will resume tomorrow. For those of you who do, put some popcorn in the microwave or pour a nice libation and enjoy the following Sunday reading.
---------

On November 6, 2009, I had the following exchange with Meteor Blades:

Me: I am challenging you on bias as a front pager.
Do you believe that those who "tell us what's likely to happen next" have any more than a random chance of being right?

MB's response: I think that one judges that by their record. Of course, as the stock analysts (are required to) say, past performance is no guarantee of future performance. What I find appalling is the willingness of so many people to accept the assumptions and predictions of economists who have proved to be so completely wrong on repeated occasions. That's not an indictment of all economists, even those who have been wrong. Only of those who are so f'n arrogant about their certainty.

by Meteor Blades on Fri Nov 06, 2009 at 06:58:48 AM PDT

[my emphasis] By MB's own standard, it is appalling that he and others continue to accept the predictions of the Pied Piper of Doom.

While I was out Friday, a commenter asked permission to cross-post an article by Bonddad at Daily Kos (one that was also cross-published by Barry Ritholtz at the Big Picture yesterday). The predictable sh**storm ensued, but in due course I learned that many of you still read both blogs. At least one of you wished there were an official reckoning of the Doomers' wrongitude. I've had that reckoning sitting in my computer for over a year. Since another front-pager on that allegedly "reality-based" blog has apparently developed a severe case of amnesia and has embraced the position of

what poor prognosticating? once again, the prognostications i saw were that the stimulus was inadequate, hamp was a joke, and we'd pay a political price for it in 2010.

now is a good time to set the record straight. I'll continue this on weekends as the spirit moves me. There is no point crossposting it at DK and I request that you not do so, at least until the entire record of over 100 false prophecies is laid out.

Herewith the beginning of the Reckoning:
===========

For someone who believes the stock market shouldn't be used as an indicator of anything, he sure thinks it is an indicator of Doom!

1. No sooner had the market reached one of its all time bottoms, he waited less than a week before pronouncing, on March 13, 2009 that

MSM and the public are grasping at straws. The market goes up 200 pts. Someone puts up $11 billion--the equivalent of chump change in the marketplace--to buy bonds (a very tiny sale, btw). And, a report comes out that says: consumer purchases didn't drop as much as everyone expected?.... All the pundits are saying 2010 to 2011 before there's any upturn...at best! This is what's known as: a.) "bottom bouncing," and, b.) a "sucker's market," which is just what was and is being predicted by many over the past few months.

That was the beginning of a 6500 point rally on the DJIA, in which it has since doubled and reached a 4 year high. He was wrong.

2. At the end of March, he was still convinced that

The truth is, many are of the opinion that this is nothing more than a "sucker's rally;" which is also referred to as "bottom-bouncing" in a bear market....
there's really little rational reason--other than spin--for the markets to be up right now.

He was still wrong.

3. In April 2009, he claimed that

Crash and Burn? A Strong Case That Recent Market Upswings Were Illusion.

This was the first of many times that following the short-side hedge fund blog Zero Hedge led him down the primrose path.

He was wrong.

4. On that same day, he claimed that:

As Roubini noted a few months ago, it may reach a point where all market trading might stop, completely, at least for a few days or weeks. Durden concludes with a quote from a trader telling us this event could occur as early as this week.

He was tinfoil hat moon made of green cheese wrong.

5. On May 11, 2009, he thought that the stock market rally since March had reached its peak:

BTW, I think the sucker's rally is ending today...maybe...a lot of people have been taken for a ride the last 8-9 weeks.

He was wrong.

6. The very next day, May 12, 2009, he said that he had

Shifted to 75% Cash/Bonds Friday!

because he agreed with Gjohnsit's position that

The rally is done. .... If you are buying now you are simply giving your money away. Now is the time to go to cash. Maybe in a few months things might be different.

Commenter Ticket Punch wished him luck. Ticket Punch was right. The PPoD was wrong.

7. On August 19, 2009, he again claimed that a market crash was near

Yves Smith, who is, arguably, one of the more calm, evenhanded and liberal Wall Street pundits in the blogosphere has let loose today, in: "Is This the Start of the Big One?" If you read her Naked Capitalism blog frequently, you'll realize this is quite out of character for her. There are some statements she makes here with which I'm not in full agreement--for instance, the Federal Reserve and the Plunge Protection Team, a/k/a "The President's Working Group On Capital Markets," simply will pull out all the stops to prevent a market crash as they have in the past--but there is much of what she says today with which I now concur.

There was no need for a "plunge protection team." There was no crash. Yves Smith was wrong. So was he.

8. On August 24, 2009, he once again called for a stock market crash, claiming:

This market's going to crash very, very hard...sometime in the next few months, IMHO.

As with all his other predictions of a stock market crash, he was wrong.

9. At the end of November 2009, he said:

about 10 days ago, Whitney also had this to say: "CNBC: Stocks Overvalued, Recession Will Return: Meredith Whitney"

That was about 3000 DJIA points ago. Whitney was wrong. So was he.

10. He got out of the "stock market's gonna crash!" business after that, but you can still make a lot of money if you use the Pied Piper of Doom as a contrarian indicator. Just last October 3, he proclaimed:

You might not know it yet, but the U.S. has just entered into another recession, according to the world’s (arguably) leading expert on economic business cycles. And, when it comes to this type of thing, the guy’s never been wrong.
...
it’s now quite self-evident, especially given the inconvenient business/economic news of the past 72 hours, noted down below, that we have already entered into another recession.

In fact, the world’s (arguably) leading expert on business cycles, Economic Cycle Research Institute Co-Founder Lakshmann Achuthan, has just called it. We are in a recession…again! And, he’s been about 100% accurate on his calls since…forever.

Done freakin’ deal..... Achuthan [ ] tells us we’re already in a Recession; we just don’t know it yet.) Meanwhile, here’s my commentary from a little over three weeks ago (see last link in paragraph immediately above)…

…“The ‘recovery’ that may be no longer.”

That was 2000 DJIA points ago. Q3 GDP was 1.8%, and Q4 was just raised to 3.0%. ECRI's initial call was wrong. So was the PPoD.

That's just the first 10. There are at least 90 more false prophecies, on plenty of other economic topics, where those came from. Needless to say, to be continued .... and continued ... and continued ...