Friday, February 18, 2011

Weekly Indicators: Oil and Jobless Claims at inflection points Edition

- by New Deal democrat

Last week I said that I was currently watching our high frequency indicators especially to contrast the forces of continued strengthening (initial jobless claims) vs. Oil's choke hold on the economy. The data this week shows the contrast of both of those indicators at inflection points. As I wrote this morning, Oil's rise past $90 during January already seems to be having an impact on consumer spending. Its level near that point since last spring is also showing up in slowing industrial production. More than a a whiff of inflation - primarily but not exclusively caused by energy prices - showed up in both the PPI and CPI. Meanwhile the LEI gave us a paltry +.1 increase, due in part to range-bound initial jobless claims and a decline in the manufacturing workweek (plus housing permits, which is probably a one month blip taking back December's big increase).

So let's see how those contrasting forces played out in this week's high frequency data:

I want to give some extra attention to the BLS's report of initial jobless claims increasing to 410,000. The 4 week moving average fell slightly to 415,000. I suspected that we would see a spike this week, perhaps to 440,000 or above. It didn't happen. Here are the weekly readings since jobless claims first hit 410,000 three months ago:

2010-11-20 410000
2010-11-27 438000
2010-12-04 423000
2010-12-11 423000
2010-12-18 420000
2010-12-25 391000
2011-01-01 411000
2011-01-08 447000
2011-01-15 403000
2011-01-22 457000
2011-01-29 419000
2011-02-05 385000
2011-02-12 410000

Here is the last time before then that jobless claims were this low:

2008-07-19 405000

Thus the "spike" was to a level that is (horror of horrors!) tied for the 4th best week in two and a half years! We have been rangebound in the 4 week average between 410,000 and 430,000 for 3 months. The last three weeks average 405,000. If next week comes in at under 425,000, we will establish a new post-recession low. We'll see.

Meanwhile, Oil retreated during the week to under $85 a barrel before trading at $86.35 Friday morning. Gas at the pump rose one penny to another new post-recession high at $3.14 a gallon. Gasoline usage was 66,000 barrels a day lower than last year, or -0.7%. This is the third consecutive negative YoY reading, and is more evidence that gas prices are beginning to "bite." It is also proof of the adage that "the cure for high gas prices, is high gas prices."

Railfax has really proven its worth over the last couple of months. Week after week, I have noted the odd sluggishness of its YoY comparisons, finally noting that it might be signaling a slowdown. This week, industrial production and retail sales showed us it wasn't odd at all. I guess even I ought to pay more attention to this proven and up-to-the-minute indicator. This week, total YoY rail shipments rebounded to 11.0% higher than in 2010. Nevertheless, baseline and cyclical traffic remain barely ahead of last year on a 4 week moving average, and shipments of waste and scrap metal remain actually below last year's levels.

The Mortgage Bankers' Association reported an decrease of 5.9% in seasonally adjusted mortgage applications last week, which maintains this series generally in a flat range since last June. Refinancing decreased 11.4%, and is at its lowest point since last July 3. Higher mortgage rates - up over 1% in the last few months - have really bitten these two series. This is yet more evidence that a slowdown is likely to develop, as a decline in refinancing in particular means slower consumer deleveraging, and less free cash to spend.

The American Staffing Association Index remained at 90 for the third week in a row. This was 14% higher than a year ago, and remains only about 9% below its pre-recession peak levels. But it too has stopped making progress towards that peak.

The ICSC reported that same store sales for the week of February 12 increased 2.7% YoY, but declined -1.4% week over week. This series' YoY comparisons have been trending lower since the first of the year. Shoppertrak reported that sales actually declined 0.4% YoY for the week ending February 5, and also increased 6.1% from the week before. Together, these are tepid to poor compared with recent readings.

Weekly BAA commercial bond rose +.05% to6.22%. This has broken out of its recent range and is at the highest since last June. This looks bad, but it compares with another 0.14% increase in the yields of 10 year treasuries to 3.68%, which is their highest rate since last April. This correlates with increasing inflation risk, but on the other hand certainly does not imply relative weakness for corporate bonds.

M1 was down 1.9% w/w, up 1.9% M/M and up a strong 9.0% YoY, so Real M1 is up 7.3%. M2 was up 0.6% w/w, up 6.7% M/M and up 4.3% YoY, so Real M2 is up 2.6%. Both of these remain in ranges where economic expansion has always taken place.

Adjusting +1.07% due to the recent tax compromise, the Daily Treasury Statement showed adjusted receipts for the first 12 days of February of $91.7 B vs. $95.7 B a year ago, for a loss of -4.0%+ YoY. For the last 20 days, $147.2 B was collected vs. $142.8 B a year ago, for a gain of 3%. February has stunk so that even the 20-day gain is poor compared with most comparisons over the last 10 months.

Altogether there are ample signs that we are entering another slowdown (note: NOT a "double-dip"). The culprits are increasing interest rates and $90+ Oil. Whether the slowdown is small or not depends on whether Oil increases as we move towards the summer driving months, or bounces off $90 as it did last year. It also depends on what Bonddad calls the "Washington lobotomy factory."

Have a great President's day weekend! If you have never been there, a visit to Washington's estate at Mount Vernon is an excellent way to spend a day (and I highly recommend it's colonial- food- themed restaurant). He was a Big Thinker, an innovator, had a first-class eye for talent, and a laser-like focus on detail. But while his will freed his (few) slaves, Martha's (many) slaves were not.

Gas Prices are beginning to choke off the Recovery

- by New Deal democrat

Yesterday Bonddad asked whether gas prices will choke off the recovery. My view of the industrial production and retail sales reports this week is less sanguine than his. In fact I believe that $90+ Oil is already beginning to choke off the recovery.

Let's begin with retail sales. As you may recall, real retail sales is one of my favorite economic metrics, since it captures a huge swath of the consumer economy on a monthly basis, and has an excellent record as a leading indicator for jobs. In the last two months, real retail sales have completely stalled:

Now let's compare real retail sales with Oil. In the graph below, the price of Oil is subtracted from its $90 inflection point (this is slightly simplified, since with inflation and GDP growth this year it is closer to $94), and the difference is divided by 10 to better visualize the comparison:

Note that Oil prices have a strong correlation with real retail sales lagged by one to three months, and that correlation is holding up now.

Now here is industrial production:

Note that in the last 8 months, the growth in industrial production has slowed noticeably compared with the first 11 months after its recession bottom.

Next, I've added in Oil prices in with the same formula used above:

Note that there is a considerably longer lag. To help you see this point, here is the same data extended back 5 years:

Oil prices appear to have a good correlation with industrial production, lagged by about 6 to 8 months.

My conclusion: Oil prices are already beginning to "bite." Consumers are beginning to retrench their other spending already. All else being equal, I would expect industrial production to continue to trend towards zero over the next half year.

I have been talking about Oil being a choke collar on recovery for close to two years, and needless to say I have been far from alone. Possibly someone in Versailles ought to notice, and try to do something NOW (not something that will help in 20 years)?

Here's a small suggestion: there are plenty of tour buses that aren't being used because of the economic downturn. These buses tend to be very comfortable -- the antithesis of public transportation. How about fast-tracking approvals for bus companies to use these buses for park-and-ride suburban expressway routes? Give me that plus a local jitney service to take riders to and from the bus drop-off point to their nearby offices, and I will give you an extremely pleasant and profitable alternative to suburban expressways jammed during rush hour with inefficient cars.

Breast Beating

It appears the controversy du jour centers around first lady Michelle Obama's decision to "promote breast-feeding, particularly among black women, as part of her campaign to reduce childhood obesity." In conjunction with this initiative, "The Internal Revenue Service...announced that breast pumps, which can cost several hundred dollars, would be eligible for tax breaks."

Michele Bachmann immediately jumped in to completely misrepresent the situation: "To think that government has to go out and buy my breast pump — You want to talk about nanny state, I think we just got a new definition." To its credit, the Times points out that Bachmann's statement is wrong on its face.

And, of course, Sarah Palin could not help herself but to enter the fray by displaying complete and total ignorance of consumer prices:

“No wonder Michelle Obama is telling everybody, ‘You better breast-feed your baby,’ ” she said at a speech on Long Island. “Yeah, you’d better, because the price of milk is so high right now.”

Really, Sarah? Really? Yup, it's as "high" now as it was about seven years ago, in mid-2004:

Of course, we can't just give infants just whole milk, so let's drill down into the specific category of "Baby Food":

So there's been no inflation in "Baby Food" in about three years, while Milk has actually declined and is lower now than it was for about a two year period in the late aughts.

And there is no serious debate about the benefits of breast feeding. The Times also points out that the government is among the largest buyers of baby formula, and that promoting the use of breast milk "might actually help reduce government spending," clearly a top priority of Tea Partiers like Bachmann.

But none of this will stop folks from simply making things up.

Manufacturing Still in Good Shape

This week, we've had three important reports on manufacturing -- industrial production, the New York Fed's Empire State Manufacturing Survey and the Philly Fed's Manufacturing Survey. Let's examine the details of each.

From the Fed:

Industrial production decreased 0.1 percent in January 2011 after having risen 1.2 percent in December. In the manufacturing sector, output increased 0.3 percent in January after an upwardly revised gain of 0.9 percent in December. Excluding motor vehicles and parts, factory production rose 0.1 percent in January. The output of utilities fell 1.6 percent in January, as temperatures moved closer to normal after unseasonably cold weather boosted the demand for heating in December; the output of utilities advanced 4.1 percent in that month. In January, the output of mines declined 0.7 percent. At 95.1 percent of its 2007 average, total industrial production in January was 5.2 percent above its level of a year earlier. The capacity utilization rate for total industry edged down to 76.1 percent, a rate 4.4 percentage points below its average from 1972 to 2010.

The above highlights the importance of details in the overall report. While IP did decline, the output in utilities was the primary reason for the decrease. Notice that utilities increased at a strong rate (4.1%) in the preceding month, making last months decrease more pronounced.

Before we look at the details, let's take a look at the chart of the overall number:

Notice overall IP has been increasing for the better part of two years.

Let's look at the details:
Manufacturing output rose 0.3 percent in January after having increased 0.9 percent in December; the level of output in January was 5.5 percent above its year-earlier level. Capacity utilization for manufacturing was 73.7 percent, a rate 5.4 percentage points below its average for the period from 1972 to 2010.

The output of durable goods moved up 0.6 percent in January. A large gain was recorded in the index for motor vehicles and parts; smaller increases were recorded for many other industries, including fabricated metal products, machinery, computer and electronic products, aerospace and miscellaneous transportation equipment, furniture and related products, and miscellaneous manufacturing. Output decreased for wood products; nonmetallic mineral products; primary metals; and electrical equipment, appliances, and components.

Nondurable manufacturing declined 0.1 percent in January after having advanced 1.0 percent in December. The decline in production in January reflected decreases for food, beverage, and tobacco products; textile and product mills; printing and support products; and petroleum and coal products. The production of apparel and leather products moved up more than 1 percent, and the output indexes for paper, for chemicals, and for plastics and rubber products recorded smaller increases. The index for non-NAICS manufacturing industries, which comprises publishing and logging, rose 0.3 percent.

In January, mining output fell 0.7 percent, and capacity utilization declined to 88.1 percent, a rate 0.7 percentage point above its 1972-2010 average. After a sizable increase in December, the output of utilities dropped 1.6 percent in January, as production declined in both electric and natural gas utilities. The utilization rate for utilities fell to 81.2 percent.

Durables manufacturing increased broadly, including an increase in auto production. This increase indicates two points: first, end users are growing more confident because durable goods require financing to make purchases, and second, financing is becoming more available as these types of purchases usually require some type of credit facility. Both of these developments indicate fundamental economic strength. Here is a five-year chart of the data:

Notice the durables manufacturing is clearly in an uptrend, increasing on a month to month basis.

The .1% decline in non-durables manufacturing occurred after a 1% increase in December. While the decline was fairly broad-based, covering a wide range of industries, the overall decline was shallow, indicating it was probably as much a simple slackening of demand after a strong increase the previous month. Here is a chart of the data:

Notice the overall uptrend that is clearly in place.

Finally, we have mining, which appears to have topped over the last 5 months:

However, the overall output is now at levels above those preceding the recession, indicating this area of IP has recovered.

Again, note the latest report from the Federal Reserve on Industrial Production fell, but that decline was largely utility related. A look at the underlying data indicates the strong uptrends are still intact.

Let's turn to the Empire State Index:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve in February. The general business conditions index rose 3.5 points to 15.4. The new orders index edged down just slightly, to 11.8. The shipments index retreated 14 points, reversing much of January's 18-point surge, but remained positive at 11.3. The inventories index continued to climb from its December low, reaching its highest level since April. The index for number of employees fell, but the average workweek measure moved up. The prices paid index climbed to a two-and-a half-year high in February, but the measure for prices received was little changed, suggesting some pressure on profit margins. The forward-looking indexes continued to signal widespread optimism, though to a somewhat lesser degree than in January. Indexes for expected prices, both paid and received, declined moderately, after reaching multiyear highs last month.

Several months ago, this number dropped into negative territory. However, it has clearly rebounded and again printing good numbers. Here is a chart of the data:

Finally, we have the Philadelphia Fed:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 19.3 in January to 35.9 this month. This is the highest reading since January 2004 (see Chart). The demand for manufactured goods is showing continued strength: Although the new orders index was virtually unchanged in February, it has increased over the past six months. The shipments index also improved markedly, increasing 22 points. Firms also reported a rise in unfilled orders and longer delivery times this month.

Firms’ responses continue to indicate improving labor market conditions. The current employment index increased 6 points, and for the sixth consecutive month, the percentage of firms reporting an increase in employment (29 percent) is higher than the percentage reporting a decline (5 percent). More than twice as many firms reported a longer workweek (23 percent) than reported a shorter one (10 percent).

Notice this is the highest reading since 2004, indicating this region has clearly bounced back from the recession and is doing better than in the previous expansion.

The data indicates that manufacturing -- a backbone of the current recovery -- is still doing well.

Yesterday's Market

Thursday, February 17, 2011

Are home sellers in 2011 throwing in the towel?

- by New Deal democrat

There is a really interesting article by Scott Sambucci today, Housing: Why are new listing [prices] down so sharply?.

It's a really interesting articles with great explanatory graphs. I recommend you go over and read the whole thing. His basic conclusion: unlike prior years since the onset of the housing bust, people (or banks) listing houses for sale for the first time this year are underpricing houses already on the market. In other words, they are throwing in the towel.

Will Gas Prices Choke Off Recovery?

From Marketwatch:

Treasurys pared an early loss after a report showed U.S. retail sales rising 0.3% last month, less than analysts expected. The Commerce Department said that excluding autos, sales rose 0.3% as well on the month — also disappointing analysts. See story on retail sales.

“Weather is likely to have taken its toll on some areas of spending,” said economists at RDQ Economics. “One theme, however, is evident in this report: Rising gas prices are taking a bite out of consumer spending power, judging by the fast rate of increase in gas-station sales.”

I think last months retail sales report was more of a weather related event than an oil prices event. But that doesn't mean we won't see gas prices start to retail spending at some point.

Consider that in conjunction with this chart of gas prices:

Interestingly enough, oil prices are down this week, despite the turmoil in the Middle East. However, how long will that lack of correlation last? In addition, we're a few months out from the summer driving season, when oil prices naturally rise.

I would add that I would rather have gas prices increases slowly but consistently (for example, a few cents every two weeks) rather than a sharp increase, as the former allows a slow absorption of the price increases and prevents the shock associated with a massive price spike.

A Closer Look At the Labor Force Participation Rate

The above chart of the labor force participation rate is very important and highlights several important cultural and societal trends.

The labor participation rate is defined thusly:
The labor force as a percent of the civilian noninstitutional population.
The labor force "includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary" while the civilian non-institutional population includes "persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces."

Let's simplify the above terms.

The civilian non-institutional population is the biggest possible pool of labor and basically includes everybody in the US. A subset of this population is the labor force, which is everybody who is employed or unemployed. The participation rate is simply a ratio that shows what percentage the labor force (everybody who is employed or unemployed) is of the total population.

The participation rate increased from a little after 1960 until 2000 and then started to decrease. The question for this decrease is "why?"

There are two fundamental reasons. The first is that women as a percentage of the labor force increased and stagnated over the same time period. As women entered the workforce starting in the early 1960s the labor force participation rate (the percentage of the population either employed or unemployed) increased in sympathy. However, women as a percentage of the labor force plateaued in 2000 and dipped slightly thereafter, leading the labor force and therefore the participation ratio to decline.

Secondly, there is the issue of the baby boomers or "someone born during the demographic birth boom between 1946 and 1964.[9]" Someone born in 1946 would turn 60 in 2006 and be 65 in 2011. As these people have retired, they have left the labor force (they are neither employed or unemployed). Hence, we have the second reason for the decrease in the labor force participation rate -- retiring baby boomers.

Expect to see the participation rate continue to decline as the underlying dynamics of the labor force change.

Yesterday's Market

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Wednesday, February 16, 2011

The Misnomer of the "Global Currency Wars"

From Jeff Frankel's blog:

“The Fed is firing a volley in a destructive international currency war.” This is the criticism that has come from some of our trading partners: in particular, China, Germany and Brazil. I don’t generally do “My country, right or wrong.” But my country is right on this one. Monetary easing is not a beggar-thy-neighbor policy. The colorful phrase “currency wars“ seems to have confused some people. The current situation is precisely the point of floating exchange rates: when some countries feel that their high unemployment calls for monetary expansion (US) at the same time that others feel that their overheating calls for monetary tightening (Brazil, India, Korea, China…), an appreciation of the latter currencies against the former is precisely the way that floating rates accommodate the differences. This is why Milton Friedman favored floating rates, so that each country could pursue its own desired policies independently. I realize that the pressure which US monetary easing puts on countries like China to allow appreciation is unwelcome. China is finding it increasingly difficult to cling to its exchange rate target by means of controls on capital inflows and sterilized foreign exchange intervention. But capital flows are a far more legitimate way to let China feel the pressure than the alternative: Congressional threats to impose WTO-inconsistent tariffs on Chinese imports if it won’t allow faster appreciation of the yuan.

This is a topic I have wanted to tackle for some time.

When Brazil first made the allegation that the Fed's Quantitative Easing program was creating a "global currency war" certain financial bloggers picked up on the idea and ran with the "we're all going to die" meme. Unfortunately, nothing could be further from the truth.

Brazil's currency is rising for several reasons.

1.) High interest rates. Brazil's interest rates are over 11% -- a rate of interest that will attract currency traders to the Real because these rates are some of the highest in the world. Brazil will be increasing their rates going forward, largely because of domestic inflationary pressures.

2.) A growing economy. Brazil was remarkably untouched by the recession. In fact, it has been growing at strong rates for some time, making it a natural magnet for investment, which causes its currency to appreciate in value.

3.) Brazil is a natural resources economy -- especially after the Brazilian oil company announced it made a major find off the coast of Brazil -- which will also attract investment.

All three of these factors are a prime reason for the Real's appreciation, which means the argument that we're in the middle of a "currency war" is misplaced.

Retail Sales Up .3%

From the WSJ:
Retail sales grew at a glacial pace last month, as winter storms kept shoppers snowbound.

Sales rose 0.3% in January from the previous month to $381.57 billion, the Commerce Department said Tuesday. That was the smallest gain since June.

"If you take the numbers literally, they imply a slowing of consumption [growth], but I think inevitably the numbers reflected snowstorm effects," said MF Global economist Jim O'Sullivan.


Paul Dales, an economist at Capital Economics, said it would be hard to know how much of the slowdown in sales growth was due to weather until next month, when February figures come out. If those show a big sales jump, it will be clear that January's weakness was caused largely by the snowstorms.

"That said, I think even stripping out those weather effects there might be a slowdown in consumption [growth] going on," said Mr. Dales. Sales growth has decelerated for each of the past three months, he noted—a sign that, with unemployment still high and many household balance sheets still in need of repair, consumers may not be able to increase their spending by very much for very long.

Let's take a look at the data.

Retail sales rose strongly in the spring of 2010, leveled off during the summer and have been rising strongly since. A high savings rate (which is currently at about 5%) is helping were fuel consumption.

On a five year chart of real retail sales, notice that sales bottomed during most of 2009 but have been rising since.

Looking at the specifics, auto sales increased .5% and have been increasing at solid rates for the last year:

Housing issues played a large negative role. Furniture and home furnishing sales decreased .3% while building material and supplies decreased 2.9%. This second figure led many to conclude that weather played a significant role in the decline. After all, who wants to build or fix a home in freezing weather?

Some economists argued we're seeing a slowing in retail sales. I don't think there is enough data yet to make that call conclusively. The slower increase could simply be a natural slowing down from a robust Christmas.

Overall, this is still a decent report that indicates the consumer is more willing to spend, helping to push the economy forward.

Plenty of Reasons To Be Hopeful

Over at the streetlight blog, Kash makes four observations why he is hopeful for this recovery.

He first notes that U.S. Manufacturing is performing very well. This is an observation that we've been making for quite some time. In fact, manufacturing was one of the first areas of the economy to turn around after the recession.

Next, Kash notes exports have been increasing. Thanks to growth in emerging markets, this trend should continue for the foreseeable future.

Businesses have also been investing in their infrastructure. For the last four quarters, business investment has grown at very large rates. While the pace of increases is slowing, there is no reason to think it will slow to a negative pace.

Finally, households have been paying down debt. This is an observation that new deal democrat has made repeatedly for the last 6 to 9 months. By lowering their total amount of debt, households are increasing their ability to participate in the recovery.

I would encourage you to read the entire article.

Yesterday's Market

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Tuesday, February 15, 2011

Climate Change and Food Prices

From Bloomberg:

Global food supplies will face “massive disruptions” from climate change, Olam International Ltd. predicted, as Agrocorp International Pte. said corn will gain to a record, stoking food inflation and increasing hunger.

“The fact is that climate around the world is changing and that will cause massive disruptions,” Sunny Verghese, chief executive officer at Olam, among the world’s three biggest suppliers of rice and cotton, said in a Bloomberg Television interview today. “We’re friendly to wheat, corn and soybeans and bearish on rice.”


Corn futures surged 90 percent in the past year, while wheat jumped 80 percent and soybeans advanced 49 percent as the worst drought in at least half a century in Russia, flooding in Australia, excessive rainfall in Canada, and drier conditions in parts of Europe slashed harvests.


Sales and shipments of wheat by the U.S. to Egypt, the world’s biggest buyer, jumped to 2.9 million tons since June 1, more than six times higher than the same period a year earlier, according to USDA figures dated Feb. 3.

Algeria bought 2.95 million tons of wheat from Dec. 16 to Jan. 26, according to crops office FranceAgriMer. That was “probably” the most the country had ever bought in a five-week period, said Xavier Rousselin, the office’s head of arable crops. Loadings of French soft wheat destined for Morocco more than tripled to 1.16 million tons from 350,000 tons a year earlier, the company said.

Hoarding of agricultural products will intensify, although it will have limited impact on prices because supplies are sufficient, Goldman Sachs Group Inc. analysts including Jeffrey Currie said in January.

The Budget Issue

Over the last few weeks we've seen the basic wrangling between the Republicans and the Democrats on the budget. However, neither party is addressing the issues, which means the Washington Lobotomy factory is still in high gear.

Let's start with a a few charts, courtesy of information from the CBO:

Over the last 40 years, mandatory and discretionary spending as a percentage of the total federal budget have dramatically changed their overall positions. Mandatory spending now accounts for 60% of the budget while discretionary spending now accounts for 40% of the budget.

In addition, medical spending is the primary reason for the increase in mandatory spending:

Notice that over the last 40 years, medicare spending has increased from 10% of mandatory spending to a little over 20%. In addition, Medicaid spending has also increased from about 4%-5% to a little over 10%. At the same time, Social Security spending as a percentage of mandatory spending has decreased from a little under 50% to a little over 30%.

The point of these two graphs is to illustrate the following points.

1.) The percentage of the US budget over which we have some degree of control is decreasing at an alarming rate. If we are going to deal with this part of the issue, Congress will have to fundamentally change aspects of a major part of US expenditures. Politically, this proposition is incredibly dangerous.

2.) Note that the primary issue is medical spending, not Social Security.

Finally, the budget issue is occurring at a time when the tax burden is the lowest its been in 40 years:

Federal, state and local income taxes consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.

"The idea that taxes are high right now is pretty much nuts," says Michael Ettlinger, head of economic policy at the liberal Center for American Progress. The real problem is spending,counters Adam Brandon of FreedomWorks, which organizes Tea Party groups. "The money we borrow is going to be paid back through taxation in the future," he says.

Individual tax rates vary widely based on how much a taxpayer earns, where the person lives and other factors. On average, though, the tax rate paid by all Americans — rich and poor, combined — has fallen 26% since the recession began in 2007. That means a $3,400 annual tax savings for a household paying the average national rate and earning the average national household income of $102,000.

And yet, at no point in the "conversation" have we heard any mention of raising taxes.

More than anything, this entire "debate" has illustrated the ridiculous nature of the American political debate and system.

$300/BBL Oil by 2020?

From this week's Barron's

What's the current capacity for global oil production?

We are producing about 87 million to 88 million barrels a day, and I would put global capacity at another five million barrels on top of that. So our capacity is about 92 million to 93 million barrels a day, and I see our capacity as reaching perhaps as much as 95 million barrels a day at the peak in about four or five years, probably around 2015. But I think production will go very modestly above that point, if at all, and, in effect, we will reach a plateau. It will be a little bumpy in 2015, 2016, 2017 and 2018. But by 2020, the first signs will become very evident that we can't go any higher than that in production. So we will begin to settle very slowly and gradually in a world in which we need more oil each year, but we can't get more.

How high will the price of oil go?

By 2020, I'm looking for about $300 a barrel, which is closer to $225 a barrel in today's dollars. So it reaches a production plateau around 2015 or 2016 and stays flattish on a bumpy plateau until about 2020, at which point output starts to recede slowly.


At what point do those price increases start to put too much pressure on the world economy?

Strangely enough, I don't think that it would bring the economy down. Rather, it is the suddenness of change that does that. That rise we saw three years ago, where in one year it went from $62 a barrel on average to $100, created a huge amount of economic damage. On a more gradual scale, and giving the effect of inflation its due, we will probably simply walk away from two-tenths or three-tenths or four-tenths of a percentage point of potential gross-domestic-product growth, which we will give up by being caught in this energy vise. But the world economy will advance, and it won't be brought down by this. However, it will touch off a huge effort to change the cars and the aircraft engines—and to use a greater amount of substitutes for oil, such as coal and natural gas. And, of course, this has a lot of positive aspects as well, because in the longer term, we would have to begin making these changes anyway. But it seems that we can't be asked to do that. We must be forced to do that, and price is the means by which that force is applied.

I can't speak to the veracity of peak oil -- that is, the idea that we're currently, or soon will be, producing oil at peak capacity, only to be followed by a gradual decline in oil production. What I do know is that at some time we'll run out of oil; as to when that is, I'll leave it to the experts.

There are two things I find telling about the above cited excerpts. The first is the observations of an individual who has been in the energy business since 1957 -- this is someone who's opinion should more than count. When he says oil will increase, to $300/bbl that's important.

But more importantly, there is the issue of how markets work. When the price of one good increases to the point of economic pain (oil increasing to a certain level), we start to change our ways. Then we start to utilize other, cheaper alternatives and adapt our goods and services to that new model. As those increase in price, we adapt again.

He also notes that we have to be forced to adapt in most areas. Why that is, I don't know. But that does seem to be human nature in action.

Yesterday's Market

Monday, February 14, 2011

The Howling you hear is not the Wind

- by New Deal democrat

From CNN:

President Obama's budget for 2012 takes a sharp knife to government spending, with proposed cuts that will reduce deficits by hundreds of billions of dollars over 10 years.

The cuts hit far and wide: airports, heat subsidies for the poor, water treatment plants and Pell grants are just some of the targets.
At some point in the next month or two, as you walk or drive past a cemetery, you may hear the sound of howling. The howling you hear is not winter storms nor March gales. No, the howling you hear is not the wind.

What you are hearing is the howls of 100,000,000 ghosts: those Americans whose experience of the Great Depression and the New Deal was not in history books or revisionist screeds, but was real, firsthand, heartfelt and known to the very marrow of their bones in life. They are not just howling at the nihilism of the GOP; they always knew about that. They are howling at an Administration whose budget turns its back on the very lives of the neediest at their most desparate hour in seventy years even as it extended profligate tax cuts for the wealthy, and yet still calls itself "democratic."

They are howling in anger and disbelief at an American public which has scorned and forgotten the history that they actually lived. They are howling at you.

Interest Rates, GDP Growth and the Dollar

Let's start with these relationships

1.) The dollar's value increases when interest rates increase. The reason for this relationship is currency traders -- after purchasing a currency -- park their holdings in the new currency in an interest bearing account. While U.S. short term rates are still some of the lowest in the developed world, long-term rates are among the highest.

2.) The dollar's value increases as the economy improves. The reason for this is a growing economy attracts foreign investment -- outside investors want to invest in a winner. In addition, consider this story for the WSJ:

A newly resilient economy is poised to expand this year at its fastest pace since 2003, thanks in part to brisk spending by consumers and businesses.

In a new Wall Street Journal survey, many economists ratcheted up their growth forecasts because of recent reports suggesting a greater willingness to spend.

3.) It's also important to note the dollar is still a store of value in the commodities market and a safe harbor currency in times of trouble.

Given these three facts, it's important to remember that going forward, the dollar may have a floor underneath prices. This has bearish ramifications for the commodities markets.

The January Jobs report: the Unemployment rate II.

- by New Deal democrat

This is the third and last post in which I dissect the January jobs report. As you recall, there was a lot of head scratching initially because employment only rose 36,000, and yet the unemployment rate fell 0.4% to 9.0%. Among the more ignorant or conspiracy minded observers, this was deemed impossible.

In my first post, I explained that the 36,000 employment number is likely to be revised significantly higher. In my second, I showed that, based on past relationships of initial jobless claims vs. unemployment going back almost half a century, the drop in the unemployment rate was no fluke. In this installment I am going to argue that the substantive reasons for the drop in the unemployment rate were:

1. population effect.
2. seasonality effects.
3. aging boomers.

1. Population effect

The important thing to remember is that the EMployment number comes from the establishment survey, in which businesses are polled. The UNemployment RATE comes from the entirely separate household survey, in which a smaller sample of households are polled. While over time the two surveys correlate very well, in any given month they can give wildly different results. After taking into account the size of the sample, in this case, businesses told one set of surveyors that they had only hired 36.000 new workers . But households told the other set of surveyors that 589,000 of their members had started new jobs in January!

So, without the annual population adjustment, here is what the BLS report on the Household Survey Data would have read like:
The civilian noninstitutional population grew to 239,051,000 in January. The civilian labor force remained constant at 153,690,000. Civilian employment increased sharply by 589,000, and the number of unemployed declined by 590,000. The unemployment rate declined to 9.07% (rounded to 9.1%) and so declined by 0.3%.
But the BLS does one, annual population adjustment for this survey, in January, and thus the entire effect is captured in one month rather than spread throughout the year. Because of that, the official report instead showed that population had declined by 185,000, employment had only gone up 117,000 (which is still considerably higher than the establishment survey), unemployment had decreased by 622,000, and so the unemployment rate was 9.04%, rounded to 9.0%.

All of this information is contained in the very simple, easy to read Table C of the Employment Situation Report for January. (BTW, in recessions there is less immigration, and couples put off having children, hence population tends not to increase as much as otherwise).

2. Seasonality effects

There is a lot of temporary holiday season hiring in October through December, and generally those people are then let go in January. You may recall that in 2008 and 2009, holiday season hiring - and subsequent firing - was abysmal. I suspect that there was a different holiday season hiring and firing pattern in 2010 than in prior years, which resolves most of the conundrum as to why unemployment rose so much in November and dropped so much in January.

Why do I believe this was so? First of all, because the surprise decrease of 0.4% in the unemployment rate in January is the mirror image of the similarly surprising INcrease in the unemployment rate from 9.4% to 9.8% in November. (BTW, I did a little search, and the people who are sure that the sudden drop in the unemployment rate last month was a canard, had no problem at all with the sudden increase in November. Fancy that.).

To get a better look at what I am discussing in this part and part 3, consider the following graphs, from the BLS report:

This is the same information, broken down by gender as well as age:

First, compare the steepness of the November-January decline with the corresponding steepness of the increase from October to November. With a few exceptions, age group by age group, and comparing by gender as well, the comparisons are mirror images.

Second, notice that teenagers didn't participate in the conundrum at all. In fact their unemployment rate generally increased.

Third, age group 35-44 was relatively unaffected by the conundrum. Their unemployment rate remained much more stable.

Fourth, notice that age group 45-54's experience was similar to that of age 55 and up. That means it isn't simply a matter of early retirement applications for social security (more on that in part 3).

Fifth, notice that age group 20-24 had the steepest decline, followed by age group 25-34. That certainly opens up the idea that the conundrum is explainable by younger workers giving up and moving back home. Paul Krugman put up an excellent post this weekend on the plight of this group, entitled Failure to Launch.

Sixth, notice that the conundrum was much more evident among men than women. There is a large difference in the change in the unemployment rates by sex. In fact, married men almost totally explain the conundrum.

For some reason the Census Bureau's seasonality adjustment seems to have undercounted hires in November, and undercounted fires in January. I think there were two primary drivers: first, the Census Bureau overestimated its seasonal adjustment generally. When holiday hiring didn't live up to the adjustment in November, there was a spike in the unemployment rate. When those workers were let go in January, the seasonal adjustment made the opposite error. It expected a lot more fires than actually happened. Further, if the age and gender of holiday workers was different this season than the seasonal adjustment anticipated, it would undercount that group in one month, and overcount in another. Remember, this was the first relatively robust holiday hiring season in 3 years. In short, the seasonal adjustment may have been fooled in November into thinking that some categories of workers for some reason weren't hired for holiday season jobs in 2010 - and then didn't get fired in January.

3. Aging Boomers

[I wish to thank Fladem and SilverOz for the analysis that went into drafting this part of the post]

Two subgroups where there isn't a mirror image between November and January is in age groups 45-54 and 55-64. In fact age group 55-64 is the place where the participation rate is falling most steeply. It appears that aging boomers, especially men, are putting in disability claims if they have a case, and are filing for early retirement at an accelerated rate. At least some of these people may have been on unemployment benefits and decided to switch over to disability or retirement if prospects of returning to the work force before expiration of their benefits were grim.

The Social Security Administration publishes statistics for annual social security disability and retirement claims. These statistics show thatin this recession as in prior ones there is an increase in such claims, that abates when the economy improves. Comparing the numbers from the mid-90's to now shows a dramatic increase in such recipients since the onset of the "Great Recession." There were 1.5 million more beneficiaries in 2010 than in 2009.

Here are the averages for SS disability and retirement for recent years:
2005 277,497
2006 291,598
2007 331,582
2008 546,029
2009 1,020,929
2010 867,978

Prediction if growth rate from 2005 to 2007 had held for 2008 to 2010:
2008 335,213
2009 340,780
2010 351,888

Difference: 1,407,978

Of this, only 2/3's of the increase is retirees. The remaining 1/3 is a dramatic increase in filings for SS disability.

In summary, there are double the amount of SS disability recipients now vs. less than 20 years ago. That can't be explained by population increase, it has to be either looser standards or filings by boomers whose bodies have been beaten up by blue collar labor. That appears to also explain some of the 45 and up increase in people leaving the labor force (and not just in the 55 and up metric, as noted in part 2 above), and also explain why it seems to be disproportionately men.

On the similar note, over the weekend Calculated Risk passed on a research note by Sven Jari Stehn at Goldman Sachs, and concluded that
the key point is most of the recent decline in the participation rate is due to demographics and not because of cyclical effects - although there will probably be some small bounce back of the next couple of years.
Whether aging boomers are filing in part *because* of poor prospects for re-entering the work force, or simply because they have reached the age where they can, the simple fact is that aging boomers (and secondarily 20-somethings who have "failed to launch")- along with the annual population adjustment and unusual seasonal effects - explain the unemployment rate conundrum in the January jobs report.

Yesterday's Market

The above three areas of the markets give us the following points.

1.) Equities continue to move higher, although the rate of participation is decreasing.

2.) Bonds have started to sell-off and are at important technical levels. This market segment was probably over-bought over the last few years and is now returning to a price level more in line with the current economic situation. However, this sell-off should provide some fuel to the equity market rally.

3.) The dollar is consolidating after a sell-off. I'll discuss the dollar in more detail in the next post.

Sunday, February 13, 2011

The Inter-relatioinshp of Interest Rates, the Dollar and Commodities

Let's start with these relationships

1.) The dollar's value increases when interest rates increase. The reason for this relationship is currency traders -- after purchasing a currency -- park their holdings in the new currency in an interest bearing account. While U.S. short term rates are still some of the lowest in the developed world, long-term rates are among the highest.

2.) The dollar's value increases as the economy improves. The reason for this is a growing economy attracts foreign investment -- outside investors want to invest in a winner. In addition, consider this story for the WSJ:

A newly resilient economy is poised to expand this year at its fastest pace since 2003, thanks in part to brisk spending by consumers and businesses.

In a new Wall Street Journal survey, many economists ratcheted up their growth forecasts because of recent reports suggesting a greater willingness to spend.

3.) It's also important to note the dollar is still a store of value in the commodities market and a safe harbor currency in times of trouble.

Given these three facts, it's important to remember that going forward, the dollar may have a floor underneath prices.