Richmond Fed -- Another Bad Month

The Richmond Fed issued this report on January 23. Because I was traveling I missed it and am now playing catch-up/.

From the Richmond Fed

Manufacturing activity in the central Atlantic region contracted again in January, according to the Richmond Fed’s latest survey. Respondents reported further declines in factory shipments and new orders, although employment and order backlogs declined on pace with December. Capacity utilization moved slightly lower, while delivery times edged higher. In addition, manufacturers reported somewhat quicker growth in finished goods inventories.

This chart is not good -- it shows the Richmond Federal Reserve District had another bad month and has been contracting for the better part of 2006. On the good side, the overall index had similar performance between 2004 - 2005 without a major problem. However, seeing any index drop like this does not raise confidence.

Here are the shipments and new orders indexes. They both show a similar pattern.





We've seen mixed manufacturing news over the past month. While overall industrial production for December increased .4%, the 4th quarter showed an overall decline. The Phily Fed was up moderately, but was nothing to write home about. The Empire State Survey softened a bit. The Kansas Fed index eased as well.

All of these regional reports are pointing to a slowing of overall production in February.

The Long View: Where Is the Trade Deficit?

BruceMcF

A long time ago, I looked at the current account blowout in The Long View: Current Account, which ended with a promise to have a look at the make-up of the blow out in terms of both geography and industry.

What I am looking at now is the broad outline of the geographic break down.

How broad? I am breaking the whole world down into The Americas, Europe, Asia & Oceania, and Africa. So the answer is, just about as broad as possible.

The Story So Far

Where I left off, before the long haitus, was the stark reality of the current account blowout:

• It is massively bigger than anything we have experience in living memory


• The problem is not income or unrequited transfers: it is trade

The trade account is made up trade in goods and trade in services. What I am going to be looking at today is trade in goods.

And before I put this information up, I will add a note that you should not shoot the messenger. After careful contemplation, I have come to the firm conclusion that messenger-shooting is counter-productive.

The source of this information is the same BEA site that provided the info for the first in this series. The only difference is that instead of working with table 1, I am working with Table 2b: Trade in Goods, Additional Historical Historical Data.

Where In The World Is the Trade Taking Place?

First, lets look at Exports to these four regions as a share of total exports. In all three of these graphs:

• the Americas are the "dash" line,
• Europe is the "dot" line,
• Asia and Oceania is the "dash dot" line, and
• Africa is the "dash dot dot" line.

The trends here are simple. Europe is losing ground as an export market, with most of that share being taken up by the Americas, and some being taken up by Asia and Oceania. Africa is a very small market, both because of the small size of so many African economies as export markets, and because of the dominance of European firms in those markets.

Now, lets look at Imports from these four regions, as a share of total imports.

Here we have the Americas as the dominant source of imports, with a loss in market share in the 80-85 period that is regained with something to spare. The second spot, however, trades place, Europe holding a slight lead over Asia in 80-85, while by 01-05, Asia and Oceania is on a path toward taking over as the primary source of imports.

Don't Forget the Blowout

A word of caution is in order here. It is important to bear in mind that the two diagrams are showing shares of totals that are sliding rapidly apart. That is, 45% (about) of our goods exports go to the Americas, and 35% of our goods imports. But that is 45% of a smaller number, and 35% of a bigger number.

The way I have set this up is to take the average of imports and exports as "average trade", and look at the Balance of Payments with each global region as a percentage of "average trade". And here ... as in the earlier diary that focused on the current account overall ... things are moving "south" at a very rapid pace.


Bear in mind here that what you are looking at is trade in goods, not goods and services overall. The US tends to have a stronger position in services than in goods. As you will see when I look at trade in services, a "small" negative balance in goods trade is good news for the overall trade account.

And for the global regions, the balance of trade compared to average trade breaks down into two stories. For the Americas, Europe, and Africa, the story by and large is improvements up through to 90-95, and then a rising deficit through to 00-05 (and, if we sneaked at table 2a, on to the present).

For Asia and Oceania, the "improvement" in the trade deficit is there, but it is very small ... from about -11% to about -9% ... and the slide since then is the single largest source of the trade deficit.

And remember: this last figure is compared to the average amount of all trade in goods. The deficit in goods trade with Asia and Oceania is more than 20% of the average trade in all goods.

The Path Ahead

Of course, whenever you find Economic bad news, you can find a pollyana that will explain that its just the market in operation, and in the end its all for the best. The main hope for the pollyanas are that "in the long run", the deficits in the goods trade will be balanced by surpluses in services trade.

And so, in the third installment in this series, I will see what the long term view of the balance of trade in services has to tell us. ... to be continued ...

Existing Homes Sales Decrease .8%

From Bloomberg

Sales of previously owned homes in the U.S. declined in December for the first time in three months, capping the biggest annual drop since 1989, a slide that's shown signs of bottoming.

Purchases dropped 0.8 percent to an annual rate of 6.22 million, the National Association of Realtors said today in Washington. For the entire year, sales fell 8.4 percent from 2005's record. In a sign the slide may be nearing an end, the number of homes on the market decreased for a second month.

``This grinding sort of correction will continue for much of this year,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``Housing will make a negative contribution to the economy this year, but the declines won't be as big as those we have seen in the most recent past.''

The best news in this report is the drop in inventory, which decreased from a 7.3 month supply to a 6.8 month supply. While that figure is still high, it is lower than recent inventory readings.

It's important to remember that interest rates have increased to around 4.85%. This does not bode well for continued strength in the housing market. When interest rates dropped from this level in mid-October we saw an increase in housing sales. Now that rates have returned to this level, I would expect sales to decrease.

While sales appear to have stabilized over the last four months, the high level of consumer debt indicates we are not out of the woods yet in housing.

State of the Union: A Nation Off Track

So, we’re all eagerly awaiting President Bush’s State of the Union address to hear the honest facts about the nation’s economy, among other key issues.

OK, not.

Looks like we’ll have to dig up the real deal on our own by taking a gander at some of the recent data and what they portend for us working types.

Tonight, Bush likely will talk about the great economic recovery we’ve seen in the past couple of years. But newly released data from two separate sources reveal just how skewed the distribution of economic growth has been in the current recovery, according to the Economic Policy Institute.

Data from the Bureau of Economic Analysis through the third quarter of 2006 show that a historically high share of corporate income is going into profits and interest (i.e., capital income) rather than employee compensation. And a newly released Congressional Budget Office (CBO) analysis of household incomes shows that a greater share of this capital income goes to the richest households than at any time since the CBO began tracking such trends. In other words, our economy is producing more capital income and that type of income is more likely to go to those at the very top of the income scale. Together, these dynamics are contributing to a uniquely skewed recovery.

That means those in the top 1 percent of the income scale received 59.4 percent of all the capital income in 2004 (CBO's latest data), up from 49.1 percent in 2000 and just 37.8 percent in 1979. The increase in the concentration of capital income to the upper 1 percent grew as quickly over the four-year period from 2000 to 2004 as over the preceding 11 years (1989–2000).

So, the economic recovery Bush will tout is mostly about the rich getting richer. And those tax cuts that Bush will call the shining star of his economic acumen? Guess what. They’re helping the rich more than the economy. As Citizens for Tax Justice puts it:

First, the tax breaks enacted since 2001 are heavily skewed toward the very wealthiest few. Second, because the tax cuts are being paid for with borrowed money, the cost of paying the added national debt more than wipes out any benefits from the tax cuts for 99 percent of residents in each state. Only the best-off one percent are net winners from the president’s fiscal policies.

But those tax cuts for the wealthy must do something for the overall economy, right? Indeed. According to the Center on Budget and Policy Priorities:

Congressional Budget Office data show that the tax cuts have been the single largest contributor to the reemergence of substantial budget deficits in recent years. Legislation enacted since 2001 has added about $2.3 trillion to deficits between 2001 and 2006, with half of this deterioration in the budget due to the tax cuts (about a third was due to increases in security spending, and about a sixth to increases in domestic spending). Yet the president and some Congressional leaders decline to acknowledge the tax cuts’ role in the nation’s budget problems, falling back instead on the discredited nostrum that tax cuts “pay for themselves.”

As the Center on Budget and Policy Priorities sums up:

A study by the president’s own Treasury Department recently confirmed the common-sense view shared by economists across the political spectrum: Cutting taxes decreases revenues.

The Bush administration ran the Clinton budget surplus into the ground after less than a year in office—and has kept adding to the national tab so that the United States is now more than $8 trillion in debt (that’s nearly $29,000 for every man, woman and child in the nation). Yet after all these years of draining the federal budget into oblivion, administration cronies now suddenly are sounding the alarm.

And they’re offering solutions. But they’re not suggesting the nation cut back on the $255 million a day Bush is spending on the Iraq war or back off those tax cut payoffs to wealthy donors. Instead, in a recent speech, Ben Bernanke, Federal Reserve chairman, used a warning about the growing deficit as the opening salvo to attack on what’s left of our country’s successful heath and retirement programs.

Warning against complacency over the federal deficit, Ben S. Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a “calm before the storm” masking a long-term danger posed by looming deficits in Social Security and Medicare.

snip

Bernanke’s comments were consistent with his past warnings, and those of his predecessor, Alan Greenspan, about the unfunded cost of the postwar generation’s retirement. But his tone was more urgent, and it seemed aimed at the arrival of a new Democratic-led Congress that is just now setting its priorities.

Let’s see. The budget deficit is in the dumpster and the Bush administration wants to salvage it by cutting back on retirement and health care. Let’s look at retirement. Without Social Security, millions of retired Americans would struggle in poverty. Between 1960 and 2004, Social Security helped cut the poverty rate among seniors by more than two-thirds, from 35 percent to 10 percent. Social Security takes on more, not less, importance as we go forward, with fewer and fewer workers getting retirement benefits on the job. As AFL-CIO Secretary-Treasurer Richard Trumka said in testimony today before the House Ways and Means Committee:

Only half of American families have an employer-provided retirement plan of any sort, a proportion largely unchanged for decades. However, whereas 40 percent of workers participated in employer guaranteed “defined-benefit” pension plans in 1980, today only 20 percent have such plans. In substituting “defined-contribution” for defined benefit plans, employers are shifting the risk of retirement onto workers. And American workers are ill prepared to carry this risk.

There are a lot of reasons why Bush’s approval rating has tanked, according to recent polls. And it’s pretty clear that Iraq isn’t the only reason 71 percent are saying the country is seriously off track.

Traveling

I am traveling today and tomorrow. Posting will resume on Thursday afternoon.

BS

10-Year Treasury and Housing

Talk of a housing bottom started sometime in October. Since then we've gotten more news on new and existing home sales to stoke talk of a housing bottom (We've also had home builders report some really lousy earnings reports). In addition, interest rates started to drop about that same time. Here's a chart of the 10-year Treasury from stockcharts.com



Rates have risen steadily since early December, largely because good economic news and public statements from various Fed governors dampened speculation of a rate cut in early 2007. As a result, the 10-year Treasury's interest rate is back near 4.84%. This was at least a non-restrictive interest level in October. We'll have to see if that still holds going forward.

Cleveland Median CPI +.3%

From the Cleveland Federal Reserve:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.5% annualized rate) in December. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (6.7% annualized rate) in December. The CPI less food and energy rose 0.2% (2.3% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 3.7%, the CPI 2.5%, and the CPI less food and energy 2.6%.

Over the past few months, several Fed officials have commented they think inflation was too high. While no one has mentioned the Cleveland median CPI as the source of their information, I am beginning to think it carries more weight than the Fed is letting on. I can't prove that -- it's just a hunch.

The Markets Last Week

Let's take a look at how the markets performed last week. All charts below are from stockcharts.com

Here's the chart for the SPY (S&P 500).



Remember the market's were closed on Monday.

Four days with a slight downward bias that followed three strong upward bars. That indicates several points. First, there was no news strong enough to send the market in either direction. In other words, the good news canceled out the bad news. We had some good earnings news this week (broker dealers), but we also had some bad news (Motorola, IBM, Intel) combined with CPI and PPI implying the Fed won't be lowering rates anytime soon. One analysis described the market thusly:

"I think we're at an extremely pivotal psychological level," said T.J. Marta, economic strategist at RBC Capital Markets. He said earnings and economic data support the Federal Reserve's notion that the economy can pull off a soft landing. Marta contends Wall Street is now mulling whether the economy will do a "fly-by" and skip a soft landing entirely with growth continuing apace.

This analyst didn't mention the implied ceiling caused by the Fed's not acting on interest rates. I think that is a big ceiling on the market right now.

Here's a chart of the QQQQs



This is where the bad tech news really hit hardest. Technology has reemerged as a market sector over the last 6 months, and the news from Intel, IBM and Apple hit this market hardest. Take a look at various technology related ETFs for the week:

Semiconductors



Software



Networking



Internet



This charts should cause concern among those in the bullish market camp. Technology has been the driver of the latest rally that started in late July/early August of last year. Now that sector is somewhat suspect going forward.

Here's a chart for the Russell 2000



We're back to a trading range for this index, between roughly 76 and 79.50. Trading ranges mean supply and demand are about equal. Traders aren't bullish enough to bid the index higher or bearish enough to sell it lower. We're waiting for some catalyst to make the market decide on one direction.

Phily Fed Up Moderately

From the Phily Fed:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a revised reading of -2.3 in December to 8.3 (see Chart).* This month, 25 percent of the firms reported increased activity; 17 percent reported decreased activity. The new orders and shipments indexes offer mixed signals about the strength of this month’s overall improvement. Demand for manufactured goods has not yet recovered much: The new orders index rose two points, from -0.9 to 1.3, after negative readings for two consecutive months. The shipments index increased 10 points from December; 37 percent of the firms reported an increase in shipments; 13 percent reported a decrease. Indexes for delivery times and unfilled orders remained negative, indicating shorter delivery times and a decline in unfilled orders.

Evidence of modest growth in manufacturing is suggested by replies concerning employment and hours worked. The percentage of firms reporting an increase in employment (21 percent) was somewhat higher than the percentage reporting decreases (13 percent). The current employment index was virtually unchanged from its revised December reading. The average workweek index edged four points higher, but the percentage of firms reporting longer hours (16 percent) was nearly the same as the percentage reporting shorter hours (15 percent).

Let's take a look at the general diffusion chart:



The gray line (current conditions) has trended down for the last 6 months or so. We saw a longer downtrend from mid-'04 to mid-'05 without a serious problem. That means the most recent decrease could be nothing more than a natural slowdown from peak activity. In addition, we have seen modest increases over the last year, so the recent increase into positive territory could be the beginning of a return to slower but positive production levels. However, we are near the 0 line, so this trend bears watching.

The new orders index rose two points, from -0.9 to 1.3, after negative readings for two consecutive months.

The new orders index isn't offering us much hope right now.

Here's some good news in the report:



The prices paid component has dropped for the last 6 months. This is good news on the inflation front.

The current employment index was virtually unchanged from its revised December reading.

We've seen manufacturing employment take a big hit during this expansion. Here's a chart of national manufacturing since 2000.



The large productivity gains have translated into fewer manufacturing employees. There is no reason to think this trend won't continue.

The short version is all the recent manufacturing numbers have showed a slightly positive reading not strong enough to warrant extreme optimism, but enough to warrant a soft-landing.

Explain This To Me

From Bloomberg:

``Central banks will get naughtier,'' said Jan Loeys, global head of market strategy at JPMorgan Chase & Co. ``They will see inflation and they will have to raise rates.''

OK -- I've been reading financial press for about 20 years. I have never see a central bank described as naughty. Maybe it's an English thing.....

New Nome Construction Increases 4.5%

From CBSMarketwatch

New construction on homes in the United States rose for the second straight month in December, reflecting year-end strength in apartment construction, the Commerce Department estimated Thursday.

Meanwhile, the number of new building permits issued rose for the first time in 11 months.

Economists said weather played a major role in the increased building activity.

The increase in housing starts was likely due to "a few large multifamily projects that were able to get started due to record warm weather," wrote Joshua Shapiro, chief economist for MFR, in an e-mail to clients.

"We do not take the data as a sign that the housing market is stabilizing, nor do we believe the worst of the housing correction is behind us," wrote Richard Moody, chief economist for Mission Residential, in an e-mail.

...

Starts of multifamily housing jumped 42.1% in December, reaching 412,000. This marked the biggest gain since April 2005.

On the other hand, starts of single-family homes fell 4.1%, trending to a seasonally adjusted annual rate of 1.23 million from 1.28 million in November.

The starts in multi-family projects appear to be the reason for the jump. That makes sense. Considering the following charts from the WSJ:



Sales are trending down and inventory is up. This is not the time to be adding to inventory.

CPI Up .5%; Core Up .2%

From the Bureau of Labor Statistics:

On a seasonally adjusted basis, the CPI-U increased 0.5 percent in December, the first advance since August. Energy prices, which had declined in each of the preceding three months, rose 4.6 percent in December. Within energy, the index for petroleum-based energy increased 7.7 percent and the index for energy services increased 1.2 percent. The food index was unchanged in December. The index for all items less food and energy, which was virtually unchanged in November, increased 0.2 percent in December. Upturns in the indexes for apparel and for tobacco and smoking products werelargely responsible for the acceleration. Shelter costs rose less than in November, but still accounted for about 80 percent of the December advance in the index for all items less food and energy.

From Bloomberg:

U.S. consumer prices accelerated in December for the first time in four months, suggesting the easing of inflationary pressures that the Federal Reserve is counting on will be slow.

The consumer price index increased 0.5 percent last month, the most since April and reflecting higher costs for gasoline and natural gas, after no change in November, the Labor Department said today in Washington. Excluding food and energy, so-called core consumer inflation rose 0.2 percent, following no change a month earlier.

Let's break these numbers down a bit.

1.) The core and total numbers same in at or slightly above expectations -- depending on whether you read Bloomberg or CBS.Marketwatch for your forecasts. So the number won't be unexpected.

2.) Transportation and energy costs were a big reason for the increase. Transportation increased 1.8% after three months of declines and overall energy prices increased 4.6% after three months of decreases. Oil has dropped in a big way since late December, meaning January's number may be much lower than December.

3.) The 12-month December to December change is 2.5%. This is still high for the Fed.

4.) Bloomberg notes this is the biggest increase since April. That's not a good development.

Beige Book's Inflation News is Fair

From the Beige Book:

Overall prices increased moderately. Prices for energy and a number of materials have eased, and competition has kept prices for final goods in check. Atlanta, Chicago, Minneapolis and Kansas City described price pressures as easing or moderating. Manufacturers in the Boston and Cleveland Districts reported that input prices were stable, although contacts noted some increases in metal prices. Meanwhile, manufacturers in the New York District indicated some increases in input price pressures. Retail prices were steady in the New York, Atlanta and Dallas Districts, but were edging up slightly in the Richmond District. Philadelphia noted that reports of price increases at business firms were not as widespread as they were earlier in the fall. Dallas described price pressures as mixed, while San Francisco said final prices rose at a modest pace.

First -- copper prices have dropped since this report was written. That means the "some contacts indicated metal prices were increasing" has either already gone away or is in the process of ameliorating.

This report uses the word "moderating" and "eased" a lot. That plays into the Fed's general story right now, which is as the economy slows price pressures will weaken. This has been the Fed's contention for the last 6 months. When Bernanke first started using this language I was skeptical. However, the economy is making Ben look good right now.

The areas of inflation increases look more like inflation "hot pockets" -- areas of limited scope and influence rather than a system wide problem.

Ben speaks to the Senate today.

Industrial Production Increases .4%

From CBSMarketwatch.com

U.S. industrial production rose by an overall 0.4% in December, as the high-technology and motor-vehicle industries posted strong output for the month, the Federal Reserve said Wednesday.

....

Bear Stearns economists said that, coupled with other recent data, the industrial output figure showed the economy improved at the end of the year.

"Data on employment, retail sales, and production suggest that the economy's momentum was picking up at the end of 2006," the economists wrote in a research note.

Let's look inside the report, because there are two sides to analyze.

Overall industrial production decreased -.3%, -.1% and -.1% in September through November, respectively. That means the overall .4% look like a rebound.

On a monthly basis there are lots of increases -- consumer durables and non-durables, business equipment (which saw a big bump), durable and nondurable manufacturing and mining all saw increases. These increases should give the market some confidence going forward because they occurred across a wide spectrum of industrial areas.

I should note that last months manufacturing ISM saw increases as well, although the index was hovering around 50 which is the line between expansion and contraction.

However, overall industrial production fell at a -.5% rate in the fourth quarter. The second lowest annual growth rate occurred in the third quarter at 4%. In other words, the fourth quarter saw an overall downturn. All industrial areas - manufacturing, consumer goods, energy, business goods -- saw low numbers on a quarterly basis. Manufacturing contracted -1.4% on an annual basis in the 4th quarter.

The breadth of this month's increases is a good sign. However, another month of increases is required before we pop the champaign corks.

Homebuilder Lennar Swings to Loss

From the Street.com

The Miami-based homebuilder lost $196 million, or $1.24 a share, for the quarter ended Dec. 31, reversing the year-ago profit of $581 million, or $3.54 a share. Revenue slipped 15% from a year ago to $4.27 billion.

Analysts surveyed by Thomson Financial were looking for an loss of 81 cents a share on sales of $4.15 billion.

The latest quarter includes write-offs of option deposits and pre-acquisition costs of $111.1 million and valuation adjustments of $382.8 million. Lennar said it posted a latest-quarter homebuilding operating loss of $319.4 million, as new orders dropped 6% from a year ago.

"Uncertain market conditions make it difficult to provide a 2007 earnings goal," CEO Stuart Miller said. "While we know that the margin in our backlog will result in lower profitability in the first half of 2007, we believe that if the current environment of strong employment, low interest rates and a healthy economy continues, and the market for new homes demonstrates traditional, seasonal improvement, we will meet or exceed our 2006 earnings of $3.69 per share."

Some of these losses could be the company loading a ton of bad news into an already bad quarter, essentially taking care of all the bad news at once. We have seen a large number housing companies report terrible fourth quarters that include a ton of bad news.

However, I wouldn't be surprised if we saw a continuation of this trend going forward for at least another quarter. Cancellations are high and the US consumer is heavily indebted with mortgage debt already. In addition, with the declining sales rate and increasing inventory, the market is shifting to a buyers market, which is going to put more downward pressure on prices.

PPI Increases .9% in December

From the BLS:

The Producer Price Index for Finished Goods increased 0.9 percent in December, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 2.0-percent advance in November and a 1.6-percent decline in October. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.5 percent in December after climbing 0.7 percent a month earlier, and the crude goods index increased 2.9 percent following a 15.7-percent gain in November.

Finished food products had the largest jump in 12 months, increasing 1.7%, while finished energy prices increased 2.5%.

The number ex-food and energy increased .2%.

The best news in the report was the 1.1% 12-month percentage change in the PPI from last December.

Both Reuters and Bloomberg note the number rose more than forecast, indicating traders may be taken back by the news.

Here's how Bloomberg reported the news:

Prices paid to U.S. producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline costs that have since reversed.

The 0.9 percent gain in the producer price index followed a 2 percent increase in November, the Labor Department said today in Washington. So-called core wholesale prices that exclude energy and food rose 0.2 percent after rising 1.3 percent.

Crude oil costs have dropped 20 percent since mid-November, and some raw-materials prices have also decreased. The declines may reassure Federal Reserve policy makers that price pressures will ease. Dallas Fed Bank President Richard Fisher said last week that there's been ``encouraging news'' on inflation, and he's ``very comfortable'' with the level of interest rates.

``We have seen a notable moderation in year-over-year wholesale inflation in the second-half of the year,'' Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. The smaller increases ``suggest less inflation risk in the pipeline, which is a favorable development for the Fed.''

Reuters reported the news thusly:

U.S. producer prices rose slightly more than expected in December but they advanced at a far more moderate pace than a month earlier on smaller gains in energy prices, a government report on Wednesday showed.

The Labor Department's Producer Price Index advanced by 0.9 percent in December. Excluding volatile food and energy prices, the index inched up a smaller 0.2 percent. Still, the gains were slightly greater than expected.

Economists polled by Reuters ahead of the report were expecting a 0.5 percent rise in the overall index and a more moderate 0.1 percent advance in the so-called core PPI, which excludes food and energy prices.

...

Economists had forecast producer prices to rise 0.5 percent, according to the median of 70 estimates in a Bloomberg News survey. Estimates ranged from a 0.1 percent decline to a 1.2 percent rise. Core prices were expected to rise 0.1 percent.

Both reports noted the official government number came in higher than expected. This means traders may be taken back by the number.

Since December, copper has fallen in a big way (see below). Aluminum has dropped as well, although not as precipitously. Oil has also dropped, helped by Goldman Sachs rebalancing its commodities index. It is now at a 20-month low and is looking to test technical support at $50/bbl. All three of those figures bode well for next month's PPI -- assuming those trends remain in place. They also mean the markets are essentially doing the Fed's work for them -- dropping prices and reducing inflationary pressures so the Fed doesn't have to increase interest rates.

However, I think this number is too high to warrant talk of a rate cut anytime in the near future. All recent Fed speeches have included statements to the effect they think inflation is still a concern. This number will not ease those concerns.

More Mortgage Industry Job Cuts

From Reuters

ResCap, the holding company for the real-estate financing business of GMAC, said on Tuesday it would cut 1,000 jobs -- about 7 percent of its work force -- in a cost-cutting triggered by a slack U.S. housing market.

ResCap said it would incur a charge of about $10 million as a result of the job cuts, but expected to save $65 million in 2008 as a result of the reduction in its payroll.

The company said in a filing with U.S. securities regulators that it would cut 800 jobs by October and eliminate another 200 unfilled positions. The majority of the jobs would be cut in the first and second quarters of this year, ResCap said.

This is not news that occurs at a housing bottom.

Copper Prices Under Pressure

From Bloomberg

Copper prices in New York fell for the third session in a row on speculation demand will lag behind supplies with global inventories of the metal close to the highest since July 2004.

Stockpiles monitored by exchanges in London, Shanghai and New York have jumped 52 percent in the past three months, data compiled by Bloomberg show. Copper prices have dropped 36 percent from a record $4.04 a pound on May 11.

``The inventories are rising, and the price is falling,'' said John Gross, director of metals management at Scott Brass Inc. in Cranston, Rhode Island. ``The sentiment has changed. The market has been in a downtrend after copper broke the psychologically important $3 a pound level'' last month, he said.

Here' the daily copper chart:



We have a clear downtrend that started in mid-October. We also have a big gap-down in late December/early January. Downward gaps are very bearish chart signs; they signal a lot of downward price pressure.

Here's the monthly chart:



Prices really peaked back in late April/early May and have been in a downtrend since. We see the downtrend accelerate at the end of last year.

The Bloomberg article is pretty clear -- inventories have increase in 50% in three months. That indicates there there is a either a big drop in demand or middle men have greatly overestimated copper demand. Either way, excess supply = lower price.

Oil hits 19-Month Low

From Bloomberg:

Crude oil in New York plunged to the lowest in more than 19 months after Saudi Arabia's oil minister rejected calls for more production cuts.

The Organization of Petroleum Exporting Countries must wait to assess the effect of supply curbs that start Feb. 1, the minister, Ali al-Naimi, told reporters in New Delhi. Prices have plunged 16 percent this year, leading Venezuela and Algeria to call for OPEC to restrain output.

``The Saudis don't see the need to take any immediate action, which just reinforces the bearish sentiment in the market,'' said Kyle Cooper, director of research at IAF Advisors in Houston. ``If the Saudis don't want OPEC to make further cuts it won't happen.''

Crude oil for February delivery fell $1.78, or 3.4 percent, to $51.21 a barrel on the New York Mercantile Exchange, the lowest close since May 26, 2005. Futures touched $50.53, the lowest intraday price since May 25, 2005. Prices are down 23 percent from a year ago. There was no floor trading in New York yesterday because of the Martin Luther King Jr. holiday.

I'm fond of mentioning the market will do everything it can to humble you -- and it has a hell of a lot of tools at its disposal. Well, on January 89 I wrote that OPEC's discussions may give oil a price floor. Boy was I wrong.

I was watching Bloomberg TV earlier today and heard the Wachovia analyst mention OPEC's previous cuts were not fully implemented yet. This was why OPEC is not looking to cut production again. He also mentioned that stockpiles of oil are high right now, further depressing prices.

It is looking like technically, the big up-coming price level is $50/bbl.

NY Manufacturing Index Drops Sharply

From CBS MarketWatch

Manufacturing activity in the New York area declined sharply in January, the New York Federal Reserve Bank said Tuesday. The bank's Empire State Manufacturing index fell to 9.1 in January from a revised 22.2 in December. This is the lowest level since the summer of 2005. The drop was much greater than expected. Economists were expecting the index to slip to 20.0 from the initial estimate of 23.1 in December. The indexes for new orders, shipments and employment also fell sharply. The inventories index dropped to its lowest level in well over a year.

From the survey; trend of a particular indicator:

New Orders: Down

General Business Conditions: Down

Shipments: Down

Prices Paid: Up

Number of Employees: Down

Average Workweek: Down

Expectations in six months and the trend of a particular indicator:

General Business Conditions: Down

New Orders: Down

Shipments: Down

Short version? This report stinks.

National Retail Federation Says Holiday Sales Were "Subdued"

According to the National Retail Federation (NRF), retail industry sales for December (which exclude automobiles, gas stations, and restaurants) rose 3.9 percent unadjusted over last year and increased 0.4 percent seasonally adjusted from November. November industry sales were revised down from 6.3 percent unadjusted to 5.1 percent unadjusted.

December retail sales released today by the U.S. Commerce Department show that total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) rose 0.9 percent seasonally adjusted from November and increased 3.6 percent unadjusted year-over-year.

“Unseasonably warmer weather and the slower housing market had a clear impact on consumer spending,” said NRF Chief Economist Rosalind Wells. “NRF expects these subdued gains to continue into the first half of 2007.”

Last month was the second month in a row where I took issue with the official government number. This type of news release leads to me to believe the new official Census sample is a bit off and will again be lowered with the next consumer numbers.

link

The Coming Week

This week we get some really important reports.

CPI (Thursday) and PPI (Wednesday) top of the list. Over the last few weeks, several Fed governors have come out and essentially said inflation is still too high above their comfort zone. This at a time when the official BLS numbers were pretty good on the inflation front for the last several months. Keep an eye on the alternate Fed inflation measures from the Cleveland and Dallas Fed. I'm suspecting these numbers are more important for the Fed than they are letting one.

We get two regional manufacturing reports; the New York (Tuesday) and Philly Fed (Thursday). Let's see how these jibe with the recent uptick from the ISM national survey. We also get industrial production.

Finally, we have housing starts on Thursday. Housing is still in a slump. As I have written before, I don't see a bottom yet because inventories are still very high and sales are still decreasing.

How Do the Markets Look After Last Week's Rally?

Here's a chart of the SPY's from Stockcharts.



The SPYs closed at $143.24, a touch higher than the $142.89 from mid-December. However, notice the lower volume total for Friday's close. New highs should be accompanied by increasing and/or high volume to indicate excitement. The lack of rising or strong volume makes the rally a bit suspect. The lack of high volume is not fatal, however. It's just something to keep our eyes on.

Here's a chart of the QQQQs:



Last week the QQQQs had a good rally with decent volume. Friday's close was above the highs of mid-December. This chart gives us some good upward momentum for the coming week.

Here's a chart for the Russell 2000 (IWM)



This is not a good chart for future upward moves. Last week's rally didn't break any new levels and occurred on decreasing volume. In other words, traders were less excited about this particular market index. Increasing prices on decreasing volume has all of the hallmarks of a reaction rally, implying the IWMs may be moving lower.

So, we have the QQQQs in a good technical position for the coming week -- rising prices with good volume. The SPYs are a bit suspect because of the lack of volume, but it's not fatal. The IWMs would need strong upward movement with better volume to break-out.

And here's my usual caveat: technical analysis isn't a science. The market's will do everything they can to humble you at every turn.

Weekend Weimar

This is the exact same look I get every morning before I walk my two -- an 11-Year old female named Kate and a 2-3 Year Old male named Sarge. They will sit there and just stare at me.

I'm traveling this weekend, so I won't be posting until Sunday night.

Have a good weekend.

Import Prices Up 1.1%

From the BLS:

Import prices rose for the second consecutive month in December and the 1.1 percent increase was the largest monthly advance since May. The price index for overall imports also increased for the fifth straight year in 2006, advancing 2.5 percent after more substantial increases of 8.0 percent and 6.7 percent in 2005 and 2004, respectively.

A 4.8 percent increase in petroleum prices was the largest contributor to the overall December rise. Petroleum prices resumed their upward trend after declining 21.5 percent for the three-month period ended in November. The index rose 6.2 percent overall in 2006, the fifth consecutive year the index advanced, but the smallest annual increase over that period.

Nonpetroleum prices increased 0.4 percent in December after a 0.9 percent advance the previous month. Prices for nonpetroleum imports rose 1.7 percent over the past 12 months after advancing 2.4 percent and 3.7 percent in 2005 and 2004, respectively. The December increase in nonpetroleum prices was driven by a 1.5 percent rise in nonpetroleum industrial supplies and materials prices. That advance in turn was led by higher prices for natural gas, up for the second consecutive month, metals and chemicals prices. The price index for nonpetroleum industrial supplies and materials increased 4.5 percent over the past year.

There is good news for Fed watchers in this report. Note that nonpetroleum import prices are showing a decreasing trend. On an annual basis, they rose 3.7% in 2004, 2.4% in 2005 and 1.7% in 2006. That annual trending decrease may rekindle speculation about a rate cut in the coming year.

In addition, oil prices have dropped in a big way since the beginning of the year. Depending on oil's price action for the remainder of the month, this may make the 1.1% increase in December nothing more than statistical noise.

The December to December percent changes in commodity imports was 2.5% for 2006, which is a decrease from the 8% increase in the December to December 2005 period. A decrease in oil prices is the primary reason for the drop.

Retail Sales Increase .9* in December

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $369.9 billion, an increase of 0.9 percent (±0.7%) from the previous month and up 5.4 percent (±0.7%) from December 2005. Total sales for the 12 months of 2006 were up 6.0 percent (±0.5%) from 2005. Total sales for the October through December 2006 period were up 4.9 percent (±0.5%) from the same period a year ago. The October to November 2006 percent change was revised from +1.0 percent (± 0.8%) to +0.6 percent (± 0.2%).

Yes, there's an asterisk in the title for a reason. I have a serious problem with this number.

First -- allow me to pat myself on the back. From CBSMarketWatch:

Retail sales increased a revised 0.6% in October and 0.7% excluding autos. This is down from the initial estimate of a 1% gain in overall sales and a 0.9% ex-auto gain.

Regarding the last report, I noted:

So, while the Census data says retail sales increased at a high rate in November, all other surveys say sales of various retail sales components decreased. There is an important difference in methodology in the other reports because they are seasonally adjusted. However, using the old Sesame Street game "One of these things is not like the other one" we come to the conclusion the Census will probably lower their numbers for November.

OK -- self-congratulation over.

Regarding the new .9% increased, consider the following from the International Herald Tribune on January 4th:

Industry sales at stores open more than a year rose 3.1 percent in December, making the holiday season this year the slowest in two years, the International Council of Shopping Centers said. Federated Department Stores' sales rose less than analysts anticipated, and Gap lowered its profit forecast by 18 percent after sales declined.

Slower growth threatens holiday-season profits, which account for almost a third of the industry's annual earnings. Retailers discounted flat-screen televisions, while cold-weather clothes went unsold during the warmest December in a decade.

The slowdown is also an indication that the global economy might not be able to count on the spendthrift U.S. consumer as much as it has in the past.

"The numbers are going to be less robust than everyone hoped for," said Patricia Edwards, who manages assets at Wentworth, Hauser & Violich in Seattle. "Promotions were high and earnings are going to be difficult across the board."

Sales for the two months of November and December increased 2.8 percent. In 2005, sales for the two months had risen 3.6 percent, while sales for December alone had gained 3.5 percent.

"It's at best a moderate gain," said Michael Niemira, chief economist of the International Council of Shopping Centers. "We have certainly seen a slower pace of spending at the end of the year. That's what we're likely to see in 2007."

The economist at the International Counsel of Shopping Centers was less optimistic about the sales numbers than the Census Bureau's numbers indicate. Considering this guy is paid to help spin numbers positively, his statements are very telling. Even removing gas sales from the total we get an increase of .6% which still seems high considering that less than robust pace reported in early January.

In addition, considering the following retail sale headlines from early January courtesy of the Big Picture:

• Retailers Post Disappointing Sales For December on Heavy Discounts (WSJ)
• Warm weather and gift cards pinch December sales (Marketwatch)
• U.S. Retailers' December Sales Slow on Price Cutting (Bloomberg)
• Time to Take Down the Decorations, Earnings Forecasts (Holiday Sales Tracker)
• Shopping Bags Half Empty
• Retailers Post Disappointing December Sales (AP)
• Wal-Mart Expects Continued Paltry Gains (WSJ)

Basically we have the same problem in December that we had in November. Every other data point suggests a fair Christmas season while the Census says sales were really good. Again -- color me skeptical.

Three Big Tech Companies Issue Earnings Warnings

Chip maker Advanced Micro Devices Inc. fell sharply in electronic trading before the opening bell after it warned that quarterly revenue would fall short of analysts' estimates.

In addition, German software maker SAP posted earnings that fell shy of forecasts and South Korea's Samsung Electronics Co. Ltd. <005930.KS> signaled a tough first quarter on weak demand for flat panel display screens.

We are still very early in the earnings season, so any hard conclusions are not warranted from these announcements. However, the latest rally has been a tech driven rally. So it's important to keep a wary eye on these numbers to see how they play out.

Link

Manufacturing Survey Show Slower Growth

From Reuters

U.S. economic growth will moderate in the first half of this year and manufacturing will likely play its part in that slowdown, according to a quarterly survey of manufacturing executives released on Thursday.

The Manufacturers Alliance/MAPI Survey on the Business Outlook showed a slowing in the first half. But strong balance sheets and liquidity will help businesses weather a profit slowdown during the year.

The survey index fell to 54 from 64 in the Sept. 2006 survey, the lowest since a reading of 52 was recorded in March 2002 and breaking a streak of 16 consecutive quarters above 60.

We've seen similar performance from other manufacturing indicators over the last few months. They have all shown a drop in current activity but higher future expectations. I am a bit skeptical of future expectations, largely because it's difficult to see someone being pessimistic about the six-month outlook unless the economy is in a recession.

In short, it looks like the current expectations for manufacturing are for a slower growth environment.

Good and Bad News in the Unemployment Report

From the Department of Labor:

In the week ending Jan. 6, the advance figure for seasonally adjusted initial claims was 299,000, a decrease of 26,000 from the previous week's revised figure of 325,000. The 4-week moving average was 314,750, a decrease of 1,750 from the previous week's revised average of 316,500.

Here's the bad news: 8 states had 1,000 or more lay-offs caused in part by construction losses. Pennsylvania and Wisconsin each had more than 17,000 lay-offs. On the good side, Florida had fewer construction related lay-offs.

While the overall decrease is good, this is the third week in the last 6 when construction related lay-offs have caused 1,000 or more lay-offs in more than a few states.

Fed President Moscow on Inflation

From a speech yesterday:

On the inflation front, core inflation—as measured by the 12-month change in the price index for personal consumption expenditures excluding food and energy—increased from 1.3 percent in the summer of 2003 to a recent high of 2.4 percent in October. In part, core inflation has been elevated because businesses have raised their prices in response to earlier increases in energy costs. High levels of resource utilization also have added more generally to inflationary pressures.

By my standards, inflation has been too high. I prefer to see it between 1 and 2 percent. The most recent news on inflation has been good, with the 12-month change in core PCE coming down from 2.4 percent in October to 2.2 percent in November. Looking ahead, core inflation likely will ease somewhat further. The deceleration in economic growth reduces somewhat the risk of sustained pressures from resource constraints. And the recent period of lower oil prices clearly is a positive factor.

Although the recent news has been favorable, risks to the inflation outlook remain. Additional cost shocks at this time would be unwelcome, or we could be wrong about reduced pressures from resource constraints. Long periods of high resource utilization are often associated with rising costs and prices. And today, as I mentioned, the unemployment rate is at the low end of the estimates for the natural rate. Growth in compensation per hour over the past year was not much higher than it was in 2004 and 2005. This measure includes benefits as well as wages and salaries. But unit labor costs have accelerated because of changes in productivity. Although the underlying trend is still solid, productivity growth over the past several quarters has moderated from exceptionally strong rates. And down the road, tight labor markets could generate some larger gains in compensation. However, profit margins are relatively high, so some further increases in labor costs could be absorbed by businesses in the form of lower margins.

Another risk to the inflation outlook would be if the recent positive news on inflation turns out to be transitory. Disappointing numbers on actual inflation rates could cause inflation expectations to run too high. If firms and workers expect inflation to be high, they will want to compensate by raising prices and wages or building in plans for automatic increases. In this way, high inflation expectations can lead to persistently high actual inflation.

So the summary on inflation is that the recent price data have been consistent with some easing in core inflation. The key going forward is whether that trend can be sustained and how quickly inflation will move back to the range that is commensurate with price stability. And we need to continue to be vigilant in monitoring the risks to the inflation outlook.

Translation: We're not lowering rates if I have anything to say about it.

Pros See Same Level or More M&A Activity

New Year's Day may have come and gone, but dealmakers would be wise to restock their champagne cellars right away. The high levels of merger-and-acquisition activity that characterized 2006 will likely continue, even grow, through the first half of this year, according to the Association for Corporate Growth. And the main drivers of the deals — private equity firms — will continue to be big players, the member association predicts.

Nearly half of the 1,230 private equity professionals, investment bankers, corporate development professionals, lawyers, and accountants who responded to an ACG and Thomson Financial survey in December said they expect merger activity will increase in the next six months. Forty-one expect M&A activity to stay level, while only 9 percent say the pace will slow down.

At a combined total value of $1.6 trillion, last year's M&A action in the United States came close to topping the $1.7 trillion record for values of U.S. transactions set in 2000. And globally, 2006's worldwide M&A value — worth $3.8 trillion — beat 2000's numbers and was 38 percent higher than 2005's total, according to Thomson Financial. Overall, it was "a banner year" for mid-market and mega deals, says Elliott Williams, president of Mirus Capital Advisors and the Boston chapter of ACG.

The large amount of M&A activity helped to put a bid in the market last year. We'll have to wait and see if it does the same this year.

Link

Trade Deficit Narrows Slightly

From the Bureau of Economic Analysis

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total November exports of $124.8 billion and imports of $183.0 billion resulted in a goods and services deficit of $58.2 billion, $0.6 billion less than the $58.8 billion in October, revised. November exports were $1.1 billion more than October exports of $123.7 billion. November imports were $0.5 billion more than October imports of $182.5 billion.

In November, the goods deficit decreased $0.3 billion from October to $64.7 billion, and the services surplus increased $0.2 billion to $6.5 billion. Exports of goods increased $0.6 billion to $89.1 billion, and imports of goods increased $0.3 billion to $153.8 billion. Exports of services increased $0.5 billion to $35.7 billion, and imports of services increased $0.3 billion to $29.2 billion.

In November, the goods and services deficit was down $5.8 billion from November 2005. Exports were up $14.8 billion, or 13.4 percent, and imports were up $9.0 billion, or 5.2 percent.

A few notes:

1.) With one reporting month left, the 2006 trade deficit is already $15.836 billion shy of the record 2005 level. In other words, 2006 will be another record year.

2.) By far the US' biggest import is oil which comprised 10.33% of total imports in November 2006. On September 22 of last year, the San Francisco Federal Reserve released a study on oil prices and the trade deficit. Here is there conclusion:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

The study had the following graph which illustrates the point:



As oil prices are continuing to drop the trade deficit will probably continue to narrow over the coming months. This bodes well for a decrease in the trade deficit next year.

CEOs More Optimistic

From the Boston Globe:

The Conference Board's index of chief executive confidence rose to 50 in the fourth quarter from 44 the previous three months, the independent New York research group reported yesterday. The third quarter reading marked the first time the index dropped below 50, which reflects more negative than positive responses, since the final three months of 2001.

Growth picked up last quarter as lower gasoline prices, unseasonably warm weather, and rising incomes drove consumer demand, helping temper concerns that a faltering housing market would spread to other areas of the economy. The index of the outlook for the next six months rose to 50 last quarter from 43, suggesting business leaders foresee continued expansion.

This could indicate an increase in corporate expenditures in the coming months which has shown some strength over 2006. According to the Bureau of Economic Analysis' NIPA tables, nonresidential fixed investment increased 13.7%, 4.4% and 10% in the first through third quarter of 2006, respectively. This has helped to offset the decline in residential investment of -.3, -11.1% and -18.7% over the same period. Total nonresidential investment -- which includes real estate and equipment/software expenditures -- accounted for 63.53% of total domestic investment in the third quarter of 2006. Finally, corporations have a ton of cash to spend. According to the Federal Reserve's Flow of Funds statement, corporate savings (undistributed corporate profits) have increased from $364 billion in the first quarter of 2005 to $516 billion in the third quarter of 2006. This is one of the reasons why we have seen so much M&A activity over the past few quarters; corporations have a ton of cash to spend.

So -- confident executives could mean that corporate investment picks up the pace to its early 2006 levels. This would help to offset the decline in residential investment, which the economy as a whole needs right now.

Late Credit Card Payments Increase

From the Houston Chronicle:

Late payments on credit card bills climbed in the summer to their highest point in a year, suggesting that some consumers are feeling financially squeezed.

The American Bankers Association, in its quarterly survey of consumer loans, reported today that the percentage of credit card payments 30 or more days past due increased to 4.57 percent in the July-to-September quarter of last year.

That was up from 4.41 percent in the second quarter and was the highest since the third quarter of 2005, when the delinquency rate stood at 4.74 percent.

Household debt is a huge issue, especially in this recovery. Here is a chart from the St. Louis Fed of total household debt outstanding. Notice how the curve's steepness has increased during this expansion:



Also note that the household financial obligation ratio is now at record levels:



As Tula notes below, wages for this expansion have been stagnant for this expansion. The Big Picture noted that health cost increases are still eating a huge amount of pay raises in the form of higher deductibles and premiums. That leads to the question of, "where is the money for this expansion coming from?" Savings were already at low levels before this expansion began, consumer spending has increased for the duration of this expansion, yet wages for most people are still stagnant.

The answer is debt. Calculated Risk has this chart of GDP growth with and without Mortgage Equity Extraction:



That's a big difference.

As the bill continues to come due, expect this trend to continue.

Many thanks to the wonderful person who sent me the Houston Chronicle article.

Jobs and Wages Are Up. But There's More to the Story

So, the latest jobs report released Friday by the U.S. Bureau of Labor Statistics (BLS) showed more job growth than analysts anticipated, and you practically could hear the champagne corks go off at the White House. The same report that found jobs increased by 167,000 in December also reported that average hourly earnings rose 4.2 percent in December.

Must mean America’s workers are sitting pretty, right?

Unfortunately for the economy and U.S. workers, such short-term trends are misleading.

Looking at long-term wage growth, Jared Bernstein, senior economist for the nonprofit Economic Policy Institute (EPI), puts it this way:

Real wages for most workers, after rising for the first few years of the 2000s, have fallen lately, and despite 14 percent higher productivity, a typical worker’s real weekly earnings are down 3 percent over this expansion. Median family income is down about $1,500 since 2000, and more than 5 million people have been added to the poverty rolls.

Wages and salaries today account for the smallest percentage of our gross domestic product on record, while corporate profits are at their highest level since the 1960s.

In touting his economic policies in the months before the elections, Bush frequently referred to the 6.3 percent rise in the average net worth of an American family between 2001 and 2004, a statistic from the Federal Reserve Board’s Survey of Consumer Finances. But the law of averages here isn’t in favor of working families. For families at the bottom 40 percent of income, the median net worth actually fell.

Another long-term trend is the separation of worker productivity from wage growth. Up to the early 1970s, the two grew together, with productivity 10 percent to 15 percent higher than wage growth. But since that time, workers have sped up their rates of productivity—but their employers have not similarly increased what they pay their employees. Wages now lag by more than 50 percent behind productivity.

Bob Herbert in his New York Times column yesterday highlighted the perversity of a system in which employees work harder but see no correlative increase in their paychecks—not the best incentive for long-term productivity and certainly no benefit to workers. Herbert sums it up this way:

The productivity gains in the go-go decades that followed World War II were broadly shared, and the result was a dramatic, sustained increase in the quality of life for most Americans. Nowadays workers have to be more productive just to maintain their economic status quo. Productivity gains are no longer broadly shared. They’re barely shared at all.

Now, back to job growth. While the superficial BLS stats show the quantity of jobs created, behind that data a darker picture lurks—the quality of salary and benefit levels. What counts is not just the number of jobs created but how well those jobs provide a middle-class standard of living. (There’s a lot we can do about all this—and future posts will highlight elements of a populist economic agenda spearheaded by EPI that we in the progressive movement can rally behind in coming months.)

Jobs are increasing in sectors such as service and health care that, for the most part, offer low wages and unaffordable or no health care and pension plans. Meanwhile, jobs in industries such as manufacturing are in free fall: Between 2000 and 2003, annual manufacturing employment in the United States declined by nearly 3 million jobs and has been largely flat since then. The level of manufacturing employment in 2003 was 14.3 million, the lowest since 1950. It’s easy to pooh-pooh manufacturing jobs as part of the “old economy,” but the fact is that manufacturing jobs provide solid salaries and health and retirement security rarely offered in the industries where we see rapid job growth.

And as Jacob Hacker has shown in The Great Risk Shift, the unemployment rates we hear about omit what Hacker calls “shadow unemployment,” which includes the length of time workers now are unemployed. Writes Hacker:

Statistics on the long-term unemployed tell an equally worrisome story. Despite the sunny job statistics that most of us are familiar with, the share of the labor force experiencing unemployment for a half year or more—the standard definition of long-term unemployment—has in fact grown dramatically over the last generation. Indeed, compared with the late 1960s, the share of workers who experience long-term unemployment during the peak of the business cycle has more than tripled.

Short-term upticks won’t solve these long-term problems, and they won’t go very far to help working families dig out of debt and pay their mortgages on time. As Bonddad reported in December:

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Wednesday, reported that the percentage of mortgage payments that were 30 or more days past due for all loans tracked jumped to 4.67 percent in the July-to-September quarter.

That marked a sharp rise from the second quarter’s delinquency rate of 4.39 percent and was the worst showing since the final quarter of last year, when delinquent payments climbed to a 2-1/2-year high in the aftermath of the devastating Gulf Coast hurricanes.

A recent Center for American Progress report showed the nation’s middle class is in worse shape than ever. Some of the report’s findings:

• From 2001 to 2004, the proportion of middle-class families that has saved three months’ worth of income dropped to 18.3 percent from 28.8 percent.
• To maintain day-to-day consumption, families have taken on a record amount of debt, equal to 126.4 percent of disposable income in the first quarter of 2006, according to the study.
  

In Election Day exit polling for the AFL-CIO, Peter D. Hart Research Associates found only 31 percent of voters felt they and their families could get ahead financially in the current economy—the rest report that they are just keeping up or falling behind. As pollster Geoff Garin summarized:

Among the total electorate, 39 percent of voters said the economy was an extremely important issue for them in this election. These voters broke solidly for the Democrats—voting for a Democratic candidate in House races by a margin of 59 percent to 39 percent.

Or, as economist Paul Krugman says:

The reason most Americans think the economy is fair to poor is simple: For most Americans, it really is fair to poor.

It’s been the pattern of the Bush administration to cherry-pick a few good stats to plump up its failed economic policies. But short-term data seldom work to describe long-term trends—and certainly don’t describe working families’ day-to-day reality of trying to pay the bills.

Payroll Employment and Recessions

The current employment picture is of the main arguments bolstering the soft-landing pundits. So, let's look at the history of employment to see what the establishment jobs market can tell us about a a possible recession. All of the charts below are from the St. Louis Fed's FRED system.

Here is a chart of total establishment jobs.



Notice that establishment jobs continue to increase until right each recession began. This indicates that monthly increases are not necessarily predictive of a continued expansion; job increases can occur right up until the beginning of a recession.

Here is a chart of year-over-year percent change:



This chart gives us something more to work with. Notice how the YOY percent change dropped noticeably before the beginning of the last two recessions. Also note we haven't had a drop of similar magnitude during this expansion. That adds some strength to the soft-landing pundit's arguments.

Here is a chart of the percent change annualized rate of change:



This chart has a lot of statistical noise, so it is not as solid as a predictor. However, notice that before the last two recessions, the annualized percent change hit 0%. But also notice that several times the line hit 0% and the economy didn't hit a recession. That makes this particular economic number pretty soft.

So, what do we know now that we didn't know when we started? That year-over-year percent change in establishment payrolls is probably the best employment predictor of recessions; it has dropped sharply before two of the last three recessions. In addition, this chart was last updated on January 5 when the 167,000 payrolls number came out. That means according to this statistic we aren't near a recession yet.

It's important to remember that hiring is an incredibly important business decision -- perhaps one of the most important decisions a business makes. That makes these numbers very important.

It's also important to remember there is no economic holy grail.

Fed Governor Kohn's Remarks on the Economy

Uncertainty about where we stand in the housing cycle remains considerable. In part, that is because this housing downturn has differed from some of those in the past in important ways. It was not triggered by a restrictive monetary policy and high interest rates; indeed, relatively low intermediate and long-term interest rates are helping to support the stabilization of this sector. But the current contraction in housing did follow an unusually large run-up in sales and construction and, even more so, in prices relative to the returns on other financial and real assets. Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed. And changes in the organization of the construction industry, with activity more concentrated in the hands of large, publicly traded corporations, may also affect the dynamics of prices and activity in response to the inventory overhang.

In my own judgment, housing starts may be not very far from their trough, but the risks around this outlook still are largely to the downside. Although house prices nationally have decelerated noticeably and appear to have fallen in some markets, they are still high relative to rents and interest rates. Building permits decreased substantially again in November, and inventories of unsold homes have only started to edge lower. We also do not know whether the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations. Even if starts stabilize at close to current levels, those levels are sufficiently low that overall construction activity would remain a negative for the growth of economic activity in the first half of this year.

While the downturn in housing was steepening during the third and fourth quarters, domestic producers of cars and light trucks slashed output in an effort to reduce their elevated inventories, particularly of light trucks (minivans, SUVs, and pickups). In October, light motor vehicles were assembled at the slowest pace in more than eight years. However, production rebounded in the final two months of the year, and, with inventories having come down from their highs last summer, available monthly schedules suggest that vehicle manufacturers anticipate maintaining the pace of assemblies during the first quarter at about the average rate in November and December. Thus, with sales reasonably well maintained through December, the drag from this sector's inventory correction should be ending.

1.) Note Kohn's statements about the housing market imply a bubble exists. He stated that interest rate increases were not the primary cause of the correction. Instead, home price increases, ran up higher "in prices relative to the returns on other financial and real assets." He next states there is uncertainly about what sent prices up. This statement is a bit baffling coming from an economist. When the Fed lowers rates to the lowest level seen in a generation, demand will increase. That's simple supply and demand in action.

2.) "but the risks around this outlook still are largely to the downside". That's not a very encouraging statement, but I believe it is very accurate. Inventories are high, sales are low and household debt is at an all-time high. Short version: there's a ton of supply on the market and buyers are dwindling.

3.) He notes that domestic car dealers cut back production in the fall but has since rebounded. This is what happens when car dealers rely on large, gas-guzzlers as their primary source of revenue during a period of increasing has price.

On inflation:

So, despite the recent favorable price data, I believe it is still too early to relax our concerns about whether the run-up in price pressures in the spring and summer of last year is truly unwinding and whether it is unwinding rapidly enough to forestall a pickup in inflation expectations. Even with the opening of some slack in the manufacturing sector and in homebuilding, labor markets generally seem to have stayed fairly tight, with the unemployment rate at only 4-1/2 percent. Although recent data indicate that labor costs were not rising as rapidly in 2006 as first estimated, labor compensation does appear to have increased more quickly over 2006 than over 2005. Last year's increase in compensation also appears to have outpaced overall consumer price inflation. That development in and of itself does not necessarily indicate an increase in inflationary pressures, especially if it represents a process in which real compensation begins to catch up with the rapid increases in labor productivity earlier this decade. What would be problematic would be a pickup in the growth of nominal hourly labor compensation that was passed through to prices over the next several quarters, or one that was not matched, over a sustained period, by a comparable pickup in the growth of productivity. Eventually, the resulting faster growth of unit labor costs would pose a serious threat to price stability.

Core inflation is still higher than it was just a year ago, and, as I noted, some of the very recent decline may result from one-time changes in relative prices rather than an easing in underlying inflation pressures. A very gradual decline in the trend rate of inflation continues to be the most likely outcome, but that path is still by no means assured, and in my judgment such a decline remains critically important to the sustained prosperity of the U.S. economy.

Translation: We're not lowering rates anytime soon if I have anything to say about it.

He concludes:

In sum, conditions appear to be in place for a good year for the U.S. economy, one marked by growth that is moderate and sustainable and by inflation that will be lower than last year's. The economy appears to be weathering the downturn in housing with limited collateral effects, and inflation appears to be easing with the aid of lower energy prices, well-anchored inflation expectations, and competitive labor and product markets. I am a central banker to my core, so I know that somewhere, somehow, something will go wrong, but you will have to rely on the new president of the Federal Reserve Bank of Atlanta to explain to you next January just what happened and what the implications are for 2008.

I found his speech to directly contradict his conclusion. He mentions that housing's most likely direction is downward. He notes that several regional manufacturing surveys have showed weakness. He notes that future manufacturing expectations are bullish, but it's hard to see people answering a future expectations negatively unless the economy is already in a recession. Inflation is down because of one-time events. There were a ton of negatives in his speech that are difficult to ignore.

Here's a link to the speech. Let me know what you think.

New Floor on Oil Prices?

Oil prices rose Monday, supported by reports that OPEC oil ministers have begun talks on another potential cut and worries about energy shortages in parts of Europe as the fallout of a dispute between Russia and Belarus.

The rebound came after last week's plunge amid a warmer-than-normal winter in the U.S. Northeast, a key region for heating oil demand.

Russia's Interfax news agency reported that Belarus had ordered a halt to deliveries of Russian oil that goes via its territory to Germany, Poland and Ukraine.

The head of the Russian state pipeline operator Transneft, Semyon Vainshtok accused Belarus of siphoning off Russian oil destined for Europe since Saturday, the RIA-Novosti news agency reported.

OPEC is notoriously undisciplined, so any news about a production cut has to be taken with a grain of salt. However, this is the third time in the last 6 months we have heard about OPEC looking to cut production in some way.

I should also add that the latest oil price drop coincided with another "rebalancing" of a Goldman Sachs commodities index.

I can't speak to the geo-political situation in Eastern Europe. However, it may provide a short-term bump in prices.

Link

The Week Ahead

Next week is a light data week. The international trade position comes out on Wednesday. I would expect this to drop a bit, especially as oil has dropped in price. The import/export price index comes out on Friday.

Finally, we get retail sales on Friday as well. This should be interesting. Last month's number raised eyebrows with its 1% gain. I was extremely skeptical of this number, largely because all of the other retail numbers that came out at that time were nowhere near that good. I'm curious to see if the Census Bureau lowers that number.

There have been a ton of large deals over the last few months that have fueled the market higher. If we see some more of this large M&A activity I would expect the market to continue higher. However, we'll be bumping up against the interest rate environment as the market moves higher.

Weekend Weimar

More Thoughts on Last Week's Market Action

From the Street.Com

Investors' repositioning for the new year collided with interest rate fears to kick off 2007 with trepidation and anxiety running through the financial markets, with the notable exception of tech and biotech stocks.

Friday's stronger-than-expected jobs number forces the markets to wrap their arms around the idea that a recession is unlikely, and that is a relief. But they also need to embrace that the Federal Reserve is not opening the door to rate cuts anytime soon, and that is disappointing to many investors.

The minutes from December's FOMC meeting, released Wednesday were, in sum, hawkish in that the Fed maintained a bias toward tightening amid concern about inflation. That wasn't a big surprise, but an early morning rally reversed when traders realized the central bank was not discussing a move to a more neutral policy stance.

Friday's stronger-than-expected 167,000 non-farm payrolls report was a surprise, given payroll processor ADP's earlier employment forecast of 40,000 jobs lost in the month. To cut rates, the Fed would need to see some softening in the labor market to mark a true slowdown in the economy.

Let's put the market on the couch to see what it is thinking.

As the chart's below illustrate, the S&P, NASDAQ and Russell 2000 were all either in a trading pattern (SPYs and IWMs) or had actually sold-off a bit (QQQQs) over the last few weeks/months. Trading patterns mean supply and demand are near equal in the market; there is no reason for buy aggressively, but no reason to sell. So the markets have been waiting for something to happen. The question is, "what are they waiting for?"

The general consensus is the markets are waiting for a clear sign regarding interest rates. The economy slowed do 2.2% growth in Q3, indicating the possibility of a Fed rate hike is a bit higher. At the same time, most market prognosticators have been noting that corporate earnings -- which have done very well this expansion -- would have to come down a bit in a slower growth environment. Putting these two strains together, it seems the markets are waiting for the first signs of either slowing corporate growth to sell or a firm indication on the direction of interest rates.

While the Fed won't come right out and say, "we're not going to raise/lower rates until x," the latest FOMC minutes were pretty clear:

All meeting participants remained concerned about the outlook for inflation. Although readings on core inflation had improved modestly since the spring, nearly all participants viewed core inflation as uncomfortably high and stressed the importance of further moderation. Participants expected core inflation to edge lower over time, in part as the pass-through of higher prices for energy and other commodities ran its course and as the moderate growth in aggregate demand likely led to a modest easing of pressures on resources. Some participants also highlighted the impact that movements in the prices of individual components of the price index, such as owners' equivalent rent and medical costs, could have on near-term readings on core inflation. More generally, participants stressed there was considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside. Moreover, participants expressed concern that a failure of inflation to moderate as expected could entail significant costs if an upward drift in inflation expectations ensued.

That's about as clear as you're going to get from the Fed. Friday's employment number was strong for the current expansion (+167,000). In my opinion, it pretty much knocked the idea of a rate cut back or even off the table for at least awhile.

In short, right now the market's don't have a strong reason to buy based on the idea of interest rates going lower.

At the same time, we have not moved into first quarter earnings season yet. So, we don't have a reason to sell yet based on declining corporate earnings. That means heavy selling action will probably be tempered with some hope for one last quarter of good corporate results.

So -- the market appears to be very nervous about the future, but unwilling to commit in either direction -- at least not yet. That could all change at a moments notice.