consumer confidence

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The Not So New Year

Year end is always an odd time. We pretend that we can wipe the slate clean and that the new year will be unencumbered by the weight of the old. We party – so I hear – and ring in the fledgling as a kind of tabula rasa open to anything.

Not so much. Not this year anyway.

Economies don’t jump from point to point, with each totally free of the consequences of its immediate predecessor. Path dependence, the inertia of past events and decisions, limits just how much novelty can emerge. Or, rather, how quickly novelty can emerge. So we should not expect much in the way of new. The trends are well set. The first few months of 2012 depend heavily on the path traveled in the last few of 2011.

With this caution in mind what can we look forward to this year?

Here in the US the media has made much of the recent spate of relatively good news. The job market looks to have shifted slightly for the better. Consumer confidence has risen steadily. Manufacturing just registered its best month in about half a year. Exports appear to be headed up. Consumers crowded into the shops over the holiday season. And even real estate seems to have hit bottom and is showing signs of a very modest recovery. Add this all together and we could arrive at the conclusion that the US economy is finally rising out of its recent rut and is about to return to a more healthy pace of growth.

We could. But we ought not to.

This string of good news has to be set in its proper context. It represents a return to very modest growth after a nasty lull earlier in 2011. A lull that had many people suggesting that we may even be headed back into recession. On reflection – and for me at the time – a recession was highly unlikely, but the middle months of 2011 left a very sour taste and may be more representative of what is in store that the more upbeat story told by the last quarter’s statistics.

That last quarter has yet to be properly measured, we will get our first glimpse of fourth quarter GDP later this month, but many of the sources of acceleration lifting growth during that period appear too fragile to be sustained much beyond the first quarter this year. This is especially true of consumer spending, which at about 70% of GDP, is crucial to the continued recovery. For all the hoopla about the uptick in consumer confidence we should be wary: it is still stuck at low levels, way below those we see during good times. It seems that consumers are shedding some of the siege mentality that has cast such a long shadow in recent years, but they are still not brimming with confidence. With wages stuck, unemployment lingering, stock prices volatile, and home prices still weak, there are no signs of the kind of support needed to keep consumer attitudes improving. Confidence may no longer be lousy, but it isn’t exactly rosy either.

This is reinforced by the ongoing effort to shed debt. If there is one defining characterization of our current economic cycle it is the effort within the private sector to downscale its indebtedness. Making this more difficult are the twin problems represented by low inflation and a horrible wage outlook. Higher inflation lifts the debt burden because debts are repaid in devalued dollars. And, obviously, people find it easier to pay down debt when their incomes are rising rather than stagnant. Given that inflation is unlikely to balloon upward any time soon, and that wages will remain a poor stepchild to profits, freeing up extra cash to pay down debt has to come at the expense of current consumption. The year end buying spree appears to have been fueled by heavy discounting by retailers coupled with the development of new frugal habits on the part of consumers. The moment those discounts end so too will the spending spree. Indeed within the past two weeks there is ample evidence that a slow down has already started and that consumption has slipped back to a lower pace.

So the outlook for demand is one of modest, unspectacular growth. This will feed into corporate budgeting and spending plans for the new year. The year end increase in manufacturing was somewhat misleading: half of all industries declined, and the bigger increases were in those where exports play a key role. Domestic activity is so-so, and export driven growth will depend, naturally, on the outlook for foreign markets. To say the least this makes for a problematic forecast. The Euro zone seems set for recession, and both the Chinese and Indian economies are showing signs of slowing. So trade may not be the positive factor that it has been recently. Further, corporate plans will now have to be set in the context not just of modest demand, but also within a very unstable political framework. It is a massive understatement to say that the farce of our political process heightens uncertainty. The political division splitting the voting public is now so large that it will not be healed in one election cycle. So we can expect repeats of the lunacy of the debt limit “debate” and the near total breakdown of consensus over what ought to be simple policy actions such as extending unemployment relief. Consumers and businesses trying to decide on what to do, and whether to spend, can only be made more cautious by the constant lurching about that now passes for leadership in Washington. So uncertainty is not diminished, nor will it be once this never ending election finally takes place.

Given this, I don’t see how the economy can accelerate. This is especially true since the fourth quarter is likely to have seen growth around 3%. Europe’s determined march into recession will harm US growth, which looks set to be slower of its own accord anyway. My view that GDP will chug along at about 2% still stands.

So 2012 is not as new as we might like. Indeed it will be more a repeat of 2011. Given where we were at the onset of the crisis, that may appear as improvement, but our inventory of unused resources is still too large for us to take much satisfaction. Our lack of nerve, our lack of leadership, and our loss of memory of sound policy are costing us dearly. 2011 was not good. 2012 will not be much better.

That’s simply not good enough.

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Winding Down The Year

We have had a flurry of news this week causing the stock market to bounce around in near frenetic glee. If you to believe that the markets are even vaguely rational, which hopefully you are highly skeptical of, then have cause for optimism. If you’re like me and regard markets as deeply flawed and easily misled, then you end the year with more of a yawn.

The news, you see, adds up to more of the same.

Earlier in the week we heard that housing starts had risen from an annual rate of 628,000 in October to 685,000 in November. This set off a market rally presumably because the perennial optimists there wanted something to offset the gloom and despondency settling in from Europe. But a cursory look at those starts numbers tells a story of continued drift: they are weak, albeit not quite so weak as before. Yes, its true that recoveries sometimes start with small steps. And it’s also true that we have to pass through 685,000 on the road to the kind of numbers we associate with a healthy economy. So this week’s very modest uptick is, indeed, a good move. But it isn’t the end of the crisis. Far from it. Housing has a very long and painful road to haul before it reaches the safety of normal growth.

So why did the markets react so strongly?

Because there are other small signs that real estate has touched bottom and has started its climb out of the hole.

On Monday we read the monthly index of home builder confidence. It too was up from the prior month. In this case the most recent reading is for the beginning of December: the index now stands at 21, up from 19 in November. This is, of course, an almost derisory reading. This is one of those indices where a reading of over 50 is considered strong because at that pint over half of all respondents state they are experiencing better business conditions. So 21 is still pretty pathetic. But, yes, it’s better than 19. This is hardly the stuff of legendary growth though, so we are all entitled to look on the market’s reaction as one of clinging to even the slenderest of slender straws of hope, rather than as a sign of a great turn about in our fortunes. Still, we should note that the index has registered three straight improvements so there are signs of stirring.

Adding to the signs of life was the sales of existing homes release on Wednesday. It too rose, from an annual rate of 4.25 million homes in October to 4.42 million in November. Once again the cautionary note holds: this is still a lousy performance. Just not as lousy as before. The problem with this news report was hidden in the details. The National Association of Realtors, not exactly an objective source in the best of times, is the group compiling this report, and they used this month to alter their numbers going back to 2007. The adjustment knocked about 14% of the accumulated number of sales between 2007 and 2010. So the decline was more severe than we first were led to believe. This downward adjustment is in line with similar moves in other indices – recall that GDP itself was significantly reduced a few months back, meaning that the recession was much worse than we thought it was as we went through it. Since housing, and the ridiculous overvaluation of our property, was at the heart of the crisis, it was inevitable that housing sales were also over-reported during that same period.

The week’s real estate news ended this morning with the data on new home sales. Again there was a very slight uptick, from an annual rate of 310,000 in October to 315,000 in November. I won’t bore you by adding my well worn caveat. Just be aware that this, too, is pretty lousy.

Amidst all this real estate news we also heard that third quarter GDP was revised downward, from 2.0% to 1.8%. This seems not to have set off a negative move in the markets. Although it ought to have done. The main reason for the revision down was that consumer spending was 0.4% less than first estimated. Given that our hopes for a solid recovery hang, by and large, on consumer spending, this is not good news. Couple it with today’s report that personal spending and incomes were essentially unchanged – both grew 0.1%, weaker results than the prior month – and it is very difficult to articulate a credible argument that we about to spring to life and see GDP growing at the oft forecast rate of 3.0% next year. There just isn’t any momentum carrying us to those kinds of heights.

But the optimists keep on forecasting that way. Sooner or later I suppose they will be correct. Not yet.

Two other reports give the optimists support: weekly claims for unemployment assistance, and consumer confidence.

The claims data has shown a steady improvement in recent weeks. They are now down at 364,000, well below the rotten readings of 400,000+ we saw all summer long. And nowhere near the awful numbers we saw at the height of the crisis. This is an indication that the labor market is firming up a little. Before we get too far ahead of ourselves, though, we need to remind ourselves that claims should be a further level down before we can think of the labor market being healed. Typically we see claims below 325,000, sometimes much lower, in better times. So there is work yet to be done. Although we have clearly made a start.

That things are improving a little is also reflected in the modest upturn in consumer sentiment, which according to the monthly University of Michigan survey, rose to 69.9 in December, from 64.1 in November. More interestingly is the fact that each successive revision of the December figure has edged the total upward, implying that a trend is developing that might carry over into next year. Once more I warn you to be careful getting carried away with this news: in a good year this index regular scores above 90, so we have a long way to go. But, as with all this week’s figures, an improvement is welcome however modest it is.

So.

What does all this mean?

Well, not a great deal.

The economy is clearly improving. After all this time it darned well ought to. The debate now centers on the rate of growth that this improvement will lead to next year, and to the political ramifications that such growth may have.

This is where I remain on the cautious side. My view is that the economy is set for a very modest year. That means, in my mind, GDP growth between 2.0% and 2.5% for most of 2012. This contrasts with the more optimistic forecasts being produced on Wall Street where 3.0%+ is frequently mentioned. The key will lie in how consumption fares. With unemployment down, but still way too high; with wages flat; with debts still to be reduced; and with no sign of a burst of business investment around the corner, I just cannot see a source of strong consumption growth. If we throw in the plight of Europe, where recession surely beckons, and the possibility of slower growth in China, the outlook for trade to provide an acceleration is also reduced. Indeed, the international outlook provides a strong chance of damage rather than help to our growth prospects. Throw in the contraction in Federal and State spending we are most likely going to see next year, and nothing appears to provide a justification for anything other than a forecast more sideways than upwards.

Anyone, like me, who thinks that recoveries from crises centered in finance – as this was – are much more difficult to recover from, has to look at next year as another year of relative stagnation. Our banking system still is unwieldy and dangerous – our banks remain way too big, too powerful, and too subsidized for our economy to grow strongly without igniting another collapse. Our debt levels are still way too high. And households are still too fearful of the future to impel us forward. We, most likely, have another two or three years of adjustment to go before we arrive back in calm waters. Between now and then the risks are all on the downside.

Then there is the endless political farce being played out in Washington. This week’s ridiculous Republican attempt to raise payroll taxes back to there pre-stimulus levels is an example of the immense damage we could sustain from the radicals in Congress. So hell bent are they in overthrowing the last seventy years of settled policy that they nearly drove our economy over the cliff once again. We live in a time of absurdist politics, where a small group of extreme radicals can sustain an attack on our economy and use the chaos of the crisis as cover for their enormously regressive agenda. In many ways the uncertainty added to our outlook from this attack hangs as the darkest risk on the horizon. Political risk is something we are used to ascribing to minor economies the world over as unbalanced regimes extract a toll on their nations. We are not used to describing the US in those terms. Yet we ought to. In my view the greatest weakness we have, and a potential source of the greatest damage to our prospects, is the radical wing of the Republican party and its attempt to double down on Reagan era mistakes. That the GOP presidential candidates all have to bend to the radical’s will – no one has the courage to stare them down and lead the Republicans back to the center – tells me that, were one of them to emerge as president, we should expect more extreme policies and a period of greater instability.

Romney’s preposterous statement that Obama is undermining free enterprise demonstrates this problem. Romney is allegedly a centrist. His claim is an overt pandering to the radicals who seem not to realize that corporate profits are at all time highs right now. We will not solve our problems by giving more away to big business, and, more particularly, to managers of big business – especially the banks. As I have said many times before: these are great times to be a corporate CEO or shareholder. The economic game is rigged already in their favor. Change will almost inevitably have to be away from business towards the people if we are to improve our economy. So the radicals want to go in exactly the wrong direction. That Romney cannot resist them does not augur well for the country.

Which is a shame, because Obama surely needs a firm kick in the pants to get him to act decisively. An opposition based upon obstruction is neither loyal nor productive. We need sensible alternative policies for the nation to debate. We do not need the radical libertarian anti-social and deeply divisive policies that currently pass for the GOP platform.

So, as the year winds down the economic news is modestly on the upside. But the political risks are mounting. Hence our need for continued caution when we try to predict the economy’s performance over the next few years.

More of the same, in other words.

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Midweek Round-Up

This is getting monotonous: leave the news for a few days – as I did over the weekend until yesterday – and nothing much changes. We live in an era of economic nuance rather than change. Except for the Euro, of course, but that’s for tomorrow. Today let’s catch up on the data so far this week.

First up we heard Monday that sales of new homes edged up to an annual pace of 307,000 in October. That’s better than September’s 303,000, but not much. And it was a lot worse than the widely quoted forecast of 320,000. The median prices of these sales dropped by a further $1,000 to $212,300, and the unsold inventory also dropped to about 6.3 months worth of supply. Evidently the real estate market is still mired in its slump despite record low mortgage rates and continued weakness in prices.

As if to reinforce this picture on Tuesday we read that the Case-Shiller index of home prices slipped again. The latest data we have is for September and records an 0.6% drop in prices, bringing the overall decline to 3.6% over the last twelve months. There isn’t much to add to this other than to point to the very thin dataset – there just aren’t that many sales in each area nowadays to provide a robust sampling of activity. So these numbers are to be taken with a large dose of salt. Still, given all the other evidence, it is clear that our real estate woes linger on.

In brighter news the Conference Board reported that its measure of consumer confidence jumped strongly in November, rising more than 15 points to reach 56. This was the largest monthly increase since 2003 and lifted the index from the miserable 40+ range recorded in the revised October figures. So consumers appear to be headed into the holiday spending season on something of an upbeat mood. But let’s not get carried away – in a good year this index typically reaches the 90+ range, so we are a very long way from a healthy consumer attitude. Interesting details within the guts of the survey include the fact that the number of consumers planning to buy a home sometime in the next six months ticked up slightly – to 4.7% of consumers; and the expected rate of inflation dropped from 5.8% to 5.5%. This latter point is interesting because actual inflation, as measured by the official statistics is much lower than that and also trending down. Clearly consumers are facing a different price experience than that reflected in the government data. Or, perhaps more likely, they are unduly influenced by one or two items that have been more volatile, whilst overlooking other items that have declined in price.

They may, of course, also be reflecting the decline in real earnings caused by the combination of flat wages and slight inflation. Either way, it would be reasonable to expect consumers faced by a 5.5% inflation rate to accelerate some purchases, especially if they perceive that wages will lag nominal prices. This expectation may be one reason that retail sales have edged up a bit lately despite those flat wages.

Next came the even better news in the ADP payroll data: private sector payrolls jumped 206,000 in November, the largest one month gain in almost a year and twice the rate of growth we have seen over the past few months. This is clearly a much better performance in the employment market and suggests that the total payroll outlook – including government employment – may also have improved. It is very difficult to get a good read on the overall job market at present because the government side of the ledger is experiencing a significant shift. The large scale reduction in workers at the state and local level seems to be over: employment there is now fairly constant. But we about to see a much more aggressive shedding of federal jobs as defense payrolls are trimmed as the Iraqi and Afghanistan military ventures are unwound. Because of this it looks as if the unemployment rate will stay unchanged, so all that good news in the ADP data may amount to little improvement after all.

Lastly, and back to real estate, there was a jump in pending home sales in October. These are sales where a contract has been signed, but the transaction has not yet closed. They were up 10.4%, a very strong performance. The main strength coming in the Midwest where they rose 24.1%, and the Northeast where they rose 17.7%. In contrast the West saw a 0.3% decline. Overall pending sales are up 9.2% over this time last year, so those low mortgage rates and weak prices are inducing some consumers to enter the market. Whether this pace can be sustained is more a function of future incomes, employment prospects, and inflation.

And that remains an enigma.

So the news this week – so far – has been the same kind of mixed bag we have experienced for months now. There is no sign of a weakening trend, but the ongoing improvement is sketchy at best. Toss in our perpetual election cycle during which it will be next to impossible to get a policy shift and the prospect for the next few months stays the same: a long slow sideways crawl fraught with risk and downside possibilities.

No change in the outlook. No change in policy. No change in much at all. At least not based on this week’s numbers.

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Weekend Round Up

It’s been a busy week. Particularly for sundry European leaders. Here’s a few suggestions for your consideration over the weekend.

Are stock markets really that stupid?

The extraordinary jump in the world’s various bourses at first sight of the Euro “solution” was out of proportion to the likely success of said solution. Actually it isn’t really a solution at all. It is a heavily disguised punt. None of its key features are what they seem. The haircut on the debt is voluntary. A hair cut is a great idea: let’s face it the Greek debt is nowhere near as valuable as the numbers the banks are carrying on their balance sheets. I would guess it’s worth about 20% of that carrying value. Nonetheless a 50% hair cut gets us closer to reality. The problem is that the hair cut is voluntary. There is no enforcement.

Why not?

Because to make the hair cut involuntary would open the door to the deal being called a default – as it it isn’t already. That is an odious word in the fantasy land of banking. A default would trigger all sort of doomsday activity, most of all in the credit default swaps market. The banks, you see are all terribly clever: they take on risk assets in order to make a profit from the risk, but then insure themselves against any losses from that risk by buying credit default swaps. Which they naturally buy from other banks. So the risk is shunted about within the banking system and ends up … who knows where? The world’s regulators have let this “pass the buck” activity grow so far out of control and undocumented properly to boot that everyone is terrified of what would happen were the banks to start making claims on this insurance. The losses implied by the hair cut could rumble about the system and destabilize banks in every corner of the globe. So no one wants to trigger a default, lest we unleash a second coming of the Lehmann debacle.

Here’s the silliness of this: the banks would thus have to book larger losses. Or at least those whose risks are properly offloaded. So, why in heaven’s name would they voluntarily take a hair cut? They would end up worse off.

But no one wants the hair cut to be involuntary.

Oh, what a tangled web the banks have us caught up in.

A second part of the Euro solution is it’s rescue fund. Hitherto that fund has been far too small to cope with the bail out of debtor like Italy – the world’s third largest issuer of sovereign debt. It can cope with small fry like Greece, but not the bigger nations now being sucked into the Euro collapse vortex. As the markets slowly realized this, the orthodox view became the rescue fund needed to top a trillion Euros. For some reason this magic number was seen as sufficiently large that it could act as a firewall: the crisis would crash against that bulwark and then ebb away as investors realized there was enough cash to keep the market alive.

So, hey presto, the negotiators conjure up a fund of over one trillion. The market heaves a gigantic sigh of relief and rages upwards. But. That magical figure is an illusion. It is the result of a proposal rather than a check arriving. The proposal is to – get this – leverage up the existing fund. Yes the bulwark against the debt crisis is the same leverage trick that sank Lehmann.

Whether the private sector can produce the debt implied in this plan I doubt. Especially when the furor dies down.

Meanwhile the most glaring deficiency in Europe – the lack of a clear lender of last resort – goes unaddressed. That means, in my view, the crisis will perk back to the boil as the next few months go by and everyone realizes that continent wide austerity is making debt problems worse

Governments cannot create jobs, but they can destroy them.

Poor Krugman. He’s beside himself this morning. I sympathize. The Republicans, whose mantra has been that the government cannot create jobs through spending – rubbish, but let’s ignore that for now – are apoplectic at the thought of all those job losses implied by cuts to defense spending.

Say what?

I admire the Republicans for having the nerve even to try this particular example of contorted mental gymnastics. It takes a very special mind to reason that defense spending is somehow not the same as any other kind of government spending. The thought is this: when the government hires a teacher, that is not job creation. When the government hires a soldier, that is most definitely job creation. More to the point: paying to build a school does not add to the economy and does not employ people. Building missiles does both. Ugh.

This twisted thinking sets a new low standard for even our political class. Yet here we are: the Republican leadership is all atwitter over the enormous damage to our unemployment problem were we to cut the offense defense budget. Just think of all those unemployed missile makers and generals. The horror. But slashing police, firefighters, and teachers from the payroll, which is what cutting domestic government spending amounts to, is somehow just fine.

There are words to describe this nonsense, but I defer using them for fear of hurting your ears.

Consumers to the rescue!

Well no, but if you are a breathless stuffed-shirt cable television expert it sounds nice to say so.

Today we learned why, or at least how, the third quarter GDP figures were as strong as they were. Don’t forget I don’t consider them strong at all. It turns out that in September, consumers spent way more than they earned. The savings rate dropped to 3.6%, it lowest since late 2007, while personal incomes rose a miserly 0.1%. Meanwhile consumer spending jumped 0.6%.

That doesn’t look like a sustainable trend to me. It looks very much like an end of summer blip.

It isn’t exactly rocket science to argue that spending cannot outstrip incomes for too long before we find ourselves back in a debt created mess again. Given that all signs indicate households are still trying to cut debt and not acquire it, the September reversal in the savings rate should be an aberration.

The implication is that the uptick in the GDP consumption category, which as you may recall was the biggest single reason for what growth we saw in the third quarter may ebb away as winter arrives. This means the other categories within GDP will have to take up the slack. Since none appear likely to do so, I think it fair to predict that the third quarter is not the start of a steady increase in activity, but is, more likely, simply another bump in a long list of such bumps along a stagnant road.

Which is what I have been trying to argue all along.

One last thing:

Back to Europe …

Fitch, one of the top rating agencies, says the Euro deal is good for Europe.

This means the deal is almost certainly not good for Europe.

Recall that Fitch, like the other ratings agencies, told us that those Mortgage Backed Securities were just amazing. Their brilliant analysis led them to go along with the magic wand trick that turned sub-prime into, not just prime, but AAA prime assets.

These people cannot be trusted to turn a calculator on correctly, let alone actually use one properly.

This is one group of folks whose recent body of work indicts their professional standing. It calls into question their ethical standing too, but that I will leave alone for now. Suffice to say Wall Street is hardly center of virtue.

But you know that already.

Enjoy the weekend.

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Consumers: Grumpy, But Spending

At the tail end of another week dominated by the absurdities of politics – this week we were treated to yet another Republican jobs plan that appears to have no jobs in it – we hear that retail sales rose nicely in September despite the continuing pessimism and general grumpiness of American consumers.

I have said it many times, but it is worth repeating: these kinds of contradictory reports are typical of an economy adrift rather than moving in any particular direction.

The retail sales gain of 1.1% in September was a bit of a surprise. Most of us thought a number closer to 0.5% would be about right. The big difference came in a modest, but significant enough, rise in auto sales, which bounced back from a weak August. There is a possibility that we should average the two months out to get a better idea of the economy’s rate of travel, but even then there is definitely sufficient strength to prevent notions of renewed recession popping up in conversation. Sales excluding autos rose a more modest 0.6%, but that too was a bit stronger than expected.

Given that both the July and August figures were lifted from their original estimates, it seems that consumers spent at a fairly good clip through the summer, so the third quarter GDP figures could be stronger than the 2.0% I have been predicting. We should, of course, remain very cautious. The GDP consumption numbers do not tie directly with retail sales and so may be weaker, and the sales figures may end up being revised down. Having said that there is enough evidence for us to assume that poor consumption will not be the cause of an overall downturn any time soon. But nor will consumption drive us forward either: even though retail sales stand about 8.0% above where they were last year, demand is just too weak for us to think in terms of a steady or robust period of growth.

This is particularly true when we take into account the sour mood of consumers.

Today’s news that the University of Michigan measure of consumer sentiment dropped about 2 points to 57.5 in early October, caught many people by surprise: the general feeling was that it would stay around 59. At the risk of being repetitive, the causes of this sour mood are very obvious: wages are weak, unemployment is still high, general prospects are dim, real estate is mired in a deep rut, and our political gridlock is eroding any chance that policies will fix any of those problems. People just seem to be ticked off.

Sure, they’re still buying things, but they are being very careful about what they commit to. The energy and confidence is lacking to pick up the pace, and the feeling is that things will get worse rather than better.

This is hardly the stuff of vigorous growth. But it is the stuff of stagnation.

Lacking leadership, coherence, and ideas we appear destined to limp along for a while.

It need not be thus, but it is. Shame on us all for not being able to solve this mess.

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