11.29.11
Posted in Economic News at 9:45 am by Kevin C. Kaufhold
The US economy may be in a slow recovery mode, but the economic climate in Europe continues to degenerate. The situation has become so difficult that in recent days, the possibility of a euro currency break-up has been openly discussed in governmental and commercial settings. Proposals thought to be radical just a few weeks ago are now being given serious consideration, in an effort to stop the currency from unraveling.
At the root of the problem lies government debt. The central government’s debt of Greece and Italy is unsustainable, at well over 100% of GDP. Several other nations also have exorbitant debt loads. As the graph shows below, the central debt (as a percentage of GDP) of both the US and Germany is much smaller in comparison. Source: St. Louis Fed Reserve, FRED data. Not surprisingly, there has been continued demand for US bonds even with the downgrade by S&P of US ratings.
Investors have been fleeing most euro-zone bonds lately, and even Germany experienced low demand in its bond auction last week. While the initial phase of the debt crisis involved the periphery of Europe (Ireland, Greece), the current phase is hitting the core of the European economies. If the trend continues, some or all EU-based nations may be locked out of the public bond markets, unable to continue capitalizing their debt loads. Sources: Reuters, 11-23-11; WSJ, 11-23-11; AP, 11-28-11.
All the pandemonium is causing ripples, far and wide. Germany has lowered its 2012 output forecast to between 0.5% and 1.0%, down from a projection six months ago of 3%. Fitch has warned on France debt, believing that nation has limited ability to absorb further shocks. Hungary is now formally asking EU and IMF for assistance. Many banks on the continent have been losing deposits from both corporations and general investors. Several US financial institutions are reviewing their bond indentures for contingencies, while currency traders are dusting off old trading systems to develop quotes on older currencies. Sources: WSJ, 11-23-11; 11-28-11.
The ECB is planning closer coordination among member nations, but specifics are generally lacking. It may allow access of its longest bonds to commercial banks, but has been resistant to greater central control without approval by the EU nations. Germany is still opposed to pooling of resources through a system-wide euro bond, arguing that monetarizing debt through a central borrowing function will not install fiscal budgetary control by individual nations. Instead, German officials are reviewing a new proposal to force budgetary discipline upon all members. Under this proposal, the EU would move from a central currency to a fiscal union with a central treasury. Sources: WSJ; AP, 11-28-11. Such a move may bring us closer to a United States of Europe, but since this would take a long time to develop, the concern is that the euro currency will collapse far before a new economic and legal structure is worked out.
Better Conditions at Home. US GDP grew slightly less in the third quarter than previously thought, at 2%. Businesses sold inventories to meet stronger than expected consumer demand. Excluding inventories, the economy grew at 3.6%., an amazing figure compared to 1.6% GDP growth during the summer. Corporate profits rose 2.3% on the quarter and almost 8% over the last year. With inventories likely being re-stocked in the current quarter as well as other data being positive, growth may lean towards 2.5% to 3% by the end of 2012. All this assumes, however, that Europe does not implode. Sources: Dept of Commerce; Reuters, 11-22-11.
Financial Sector. Bank profits are up almost 50% from a year ago, but without much revenue growth. Most of the earnings increase comes from less being set aside to cover bad loans, and lending increased only marginally. Total loan balances also increased somewhat after three years of loan portfolio declines. Small business loan generation is still weak, however. The number of banks on the problem list decreased for the first time since 2006, at 844 institutions. Source: WSJ, 11-23-11. Volatility is increasing in bank stocks, reflecting the heightened uncertainty in Europe.
The Fed announced last week that new stress tests will occur on US banks, with more banks involved this time, and with more disclosure of results. The new test will look at the impact to capital buffers from the stresses of higher unemployment; lower GDP; and further declines in home prices and equity markets. Critics believe these parameters amount to overkill. Source: WSJ, 11-28-11. Further, a “hard landing” in China coupled with continued European turmoil may be more probable scenarios to run stress tests on than marginally worse domestic economic statistics. The tests at least may point towards heightened capital commitments by banks to stave off further problems, whatever the source.
Real Estate Sector. Sales of previously owned homes increased in October by 1.4%, but median prices continued to fall. One in three real estate agents report that at least one sales contract failed in October, due to difficulties in obtaining a loan as well as appraisals being too low to support the sales offer. Another report indicated that it might be until 2020 before all foreclosed properties and shadow inventories are worked through. Sources: Natl Assn of Realtors; WSJ, 11-22-11.
Two million construction-related jobs disappeared in the recession, but the total fallout from the real estate bubble may be much higher. An estimated 800,000 jobs were lost in affiliated industries, and the entire sector was slowing before the official start of the recession. Altogether, 40% of jobs lost between 2007 and early 2010 have been traced to the devastation in the real estate and construction industries. Sources: St. Louis Fed paper of Juan Sanchez and Daniel Thornton; St. Louis PD, 11-27-11, p. D3.
Personal Income Statistics. Discretionary spending has been the lowest of all post-recession environments, at 2.8% in the first nine quarters. 2001 saw 5.8% increase in discretionary expenditures, while 1982 was at 13%. Spending on goods has been more moderate. Sources: Commerce Dept; WSJ, 11-25-11. It seems that people have put off non-essential spending this time around.
The Shifting Nature of Employment. For many years, the US was thought to have a more flexible employment structure than in Europe. US firms are generally free to shed jobs in a recession, generating quick losses in payroll, but also producing a quicker economic turn-around. In Europe, employment is more rigid, with many laws making firms reluctant to hire or fire. Since the 1990’s however, the US economy has developed statistics similar to Europe on youth unemployment, long-term unemployment, and overall joblessness. A theme of chronic and long-lasting unemployment is emerging in both places, but with different causes.
While Europe’s high unemployment is still considered structural in nature, a relative lowering of mobility among the adult US work force may be behind some of the changes at home. Source: WSJ, 11-28-11. This finding is rather new, as the more common thesis for the higher unemployment in post-recessions is that businesses have been using recessions since 1992 to restructure both its capital and labor forces. This generates a far different range of jobs and production techniques in post recessions, resulting in a search for workers with new and varied job abilities. Long-term, such restructurings produce higher productivity, but short-term, it means a far longer out-of-work status, and with some workers never being able to fully recover.
Other International Economies. With recent news focused on Europe, we should be remindful of important economic items in other countries. Japanese exports fell by 3.7%, compared to a year ago. This is mostly due to lowered European demand. The IMF has now warned Japan that its debt is too high, at almost 200% of GDP, which is actually worse than Greece or Italy. IMF; WSJ, 11-25-11.
US multinationals added 1.5 million workers to payrolls in Asia and Pacific in the 2000’s, as well as 475,000 in Latin America, compared to job reductions in the US of 860,000 +. Only some of this was due to outsourcing, with many new jobs simply coming from expansion into new territories abroad. Source: Commerce Dept, 11-22-11. Still, the data implies that lower costs abroad continue to be a larger factor to many corporations that higher productivity at home.
China’s production index is being closely monitored, as weaker demand from Europe and lower construction inside China may be impacting matters there. Export growth, adjusted for inflation and currency changes, may now be down to less than 10%. New housing starts fell 2.2% in the last year, as the government is attempting to reduce rents and real estate pricing. Capital investment in real estate has declined, accordingly. The big concern is whether China can coast to a more sustainable economic growth from its current export-dominated economy. If internal consumption does not make up for declining export activity, the fear is that China may go from a boom economy with inflationary tendencies, to a rather abrupt bust.
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11.22.11
Posted in Economic News at 8:43 am by Kevin C. Kaufhold
The US Congressional Super-Committee failed to reach agreement this week on a deficit reduction plan. The two sides were never that close at any time in their discussions, staying well within positions favored by their own constituent base. The US markets reacted negatively on the news. At least deficit reduction will still occur in the US, albeit rather painfully, with $1.2 trillion in across the board cuts unfolding over the next ten years.
Other countries have also failed to generate lasting budgetary reform. Any serious effort at deficit reduction has been met in numerous countries, including Greece, Italy, and Spain, with severe protests and loss of parliamentary majorities. Both representative and parliamentary democracies, it seems, have lost the ability of a middle-ground solution.
On more mundane (but critically important) economic news, several data tracts point toward continued recovery, with the primary dark spot now being the unfolding drama in Europe. More details below.
US Back in Spotlight. In the wake of the failure of the Congressional super-committee to reach agreement on deficit reduction, both sides immediately fired salvos at each other, with no end in sight to the blame game. In all, it was a rather predictable ending to any effort at sensibly reducing the size of the deficit. Automatic across the board cuts totaling $1.2 trillion over 10 years will now begin to kick in, with $600 Billion alone coming from defense. A constitutional amendment requiring a balanced budget was also rejected in the House. Congress did manage to pass a spending bill however, to keep the government operating and avoid a repeat of the debacle which occurred in August. Still to argue about, Congress will now debate renewing a payroll tax cut and jobless benefits set to expire at the end of the year.
Leading Indicators are Up. The leading economic indicators increased 0.9% in October, better than September when the leading index was essentially flat. Lack of consumer confidence may slow forward momentum however. Source: The Conference Board. Business inventories were flat in the latest month, but retail sales increased 0.5% on the month. Source: Census Bureau. Industrial production rose 0.7% in October, fueled by an increase in autos. Factory output was up 0.5%. Source: Fed Reserve, 11-17-11.
Inflation is Tame. The PPI fell 0.3% in October, but are up almost 6% in the last twelve months. Consumer prices also fell slightly in October, down 0.1%. Falling energy costs were the reasons cited for both indexes dropping. Source: DOL BLS. Excluding energy and food, core inflation has been nil over the past 10 months. This suggests that the inflation occurring earlier in the year was raw-material based, and not consumer demand driven. With many international economies now slowing down, CPI may continue to be moot.
Unemployment Down. Initial claims for unemployment benefits again fell last week to 388,000, the fourth decline in five weeks. Source: DOL BLS. Claims probably have to be above 375,000 however for job growth. Total unemployment benefits also dropped, to 3.6 million (plus another 3 million on extended benefits), which is the lowest level since September, 2008.
Real Estate Still in a Depression. Homes sales declined on a seasonally adjusted basis, to 4.8 million units, down some 10% on the year. New residential construction figures are at 628,000 homes, while building permits increased 11% on the month. Permits on apartment buildings increased markedly, some 30%. Construction of single family homes increased by 3.9% in October. Foreclosure processing is occurring again, but the overall amount of homes in economic distress may be declining, now down to 13%. Mortgage rates have continued to drop, down to 4% in some areas, but almost 15% of all real estate contracts do not close because of lack of bank financing. Sources: WSJ, 11-21-11; 11-17-11; Mortgage Bankers Assn; Natl Realtors Assn; Dept of Commerce. Some analysts believe that home prices will drop another 8% in the coming year, and the real estate market as a whole may not bottom until 2013.
Business Financing and Health. Unlike some areas of Europe, US companies continue to freely access banking and public debt markets, with the aggregate corporate bond premium holding steady at 2.3% above the US Treasury note. Indeed, with investors shying away from European sovereign debt, demand for US corporate bonds may be increasing among retail-level investors. Source: WSJ, 11-21-11. In a replay of the 1990’s S&L refinancing, JP Morgan is preparing to package together bad loan securities, believing there may now be a market for $300 billion in distressed commercial real estate loans.
Fitch is the latest to warn that if the EU debt problems continue, US banks and other businesses may have credit and cash flow difficulties going forward in time. Source: Reuters, 11-16-11. US Secretary Geithner also weighed in this week, stating that the general outlook in Europe is dire. Source: WSJ, 11-16-11. And while many larger US businesses are bulking up on their cash reserves, many corporations have also markedly increased their debt loads, possibly as an additional cushion against a Euro-led repeat of the 2008 US credit crunch.
Doom and Gloom in Europe. Merkel of Germany declared this week that Europe is in its most serious crisis since WW II. Not surprisingly, financial strains have been appearing throughout the continent. Italy sold $4 Billion (US) of bonds this week with a yield over 6%, and secondary markets have pushed yields of Italian debt over 7%. Spain paid 7% for an issuance this week of its 10 year note. Even stronger nations, such as Belgium and France, are experiencing higher band rates. Hungary’s debt could now be reduced to junk status (as a point of comparison, US ten year notes are at 2.01%). Industrial production in the EU dropped 2% in September, the steepest dive since 2009. GDP hardly grew in the third quarter, up only 0.6%, and this set off a severe sell-off in European equity and bond markets. Many economists feel that signs point to the beginnings of a new recession for Europe.
Some countries are seriously considering direct bond sales to their own citizens, while financial entities are planning on raising capital, reducing banking-related services, and slashing jobs. Industrial-based firms have been accessing public bond markets while they can, but are finding higher borrowing costs. Banks have been curtailing their lending of even the larger public companies. Annual costs of insuring corporate debt have soared recently, too. Source: WSJ, 11-11-11. Central banks have been buying massive amounts of gold. The Euro Commission has now suggested a euro-zone wide debt instrument. Germany is adamantly opposed however, believing that it may be eventually stuck with defaults occurring in other countries.
China. The trade surplus in China is down 43.5% from a year ago, to $57.8 Billion in third quarter. The surplus as a percentage of the GDP is also down to 3%, being as high as 10% in 2007. Critics argue that the decline in the surplus is only temporary, and will reverse once the global economy improves again. The changing ratios may largely be driven by domestic investment and not by consumption, which is thought to be necessary for a self-sustaining economy, rather than one overly dependent upon exports. Some businesses are arguing that pegging the yuan to the US dollar amounts to an unfair export subsidy that would trigger WTO tariff penalties. Source: QSJ, 11-16-11.
Main Web-Site at: Kaufhold Company, LLC
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11.14.11
Posted in Economic News at 2:35 pm by Kevin C. Kaufhold
After taking a pounding for the last three years, the US national economy may ironically being faring better than many economic systems abroad. Growth has been modest, but continuing technological innovations, increasing net equity positions by many US businesses, and a work-force that will expand for an entire generation all points toward the resiliency of US economic conditions. Contrast that with overseas, with Europe severely lagging in necessary economic and financial reforms, and China continuing to use centralized policy rather than market dynamics to generate growth. The greatest risks facing the US economy right now may not be from internal constraints but from possible downturns flowing out of international malaise.
The US Economy. 4.4 million job openings now exist, the largest in 7 months. Source: DOL, BLS. This is still below the 5.0 million openings pre-recession, however. With state and local governments contracting, total employment gains may be small in forward months. Many private sector employers are complaining that the openings are not from product demand, but being unable to find the right skill sets. Indeed, much of the current growth in the economy is due to businesses and consumers spending again after rising gas prices and Japanese supply disruptions were felt earlier in the year.
The following graph shows that leading indicators are continuing to improve modestly, after dropping horribly during the recession. Source: St. Louis Federal Reserve, FRED data.
Home prices fell 4.7% in the third quarter, caused by weak demand and over-supply of distressed properties. Source: Natl Assn of Realtors. As a result of increasing grain prices, land previously earmarked for residential development is again being turned back to agricultural use. Source: WSJ, 11-14-11.
Exports have been strong throughout the down-turn, and this trend is continuing, with a record $180.4 billion in exports in September. Source: Dept of Commerce. With a slowdown occurring in Europe however, the real question is how long will exports stay in a good position? Already, GM has lost $300 Million in the most recent quarter in Europe alone.
From a generational perspective, domestic prospects may be in decent shape. The US remains the leader in many technological innovations. Most importantly, the workforce is expected to grow by 37% in 2050, while EU work population will shrink up to 21% in the same time period (from lower birth rates and anti-immigration policies). Even China may experience a decreasing work force, down some 10%. Source: WSJ, 11-12-11.
Europe in Shambles. The long-time Prime Minister of Italy has now resigned after losing a routine vote on budgetary matters. The new government is being led by an economist who pledges growth policies. It will be a difficult task, as bureaucratic and legal inefficiencies are so entrenched that even family-owned businesses tend to not grow once they achieve a niche market. Source: WSJ, 11-14-11. Overall, Italian GDP is only 3% higher than a decade ago. Investor confidence has been shaken, with Italian bond yield briefly going over 7% earlier in the week. Italian debt is now at 120% of GDP, and there is growing concern that the government cannot afford to pay current bond costs, let alone to make new borrowings in the public markets.
Greece has picked an economist from MIT as its leader. The new government wants to take steps towards budgetary constraints, but is facing continuing protests and social unrest from its own population. France is also coming under pressure to meet deficit reduction targets. French debt financing costs have been rising, as result. This was the case even before S&P mistakenly sent out an alert to its subscribers announcing a French ratings downgrade (which was retracted 2 hours later).
Meanwhile, the ECB is having trouble developing a $1.36 trillion (US equiv.) bailout fund. There has been little success in developing external public and private sources. The EU Executive Committee has now dropped growth forecasts markedly for the next year, down to 0.6%. The official comments are even more startling, with the risk of a deep and prolonged recession and continued market turmoil not being excluded.
European banks will likely have to boost capital reserves or reduce their balance sheets. Thus, commercial loan financing is becoming scarce as banks are trying to reduce loan positions. Some businesses have been going to the bond markets in anticipation of future credit freezes. Other firms, such as BMW, have been expanding their credit lines to include numerous banks. There is also an issue with banks not fully disclosuring their exposure to bond defaults. Even when they do disclose their hedges against default, questions remain as to whether the counter-parties on the hedges may have financial difficulties during times of stress. Sources: WSJ, 11-9-11; 11-14-11. In general, many professional-level investors believe that EU banks have not undertaken the painful, but necessary, steps that numerous US financial institutions have already engaged in.
Rest of World. After two years of governmental effort in China, housing prices are starting to fall. But with 25% of its economic growth coming from real estate, it may be a tricky game for centralized governmental policies to lower prices without producing problems in growth. Chinese inflation is falling, as well, coming down to 5.5% in October from over 6% in September. Source: WSJ, 11-10-11. These price increases would be very difficult to accept within a decentralized system, and it is a question how long they can continue in China without an implosion occurring there.
Trade agreements have been sprouting up recently. Russia will be joining the World Trade Organization, after 18 years of negotiations. Also, a Pacific-America Trade agreement finalized last weekend involves eight countries, but may provide the foundation for up to 21 economies to streamline rules of origin and other regulations. This may pose an eventual trading problem for both China and Japan, with both of these governments being known for their excessive trade restrictions that many in the US have complained as being grossly unfair. Source: WSJ, 11-10-11.
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11.08.11
Posted in Economic News at 1:08 pm by Kevin C. Kaufhold
The 2008 recession was the longest and deepest of any drop in US economic activity in the last 70 + years. Gross domestic output is just now returning to pre-recession levels, taking longer than any recession since WWII. On a per capita basis, output remains 3% lower than at the end of 2007. Source: WSJ, 10-31-11. Unemployment will likely remain stubbornly high into 2013, maybe even longer. The current economic climate is certainly not as desperate as it was in the Depression, but is becoming known as the “Great Recession”, with lingering financial after-shocks and tepid growth that will take years to overcome. Now for interesting financial news items.
The Fed Watch. At the latest Federal Reserve meeting, Fed officials stated that EU fiscal and banking concerns have restrained financial markets, with adverse impacts to growth world-wide. Unemployment is now projected at 8.6% into 2012, falling to between 6.8% and 7.7% by 2014. Significant downside risks exist in the Fed’s forward economic outlook. Source: Federal Reserve Board release.
No new actions were taken at the meeting. Chairman Bernanke did indicate that he was ready to take further actions as necessary, however. Buying additional mortgage back securities appears to be high on the agenda. Short-term rates are likely to stay near zero at least through mid-2013. Source: WSJ, 11-3-2011. Fed Chicago President Evans has publicly advocated interest rates being kept at 0% until unemployment drops below 7% or the inflation outlook for the mid-term is over 3%. The implied inflation rate is well contained at the present, hovering at 2.2%.
US Statistics. US manufacturing activity dropped in October to 50.8 from 51.6 in September, with businesses reducing inventory levels. New orders rose; however, and prices for raw materials remained unchanged. Source: ISM Survey. US aggregate auto sales rose 7.5% in October, even though two Japanese auto companies decreased sales as a result of parts shortages occurring from the tsunami and earthquake there. The rise in big ticket items, such as auto sales, is a closely watched indicator of consumer activity. At this point, the increase may simply be due to older vehicles wearing out, and not evidence of a broader consumer-led economic pick-up.
Banks appear to be on a better footing than in 2008, with total equity capital now at $1.5 Trillion. Some banks have even started to loosen lending standards after tightening them severely over the last two years. But fears in Europe are triggering higher costs of insuring against bank defaults, while US money market funds have been pulling away from many European assets, favoring US, Canada, and Japan. Source: WSJ, 11-3-11; 11-7-11.
October employment was up 80,000 jobs, mostly driven by private sector increases in professional services, leisure, hospitality, health care, and mining. However the unemployment rate changed very little, moving down only 0.10% to 9.0%. Source: DOL, BLS, 11-4-11. Job growth probably needs to be above 120,000 per month to keep pace with overall population growth, and more critically, growth in the work force. Analysts had been expecting 90,000 to 100,000 new jobs. New unemployment claims dropped below 400,000 on a seasonally adjusted basis and productivity increased 3.1% annualized since June, 2011. Productivity dropped earlier in the year, so the higher rate currently may be mostly from firms evening out business flows over a year’s time.
US businesses are now holding up to $2 Trillion in cash, acting as cushion against lowered forward growth or a new credit freeze. Of course, not reinvesting the cash into new capital projects has a negative growth impact by itself. Companies are on edge over Europe; however, as the EU accounts for $200 Billion in US income earned abroad, roughly 50% of world-wide totals. The loss of confidence in Europe is definitely making larger US businesses more cautious in their forward commitments. Source: WSJ, 11-7-11.
Drama in Europe. At the outset of the week, the Greek Prime Minister surprised almost everyone by announcing a referendum on the latest bailout proposal. This rocked the capital markets, with spreads between Greek and German yields widening sharply. Source: WSJ, 11-2-11. Germany and France quickly responded, openly threatening Greece with expulsion from the European Union if it proceeds with a referendum. Within a few days, the call for a referendum was withdrawn. But the end of the week, the Prime Minister announced that there would be co-sharing of his elected duties, so that a unity approach could be developed with the political opposition in that country. And so it goes in Greece.
The European Central Bank surprised markets by cutting its interest rate to 1.25% after raising rates twice earlier in the year. ECB continued to resist making itself the lender of last resort. All of this turmoil has caused the issuance of the EU stability bond, the very instrument necessary to actually fund the bail-out, to be put on hold. European banks are increasing their hedges against Greek exposure. They may have bigger problems in any event, with greater total exposure to US CDO’s, credit market assets, and real estate holdings than all bond holdings from the troubled governments. Source: Credit Suisse.
Manufacturing contracted in October at the steepest rate since July, 2009, with the PMI in EU below 50 for the last three months. New orders also contracted for the fifth straight month. Italy has not reduced its regulatory and tax environment, as thought to be necessary to encourage growth there. With Italian borrowing costs now escalating, investors are further shunning Italian debt. Meanwhile, Spain unemployment is a shocking 22.6%, almost as high as US unemployment was in the Depression, and Spain’s GDP was flat in the latest quarter. But Germany, Austria, and the Netherlands are onto a stable if slow recovery, and thus the divergence continues among the 17 member nations of the EU. Unemployment rose throughout the union as a whole, to 10.2%, with 16.2 million now looking for work. CPI is 3.0% throughout the system, while the stated goal is 2%. Amidst all of these problems, copper prices world-wide fell 2% on weaker demand expectations. Even gold has been falling somewhat (although it is still $1,700 / ounce), with foreign investors having to contend with quickly moving currency exchange fluctuations. Source: WSJ, 11-1-11.
Rest of World. A slow-down in world-wide economic growth is becoming more evident in the data. Brazil industrial output has now decreased the last 2 quarters, with the blame being pointed at its soaring currency, crumbling infrastructure, and government bureaucracy. Manufacturing in Asia is also slowing, being somewhat dependent upon exports to EU. The Australian central bank is easing its monetary policy, following both Pakistan and Indonesia. The Taiwanese production managers index (PMI) fell considerably, and output in South Korea is continuing to shrink. China continues to slow its growth rate, as well. Many world leaders are hoping for a “soft landing”, as the staggering 9.1% growth rate in China’s economy is generally considered unsustainable, and may prove difficult for central policy makers to manage.
Main Web-Site at: www.kaufholdco.com
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10.31.11
Posted in Economic News at 11:02 am by Kevin C. Kaufhold
With the economy modestly growing again after sliding earlier in the year (see below graph and commentary), the real issue is the depth of the growth. European activity has been dragged down by continuing problems overseas, while domestically, disposable income has actually turned downward when adjusted for inflation. With much of the world including the US treading water, growth in the domestic economy will be prone to continuing macro-economic shocks and heightened volatility in the capital markets.
Not Enough Growth. The economy grew in the third quarter by 2.5%, driven by consumer spending and capital business investment. Source: Dept of Commerce, BEA. At the same time, inflation-adjusted after-tax income dropped 1.7%. And with less real money to spend, savings dropped as consumption increased on necessary items. Coupled with this, median household income fell 3.2% during the recession, and another 6.7% in the last two years. Source: US Census Bureau.
Even with jobs being added to the economy, it would take 150,000 newly created jobs per month to account for the growing population. The general consensus is that GDP growth must be over 3% for unemployment to drop dramatically. The lack of a solid expansion is leaving many workers still out of work or in part-time status. Budget cuts at all levels of government coupled with a slowing economy abroad may slow GDP growth into the fourth quarter and beyond to 2% or lower. Source: WSJ, 10-28-11; 10-31-11.
Federal Activities. The Fed may be coming closer to new security purchases, with an emphasis on mortgage-backed issues. At least two Fed governors (NY and Boston) are openly in support of another round of quantitative easing, but three others have been concerned about inflationary effects and adverse structural impacts on real estate capital markets. The Fed is also mulling about some options to become more transparent in its economic goals.
The Congressional Super-Committee rejected initial opening positions along partisan lines this week. The Committee faces a Nov. 23 deadline before $1.2 trillion in cuts start to kick in over a 10 year horizon. The cuts would affect both defense and domestic programs.
Income Gap Widens. While many of the objectives of the Occupy Wall Street movement are ill-defined and fuzzy at best, one statistical fact is stark: the gap between rich and poor has been widening for the last 30 years. After-tax disposable income since 1979 has dropped for 80% of the population, with only the top 20% increasing their income levels. The top 1% has more than doubled its income share, by some 275%. Source: US CBO, 10-26-11. With that kind of data, it is no wonder that social protests not seen since the 1960’s have sprung up recently, not only in New York, but around the nation as well.
Corporate Activities. S&P 500 earnings are up 14% so far this year, energized by continued cost cuts and modestly rising revenues. With wages stagnant but health and retirement benefits continuing to increase, many businesses are eyeing further options. Indeed, the latest company to announce cutbacks is Whirlpool, who is shutting down two plants and eliminating 5,000 jobs, or 7% of its workforce. North America demand is down 30% below expectations, with consumers buying new appliances only if something breaks and is beyond repair. The second largest appliance manufacturer, Electrolux, is also under pressure. Other large businesses, including HP and Kodak, are facing restructuring costs arising from technological changes and obsolescence in some of its product offerings. Most recently, MF Global, a large security firm, is now facing re-structuring or bankruptcy protection after multi-billion dollar bets on European sovereign bonds went awry. Sources: WSJ, 10-31-11; 10-28-11.
Europe. The risk of recession may be rising across the European continent. Italy’s GDP has dropped the past four straight months, and France may also be having trouble sustaining a recovery. Germany is growing slightly at the moment. Source: EU PMI Survey. With governments now in the midst of budget cuts, EU economic activity dropped in October for the first time since 2009. Some companies are cutting production, reducing costs, and restructuring operations, believing that Europe is in for a lengthy decline. Source: WSJ, 10-31-11.
Meanwhile, a new restructuring was announced this week, with Greek debt to be cut by 50%; the size of the bailout fund increased; banks having to hold more capital reserves; and Greek bond reimbursement to banks reduced by 50%. However, many details on how all of this will occur are yet to be firmed up. Source: WSJ, 10-26-11. The prior plan fell apart when its many nuances failed to garner broad enough political support across 17 member nations.
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10.24.11
Posted in Economic News at 11:42 am by Kevin C. Kaufhold
Economic projections have been less dour lately, noting the improving economic data in retail sales, manufacturing, and financial lending. The aggregate economy appears to be growing in the 2nd half of 2011, albeit at a very slow pace (see story below). Still, with the financial problems in Europe being unresolved and growth slowing in many economies abroad, financial and business risks remain to the down-side.
Improving Forecasts. Supply chain problems from Japan’s disasters and high oil prices hit hard in the 2nd Quarter, slowing growth to 1.3% GDP. Some estimates are at 2% for the 4th Quarter, although the financial problems in EU as well as US handling of its own debt problems in August are lowering US growth prospects. Source: WSJ, 10-24-11.
The economic projections are taking note of better underlying data. Retail sales are up 1.1% in September. Source: Commerce Dept. Manufactured good shipments increased 10.7% from a year ago, while a manufacturing production index rose 0.4% in September. Commercial and industrial loans are up $100 Billion in the last 12 months. Source: Fed data. Total household debt has fallen 8.6% over the last three years, and 103 million credit card accounts have been closed. Credit card payments exceeded purchases by $16 Billion in the last two years. This de-leveraging of consumer debt may help long-term as the savings rate eventually grows, but it does keep immediate consumption down.
A Conflicted Fed. At the September Open Market Committee meeting, minutes showed extensive disagreements among participants. Three members dissented from shifting the Fed’s $2.65 Trillion portfolio more to long-term and mortgage securities, while two others wanted even more aggressive efforts at bringing down unemployment. Source: Fed Beige Book.
All Fed districts reported growth in September, although the pace of growth was slight in several areas. Financial markets probably deteriorated over the summer; however, with foreign economies and banking issues worsening in the EU. Discussions could be underway at the Fed to engage in another round of quantitative easing which targets mortgage back securities. Source: WSJ 10-21-11. Other Fed governors believe that such actions would weaken credibility, since the Fed may be moving towards a more tolerant stance on inflation.
Looming Inflation and a Business Restructuring Underway? The CPI-U increased very slightly 0.3% in September and 0.4% in August. Overall however, CPI has risen 3.9% in the last year, enough to trigger a SSA COLA adjustment for the first time in several years. The PPI rose sharply on gas and food, up 0.8%. With energy and food, the PPI has increased 6.9% annually. Source: US DOL BLS. UK inflation is up too, 5.2% in the last 12 months.
With the PPI continuing to lead the CPI, businesses will either pass the costs along (difficult to do in the current environment); increase productivity (many productivity gains have already occurred); or reduce costs further (more likely). This may explain the activities of many businesses recently, as several large firms are setting aside money for restructuring costs. A few companies are already taking action, with Lowes closing 20 of its stores and lowering its outlook on future openings, while Gap will be closing 15 of its stores over the next two years. Sources: WSJ, 10-18-11; 10-24-11.
The Financial Arena. In the bond markets, Morningstar has recently started ratings on bonds backed by home mortgages, and is already rating commercial mortgage bonds. The firm plans to compete directly against S&P, Moody’s, and Fitch. Other companies are also in the early stages of ratings. Source: SEC filings. In the stock markets, a lack of liquidity is developing, with a rise in spreads between asks and take quotes. Increasing credit spreads are also occurring.
Real Estate Woes Continue. 2.19 million single family homes were listed for sale in September, down 30% from a year ago. This may not tell the entire story in the real estate market, as there is likely more than 1 million distressed or foreclosed homes being held back in a shadow supply. A more expansive definition of housing which includes condos and townhouses has 3.58 million homes for sale, but this figure is also down 28% from a year ago. Sources: Natl Assn of Realtors; WSJ 10-17-11.
State and federal negotiations with the banks on foreclosures continue. With possibly half of home loans being absorbed by Freddie Mac and Fannie Mae, plans are underway to ease refinancing abilities rather than more foreclosure proceedings. Source: WSJ, 10-24-11.
Europe. Negotiations continue on restructuring of public and private debt. The latest idea involves recapitalization of banks and continued restructuring of Greek debt. Meanwhile, Spain is now likely to miss its budget target, just as Greece and Portugal has, and a slowdown in growth is expected all across eastern Europe. Growth in the Baltics may only be 1.7% into 2012. Moody’s has warned on French government debt, and French banks have heavy bond exposure to many of the troubled economies. German and Britain banks are less exposed.
China. The rapid pace of growth in China may have peaked, but is still quite high. Trade activity in China grew at its lowest rate in 7 months. Chinese demand for commodities (copper, etc) is slowing down too. Chinese growth slowed in 3rd quarter, 9.1% from a year ago. The trade surplus in China has decreased year to date 11%. China pointed towards these economic figures in a defense of its policies. This past week, the US Senate approved a bill that would pressure China on its currency. The Chinese central bank responded by lowering its exchange rate. The move was widely viewed as a negative response to US action. Source: WSJ, 10-13-11.
The Rest of the World. Emerging country export sectors are showing signs of declining growth. Brazil’s economy is slowing, with its central bank again cutting interest rates, even as inflation has increased to 7% there. Banks in emerging markets have been tightening standards, and are also experiencing an increase in bad loans. The IMF has downgraded growth prospects in Asia. Japan is still growing, but at a reduced rate following the earthquake earlier in the year.
Main Website at: www.kaufholdco.com
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10.13.11
Posted in Uncategorized at 8:10 am by Kevin C. Kaufhold
The latest employment statistics give some hope to the belief that the US economy may not be sliding into another recession This is only a small comfort however, given the net loss of over 6 million jobs from pre-recession amounts (see below graph). The dour situation not only exists in the US, but abroad as well. Sovereign debt concerns in Greece, Italy and some other countries have spread to the European banking community and even more solvent governments that have guaranteed bank asserts. And in China, private sector erosion and loss of faith in accounting and governmental statistical standards is definitely underway. Some economists are of the belief that global economic problems are now being felt domestically, slowing down the tepid pace of the US recovery.
All of these items points toward a long and slow recovery from a financial crisis that has become disparate and world-wide in nature and scope.
On the Domestic Labor Front. Nonfarm employment increased 103,000 in September with the unemployment holding at 9.1%, but the underemployed increasing to 16.5%. Source: DOL, 10-7-11. 6.6 million jobs remain lost at the national level however. In the local area, 61,000 net jobs have been lost since employment peaked in Feb. 2008, with the average duration of unemployment extending to 40.3 weeks. Source: St. Louis Post Dispatch, 9-25-11, at E1. At the federal level, the Obama Administration has been pushing a jobs bill to be paid by taxes on individuals making more than $250,000 per year. The bill has drawn significant partisan fire. New jobless claims decreased by 4,000 in early October to 414,000 on a four week moving average basis. Seasonally adjusted initial jobless benefits are now at 401,000. Source: DOL, 10-6-11. This suggests that employment may be stabilizing after a drop in jobs in August and early September, possibly again coming close to recession.
Employment levels in thousands from 2000 to 2011
The Spreading Contagion in Europe. With continuing pressure on European sovereign debt loads, the major casualty may be the European banking industry, and possibly even governments with firm economic foundations. Since banks overseas tend to hold large amounts of sovereign debt of many EU nations, a default by any one nation on the continent may set off a chain reaction in the banks. The German and French governments, as well other Euro-zone entities, have been working of a recapitalization of banks and unsustainable debt in Greece. Some governments also have issued guarantees of redemption on these banks, and this has now resulted in Moody’s placing Belgium governmental credit rating under review. Source: WSJ, 10-11-11. Some municipalities in the US may even be affected, with borrowing costs rising from a loss of access to financial credit in Europe. Source: WSJ, 10-5-11.
The Continuing Saga in China. Loss of credibility in Chinese accounting standards and government statistics has severely weakened demand for Chinese financial securities in the last few weeks. Several accusations have been leveled by investors of Chinese private assets as well as public debt. The situation has deteriorated to the point where national sovereign wealth fund is buying shares in banks in order to stem a free fall in share pricing. Source: WSJ, 10-11-11. The loss of market-level credence in Chinese assets is rather ironic, given that government’s criticism last year of US deficits destabilizing bond valuations.
Meanwhile, Chinese wage inflation has been increasing since 2006, and food prices are also sharply rising. The yuan currency has increased 30% against the US dollar since 2005, but this has not deterred US Trade representatives from recently questioning hundreds of subsidies by the Chinese in possible violations of world trade rules. Additionally, a bill has now passed the US Senate which would penalize China for manipulating its currency to artificially low levels in order to stimulate Chinese exports.
Regulatory and Litigation Response. In the wake of the financial crisis commencing in 2008, numerous governmental proposals have been under consideration as well as associated litigation. The Volker Rule, which was recently leaked onto the Internet, would effectively ban proprietary trading at banks and financial institutions using their own capital assets. A recent settlement of a shareholder action against a bank may limit investment banks form offering “staple financing”, or buyer financing when they also advise the seller. S&P is under pressure for previously evaluating financial products on the basis of typical “or dummy” assets held rather than worst case scenarios. And, federal and California state officials are proposing a $25 Billion settlement against certain financial institutions for their foreclosure practices. The fall-out is likely to continue for some time. Source: WSJ, 10-7-11.
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05.12.11
Posted in Uncategorized at 3:34 pm by Kevin C. Kaufhold
On May 9, 2011, Governor Quinn appointed Kevin C. Kaufhold as a Southwestern Illinois Development Authority (SWIDA) board member. SWIDA is a special-purpose, municipal corporation and local governmental unit created by the Illinois state legislature to promote, encourage and facilitate economic development in four southwestern Illinois counties including Bond, Clinton, Madison and St. Clair. Kevin stated, “I look forward to the appointment as I feel it will allow me to use my legal and economic expertise in this new, exciting opportunity.”
Main web-site: www.kaufholdco.com
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03.24.11
Posted in Economic News at 8:28 am by Kevin C. Kaufhold
Employment has finally started to make gains. The average number of manufacturing hours has now stabilized, while initial unemployment claims has been gradually but steadily dropping since 2009. Non-farm payroll bottomed in 2010, but has been increasing only very modestly since then. Total civilian employment has showed the same pattern. The average duration of unemployment has kept going up however. This data series is a lagging indicator, so the upward trend is not overly surprising, and may largely indicate that the economy has not yet become so sustaining that even the lagged statistics are improving.
The number of total unemployed has dropped significantly, but still remains to around 14 million. The unemployment rate has dropped to under 9%, but is still hovering at 17%, when all marginally employed and part-time employed for economic reasons are factored in.
With vast numbers of individuals still unemployed, it may be a long time before workers and consumers feel comfortable about their current economic situation.
Business Group Presentation
Kevin C. Kaufhold gave a talk to the Collinsville, Illinois Rotary in March, 2011. The presentation was entitled “Current Economic Conditions” and highlighted macro-economic trends over the course of the 2008-2009 recession to the present. A power point of the presentation is available at:
http://kaufholdco.com/files/Current_Economic_Conditions_PP_2011-03-14.pdf
Main web-site is at: www.kaufholdco.com
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03.14.11
Posted in Uncategorized at 9:06 am by Kevin C. Kaufhold
With consumer-related activity being a major driver of the national economy, consumption statistics are critical indicators of overall economic conditions.
Personal income and real disposable personal income on a per capita basis are both now trending upward, after dipping throughout the recession. Personal consumption expenditures (PCE) have also been modestly increasing on both a real and nominal basis.
Consumer expectations are more tepid however. While consumer sentiment is higher than at the trough of the recession, it is still far off of energetic levels. This is seen in the following graph, which displays the University of Michigan consumer sentiment survey.
Total consumer credit outstanding has recently bottomed, after dropping significantly during the recession. This shows that consumers have been dramatically paying down their debt loads. The ratio of consumer credit to personal income is still dropping, and this indicates that income levels have not risen to the point where people feel so financially secure that they are borrowing again.
Personal savings skyrocketed during the recession and remains at elevated levels. The savings rate has also gone up significantly in the last several years, from 1 to 2% during the last expansion up to the current levels of 5 to 6%. With consumption expenditures up only modestly but consumer credit falling until recently, it is obvious that most of the higher savings has been going towards debt reduction.
Real private investment bottomed towards the end of the recent recession, and on a positive note, has been increasing since that time. Investment typically lags economic activity, as individuals often lack resources in economic downtowns to invest, while businesses will defer new investments and accumulate cash in recessions until economic conditions improve. Decisions to consume or invest which are made at the individual and business levels ultimately affects aggregate investment levels, so capital investment can be seen as deferred consumption.
Non-residential private investment has been following the same general characteristic peak and dip as total gross investment. But total residential fixed investment remains at depressed levels, after plunging from almost $800 Billion dollars in 2006 to somewhat over $300 Billion currently.
A more complete analysis of Income, Consumption, and Investment is available at www.kaufholdco.com.
The main web-site is at www.kaufholdco.com
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