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Are We Heading Toward A Double Dip?

Submitted by Econophile on 07/07/2010 14:47 -0400

While the data will reflect a normal uneven trend in the coming months, there is a clear indication that the economy is slowing.

The reasons are cyclical as much as a result of a winding down of various government efforts at fiscal stimulation. Manufacturing gains have been a result of some stimulus, but much of it is cyclical, coming from the initial inventory reduction by retailers and wholesalers after the crash as consumer spending tanked, followed by a modest restocking effort driven by normal demand from the 80% of us who are employed. Some it was from stimulus programs such as Cash for Clunkers and the home buyer's credit. Flattening consumer expenditures will dampen additional manufacturing growth. Without consumer demand picking up, the economy will be flat at best. And add to this sinking demand from Europe and China other developing countries, our exports will flatten at well.

This is something that I have been forecasting since February (actually since Q3 2009) based on several premises:

Fiscal stimulus would not create any lasting economic impact.
A lack of credit.
A declining money supply.
Government policies that prevent or delay deleveraging or bankruptcies of malinvested capital.
Several long-term megatrends that are impacting our economy.

Aside from looking at data releases from government and private sources, I carefully monitor the news and the frequency of positive or negative articles that come from the Wall Street Journal, Bloomberg, the NY Times, and the Financial Times. I tend to ignore what polls of economists say, because if they see data rising they will predict a recovery; if data is declining, they will predict caution and consternation.

Recently, the article content is catching up with the data. It seems that if there is sufficient negative data, then the media finally jump on the band wagon and they don't report as many "unexpected" events.

Here are some recent articles that I believe reveal a trend. There is a lot of data here and you need not read it all but it is worth skimming through it:

Pending Home Sales Decline 30%.

No need to explain this one other than to say the home buyer credit was expiring (now extended to September 30). The Case-Shiller report showed an increase (3.8%) but the article says its all from the tax credit.

Manufacturing Shows Decline

Slowing in the U.S. manufacturing sector is a new risk for the financial markets, seen in yesterday's ISM report and in today's factory orders data. Orders in May fell back 1.4 percent though details do show some strength. May's weakness is centered in non-durable goods, down 2.1 percent and reflecting soft prices for energy. On the durable side, data first released in last week's advance durable goods report, May shows a 0.6 percent month-to-month decline.

The acceleration in manufacturing cooled but only slightly in June, according to the Institute For Supply Management's composite index which slowed to 56.2 from May's very strong 59.7. The slowdown was led by a more than 7 point decline in new orders to a 58.5 reading that nevertheless indicates a strong month-to-month gain, only a smaller gain than in May. Orders continue to move into backlogs but also at a slower rate. Production slowed but remains very strong at 61.4 while hiring also slowed but also remains strong at 57.8. Delays for deliveries eased with the index down nearly 4 points to 57.3, also consistent with slowing activity.

Manufacturers may be having trouble building inventories as the index is little changed at 45.8. But improvement in the customer inventory index suggests that inventories are not as bare as they were in May. A big 20.5 point drop in prices paid indicates easing month-to-month pressure for inputs, the result of flat energy prices.

Peak growth may have already come and gone, a worry of the global markets and indicated by the ISM's June report on non-manufacturing which covers about 90 percent of the economy, fell to a four-month low. The headline composite index slipped back 1.6 points to 53.8 for its lowest reading since February. Nearly all details indicate a slower rate of growth in June than in May. New orders fell nearly three points to 54.4 for its lowest reading of the year and joining the ISM's manufacturing index for new orders which, in data released last week, is also at its lowest of the year. Orders slowed for a third month and employment declined.

U.S. Economy: Private Payrolls Grew Less Than Forecast in June

The jobs picture in June was quite mixed as temporary Census workers were laid off and private hiring was positive but moderate. Also, the unemployment rate continued to dip even as the workweek slipped. Overall payroll jobs in June fell back 125,000 after spiking a revised 433,000 in May and after a 313,000 jump in April. The June decrease matched the market forecast for a 125,000 decline.

Looking beyond the temporary effects of Census hiring and firing, private nonfarm employment increased 83,000, following a 33,000 rise in May. The latest figure fell short of analysts' projection for a 105,000 advance in private payrolls.

Taking into account revisions to prior months, the U.S. economy added an average of around 150,000 jobs a month in the first half of 2010, a level that's still not strong enough to bring unemployment down significantly.

The jobless rate, which is calculated using a separate household survey, edged down to 9.5% in June from 9.7% the previous month. Economists were expecting it to edge up to 9.8%.

The unemployment rate is down to its lowest level in a year, but the move was driven by a huge drop in the work force. The participation rate fell to 64.7% in June from 65% in May.

Pacific Investment Management Co.’s Bill Gross and David Rosenberg, chief economist at Gluskin Sheff & Associates Inc., said June’s employment report indicates sluggish job growth and a slowing economy.

“That’s a statistical illusion because you had this precipitous fall-off for the second month in a row in the labor force and without that, the unemployment rate would have gone up to 10 percent,” Toronto-based Rosenberg said during a radio interview on Bloomberg Surveillance with Tom Keene. “You can go as high as 16.5 percent, if you count the unemployed and under- employed.”

The pace of hiring signals it will take years for the world’s largest economy to recover the more than 8 million jobs lost during the recession that began in December 2007. The turmoil in financial markets brought on by the European debt crisis raises the risk that employment will slow, depriving American households of the income needed to maintain spending.

“The economy is slowing, not just in the United States, but globally,” Gross, co-chief investment officer at Pimco, said in a separate interview with Keene. “It’s a ‘new normal’ type of phenomenon. I don’t think the Federal Reserve can raise interest rates in the face of unemployment near 10 percent.”

Consumer Confidence Tumbles

The Conference Board's consumer confidence report is a major disappointment, falling dramatically and showing regional weakness tied no doubt to the Gulf spill. The consumer confidence index fell to 52.9, in a nearly 10 point decline the size of which usually corresponds with an economic shock. The decline was led by severe weakness in the East South Central (37.7 June vs. 56.0 May) and the South Atlantic (49.1 vs. 62.8). But other regions are weak too including significant drops in the Mid-Atlantic and Pacific regions.

Consumers are now showing much more concern over the jobs market and over their income prospects, with the latter reading arguably the closest to the consumer psyche. Those saying jobs are currently hard to get rose nine tenths to 44.8 percent. The size of this rise isn't overwhelming but the direction is definitely troubling, only the second negative monthly comparison since November. For the jobs outlook, more see fewer jobs (20.8 percent vs. 17.8 percent) and fewer see more jobs (16.0 vs. 20.2). On the future income question, the unprecedented negative spread deepened between the optimists, now at 10.6 percent vs. May's 11.4 percent, and the pessimists, now at 17.2 percent vs. 16.4 percent. Consumers aren't going to be spending if they don't have confidence in their income.

Buying plans fell back sharply led by autos and including appliances. Buying plans for homes, already badly depressed, fell back some more. A slip in inflation expectations, the result of soft gasoline prices, is the report's only positive, at least a positive for the interest-rate outlook. Stocks are falling on this report, one that offers the first hint of significant economic trouble related to the spill and one pointing specifically to trouble for Friday's employment report.

Personal Income Rises but Spending Is Muted

A gradually improving labor market is helping bolster U.S. paychecks, but workers remain cautious about spending. Gains in wages and salaries helped lift U.S. personal income 0.4% in May from April, the Commerce Department reported Monday, but consumer spending rose a more muted 0.2%.

"Right now, people are just not spending a whole lot of money," said Joel Naroff, of Naroff Economic Advisors. "They seem really uncomfortable with the recovery."

The report suggests that consumer spending, which grew at an inflation-adjusted annual rate of 3% in the first quarter, will post slower growth in the second quarter. After previous downturns, spending has tended to rebound strongly, but it seems the severe recession that most economists believe ended a year ago could have lasting effects on how readily people spend their money.

ICSC reported retail sales up 2.1% MoM and 3.0% YoY for the week ended June 25, while Redbook reported same-store sales tally fell seven tenths in the week to plus 2.5 percent for the weakest reading since May. For the month-to-month comparison, Redbook now sees slightly deeper weakness, at minus 0.6 percent to indicate trouble for the ex-auto ex-gasoline reading for the June retail sales report.

The personal saving rate—the share of after-tax income that doesn't get spent—rose to 4% in May from 3.8% in April, its highest level since September and well above the average 1.7% rate that prevailed in the year before the recession hit.

Personal income posted a solid 0.4 percent increase for April, matching the gain the month before. Importantly, the latest increase was in what really counts as the wages & salaries component advanced 0.4 percent after rising 0.3 percent in March.

Consumer Bankruptcies Rise 14% in First Half

Consumer bankruptcy filings reached their highest point since 2005 in the first half of this year. Through the first six months of 2010, consumer bankruptcy filings increased to 770,117 — 14% more than filings made over the same period last year, the American Bankruptcy Institute said. This marks the largest number of filings since the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted to curb the increase in filings five years ago.

Month-to-month, June figures indicate a decline for the third consecutive month. Bankruptcy filings totaled 127,000 last month, down more than 7% from May. The number of June 2010 filings, however, was more than 8% higher than last year, based on data compiled by the National Bankruptcy Research Center.

Better Credit-Card Statistics Because Jobless Have Left Credit System

U.S. card issuers, such as American Express Co., Capital One Financial Corp., J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Discover Financial Services, are reporting improving credit trends despite stubbornly high unemployment rates. Issuers of plastic are also seeing a bump in earnings from whittling down their loss reserves, a trend that's expected to continue this year.

The reason for the divergence is grim: Some people have been unemployed so long they have simply been washed out of the credit system and no longer have any effect on the numbers. "We have never seen the kind of divergence we've seen this time" between unemployment and credit losses, said David Nelms, Discover Financial's chief executive, last month in an interview.

Crisis for 46 State Governments Facing Greek-Style Deficits

Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.

“States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

Industry Cuts Back as Steel Prices Fall

Steel prices in the U.S. are declining after holding firm for months, potentially a bad omen for the nation's economy as manufacturing activity slows and consumers grow more cautious about big-ticket purchases, such as cars and appliances. ... Steel prices tumbled in June, and U.S. steel mills are responding by cutting production. Earlier this year they were ramping up capacity to meet the growth in demand they hoped would emerge from the economic recovery. Instead, demand has been spotty.

Fears mount over slowing global demand

Fears grew that the global recovery is faltering on Thursday after a slew of data pointed to weaker global demand led by slower growth in China. Figures showed manufacturing output slowing across large parts of the world, posing further challenges to leading economies as they attempt to shore up shaky fiscal positions without falling back into recession.

In Asia – the world’s production powerhouse whose economies are still largely dependent on export demand – manufacturing activity indices for China, South Korea, Taiwan, India and Australia all showed weaker activity for June. ...

Nick Beecroft, FX Consultant at Saxo Bank, said: “This looks like the day that fears of a double-dip recession in the US, with all its attendant unpleasant consequences for the US budget deficit, finally trumped eurozone bank and debt concerns.”

I'm not making this stuff up.

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Wed, 07/07/2010 - 22:08 | 457732 Akrunner907

Yawn....the market continues to rise....so all is well! I equate the current situation to a hospital...you have a patient in triage and you give them a shot of adrenaline in order to stimulate their body and keep it alive, but you just got back the test results and the body is being ravished by cancer and cannot be cured. So now you just make them comfortable until they succumb to the disease.

Wed, 07/07/2010 - 19:16 | 457497 RockyRacoon

I can't be bothered with this right now... Kudlow is interviewing Timmy right now and I need my positive spin. Boy, they are tearing it up. Marginal corporate tax rate is 35%? Tell that to Kudlow's boss, GE. They paid zip, nada, goose egg. Has Kudlow ever met a tax cut for business or the "rich" that he does not like? When your only tool is a hammer....

Wed, 07/07/2010 - 19:35 | 457533 Mr Lennon Hendrix

When your only tool is a straw.

Mon, 07/12/2010 - 14:20 | 464633 RockyRacoon

That's funny! Hey, Kudlow, you listening?

Wed, 07/07/2010 - 17:16 | 457297 covert

there is no cause for worry or alarm. leveraging to pick up a few land bargains would be a good choice over time. especially the low end section of the market. commodities will hedge against inflation. rent out the slums. sell when the bubble is about to burst.

http://covert2.wordpress.com

Wed, 07/07/2010 - 16:43 | 457238 lbrecken

what is this a rehash of old news. The idiot bulls suggest 1-2% GDP growth is already in stocks so with zero interest rates rallies like today are the result.

Wed, 07/07/2010 - 16:41 | 457227 DosZap

Where are we relative to the DEATH CROSS?,in the Mkt.

Wed, 07/07/2010 - 20:17 | 457591 Rider

Death Cross is doing well, still in place and will remain in place unless the market closes several sessions above S&P 1090.

Wed, 07/07/2010 - 16:56 | 457097 Agent P

You said you look for positive and negative news...couldn't you have at least thrown in one positive story for good measure...maybe one about the circus coming to town, or something along those lines?

Seriously though, I like reading your stuff, and while I would argue it's probably a little too soon to see trends (vs. a short-term stall) in the data, I can't dispute that the news is overwhelmingly negative these days.

Thu, 07/08/2010 - 17:09 | 459245 Econophile

I saved money on auto insurance today.

Wed, 07/07/2010 - 16:00 | 457088 Commander Cody

Good analysis based on facts, although completely irrelevant to stock market performance.

Wed, 07/07/2010 - 15:50 | 457054 Boilermaker

What? The DOW just crossed 10k!!!

What an unfuckingbelievable mockery of the markets.

Wed, 07/07/2010 - 15:46 | 457047 OutLookingIn

Take all of the above post and add in the ECRI reading that has just 2.2 points to go before recession is reached, along with the BDI which is the lowest it's been in 14 months - mix thoroughly and viola! Dippity doo da, dippity day, my oh my feels like recession today!

Wed, 07/07/2010 - 15:31 | 457028 cainhoy