If Everything Is So Good, Why Am I Feeling So Bad?

From The Daily Capitalist

The markets behave as if everything is just fine. This week the S&P 500 was up 7.3% for the month (from 1027 to 1102), corporate earnings have been looking good, retail sales inched up last week, the CPI is low, interest rates are low, Dr. Bernanke is ready to pump money into the economy if things go awry, most European banks passed their stress test, and we've got a new financial markets regulation bill which will save us from economic collapse.

Yet most folks don't believe things are getting any better. What's wrong?

Here's some data I gathered for the week of economic reports that might shed some light on the topic:

The U of Michigan's consumer sentiment index crashed: it dropped from the June high of 76 to a mid-July reading of 66.5. About 10 points. This could mean that consumers are pulling back, according to the data.

The latest Conference Board's Index of Leading Indicators turned negative, down 0.2% in June. In May it was up 0.6%. According to my report, if you take the interest rate spread out of their index, it would have fallen 0.6%. (See Leading Indicators Have Turned South.)

New jobless claims for the week of July 17 jumped 37,000 to 464,000 from 427,000 in the prior week. The four week moving average also declined by11,750 to 455,250, the lowest level since mid May.

Corporate earnings have been good; so far three-quarters of companies have beat estimates. For example Ford reported a 13% gain in earnings for Q2. Up-selling and cost cutting seemed to do the trick. Which lies at the heart of the problem: revenues tend to be tame and gains are coming from efficiencies. It's a mixed bag, so it's difficult to generalize here. Oil, autos, technology, and exporters did well. The key to any sustained recovery will be consumer spending.

Which gets me to payrolls. The state-by-state report from the Labor Department showed that payrolls decreased in 27 states, including the biggest, California and New York. Some 16 states had unemployment in excess of 10%. We'll have to wait for the next unemployment reports to sort this out, but it seems that we aren't adding net jobs.

What consumers are doing is paying down debt. According to an American Banker report, a "handful" of mid-size banks (KeyCorp, Huntington Bancshares Inc. and M&T Bank Corp.) are experiencing a surge in loan paydowns without experiencing an increase in lending. While this improves credit quality it doesn't help their longer-term loan book. I see this as a good thing, part of a necessary deleveraging process, it shows us where consumers are putting their money. It's the biggest raise they can give themselves: with negligible earnings on money market accounts, a debt paydown on a 6% loan is a positive for them.

The housing market is still bad. While prices have been going up (0.5% per Federal Housing Financing Agency--FHFA), sales of existing home sales are down 5.1% in June.

Newly signed contracts plunged by 30% in May from the previous month, when the tax credit expired.

"Given that, you are going to see a huge drop in closed sales in July, and it's going to continue at a minimum until August," said Thomas Lawler, an independent housing economist in Leesburg, Va.

Home inventory which had been declining as the result of the housing tax credit went up in June by 2.5%. The supply vs. sales index went from 8.3 months to sell a home to 8.9 months.

My last point is the Baltic Dry Index. I follow this report on shipping traffic around the world as an indicator of worldwide economic health. If China is not importing a lot of raw materials, which it isn't, this leading indicator is a negative. In the past two months it has dropped almost 60%:

P.S. Coming soon: a major article analyzing the financial markets overhaul bill.

Comments

[Colonel Sun]

"My last point is the Baltic Dry Index. I follow this report on shipping traffic around the world as an indicator of worldwide economic health. If China is shipping a lot of goods to the U.S. and Europe it is because there is consumer demand for such goods, which shows a healthy economy. In the past two months it has dropped almost 60%"

The BDI reflects the shipping of commodities - raw materials - rather than manufactured consumer goods:

http://en.wikipedia.org/wiki/Baltic_Dry_Index

Bulk dry carrier [ship]:

http://en.wikipedia.org/wiki/Bulk_carrier

On the other hand maritime [container] freight rates [TEU] for manufactured good have been rising

http://www.joc.com/maritime/hapag-lloyd-hikes-india-south-america-freight-rates

[Econophile]

BDIY is a leading indicator. China's imports of raw materials are dropping like a rock. I think what I wrote is confusing though and I corrected my error. Thanks.

[chrisina]

True, that's why the BDI is a leading economic indicator.

Shipments of raw materials indicate future industrial output. Shipments of manufactured goods indicate present output. We already know industrial output had been rising, just check the latest GDP figures. But most of that growth was from inventory restocking. And apparently those inventories aren't selling that well, otherwise demand for raw materials would be rising, and the BDI indicates the opposite.

[Mark Beck]

The leading effects on BDI should be reflected in port and rail traffic during a reduction in demand. The spurt was an inventory restocking cycle sustained through stimulus.

Is this good quarter all the real economic activity derived from ARRA as an investment, and if so, why was it so inefficient?

So as we look at economic data and try and understand cause and effect of stimulus, what we see is an inability of existing metrics to describe the economic effects.

When the old tools lose their ability to measure, perhaps we should find new ones.

----------

From a corporate standpoint, stimulus is a way to make an quick buck. But, obviously stimulus is temporary. So make your profits and minimize tax expense through your global subsidiaries. 

We look at the huge burdens placed on the US tax payer base and ask;

Why would stilumus driven profits compel large long term corporate investment in the US? Why not wait and try and understand the real health of the economy before investing.

Mark Beck

[Reese Bobby]

Bingo!  Cumulative cap-ex remains barely above maintence levels.  Inventory restocking has blown most of its wad.  And the pent-up consumer spending is fading as we blog; unless you sell high-end luxury goods.  This was all we got for trillions of dollars of money printing. Yikes... 

[Testicular Cancer]

Dont forget the ECRI. Depression is iminent.

[Econophile]

See my article here.

[TheSoloKnight]

All due respect, Sir, but why do everyone keeps forgetting that TPTB doesn't want the markets to fall and they will not let it fall. In 2008, the markets were falling because the TPTB had to force the congress into yielding to unholy bailouts, and fed into cheap money.  Now they have got the bad "ass"ets guaranteed by the govt itself and cheap money to repair their balance sheets. There is no good reasons for them to let the markets drop.

If you say "fundamentals" sir, then let me add that in short term  markets are driven by sentiment, in medium term by liquidity and long term by fundamentals.

But sir,  "on a  long enough time line the survival rate for everyone drops to zero".