Something Is Happening

This article originally appeared in The Daily Capitalist.

Something is happening. I am not saying it is a trend, but the data are suggesting some improvement in the economy. This is the first time I have said this in two years. It may just be a temporary phenomenon since there are so many headwinds against a recovery. Perhaps it is just that things aren't getting worse. But the data are important and should not be ignored. Also these data don't change my mind about Q3 and Q4 being weak. But ...

Before you dismiss me as a (complete) lunatic, here is what I am seeing.

Wholesale inventories are growing faster than sales (1.18):

I interpret this as being a positive because wholesalers are stocking their shelves in response to improving retail sales and in anticipation of increased Christmas sales. According to a Wall Street Journal article:

Wholesale inventories grew 1.5% to a seasonally adjusted $417 billion in September [1.4% unadjusted], the Commerce Department said Tuesday, suggesting business confidence in the run-up to the holiday shopping season. ...

Wholesalers account for about 30% of business inventories in the U.S., with manufacturers [at 38%], and retailers making up the rest. Growth in wholesale inventories shows companies are feeling better about consumer demand over the next few months and are preparing for rising sales.

Inventory growth has been a strong contributor to the economic recovery of the past year, accounting for nearly three-quarters of the modest 2.0% growth in the third quarter.

That is poised to continue, at least for a few months. The Commerce Department report showed companies have a low level of goods on hand relative to sales, a sign that factories are likely to keep humming. At the current sales pace, wholesalers had enough goods on hand in September to last 1.18 months, up from 1.17 in August but below 1.22 in September 2009.

Business inventories also increased, up 0.9% for September. Business sales were up 0.5%. Retail inventory build up (0.8%) was mainly related to autos (1.7%) and "other" retail inventories increased 0.4%. The business inventory sales ratio was 1.27, showing a steady increase since May 2010.

This also relates to inventory build-up for Holiday shopping.

Retail sales have actually been "OK" lately. Monday's report from the Census Bureau showed retail sales jumped 1.2% in October:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $373.1 billion, an increase of 1.2 percent (±0.5%) from the previous month, and 7.3 percent (±0.7%) above October 2009.  Total sales for the August through October 2010 period were up 6.3 percent (±0.5%) from the same period a year ago.  The August to September 2010 percent change was revised from +0.6 percent (±0.5%) to +0.7 percent (±0.3%).

Retail trade sales were up 1.3 percent (±0.5%) from September 2010, and 7.7 percent (±0.7%) above last year.  Auto and other motor vehicle dealers sales were up 14.7 percent (±2.5%) from October 2009 and nonstore retailers sales were up 13.5 percent (±3.1%) from last year.

The jump in auto sales was reflected in consumer credit numbers: it increased a net $2.1 billion in September which was solely due to auto sales (nonrevolving credit) being up by $10.4 billion. This is only the second increase in the past 20 months.

Gallup's spending survey numbers for October are overall low, but turning positive:

Gallup reports discretionary and marginal spending which are self-reported by consumers. While showing a slight increase, it is still down from 2009 which was a bleak year.

But ... there are other important numbers to look at. While we can shrug off private job growth of 159,000 in October as being weak, it does reflect a positive trend. On the other hand, new jobless claims are stuck in the 440,000-490,000 range.

Another thing to consider is that the dollar's devaluation will have a positive impact on multinationals and exporters. Ignoring for the moment to issues surrounding devaluation and QE, it will make U.S. exports more attractive in foreign markets.

The other thing, and which I consider to be the most important statistic, is that money supply is growing:

From Michael Pollaro, The Contrarian Take

According to Michael Pollaro, who generates this data:

[M]oney supply under the Austrian formulation of money, which Austrians have coined the True Money Supply or TMS, has been growing at double digit rates for some time now, 21 consecutive months to be exact, with the latest month showing a year over year rate of increase of 11.2%.  And what has been the primary cause of this money supply explosion?  QE I, which beginning in September 2008 not only pumped roughly $1.5 trillion of reserves into the economy but pumped the same $1.5 trillion of money into the economy too. ...

Now another $600 billion of monetary inflation in the pipeline with QE II.  That’s over $2 trillion in monetary inflation courtesy of the Federal Reserve’s QE programs.  In September 2008 TMS was $5.4 trillion.  It’s now $7 trillion, likely on its way to at least $7.6 trillion.  I think you would agree, that’s a far cry from [Ben Bernanke's claim that] the amount of cash in circulation is not changing.

I urge you to read Pollaro's complete article. Money supply growth is inflation. This should generate a temporary push to the economy. I anticipate we will see higher CPI numbers on Wednesday, reflecting price inflation as a result of monetary inflation. (I might even have to apologize to Mrs. Palin.)

With all this new money sloshing around we are seeing "improved" loan activity, and as a result some reduction in excess bank reserves held at the Fed:

Bank credit and bank loans are improving, or, to put it more accurately, they have flattened out and are not still collapsing. Here are three charts reflecting banking trends:

The most recent survey of loan officers by the Fed bears this out:

Banks further eased standards and terms on some types of business and household loans in the past three months, a Federal Reserve survey showed, while many said it would take years for standards to return to long-term norms.

Banks were more willing to make consumer installment loans and eased standards on credit-card loans, the central bank said in its quarterly survey of senior loan officers through the middle of October. At the same time, demand for mortgages remained weak, while demand for business lending fell, after having been unchanged in the previous survey.

For the second consecutive survey, banks eased standards on commercial and industrial loans. Banks that eased “cited a more favorable or less uncertain economic outlook and increased competition from other banks and nonbank lenders as important reasons for doing so,” the Fed said in its survey.

The Fed survey ended with this sobering caution:

Banks in the survey said that all types of lending would not return to normal for years. “For all loan categories, substantial fractions of respondents thought that their bank’s lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run averages for the foreseeable future,” the Fed said.

I have also been reporting that things are changing at the local and regional banks in that they are starting to aggressively clean their balance sheets by getting rid of foreclosed CRE and delinquent loans.

The fourth quarter is often a time when banks try to tidy up their balance sheets for the coming year. As they step up efforts to sell problem loans, this quarter could be the big flush. ...

In recent weeks several banking companies have announced that they have shed nonperforming assets or struck deals to do so. Loan-sale experts say interest in selling is picking up, with executives growing weary of playing defense and looking to start 2011 with a clean slate, or at least a cleaner one.

"I think there is a segment of the bank seller market that really has the desire to clean up their books for the end of the year and be able to move on next year," said Justin A. Barr, president of Loan Workout Advisers in Chicago.

Local and regional banks are preparing for stiff competition from the large banks who now see opportunity in the small-to-middle-market sector. They need to be healthy in order to defend their customer base from aggressive poachers such as Citibank and BofA .

What does all this mean? Things are improving.

I am not calling this a "turn" or necessarily a "trend" in the economy because of all the negative factors still out there. But I do think things are improving. Perhaps things are just flattening and not getting worse.

But much of the prospect of a turn around depends on the resolution of other important issues that are weighing on the economy:

• Loan demand is poor because businesses are reluctant to commit to borrow until they see sufficient demand and they perceive the risks from "regime uncertainty" is manageable. Regime uncertainty refers to uncertainty relating to the impact of new government burdens. It is a major stumbling block to a recovery. One hopes that the 2010 election revolution will put a stop to further economically disruptive legislation. And perhaps businesses will see some roll-backs of proposed tax increases, Obamacare, and Dodd-Frank burdens on them. If so, it might give them an incentive to expand their businesses, borrow, and hire.
• Monday's Empire State manufacturing report tanked (down 11.1%) and the Philly report (Friday) is expected to be bad.
• Eurozone problems look like they are about to explode again with PIIGS problems.
• Trade wars are a realistic threat.
• Competition among sovereigns to finance debt from a shrinking pool of capital.
• Unemployment is still high and job growth is too low to significantly budge the needle.
• Federal spending, growing deficits, and the prospect of higher taxes threaten productivity.
• A devaluing dollar will harm consumer spending as imported goods increase in cost.
• Inflation. It could be that, since these rising numbers are almost all nominal (i.e., not adjusted for inflation "real"), these improvements are negated by price inflation.

The GDP numbers are already baked in, so I don't see any change in the Q4 report that would change my belief that it will be no better than Q3 GDP. We can probably expect the revised Q3 numbers to be a bit weaker than +2.0%.

We need to note that if there is an improving trend, neither the Fed, nor the Obama Administration can claim they were the cause. All business cycles run their course. They all behave differently, largely depending on how much the government interferes with the recovery process. During the first two years of this crisis, the government has done everything they could to deter a recovery: bailing out failed institutions, propping up banks which should have been dissolved or have been forced to raise more capital and clean up their balance sheets (thanks for mark-to-make-believe, delay and pray, extend and pretend), spending vast sums on wasteful projects, incurring huge deficits which raise the specter of higher taxes, Cash for [Your industry here], HAMP, HARP, HAFA, and many more.

While all this was going on individuals were deleveraging and increasing savings, banks were dealing with their problems albeit slowly, companies were becoming lean and mean, bankruptcies kept rising, foreclosures continued. These things are painful but without them we would not and will not recover. I believe this process is now speeding up which is positive for a recovery.

But, tell me what the government will do next: they are Factor X. But for now, I can't ignore the data.

Comments

[walküre]

Down 5% compared to when?

China is gobbling up German cars faster than Germany can build them.

How many American cars are being sold in China?

Germany is screaming for skilled talented labor in all manufacturing.

The doom & gloom doesn't extend past the US borders anymore.

Things are pretty good outside of the US.

Now, if the US would just finally swallow that bitter tasting medicine and give up the reserve currency because it doesn't deserve it anymore.. maybe we can move on to something like a good soccer match.

"End the Fed" really means end to the US overall hegemony, end to US imperialism in whatever way, shape or form. Free trade cannot happen with a US financial elite that prints money out of thin air and forces the rest of the world to accept the worthless paper as tender for valuable resources.

[ex VRWC]

Your example of cars in China is misinformed. When I visited I noted all of the Audis, VWs, and Buicks there. My host even had a nice VW. I asked him where they all were made and he was very clear - they were manufactured there, in China. You see, to break into the Chinese market, the price of entry is to transfer your manufacturing knowhow there. And they have done a good job of following their plan.

[ex VRWC]

Your example of cars in China is misinformed. When I visited I noted all of the Audis, VWs, and Buicks there. My host even had a nice VW. I asked him where they all were made and he was very clear - they were manufactured there, in China. You see, to break into the Chinese market, the price of entry is to transfer your manufacturing knowhow there. And they have done a good job of following their plan.

[trav7777]

my contacts in business, particularly in staffing, are telling me that it is brutal out there, even in DC.  There simply aren't a lot of jobs to come by.

[voltaic]

Green Shoots Part 2.

[Ruffcut]

So what if the wholesalers are increasing inventories? They are grabbing the last of cheap shit, from the far east.

Retail sales could go the fucking moon, and no dollars will pass to the AMerican labor force.

More vacant factories, more vacant warehouses, more vacant commercial offices, and more vacant homes. Sounds like things are getting better. Sure, the banks are on life support and the country is every bit broke, as GM was for the past years.

But thanks, for trying to pump some sunshine up our asses.

Oh yes, something is happening. The fart has gone wet!!!

[Admiral Bolitho]

A good review of the data.  Too bad some of the comments are the same old "end of the world" blah, blah, blah.  Having said that, I think at this point the indicators are too small to draw any larger conclusions.  The macro picture remains of a government monetizing an otherwise unsustainable debt. 

[SofaPapa]

I agree with this interpretation.  I am also on the lookout for a true upswing, but as long as the banking sector exists only propped up using increasingly worthless paper, I am skeptical of the limited signs we see.  I think there's still more pain to come until the underlying structural issues are addressed, which has yet to even begin.

[Ned Zeppelin]

Fair comment - I just don't see enough here to start tooting the horns, and some of us are just plain tired of false cheerleading.  I suppose it's all micro - when it looks better in my world, things will be getting better, that sort of thing.  I see these macro-stats as sort of buzzing noises that fluctuate but never move all that much.

Our national conversation about how to kickstart the drivers for growth has not even gotten off square one. And there are none in sight.

[ghostfaceinvestah]

No mention of the 7M delinquent mortgages, in the face of further 10% house price declines, 5% of which has already happened but is not yet reflected in the HPI data?

[DR]

Yea, no double dip but the trend is still towards deflation.

THE AGE OF DELEVERAGING

http://pragcap.com/age-deleveraging

[Bill Lumbergh]

Great article and obviously Gary understands the underlying issue which is debt.  Certainly there are areas of improvement in the economy since nothing can stay down forever.  However I have always maintained without sizeable reduction of debt loads there can be no sustainable recovery.  People who pick out data points and then conclude a bottom has arrived are clearly not seeing the bigger picture.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved."  - Ludwig von Mises

[Econophile]

The data suggests that we are experiencing more aggressive deleveraging. I follow bank data fairly closely, and banks are a big part of it. I'm not suggesting we are necessarily recovering. As an Austrian I agree we do need deleveraging before recovery, and I think it's happening--banks and consumers. I think we've pretty much had the catastrophe and real data reveal it was much worse than we thought. It isn't over, but at some point ...

Thanks for the comment, Bill.

PS You were great in Office Space.

[EvlTheCat]

"I think we've pretty much had the catastrophe.."

Your idea of a catastrohe and my idea of a catastrophe are increadibly different.  Just for argument sake what will you classify it if in the next few years we enter a long and prolonged depression?  Oblivion?  Decimation?

Thanks for the article, and the postiive thinking, but I will continue watch and wait.

[Ned Zeppelin]

Not persuasive.  Bigger inventories can simply mean slower slower sales. And relying on fed statistics for signs of life is always a bad idea - here's the drill, it's bad, still bad and the forecast is for continued bad. No lending.  Forget the "loan officers' survey".

[MGA_1]

Inflation + Better Consumer Sentiment = More Spending

-

Euro Debt + State Debt + Mortgage Crisis (never ends it seems)

= I have no idea. 

I think at some point in time the govt going to step in and just take over the banking system and start to write stuff down.

[ATG]

Never Never Land?

[SheepDog-One]

Something IS happening! No one is impressed with QE2, in fact everyone is revolting against it and knows we're bankrupt, the markets are collapsing under their sheer unsupported gross tonnage...yea somethings setting up to happen its called collapse into greatest depression and launch of WW3.

[RSDallas]

You need a stiff drink, a good therapist and a sit down with OG Mandino "The Greatest Salesman"!

[EvlTheCat]

A "good therapist"?  Just drink more it will be cheaper, and better on your mental health in the long run!

[Bartanist]

Your comment:
"I interpret this as being a positive because wholesalers are stocking their shelves in response to improving retail sales and in anticipation of increased Christmas sales."

I completely disagree with the interpretation. Inventories growing faster than sales means that production and importation is too high compared to consumption.

All of the B/S economists claim that there is improvement based on "anticipated" this or anticipated that. Sorry, but until it actually happens it is just vapor.

IMO, your least credible article to date.

[Econophile]

Bartinist:

I would agree if retail sales weren't improving, but they are.

[RockyRacoon]

Adjust those retail sales for inflation -- whadaya got then?

http://www.shadowstats.com/charts/retail-sales

[GoatETF]

Actually I can agree with the article. A recent example, backed by my technical analysis of new metrics, is my wife has been looking at me a little more than usual and winking once in awhile. In anticipation of future sex I've got babysitters booked every night this week.

Bring it on:

http://www.youtube.com/watch?v=Fav0cE3JnDQ

[SoCalBusted]

Are the babysitters of legal age?

[Assetman]

I agree.  One other way of putting it is that wholesalers are gambling that Christmas retail sales will follow through strongly, since have already seen a pick up in retail activity so far this year.  If the wholesalers are wrong, then they'll fall flat on their faces come January.

The one other risk is that higher input prices will have a negating effect on gross margins.  Perhaps wholesalers are building inventories because they see that there is (a lot) of pipeline pressures in raw materials, and they want to minimize those costs.

I'll disagree with you on the general premise... I think Econophile is right to suggest that we shouldn't totally dismiss the links of data that support a recovery.

[RockyRacoon]

NY Fed Manufacturing Survey: New Orders Index Plummets 37 Points to -24.4, Sharpest Drop Since September 2001; Prices Received Negative

[Assetman]

Yeah... that's the part that concerns me.  I'm thinking the margin squeeze in some areas may become really intense.

The biggest problem is that at 17% underemployment and flat wages-- there is no room to raise prices without lowering volumes.  People just won't pick up the pace buying discretionary items in such an environment.

[Orly]

Even Santelli blew that one off as, "New York is not known as a bastion of manufacturing."

[RockyRacoon]

So where is this mysterious "bastion"?

http://panzner.typepad.com/.a/6a00d83451591e69e20133f59d161f970b-pi

[mkkby]

Most of the data he cites has been debunked already.  The "positive" retail sales print due to increase in auto sales was entirely a seasonal adjustement. The raw sales number was DOWN 1.5%.

Inventories rise every 4th quarter for christmas stock up.  Retailers generally over buy because they hate underestimating and losing market share.

Anecdotally, freeway traffic appears heavier because the weather slows everthing up.

We shouldn't dismiss positive data, but this is all rehash and garbage.  The author is not keeping himself informed.

[Assetman]

I'm not sure I'd make blanket comments out of all that especially on the monetary aggregates, but to each his/her own.

As for the retailers, I have a colleague that follows this group closely-- and she's been telling me that revenue momentum for a majority of her names have been strong through the fall season.  While inventories do typically build in the 4th quarter, there seems to be even more building in anticipation this year. 

And I can tell you one thing-- its purgatory taking a wrong guess on inventories.  Not every retailer is going to overshoot on purpose, because if products don't move, they'll need to be marked down signiicantly.  I think many of these companies either expect the sell-through to be great-- or they are purchasing ahead of much higher input costs (especially true for apparel items).

Whoo-hoo!  I got junked!

[Mediocritas]

I'm favoring your argument that inventory builds are also because of the perception of price inflation. We see the opposite during deflation, inventories get cleared away, moving to "just in time" pipelines as cash becomes king.

[SheepDog-One]

Hmmm yes it must be more 'pent-up demand'...similar to what theyre saying about all the housing inventory...only in that market Id say its more like 'TENT-up' demand, as foreclosures rocket upwards.
Just because theres a lot of something, doesnt mean people are clamoring to buy it at a higher price!

[1100-TACTICAL-12]

The Road to Recovery..The Consumer is Coming Back...GMAFB...

[Orly]

I'm gonna steal page from the Sheep Dog and say, you mean the "roast" to recovery.

Okay, so I'm not that good at it.

?:

[razorthin]

Don't we need some phantom "improvement" to spark the hyperinflation we are expecting? 

[SheepDog-One]

'Data improving' well thats pretty easy to achieve with world record money printing and a license to all TBTF accountants to mark everything to fantasy.
I have a hard time looking at the manipulated data based upon imagination and decipher anything at all from it.
Unrecoverable debt, collapse and depression is coming theres no way around that.

[f16hoser]

Gee, maybe they think people will max-out credit cards THIS SEASON with absolutely no intention of paying IT back. Rumor is, people are doing this as "Their" bail-out from the government. I don't see this as A POSITIVE.

hOSER

[ATG]

http://www.cnbc.com/id/40214649

[shortus cynicus]

just found soundtrack for this article:

http://www.youtube.com/watch?v=qOezOJevD6E

_{For What Its worth BUFFALO SPRINGFIELD}

[hidingfromhelis]

What, you mean this isn't the soundtrack?

http://www.youtube.com/watch?v=8qrriKcwvlY

The Future's So Bright, I Gotta Wear Shades by Timbuk 3

Dangit, the hopium in my inhaler must have expired again.

[palmereldritch]

I'll call and raise you a pair

http://www.youtube.com/watch?v=OKs_HKbAvkI

[doolittlegeorge]

'the United States of America is broke."  that's no mere "headwind."  of course "trading equities higher on this reality" (since it's been true for decades) deserves a little credit, don't you think?  Or "aren't we all better off when that worthless crap hits the big old goose-egg like we all know it's worth"?

[AchtungAffen]

Yeah, when looking at the numbers it all looks fine and dandy. But that's the "economic lie", the difference between what the numbers said and what people are actually going through. Foreclosures, huge unemployment, reduced salaries, increasing corporate interference in the branches of government, more lax campaign contribution laws. Social disintegration and an ever increasing military complex (private and not).

That's the real trend. The rest are smoke and mirrors, regrettably.

[ATG]

warfare welfare

[Jean Valjean]

I feel the "something" that is happening is the last gasp.  A scramble for something "real".  Next stop, flatline.

[ATG]

The House Economy

[hambone]

I don't mean to sound negative or demean the data - but when you throw all unsustainable actions against the economy / market and then say, look, there's a pulse...it's like running a current through a corpse to fire neurons and then say, look, it's alive! 

Unfortunately we've gone too far now and any pulse is short lived before the piper is to be paid back.

[Econophile]

To Hambone: Why?