This page has been archived and commenting is disabled.
Spending, Industrial Output and Recovery
From The Daily Capitalist
Monday we had several important economics releases that on their face point to a recovery. I think we are actually stagnating economically, and many of these positive factors will prove transitory.
Consumer Spending Report
Consumer spending increased slightly in March by 0.6% (MoM) although income only went up by 0.3% (MoM).
Spending was driven by a decrease in savings (2.7% vs. 3.0% in February) and a substantial increased in government unemployment and other welfare benefits. These government transfer payments were up $24.9 billion in March, compared with an increase of $7.3 billion in February.
In other words, government transfer payments are helping to encourage spending and discourage savings.
While you can argue that unemployment benefits aid consumption, that is not the case. The money has to come from somewhere and that somewhere is your current or future earnings (through taxation) which means you have or will eventually have less to spend. Transfer payments such as these never have any lasting benefit to the economy.
Here is a chart from Calculated Risk that shows exactly what I mean:
]
This shows that income, excluding government payments, is flat and transfer payments have had a significant impact on spending.
What were consumers buying? It appears to be autos and appliances.
Purchases of durable goods increased 3.4 percent in March, compared with an increase of 1.0 percent in February. Purchases of motor vehicles and parts accounted for most of the increase in durable goods in March [+$37.7 billion]. Purchases of nondurable goods increased 0.4 percent in March, compared with an increase of 0.7 percent in February. Purchases of services increased less than 0.1 percent, compared with an increase of 0.4 percent.
And this Autodata report today on April auto sales apparently comprised most of the durable goods sales:
April total sales came in at an annualized rate of 11.2 million units, down 5 percent from March. Sales of domestic-made units totaled 8.5 million vs. March's 8.8 million with sales of imported light vehicles at 2.7 million vs. 3.0 million in March. Month-to-month weakness is centered in the lower cost car component not light trucks which show a smaller dip, this along with less aggressive incentives will limit the dollar decline in retail sales data.
Thus, a large part of the PCE increase came from auto sales while other sectors of spending (goods and services) were relatively flat. The boost in auto sales came from company incentives (largely in March according to the Autodata report) which are now winding down. Earnings announcements from auto manufacturers have been good. The Wall Street Journal ran an article today showing that U.S. auto company sales were up 20% in April.
Durables also includes things like washers, dryers and refrigerators, sales of which have been increasing because of the boomlet in residential sales from the tax credit. The only area of credit expansion in the last three months has been in revolving and nonrevolving credit financing (other than government Sallie Mae loans), which mirrors the increases in the appliance and auto sales. As you can see it is declining again, putting it in line with other all other credit factors which may indicate a coming decline in durables sales.
(It's the same with revolving consumer credit.)
While it is appears from the headlines that PCE (personal consumption expenditures) are increasing, the numbers do not show a broad expansion, but rather sector specific increases related to the housing tax credit and auto dealer incentives.
Another important factor: the extra $25 billion of transfer payments are improperly included in the BEA's income calculations; without these payments, income is flat and spending is declining to flat. Again, transfer payments never create real economic growth.
While I have been saying all this, the trend in spending appears to be very positive:
What is important is whether this spending is organic and lasting or a result of fiscal stimulus, inflation, or some other cyclical factor, and thus temporary.
With unemployment at 16.9% (U-6), with wages flat to declining, with savings declining, with credit continuing to decline, with Boomers facing the necessity of saving more for retirement, there is a question of how long spending will improve. It is likely that most of this spending arises from temporary fiscal stimulus (tax credits, tax rebates, transfer payments, and some infrastructure spending). None of these will have a lasting impact nor will they stimulate organic growth in the economy. Government spending is a drag on the economy.
Industrial Activity Report
Industrial activity is picking up. The Institute for Supply Management report (April ISM Report) was good:
The ISM's composite index, at 60.4, posted its strongest reading in six years. The pace of new orders is very strong, at 65.7 to extend a run of 10 straight months of strength. Production is following new orders, at 66.9 for a nearly 7 point gain from March for its strongest reading in six years.
Are We in Recovery?
Will it consumer spending and industrial activity continue? This is the difficult part.
Cyclical factors, starting with inventory reduction (2008 and 2009) and now inventory rebuilding, are driving manufacturing. The crash caused consumers to (properly) fear for their economic well being and they cut back spending; retailers discounted goods to get rid of inventory; now inventory has to rebuild to meet base demand. Think about it: it isn't as if there is no economy since 83.1% of workers have jobs. People buy things. Compared to Year-over-Year activity, growth looks good but it is starting from a very low point.
We also know that technology spending has been a key factor in manufacturing as companies are doing everything they can to become more efficient. Is this sufficient to carry a recovery?
This apparent growth will only continue if consumer spending picks up. Consumers won't increase spending until they feel comfortable that the economy is recovering. But they need to see it with their own eyes. And the tepid level of PCE indicates that they remain cautious.
I believe we will see a pullback of economic activity sometime in the second half of this year. I don't think there is sufficient real savings to support a recovery, especially in an economy dominated by consumers. Massive government spending is removing vast amounts of capital from the private economy to redirect it to projects the government favors. I believe most of this spending is wasteful and will result only in higher debt and taxes which will be a substantial drag on the economy.
The key to recovery is the recovery of banks, especially regional banks who do most of the lending to businesses that represent one-half of our economy. Business and consumer credit is frozen because they are burdened with huge bad commercial real estate loans and bad consumer loans. The government at this point is doing everything they can to prevent a liquidation of this bad debt and the ensuing bank closings that would result from it. This is very similar to what caused Japan to stagnate for almost 20 years. We too have zombie banks and lenders.
It will be difficult to sustain growth without credit or rising wages.
»
- advertisements -
http://research.stlouisfed.org/publications/usfd/page20.pdf
Read the bottom of the page. Accounting rule change, magically coinciding with the end of the term auction facility. Had to get those garbage MBS's off the books (via sales to the Fed) before they put the garbage consumer loans on the books. This is also why the Fed will not be audited; to do so would reveal the actual value of those MBS's, and we know that definitely isn't going to happen.
http://research.stlouisfed.org/fred2/series/TOTLL?cid=100
I like this one because it's updated more frequently (I realize it's non-specific to consumer loans, but I think trending needs to include commercial as well to get a fuller picture). Notice the 400 billion dollar spike on 3/31 (putting the off-balance sheet items on the balance sheet) and the subsequent 50 billion dollar drop by 4/21. This is a steady march downwards. The banks respond to incentives just like everyone else. They're tightening lending standards because of changes in their risk modelling using Bayesian updating. They're spending the rest of their cash on, well, keeping it in cash, or buying US government debt, because their risk adjusted yield per their modelling is better with this strategy than continuing risky lending.
No, revolving credit went through the roof in increases. See:
http://www.economicpopulist.org/content/consumer-loans-march-2010
Then you're grabbing NONREVNS, where the last observation date is February 2010.
CONSUMER loan data (3/1/10) is February data, not March data. Consumer loans are used in the GDP numbers and include housing, medical, energy, and other things. The Credit series is more accurate in revealing the status of the credit markets and consumption. See TOTALNS and it's bad to flat. If you look through the entire series on credit, the only factors that were expanding were Sallie Mae loans (NREVNGOV). So, I think my data is accurate as to spending and credit.
Meanwhile, speaking of "recovery"...
http://www.rockinst.org/newsroom/news_releases/2010/05-04-fed_tax_troubling.aspx
A decline in personal income tax revenues collected by the federal government through the end of April 2010 suggests that state governments may suffer significant declines in such tax collections compared to 2009, a period which itself was down dramatically from the year before, according to Rockefeller Institute fiscal experts. ...
Through April 30, the federal government’s nonwithheld income taxes are down 17.6 percent from a year earlier.
So, a decline in income tax collections from a year ago - when everyone was convinced the world was ending.
Yeah, that's one world-class recovery we got going on here. World. Freaking. Class.
Econophile,
You say- "I don't think there is sufficient real savings to support a recovery, especially in an economy dominated by consumers."
Isn't that a fundamental contradiction, given that a substantial increase in personal savings, say to address the boomer's uneasiness about their future economic health, would drive down or at the very least hold down the growth of spending?
Gotta think like an Austrian: "Real Savings" = Accumulated capital from real wealth generating activities that is used to drive down the costs of production through increased scale, efficiency, etc., a real increase in the size of the pie and not a carving up of it into smaller pieces (inflationary ZIRPing). The "real" part of the savings is that the capital lifeblood doesn't literally evaporate if the asset side of the banks' balance sheet implodes.
Real savings are what allows an economy to produce real things, not just financial instruments.
Real Savings also result from the paydown of debt.
Touchae, sir. I do believe you are correct, less parasitic drag on production.
Thanks Corporal for bringing this up. "Real" savings is a term used in Austrian theory economics that differentiates "money" from "wealth." If the government prints more pieces of paper money and all of a sudden everyone has $2X instead of $1X, that is not an increase in wealth. Otherwise Zimbabwe would be a rich country.
Real savings are actually savings from consumption. For example, if you, a baker, produce more bread than you need, and you forgo present consumption of these loaves and put them aside for future use, those saved loaves are real savings. This is wealth creation. You can trade them for other goods in the future. Fortunately we have money which enables us to hold these real savings as a medium of exchange so we don't have to store the loaves and let them go stale.
You can't create wealth out of thin air; it only comes from not consuming present production and saving it for the future. The question is: how much of the money sloshing around the system is real savings and how much from government printing presses, or from redistribution of wealth by the government? It's hard to tell.
By forgoing consumption, wealth is held as savings, which is a signal that consumers are cutting back on the purchase of consumer goods. Increased savings, in a world without the printing press, would lower interest rates and signal capital goods manufacturers that they can now afford to buy capital equipment which will eventually lead to machinery for the manufacture of consumer goods. By then in the typical business cycle, the capital goods workers' wages go up, this money stimulates the production of consumer goods and off we go.
Yes, increased savings, real or not, isn't being spent on consumption and that would reduce consumption spending. But, is the capital being saved enough real savings to spur growth? If it's just paper money or redistributed wealth, it won't lead to growth. It will lead to the misdirection of capital (called malinvestment) to things that were profitable only because of inflated paper dollars. Then it blows up and we get rid of the things wrongly produced, like houses, and we start over.
This is a thumbnail explanation of a very complex theory. For more information see my Reading List.
Econ,
Thanks for the reply.
The savings I am thinking about is probably real savings in that most people save earnings or the sale of real assets, i.e, don't use it for consumption...correct me if I'm wrong.
Your bread baker example would be better if he didn't bake the loaves at all but held the flour and yeast for a better opportunity.
I will look at your reading list.
It does matter that the goods saved are consumer goods. The idea is to not confuse money with wealth.
Read Economics in One Lesson by Henry Hazlitt as a starter.
Thanks.
So the whole world market is going down, and that goes up... I don't buy it.
Where oh where is Harry now?
An excellent post and excellent analysis. The disagreement that I have begins with this statement: This apparent growth will only continue if consumer spending picks up. While on the most technical level this may be true, we are today suffering from the effects of decades of an economy based on selling things to one another with housing having been the largest ticket item that we sold.
A pick up in consumer spending will likely transalte into the purchase of more and more cheap imported goods as memories of the past recession, higher taxes and continued job uncertainty will force consumers to remain price conscious. The expected strengtheining of the dollar as a "safe haven" (at least temporarily) will make our exports uncompetitive thus depressing manufacturing activity.
Even with ZIRP, I am concerned that there are numerous structural problems impeding a recovery and any "recovery" based on the return of the consumer is not only a fragile one, but one that we should not root for.