David Rosenberg Part 1: "Why The Depression Is Ongoing"

From David Rosenberg.

There are classic signs indeed that the recession in the U.S. ended last summer — output, sales, etc. But the depression is ongoing and the reason we say that is because real personal income, excluding handouts from the government, has barely budged. In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trendline for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits. The share of U.S. personal income being derived from Uncle Sam’s generosity has risen above 18% for the first time ever.

Real consumer spending is up $200 billion over the past 16 months and everyone believes we have a sustainable recovery even though organic income is down almost $500 billion. Think about that for a second because once the stimulus wears off, and with a 10% deficit-to-GDP ratio and concerns surfacing everywhere about sovereign credit risks, there is little out there to support future growth in consumption.

Some are clinging to the notion that employment growth will accelerate. From our lens, once you remove all the assumptions the Bureau of Labor Statistics uses in its monthly data, there is little growth in the nonfarm payroll data. And, the Household survey is much too volatile and too small a sample size to rely on, even if all of a sudden it has become a focal point for the bulls (who conveniently were ignoring it as the recession began).

The ADP private payroll survey is showing marginal employment growth with none in the small business sector at all. And jobless claims, as we saw yesterday, have basically stopped falling; however, at still around the 440k level, they are not consistent at all with sustainable job creation. After plunging from 600k in June 2009, to 440k, as of January 2010, claims have basically stopped declining. That is a problem.

To reiterate: outside of the lagged impact of all the government stimulus and the arithmetic impact of inventory accumulation, the economy is not growing. The National Federation of Independent Business small business survey is showing that economic growth is stagnant at best. Even if you take the government data at face value, the past four quarters have averaged a mere 1.38% in terms of real final sales, which goes down as one of the very weakest post-recession trajectories in recorded history. We know it’s a tough pill to swallow, but we are sure that mostly everyone will get over it.
If you don’t believe that consumer frugality is a secular theme, then go to the New York Post story titled Young Gals Find Thrift is a Gift: Recession Has Put an End to Their Wild-Spending Ways — a Citi survey shows that 72% of females plan to boost their savings. Only 43% intend to take a vacation in the next six months. The article quotes 32-year old Tenira Forman, a former shopaholic, as saying “Within the last two years, I’ve been living a new life. I had an epiphany not to spend and to save more … I have the urge to shop, but I’m fighting it. I’ve given up electronics, shoes, clothes and home goods.”

If there is a bright spot, it is in the industrial sector:

  • The just-released U.S. industrial production data was strong, rising 0.8% MoM in April beating analysts’ expectations of a 0.6% increase. On a year-over-year basis, production is running at 5.2%, the strongest pace since mid-1997. Manufacturing is a bright spot with production jumping 1% MoM, matching the gain in March and is also up 6% YoY.
  • Steel production is up 74% year-on-year.
  • Lumber production has risen 29%.
  • Automotive by 67%.
  • Truck tonnage has risen 7.5% and container traffic out of Long Beach has surged 19%.
  • Railway carloadings are up 14% over the past year. Some of this is related to global growth, some it to the lagged impact of U.S. dollar depreciation, and some of it related to the improved productivity position of U.S. manufacturers, which indeed seem to be enjoying somewhat of a renaissance (something we wrote about three years and should be on archive back at the old shop).
  • The latest foreign trade data showed that U.S. exports of goods and services have exploded 20% YoY, as of March.


So you see, the news is not all bad. The 20% of the economy related to exports and capital spending — the latter will benefit from the fact that capacity actually fell a record amount over the past two years and some of that surely has to be rebuilt and most pronounced in areas like transportation equipment, chemicals, plastics, industrial machinery — are certainly bright spots.

Let’s face it, left to our own devices, the U.S. personal savings rate would be going up, not down. But the government has done everything it can to perpetuate a consumer spending cycle even though such expenditures command a record of over 70% of GDP. Mortgage applications for new home purchases and miles driven across the U.S.A. are both negative year-on-year, and although consumer confidence has certainly rebounded from the lows, they are still consistent with recessionary environments (and this follows a record amount of bailout and handout stimulus from the federal government).

Keep in mind that even with the ‘cash for appliances’ program, almost 80% of chain stores missed their sales targets last month; and the new normal in the aftermath of the ‘cash for clunkers’ program seems to be around 11 million units at an annual rate on auto sales at a time when replacement demand should be closer to 12 million. Moreover, once the foreclosure moratoria is over, and the government no longer tries to play around with market forces and allow for price discovery, home values are back on a downward track, now evident in all the data series. There is no denying, after looking at the latest Census data, that there is an excess of five million vacant housing units across the U.S. acting as a continued dead-weight drag on house prices. While this is not good for homeowners, especially the 25% of the mortgage population already ‘upside down’, think of the affordability potential this will offer the one-third of the population who rent and who were crowded out during the price frenzy of the last cycle.

We realize that there is a healthy debate emerging over the outlook for residential real estate in the U.S. as some former noted bears have suddenly become bullish. We shall let the data do the talking — more home sellers cut their listing prices in April despite what should have been a flurry of sales activity ahead of the federal tax credit expiration. Prices on 22% of the homes on the market, as of May 1, have been cut at least once (this compares to 20% a month ago). See page A6 of the IBD for more.