US retail sales…Is the Sun really shining again?

Retail sales takeaways:

  • In rebound mode, but nothing as yet to suggest trend of slowing growth cycles has been broken.
  • Motor Vehicle and Parts sales, a key driver of sales growth heretofore, looks to have slipped to a much lower gear: less consumer credit growth fuelling demand?
  • Retail sales adjusted for CPI ex shelter and adjusted for population growth only just bubbling up around pre crisis levels.
  • Seasonality: some questions over the extent to which seasonality is impacting the data.
  • Inventory to retail sales growth at historically high levels: economy exposed to heightened short term risks to spending.
  • CPI ex shelter, flatlining post 2012.
  • Boundaries to retail sales growth: consumer credit to disposable income ratios, long term income growth declines, peak personal consumption expenditures and continuation of weak profile post late 1990s: longer term dynamics at play.

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Perspectives on US New Manufacturing Order data:

Key takeaways:

  • The frame should dominate analysis of new order fundamentals: long term weakness dominates.
  • The new order bounce back in March/April was led by the transportation sector (MVPs in particular), but the bounce back should be set against the depth of the declines.
  • Outside transportation the trend is very weak.
  • Consumer durable goods orders on a smoothed 6 monthly basis have weakened noticeably since the start of the year.

Commentators are increasingly concerned about the risk of a recession in the US Economy.  Recessions are typically short term step backs/retracements within expanding frames whereas we are in a rather complicated contracting one the one hand (developed economies) and transitioning frame (developing economies moving from investment dependence to consumption/service sector dependence) on the other characterised by excessive debt levels, unconventional monetary policy and increasing income inequality to name but a few fundamental issues. 

So let us look at US manufacturing new order data, at first in terms of the frame, which bounced back on a monthly basis in April:

The frame

We can see from the following chart that annualised real growth rates over rolling 10 year time frames (using new order data adjusted for PPI and smoothed) have been heading downwards since the start of the decade.  The real annualised rate of growth over rolling 10 year time frames shows that the current cycle is much weaker than the pre 2008 cycle.

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We can see the step down in growth more easily if we just view the high water mark dynamics (which ignores the current index level if it remains below the HWM).

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In reality given the declines in flows since 2014, new orders for manufacturing adjusted for the PPI stand below levels reached at the end of the 1990s, and yet, here we are all worried about the risk of recession when the risk of something far greater has already occurred.  Tied into the frame is the key dynamic of global rebalancing: cheap labour in emerging/developing economies had offshored a significant amount of manufacturing output from the late 1990s onwards (the weak order data partly reflects this) and the expected maturing of developing economies consumers and rising wage costs was anticipated by many to create a rebalancing of global economies.  This is presently at risk a) due to the time frame of transition being longer than many expect and b) given that technology is driving out labour in key industries.

And in the next chart we see nominal annualised rates for new orders over rolling 10 year time frames: clearly the structure and balance and dynamics of the US economy and the attendant global economic dynamics are unable to support the type of growth the economy had experienced in post WWII years.  The primary issue we are facing today is not one of a prospective recession but of a weakening frame:

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Why do economists like Paul Krugman completely ignore financial imbalances and their structural accentuators?

In a recent post Paul Krugman challenged the “rationale” for the Minneapolis Fed appointment of Neel Kashkari.

His objection lay with “the view” of the new chair (Kashkari) that growth prior to the breaking of the financial crisis was artificially fast due to the leveraging of the economy.  Krugman’s point was that just “because we had a bubble, in which some people were borrowing too much,” does not mean that the output produced from 2000 to 2007 wasn’t real and therefore the problem we have now is 100% one of insufficient demand as opposed to supply. 

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US employment figures in the context of consumer credit and inventories.

The US economy is no ordinary cake in the oven and the release of the latest employment numbers do nothing to disprove this analogy.   Global economic growth is continuing to slow as evidenced by trade numbers, manufacturing data and a host of PMIs.  The direction of cause in this most recent of trends has been from key emerging economic regions.  The direction of cause is one for concern given the importance of the development of consumer markets in emerging economies to aging and slowing developed economies.  A slowdown in emerging market growth is important for asset markets and financial stability (loan servicing and financing) given that asset values and debt financing are heavily predicated on a discounted future.  The possible impact on global growth and financial stability of this reversion of cause and hence flows may well prove to be of significance.

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US – Some interesting charts on income, GDP and new manufacturing orders from recent data

There are some interesting patterns and trends in US data: so I do ask myself, are we at the peak of the current cycle, are we as far as debt and low interest rates can take us?

US income growth has long been acknowledged to have weakened considerably yet recent data shows that the trend has indeed been weaker than first thought.  Note the following chart showing pre and post revisions to chained per capita personal disposable income:

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A Foray into the Fundamentals of Austerity in Anticipation of the Outcome.

A recent IMF report pointed out some supposed vast amounts of room available for the world’s economies to step up government borrowing to finance consumption, investment and production decisions.   Oddly the report appeared to ignore other forms of debt and material deterioration in key areas of the economic frame.  

When the crisis broke back in 2007 it was clear to me that monetary and fiscal policy would likely need to go for broke to support economic growth and employment at a time of collapsing asset values, debt defaults and a world wide retrenchment in expenditure of all kinds.   As it happened a great deal of that support went into asset prices and financial institutions.

But some years after the crisis, after a slow and drawn out recovery with interest rates locked to the floor, economies still appear to be borderline reliant on debt financed government expenditure.  Any attempt to reduce borrowing, to either raise taxes or cut expenditure to pay back debt would be considered by many to have an adversely negative impact on economic growth, especially at such low growth rates. 

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A world in transition, but so many straws in the wind, some thoughts!

Everybody is asking and at times hoping to answer the question as to why world economic growth is slowing down, why is it so sub par, why has it not recovered post the turbulence of 2007 to 2009?   There are many straws in the wind, but which ones are cause, which ones are consequence and which are accommodation linking both?  In a world where diverging tiny margins can accumulate into significant distances it is hard to determine just what and which is the key.

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Not a “Savings Glut” per se but a monetary excess amidst a period of complex global structural economic change!

If you stream through the data it is pretty clear that developed economy growth has been slowing for some time and that monetary policy has accommodated this adjustment with lower interest rates and a relaxed attitude towards money supply growth.  At about the same time these trends were moving ever closer to their sweet spot on the horizon (because we are not yet at peak of this particular movement) certain developing markets really got going, with the help of a fair amount of their own monetary stimulus but also by a reconfiguration of global supply chains and offshoring in key economies.  All factors combined to create a heady and dangerous global financial imbalance, a weak bridge cast across a widening economic divide.  No wonder it all came crashing down..but who was to blame?  The world’s central bankers who were blindsided into excessively lax monetary policy by a low inflationary world that had become obsessed with laying off and chopping and dicing of risk to those “who could best absorb and bear it”, or some of the finer strings in the mesh?  Well, some have chosen to blame excess savings in the emerging/developing part of the world, principally China, but this is all too pat.   The “savings glut” theory, if you can really call it “excess savings”, was merely a return of serve of part of the vast ocean of financial and monetary excess that barrelled through the early to mid 2000s.

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Some important dynamics from US Q4 GDP Update

A weak frame:

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Personal consumption expenditure is the most important component of US GDP and growth in real Personal Consumption Expenditure (PCE) is tied to the productive capacity of the economy.  So why on a real per capita basis has the economy failed to produce sustained increases in consumption capacity post the early 1980s?  And note that this is despite an increase in PCE as a % of GDP over the post war period. 

And also on a nominal basis:

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How reliant in fact has GDP been on the PCE component? Growth in PCE has eclipsed both GDP and equipment investment over the post war period, and significantly so.   The question begging to be asked is,”where is growth going to come from?”

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In another recent blog I exposited about asset valuations relative to GDP growth.  Now the charts above show the increasing reliance of US GDP on PCE, a component which appears to have outsized importance in GDP terms.  Well the following shows even PCE growth being dwarfed by increases in household asset values:

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In fact we can see that PCE expenditures have been less reliant on income growth post 2000s:

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And looking at nominal GDP only, if we adjust for inventories and the impact of changes in consumer credit we find a much subdued trend in growth:

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And nominal growth in expenditures have been declining:

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And motor vehicles etc continue to be an important part of consumer expenditure…

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And relative to the prior debt fuelled cycle we find that expenditure on MVPs and RV combined is a much greater…I have pointed out concerns with respect to the growth in non revolving consumer credit relative to income growth, a ratio which stands at historically high levels.

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Services expenditure has been increasingly volatile:

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And note the importance of health care expenditure:

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Interestingly if we take out healthcare expenditure from PCE, PCE as a % of GDP has been more more stable..

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And financial services expenditure has also picked up since Q1 2013:

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Interestingly, all the domestic investment components (on a nominal basis) are turning down in a synchronised way:

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Exports have been an important driver of growth recently, but more recently has fallen back as a nominal driver of expenditure: there are many explanations for this amongst them the recent decline in the oil price and weakening global demand growth.

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And of course the chart raises the question, where is the growth going to come from?

Finally, a quick peek at growth in commercial bank deposits relative to nominal GDP growth:

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A look at final Q3 GDP..was it really that strong? And what of the Frame?

One of the risks with short term data points is being fooled by their randomness.  I believe the US economic engine is slowing down and that weight of the past remains a significant head wind!

A number superlatives are cropping up re final Q3 GDP numbers:”fastest pace since Q3 2003” and others…

But what of the frame?   If we look at the average increase in real GDP over the last 4 quarters (average change in GDP over 4Qs/average GDP in prior 4 quarters) we see that real GDP growth is relatively low in an historical context and it is unclear whether the current trend is either a bounce back from earlier weakness or a position of growing strength.

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Importantly private consumption expenditure is still outsized with respect to economic growth and other important items such as machinery and equipment expenditure.  That is much of the growth in GDP to date has been due to growth in personal consumption expenditures: 

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