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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US Employment data, key points and filler!

Unlike retail sales, industrial production, new orders or a number of other economic data, the employment report comes with a lot of extra filler.  You need to dig down into the ingredients to figure what is and what is not good.  On the surface we have seen a recent deceleration, but nothing which looks out of the ordinary post 2009.

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But what do we see when we dig? 

  • Productivity growth at post war lows!  Employment data is producing less and less and becoming in GDP, asset price support and income growth terms, increasingly diluted.
  • Health care and social assistance has been key to recent employment growth but the growth rate is falling off.  Looking after an aging society may not produce the growth needed to sustain the liabilities attached to the economic frame.  Indeed, many of these liabilities may not be adequately accounted for within asset valuations.
  • If we exclude health care and social assistance from employment date, employment levels only returned to growth on an annual basis in October 2014, making the current employment growth cycle a short one to date.
  • Add food service and drinking places employment (to health care and social assistance) and we have the sum total of jobs created since the recession started.  But even food services and drinking places employment growth has shown a recent declining trend.   Again, the income/productivity dynamics of this type of employment is unsupportive of the current asset/liability frame.
  • Retail trade employment growth was especially strong during the latter part of 2015 (dominated by motor vehicles and parts dealers), although we have seen weakening of late.  Watch out for MVP employment (which means an eye on consumer credit) and buildings and materials (which means an eye on construction).  There has been weakness on the retail side that is obscured by recent April data
  • The weakness in the goods producing industries, construction excepted, and trade and transport is noteworthy in the light of weakness in output, new orders and exports.  These are all key industries in terms of the economy’s ability to provide generate long term GDP, income and productivity growth.   Manufacturing and trade are important cogs in the economic machine.
  • The one relatively strong point in the data remains the professional and technical sub sector of professional services.  Relative to service sector (and hence all employment) it has continued to rise in importance, but the growth rate of this dynamic has slowed in the current cycle.  This may not be a positive for income flows if it represents a movement towards rationalisation of processes (reduced employment at the front end and a small increase at the operational core), reflective of cost reduction and other operational rationalisation.
  • Long term dynamics  – employment growth rates/part time versus full time/self employment versus employed – are all weakening or stuck in a post recession rut.  A lot of recent employment gains look like they are due to a rise in part time employment (which may be a positive if it signals increasing willingness to hire) so growth fundamentals are still very weak and possibly weakening. 

What makes employment growth and the make up of employment growth so important is that it impacts productivity and earnings growth, two key factors that require vigour if we are to accommodate high debt levels and high asset prices.  Other relevant relationships include capital investment (historically weak), income inequality and a slowdown in population growth as well as a shift in its demographics.   Finally, with weak global trade dynamics we have considerable pressure on areas of the economy that have traditionally been important to productivity and earnings growth.  

There is nothing wrong in a declining population and declining growth rates of employment as long as the relationship between asset values (debt/equity) and consumption/investment dynamics are in keeping.   I very much doubt whether it is and this is why employment growth today is a much more important indicator of financial health than it is fundamental economic health.  There are so many straws in the wind!

And the graphics:

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“Investing in social infrastructure as an anti-recession tool”

…is the title of a Washington Centre For Equitable Growth article.  I think that there is some logic to investing in social infrastructure in a slowing growth frame. 

WHY?

In a slowing growth frame less of a corporation’s revenue flows are likely to be reinvested and productive capital is likely to be increasingly depreciated over time, depending on the rate of decline of the frame.  At the moment this cash flow, distributed as either dividends or buybacks, is likely to go disproportionately to those with higher wealth and hence more likely to be reinvested in existing assets, driving up their prices.

In a competitive economic model cash flows would be used to finance the transition to lower growth, with flows consumed and/or used to reduce debt.  As people age the costs associated with complex medical and personal  care needs rise, but these are liabilities that are presently not that well funded.  It makes sense to optimise the allocation of flows to a) fund the economic costs of older adult communities and b) make sure that those at the younger end of the scale continue to receive the necessary education and employment skills training.   This would ensure that the expenditure flows in the economic habitat would be healthier in terms of optimising expenditure and investment.  Imbalances due to inefficient distribution of flows are likely to lead to higher asset price and financial system risks.

In a growth frame where higher levels of productive capital investment is needed it makes sense to have lower corporate tax rates, but in a slower growth frame where higher percentages are distributed it would make sense to tax these distributions at higher levels for more efficient distribution.   In a competitive efficient market place without asymmetric properties we would be less likely to have the present skewed distribution of income and wealth and associated funding pressures on key aspects of social infrastructure.

Helicopter Money…Japan..25 charts

Japan has been at the forefront of weakening GDP/wages/growth, deteriorating demographics, elevated sovereign debt and extreme monetary policy.   Of all the major economies, given its existing debt burden and aging population, Japan is arguably the closest to Helicopter money.

Post 2012, policy (Abenomics) aimed at stimulating demand, generating wage growth and inflation has failed with respect to the specific objectives set.  But then again, what is an optimal level of consumption in a declining demographic paradigm?  Perhaps in the modern world it is one which drives growth to the point that current debt levels become manageable, or where risky assets provide returns commensurate with the consumption liabilities expected to be provided by them.   In this context, global Central Banks have been consciously attempting to manufacture growth for at least a decade.  Helicopter Money would however break this intercession, acknowledging that only more money supply and more debt relative to growth can support the expenditure/infrastructure side of the balance sheet: it is difficult to comprehend just how the asset side of the balance sheet would evolve in such circumstances.  I suspect that there would need to be an adjustment, a reset, but even that would be only half the story.  That said, on to Japan:

Japanese real GDP growth has been sliding heavily since the bursting of its own asset  bubble starting in 1990:

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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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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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Is Canada’s Mini Golden Age behind it?

I remember back in the 1990s looking at long term Canadian stock market performance and thinking how lacklustre it had been.  Since then of course things changed: while many markets have fallen back below levels reached in the 1990s (UK, France, Japan,  Italy) Canada’s stock market, up until recently, has been ratcheting up one peak after another; its markets have behaved more like developing Asian markets (South Korea, Hong Kong etc).

Commodity price and production increases have played a large part in much of post 1990s economic performance as has a considerable debt financed house price/construction boom and other debt financed consumer expenditure.

With the recent hefty collapse in oil (other commodity prices have been falling for a while too) it is worth asking whether Canada’s mini golden age has passed.   Certainly the boost that came from a debt financed property market boom is unlikely to be repeated and the consequences of debt more likely than not to weigh on future economic growth.  Additionally, China, a key figure in the growth of world trade and demand for commodities post 1990s is slowing down. 

But what of other dynamics?  Well population growth and aging are very important and have likely been a major factor in slowing global growth.   If we look at employment growth between 2000 and the present point in time we see that Canada has significantly outperformed the US and a good part of its economic performance has likely been due to this superior metric:

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Recently a Statistics Canada report eulogised Canada’s population growth, the highest amongst G7 economies but I see more troubling trends behind the data:

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The age 65 and over population is expanding rapidly at the same time as under 20s has actually been falling.  Back in 1990 12.5% of the US population was over 65 and 28.8% was 19 and below.  In Canada the respective figures were just under 11% and 27.7%.  By 2013 US over the age of 65 had risen to 14.14% and those under 20 had only fallen to 26%.  In Canada the respective figures were 15.3% and 22.3%.  The trend is divergent: the working age cohort in Canada started at a higher level and has now shrunk to a lower level and looks set to fall further.

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We can see the growth rate of the key 20 to 54 age group has been declining steadily.

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We also note that employment growth in the 20 to 24 age group (and hence the 20 to 54) had benefited some from a recovery in growth (long since past) in the 0 to 19 age group from the mid 1980s to the late 1990s.   This has now worked its way out of the system.

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Canada has seen relatively strong employment growth from the late 1990s to around 2008, which had held up reasonably well post 2008.  But if we assume that the 0 to 19 age group is declining and that the surge in employment growth has been due to a temporary surge in growth in the younger cohorts, expect employment and economic growth to suffer.   Also expect demand for highly priced properties to abate.

Poor demographics and high levels of debt combined are highly deflationary.  Moreover high levels of debt and slow economic growth risk further weakening population growth, compounding growth and debt problems.   This to my mind is a key reason why we need to worry a lot more about debt levels.