Mish's Global Economic Trend Analysis

Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge
Greece Needs Ronald Reagan's PATCO Play
Anecdotes from Germany regarding 'Kurzarbeit' (Part-Time for Economic Reasons)
Following Yesterday's Hype of Fastest Growth in 4 Years, June Retail Sales a "Mixed Bag"

Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge

Posted: 08 Jul 2010 09:33 PM PDT

Consumer credit has fallen an unprecedented 7 consecutive quarters. Moreover, credit is poised to plunge further as consumer spending plans are falling through the floor.

Bloomberg reports Consumer Credit in U.S. Declined More Than Forecast.

Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.

The $9.1 billion decrease followed a revised $14.9 billion slump in April that was initially estimated as a $1 billion increase, the Federal Reserve reported today in Washington. Economists projected a $2.3 billion drop in the May measure of credit card debt and non-revolving loans, according to a Bloomberg News survey of 34 economists.

Borrowing that's increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month.

Consumer Credit This Recession vs. Last

The above chart courtesy of Chris Puplava at Financial Sense.

Note the remarkable difference in consumer attitudes the latest recession vs. 2001. This drop is unprecedented, at least back to the great depression.

Massive Chargeoffs or Consumers Paying down Debt?

Inquiring minds are asking an important question: Is the drop in consumer credit related to chargeoffs or because consumers are wildly motivated to pay down debt?

For some clues, please consider Credit-card debt drops 10.5% in May

Paying down credit-card debt appears to be on the upswing.

Consumers cut their outstanding revolving debt -– overwhelmingly credit cards -– by an annualized, seasonally adjusted rate of 10.5 percent in May, the Federal Reserve reported Thursday. That's on the heels of an 11.8 percent drop in April. Revolving credit is a line of credit allowing consumers to pay all or part of an outstanding balance, and, as the balance is paid, it becomes available to spend again as credit.

But it might be premature to say that consumers have been scared straight.

The monthly consumer credit numbers tell only part of the story because it's not yet known how much debt banks or merchants will charge-off, or remove from their books because they've deemed it uncollectable. The Fed's charge-off numbers are released quarterly, and the first quarter's 10.1 percent rate tied for the highest since the beginning of 1985, the latest period for which figures are readily available.

"Unfortunately we won't know until the charge-off data comes out for the second quarter whether the reduction was actually due to consumers paying down their debt or the banks writing bad debt off the books," Odysseas Papadimitriou, a former Capital One executive who is now founder and chief executive of credit-card research Web site Cardhub.com, said.

In the first quarter, for example, about 40 percent of the decline in credit-card debt was due to charge-offs, Cardhub.com said.

I believe it is safe to say we are seeing both writedowns and chargeoffs. The latter will lead to declining financial earnings unless provisions for losses cover the writeoffs.

I highly doubt loan loss provisions are adequate.

Fed Consumer Credit Release

Inquiring minds are taking a look at the Fed G.18 Consumer Credit Release to see what additional details we can find.

The report shows "Consumer credit decreased at an annual rate of 4-1/2 percent in May 2010. Revolving credit decreased at an annual rate of 10-1/2 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent."

The report also shows the interest rate for 48-month new car loans is 6.26 percent and the interest rate for 24-month personal loans is 11.0%

Those numbers are near all-time lows. So where is the demand?

Consumer Inflection Point

The Contrary Investor is asking Is Consumption About To Hit A Rate of Change Inflection Point?

Is Consumption About To Hit A ROC?...You'll remember that last week we took a look at just how meaningful government support has been to personal consumption in the current headline economic recovery to date through the vehicle of transfer payments, and specifically unemployment benefits. Without the benevolence of those extraordinary benefits headline personal income would be running in negative year over year rate of change territory. Not a happy thought.

As we mentioned last Thursday, at least so far our elected leaders have not extended benefits again, as has been the case for close to two years now. In fact, over the last week over one million folks fell off of the extended unemployment benefit rolls. So right to the point, is personal consumption about to hit a rate of change inflection point as the magnitude of government transfer payments hits its own nominal dollar peak and begins to retreat?

.... So in a bit of quick summation, both the technical action of retail/consumer oriented equities and the actual fundamental numbers from cycles past are strongly suggesting the price out performance run of retail/consumer discretionary is over for the current cycle. It's also in rhythm with classic early cycle beta out performance giving way a year to a year and one half after initial cyclical equity bull runs commence. If government transfer payments have peaked for the current cycle, specifically the nominal dollar magnitude of extended unemployment benefits, the odds increase that perhaps even a trading range of relative performance for retail/consumer discretionary equities is optimistic. If the rate of change in headline personal income numbers exclusive of transfer payments cannot get back into positive territory in a short while and transfer payments lessen meaningfully, retail stocks are at outright risk.

Maybe putting a bit of a tiny exclamation point behind the need of business spending to indeed pick up is data we saw in the consumer confidence report concerning consumer spending plans. We have not updated the following chart in some time, so here it is in all its glory.

As per the report last Tuesday, consumer plans to buy major appliances and autos hit new lows. And yes, as you'd expect post the expiration of the tax credits for home buying, plans to buy homes has retreated. Wildly surprising? Not really. But it does reinforce the message of business spending importance both in 2H 2010 and into 2011.

A tip of the hat to the Contrary Investor for explicit permission for the above snip.

Plans Match Reality

Consumer plans to buy a new home certainly matched reality as last month new home sales plunged 33% to a record low.

For details, please see Inane Thoughts of the Day: CNNMoney Article says "Housing Shortage is Coming"; Coldwell Banker CEO says Now is the "Absolute Best Time" to Buy a Home.

It stands to reason if new home sales are plunging, appliance sales will as well.

Moreover, those plans to purchase new cars looks rather ominous with all the absurd hopes pinned on manufacturing leading the cycle.

Once again, remember this is happening smack in the face of all-time low mortgage loan rates and all-time low new car loan rates.

Consumers just do not want credit at any price. Repeating what I said earlier today in Following Yesterday's Hype of Fastest Growth in 4 Years, June Retail Sales a "Mixed Bag"

If you are properly reading the signs, this is what you see ....

That's All Folks

Image courtesy of clipart for free.

Given the headwinds in this economy, the lack of jobs, the falling consumer confidence numbers, falling new home sales, and falling leading indicators, today may be the last hurrah for retail sales for quite some time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greece Needs Ronald Reagan's PATCO Play

Posted: 08 Jul 2010 06:32 PM PDT

Greek public unions, upset over austerity measures and benefit reductions, have once again gone on strike (their favorite pastime). This go around, air traffic has been delayed and 89 flights were canceled and another 109 rescheduled, stranding tourists.

In response, the Greek government is offering to pay costs incurred by travelers affected by the strikes.

The Guardian discusses the situation in detail in Strike-hit Greece vows help for tourists.

Greece's promise to recompense tourists affected by industrial action was tested today as thousands of holidaymakers were left stranded by a general strike over the economic austerity measures.

The strike, the sixth in as many months, saw shutters come down nationwide as workers in the public and private sectors joined the walkout. At Athens international airport 89 flights were cancelled and 109 rescheduled as air traffic controllers heeded union calls to join the protests. Striking workers kept office blocks, schools, hospitals and banks closed.

The ruling socialists have vowed to pay up to €70 (£58) a day to cover costs incurred because of strikes. "We are guaranteeing to pay any extra room and board any visitor in Greece pays," said the tourism minister, Pavlos Geroulanos. "Even if [they are] stuck here because of a volcano in Iceland."

Tourism has nosedived this year after public protests over the policies demanded by the international community in return for a €110bn rescue package. More often than not tourists have cited strikes when cancelling bookings.

Ronald Reagan's PATCO Play

The only thing Greece has going for it is tourism, and the idiotic unions are threatening their own livelihood. Worse yet, they have lessened Greece's already extremely slim chances of extraditing itself from its budget mess.

Greece desperately needs Ronald Reagan's PATCO Play.

The Professional Air Traffic Controllers Organization or PATCO was a United States trade union which operated from 1968 until its decertification in 1981 following a strike which was broken by the Reagan Administration. The 1981 strike and defeat of PATCO has been called "one of the most important events in late twentieth century U.S. labor history.

On August 3, 1981 the union declared a strike, seeking better working conditions, better pay and a 32-hour workweek. In doing so, the union violated a law {5 U.S.C. (Supp. III 1956) 118p.} that banned strikes by government unions.

Ronald Reagan, declared the PATCO strike a "peril to national safety" and ordered them back to work under the terms of the Taft-Hartley Act of 1947. Only 1,300 of the nearly 13,000 controllers returned to work.

On August 5, following the PATCO workers refusal to return to work Reagan fired the 11,345 striking air traffic controllers who had ignored the order,[6][7] and banned them from federal service for life (this ban was later rescinded by President Bill Clinton in 1993).

The proper response to any striking public union (either in Greece or the US) is to fire everyone on strike. Better yet, public unions should be illegal in the first place, and the issue would never come up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Anecdotes from Germany regarding 'Kurzarbeit' (Part-Time for Economic Reasons)

Posted: 08 Jul 2010 01:05 PM PDT

Here is an interesting email from "Klaus" in response to Economists Surprised Again as German Factory Orders Unexpectedly Fall

Hey Mish,

I have a German friend visit whose family owns a small manufacturing company that makes the machinery to clean and refurbish commercial concrete forms.

This is his story: a few years ago business was steady and they had about 12 employees. They didn't really see any slowdown in 2008. Moreover, 2009 was a bit of a boom year and they staffed up to about 15. That lasted for a while, but this spring (May) business fell off a cliff.

They are now down to about 3 people, the rest are on 'Kurzarbeit' (translated: 'short work'), which is essentially a way to keep people on payroll while slashing their hours and pay.

A quick search shows 'Kurzarbeit' is being hailed as a model for other countries to follow. This makes me wonder how much 'Kurzarbeit' is masking unemployment problems in the US.

Klaus

Kurzarbeit in the US

Hello Klaus, thanks for the report and thanks for your question. I am quite certain Europe will slow much more than the mainstream talking heads realize.

In the US, "on Kurzarbeit" is known as "part time for economic reasons".

If you work as much as 1 hour you are considered employed.

Part-time census workers alone added 411,000 jobs in May. 225,000 of those jobs went away in June as noted in Jobs Decrease by 125,000, Rise by 100,000 Excluding Census; Unemployment Rate Drops to 9.5%; A Look at the Details

Table A-8 Part Time Status

click on chart for sharper image

The above table shows we have 8,627,000 "on Kurzarbeit".

Those "Not in the Labor Force"

Moreover, those "not in the labor force" rose by a whopping 842,000 in a single month. In the last 3 months, those "not in the labor force" rose from 82.6 million to 83.9 million, an increase of 1.3 million.

In the US, if you want a job, but do not report you looked for a job, you are not a part of the labor force and therefore are not considered unemployed. This explains how the unemployment rate dropped.

Most of those not in the labor force are under the age of 16, retired, or in prison. However, there are 2.6 million workers who want a job but did not look for a job in the last 4 weeks. The euphemism for this sorry state of affairs is not unemployed, but rather "marginally attached".

"U-6"

If you add up the marginally attached and part-time for economic reason workers and add those totals to the official unemployment rate, you arrive 16.5%. That number is a more reasonable approximation of unemployment misery than the "official" number. We label that total "U-6".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Following Yesterday's Hype of Fastest Growth in 4 Years, June Retail Sales a "Mixed Bag"

Posted: 08 Jul 2010 08:26 AM PDT

The Wall Street Journal reports Retailers Turn in a Mixed Bag for June Sales.

U.S. retailers reported mixed results for June, with some stores benefiting from aggressive promotions and others hurt by consumers' continued restrained spending.

Retailers from department stores to teen retailers responded to limited demand with increased markdowns. Big sales during June are common as retailers try to clear shelves for fall merchandise, especially back-to-school apparel. But a number of analysts are calling June's discounting steep.

"Many retailers pulled out all of the stops with respect to promos in June," said Brian Sozzi, retail analyst at Wall Street Strategies. "During our store walks throughout the month, the level of promotions picked up relative to previous months."

"Sales in electronics, video games, music and movies were particularly soft for the month," said Target Chief Executive Gregg Steinhafel. "We continue to plan our business cautiously." Target said it expects July same-store sales to be up in the low single digits.

Retailers were forecast to report 3.2% growth at stores open at least a year, according to the 28 companies tracked by Thomson Reuters. The estimate compares with a 4.9% drop last year. Same-store sales are considered a key barometer of retailers' health because the figures allow clean comparisons as opposed to overall sales because store numbers fluctuate.

"We're almost treading water compared to the building spending momentum we saw at the beginning of the year," said Mike Berry, director of industry research at MasterCard Inc.'s Spending Pulse unit. "At the beginning of the year, people were anticipating good news and spending increased. When economy didn't turn around, consumers took a step back."

Retail Winners Exceeding Expectations

J.C. Penney Co. (JCP) sales +4.5%
Macy's (M) sales +6.5% w
Nordstrom (JWN) sales +14%
Ambercrombie & Fitch (ANF) sales +9%

Retail Losers Not Meeting Expectations

Target (TGT) sales +1.7% vs. expectations of +2.7%
Kohl's (KSS) sales +5.9% vs. +6.5% expected
Teen retailer Wet Seal (WTSLA) sales -3.6%
Gap (GPS) sales flat

Retail Sales Synopsis

Those numbers may seem pretty good but June sales benefited from a late Memorial Day that pushed sales into June. Moreover, June is normally a stronger month than May. More importantly, note how estimates were ratcheted lower as the month progressed.

At the beginning of June estimates were +3.8% in aggregate but by the end of the month the estimates (and numbers to beat), were a mere +3.2%.

Discounting was steep.

Here is one of the most telling comments from the article "Retailers that surpassed analysts' expectations were mostly quiet about increasing their second-quarter guidance, raising questions about how much the promotions, while aiding sales, came at the cost of lower profit margins on the items."

Yesterday's Amazing Hype

In contrast today's reported "Mixed Bag", yesterday's hype was rather amazing, including a Bloomberg headline touting "U.S. Retailers' Sales Rise at Fastest Pace in 4 Years"

I talked about that hype in Market Rallies as Retail Sales 'Purportedly' Rise at Fastest Pace in 4 Years; Signs Suggest this Oversold Rally will Soon be Dead

Same Store Sales - Misleading Sign

Reis has it correct and so do I. Not only is it easy to beat record low comparisons of a year ago, same store sales are rising in part because stores are closing like mad.

Circuit City closed its entire chain in bankruptcy, thus some of those sales went to Best Buy, some other places, and some sales simply vanished.

More importantly, states have been reporting declining sales tax collections for the entire year.

Admittedly state tax collection numbers are frequently delayed by a couple months, but that still does not jibe with overly bullish comments about sales over the first five months of the year from the International Council of Shopping Centers.

Assuming you believe the fantasy sales reports, a more important question is "where to next?"

If you are properly reading the signs, this is what you see ....

That's All Folks

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Thursday, July 8, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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