Mish's Global Economic Trend Analysis

NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers
Telling Signs-of-the-Times: Layaways, Off-Brands, Goodwill Stores, Consignment Sales, Frugality, all Thrive in Middle-Class Suburbia
Ceridian Report says "Shipping Decline Signals Weaker Holiday Season"; Phone and Email Interview with Ceridian Chief Economist Ed Leamer
1.5+ Million Non-Business Bankruptcy Filings in Fiscal 2010, 14% Increase

NFIB Report Shows Lack of Sales Still #1 Problem of Small Businesses, Inflation Barely Registers

Posted: 09 Nov 2010 09:00 PM PST

Inquiring minds are digging into the November NFIB Small Business Trends Report for clues about the health of the economy and the plight of small businesses.

Once again the number one problem facing small business owners is lack of sales. The second biggest concern is taxes. In spite of a huge surge in commodity prices, inflation barely registered as a concern.

From the NFIB Report ...

OPTIMISM INDEX
Optimism rose again in October to 91.7, but remains stuck in the recession zone established over the past two years, not a good reading even with a 2.7 point improvement over September. This is still a recession level reading based on Index values since 1973. However, job creation plans did turn positive and job reductions ceased. The mood for inventory investment weakened a bit even though views of inventory adequacy improved, and an improvement in sales trends produced a marked improvement in profit trends, still ugly, but less so by a significant amount.

LABOR MARKETS
Average employment growth per firm was 0 in October, one of the best performances in years. Reaching the "0" change level raises the odds that Main Street may contribute to private sector job growth for the first time in over a year.

CAPITAL SPENDING
The frequency of reported capital outlays over the past six months rose two points to 47 percent of all firms, three points above the 35 year record low. The percent of owners planning capital outlays in the future fell one point to 18 percent because the environment for capital spending is not good.

INFLATION
The downward pressure on prices appears to be easing as more firms are raising prices and fewer are cutting them. Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years. On the cost side, four percent of owners cited inflation as their number one problem and only three percent cited the cost of labor, so neither labor costs or materials costs are pressuring owners to raise prices.
If "pricing power" in making a comeback, owners will begin to see a reversal of rather adverse profit trends.

PROFITS AND WAGES
Reports of positive earnings trends posted a seven point improvement in October, registering a net negative 26 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising.

CREDIT MARKETS
Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported credit needs not satisfied, and a record 52 percent said they did not want a loan (13 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Only three percent reported financing as their number one business problem. However, 30 percent of the owners reported weak sales as their top business problem, a major cause of the lack of credit demand observed in financial markets. A near record low 31 percent of all owners reported borrowing on a regular basis. Reported and planned capital spending are at 35 year record low levels, so fewer loans are
needed.

Optimism Index

How much of the rise in optimism is due to expectations of a Republican takeover of Congress that happened? It is no secret that small businesses do not much care of Obama.

Most Important Problem

Please compare inflation to sales, taxes, competition from big business, and taxes. Inflation barely registers.

Sales and Taxes are Two Biggest Problems

Inflation Is A Non-Issue

Historically inflation measured as a big concern in the mid-to-late 1970's. Inflation concerns spiked again in the summer of 2008 along with gas prices. In spite of a huge recent rally in commodities there is no fear of inflation now.

From the report "Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years."

The number of business owners raising prices is a net negative 5%. The profit squeeze continues as small businesses are not able to pass along rising input prices. The result is easy to spot: " far more owners report that earnings are deteriorating quarter on quarter than rising."

There are many more charts in the 23 page PDF. Inquiring minds will want to give it a look.

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

Telling Signs-of-the-Times: Layaways, Off-Brands, Goodwill Stores, Consignment Sales, Frugality, all Thrive in Middle-Class Suburbia

Posted: 09 Nov 2010 12:47 PM PST

Telling Signs-of-the-Times: In grocery stores, "No-Name" sales are up 2% and now represent 22% of total sales. Some full priced stores now offer consignment sections, an unheard of practice a couple years back.

Layaway sales are back in vogue at Toys-R-Us and jewelers alike. Layaways are a depression era phenomenon that all but died with the mass marketing of credit cards.

Old Stigmas Become New Badge of Honor

Frugality is the new "badge of honor" says the Yahoo!Finance report In a tough economy, old stigmas fall away

The Goodwill store in this middle-class New York suburb is buzzing on a recent weekend afternoon. A steady flow of shoppers comb through racks filled with second-hand clothes, shoes, blankets and dishes.

A few years ago, opening a Goodwill store here wouldn't have made sense. Paramus is one of the biggest ZIP codes in the country for retail sales. Shoppers have their pick of hundreds of respected names like Macy's and Lord &Taylor along this busy highway strip.

But in the wake of the Great Recession, the stigma attached to certain consumer behavior has fallen away. What some people once thought of as lowbrow, they now accept -- even consider a frugal badge of honor.

At the supermarket, shoppers are buying more store-labeled products, like no-name detergents and cereal, and not returning to national brands.

And in a telling trend, Americans are turning to layaway more often when they buy expensive items such as engagement rings and iPads. The wealthy are also using layaway more often, a drastic change from the past.

"The old stigmas are the new realities," says Emanuel Weintraub, a New York-based retail consultant. "Now, people don't have a problem saying, 'I can't afford it.' It's a sign of strength."

Two years ago, having second-hand clothes in the same store that sells regular-priced goods might have driven well-heeled shoppers away. Today, the concept works. The new consignment area, called My Secret Closet, has brought in new customers. Shoppers browse both the retail and consignment areas without hesitation.

"We are seeing a permanent change in how people shop, and we have to respond to that," says Tom Patrolia, who has owned the store for 24 years.

The growth in layaway also reflects Americans' new willingness to set aside old shopping stigmas. Layaway, which lets shoppers pay over time while the store holds the item, had its roots in the Great Depression. It became passe in the past two decades with the rise of credit cards.

Attitudes - Bernanke's Biggest, Most Futile Fight

I have been talking about Frugality for over two years. In case you missed it, please consider Please consider Teenagers Scared Over Plight of their Parents; Attitudes - Bernanke's Biggest, Most Futile Fight

That post contains an email from "Nancy Drew" about her daughters, aged 15 and 17 with their friends scared half-to-death about their parents' financial woes.

Flashback June 25, 2008: Peak Credit

Lessons Of The Great Depression Forgotten

The lessons of their great grandfathers who lived in the great depression era were forgotten. Over time, everyone learned to ignore the dangers of debt, risk, and leverage. Belief in the Fed and the government to bail out any problem are ingrained. Bank failures are distant memories.

Peak Credit

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

For more on attitudes please see:

Changing Social Attitudes About Debt - February 25, 2008
Moral Obligations Of Walking Away - February 7, 2008
Attitudes Lead, The CPI Lags - March 19th, 2008
A New Phenomenon: Haggling Over Prices - March 23 2008
Cool to Be Frugal - April 24, 2008
The Future Is Frugality - August 10, 2008
The Age Of Frugality - October 19, 2008

This is what I said on June 30, 2010:

Every place you look, be it housing, education, or public unions, attitudes towards debt, lending, and the role of government are changing. It is precisely those changing social attitudes why Bernanke is losing and will lose the battle against deflation.

The sad irony is Japan has proven it is a stupid battle to be fighting in the first place.

Those fretting over base money supply and foolishly screaming hyperinflation (or even inflation), simply do not understand the dynamics of debt deflation, nor do they understand how small the increase in base money is compared to debt that will be written off, nor do they understand the role of changing social attitudes towards spending.

Attitudes Still Rule

QEII did not change a thing, except to encourage more short-term speculation. Long-term, attitudes still rule, and "Telling Signs-of-the-Times" are all you need to know about the direction of attitudes.

Talk of hyperinflation or even strong inflation is complete nonsense with this backdrop in attitudes.

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

Ceridian Report says "Shipping Decline Signals Weaker Holiday Season"; Phone and Email Interview with Ceridian Chief Economist Ed Leamer

Posted: 09 Nov 2010 10:41 AM PST

Last night I had the pleasure of speaking with Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast about the Ceridian shipping index and what trends in fuel usage suggest about holiday sales. We also discussed the likelihood of a double-dip recession. First let's take a look at the report.

Recovery Time-Out

It's a "Recovery Time-Out" says the Ceridian-UCLA Pulse of Commerce Index™ for October 2010.

Holiday Season Begins on a Down Note

The Ceridian-UCLA Pulse of Commerce Index™ (PCI) by the UCLA Anderson School of Management, adjusted for season and for monthly workdays, fell 0.6% in October following a decline of 0.5% in September and a decline of 1.0% in August, which was the first three consecutive months of decline since January 2009, when we were still deep in recession.

We have had a recovery time-out since May of this year. From peak in January 2008 to trough in June of 2009, the PCI fell 15%. A strong recovery from June 2009 until May 2010 gave us back almost 2/3rds of the losses, leaving us 6.1% below the January 2008 peak. But since May, trucking has been slowly receding, and we are now 8.3% below the peak, and much farther below normal trend.

October is especially important because it is the peak month for holiday shipping, with a seasonal factor of 1.029 compared with 0.978 in November and 0.941 for December. The October decline in the PCI can be summarized in a single word: worry. Worry about the strength of sales in the holiday period has apparently caused a slowdown in trucking in October which might be only a postponement to November if consumers show a little more exuberance.

Year-over-year growth in the PCI has continued to fall since May's exceptional number of 9.0%: 8.6% in June, 8.0% in July, 6.0% in August 5.8% in September and now 4.1% in October. With the three-to-one relationship between the PCI and GDP growth in recessions and recoveries, that 4% figure translates into 1.3% GDP growth, far below what is needed for a healthy job market.

Those are 2 of 10 charts and tables in the report. Inquiring minds will want to give the report a closer look.

The Ceridian-UCLA Home Page contains additional commentary plus an interactive graph as well as an animated video.

Over the Road Trucked Shipping Decline Signals Weaker Holiday Season

"The October PCI sounds an alarm about growth in the fourth quarter, and our latest PCI data indicates retailer wariness about future sales prospects," said Ed Leamer, chief PCI economist and director of the UCLA Anderson Forecast.

"While it's discouraging to see the PCI decline for the third consecutive month, October represents the eleventh straight month of year over year growth in the index. This means that the holiday sales season will likely be better than last year, but potentially disappointing versus current expectations in the marketplace," said Craig Manson, senior vice president and index expert for Ceridian. "Should consumers show early exuberance, October's decline may only spell postponement to November. However, the PCI's performance indicates that retailers lack confidence in the coming sales season."

Interview With Ed Leamer

Yesterday I was asked by Cerdian if I would like to speak with Ed Leamer about their shipping index. Here are a few questions I submitted accompanied by responses from Leamer.

Mish: Does the drop-off in shipping signal anything definite about real demand or is it merely a sign that inventory replenishment is over? Isn't that the crux of the problem in interpreting your data?

Leamer: As we discussed on the phone, the continued increase in shipping after the inventory replenishment at the beginning of this year depended on increases in sales (with a constant inventory/sales ratio), and the drop-off in shipping suggests that there hasn't been much to replace what was sure to be a temporary driver – inventories.

Mish: How do you reconcile recent hiring, and more specifically holiday season hiring plans by retail stores in light of a shipping slowdown? Are stores making a mistake by increasing hiring?

Leamer: Be aware that on a year over year basis October shipping is up 4.1% which suggests a need for more seasonal hiring than last year on the order of 1%. The weakness is in the second half of that October-October year. (the critical half for thinking about the future)

Mish: Do you have an actual forecast for holiday sales in percentage terms, if so what? (e.g. -1% to +1% or whatever)

Leamer: Our formal forecast model doesn't have retail sales as one of the variables, but our forecast for GDP growth in the fourth quarter is 2.1%, quarter over quarter, annualized. Tepid growth.

Mish: What is the likelihood consumer attitudes change for the better or worse in December, regardless of what Gallup and other surveys suggest right now, and regardless of what Ceridian suggests?

Leamer: It doesn't matter what they say to Gallup, what matters is what they do, which is subject to some serious uncertainty but there doesn't seem to be anything on the horizon, like a big surge in jobs, that is going to improve the mood. Fortunately, fear of another Great Depression is dissipating.

Mish: Given that much of the rise in shipping, hiring, ISM etc, has been inventory replenishment, and given pending cutbacks in municipal and state budgets, why should anyone want to rule out a double-dip?

Leamer: Dips come from collective postponement of the postponeable purchases: homes, cars and equipment. But all three of these are at record lows relative to GDP after all the postponement that has already occurred. (After having falling to the floor, the economy has to at least get back to its knees before it can fall again.)

Phone Notes

Here are a few additional notes I made from our phone conversation.

To get a recession, volatile parts of the economy have to shrink. The volatile components are housing, consumer durables, and business capital spending. The first two are extremely weak and unlikely to shrink much further.

0% to 2% growth is not out of the question. The critical thing to watch is labor. So far there has been no sustainable positive feedback from any efforts to stimulate hiring.

Data suggests the inventory replenishment cycle is over for now.

Consumers have to start saving.

The seasonal adjustment "one size fits all" methodology of the BLS in regards to the Household and Establishment Surveys is suspect.

Housing is the business cycle and that cycle is anemic.

Structurally High Unemployment Here to Stay

I believe we are going to have structurally high unemployment for a decade. The San Francisco Fed ruled it out. You can see my rationale in Common Sense vs. Academic Formulas; Fed Concludes Structurally High Unemployment is a Myth

To those arguments I would like to add the fact that boomers are ill-prepared for retirement. They need to work longer than they expected. Their homes are not the retirement plans they once thought.

Equity extraction for consumption is over. In many cases there is no equity to begin with. The only reason the unemployment rate is not above 10% now, is the participation rate (labor force), has been falling like a rock.

Duration of Unemployment

BLS Table A-12 tells a sad story. Over 6.2 million unemployed have been out of work for 27 weeks or more. That is 41.8% of the total. Once you lose your job, it is likely to be gone for a while.

Unless Congress extends unemployment benefits in the November lame-duck session, an estimated 2+ million would-be workers, will lose their benefits.

Stop and think as to what that might mean for spending, bankruptcies, foreclosures, etc.

No doubt that is weighing on consumer psychology, and it will continue to weigh on consumer psychology until there is a meaningful uptick in jobs.

Final Thoughts

Here is a point I made over two years ago that has now come to fruition: "Boomers will be competing against their kids and grandkids for jobs at Walmart and McDonalds."

Look at the average age of greeters at Walmart and the ages of some employees at fast-food restaurants. Think those people are working because they want to work or because they need to work?

Now look at things from the perspective of management. Would you rather hire someone over 62 who collects Medicare or someone 25 starting a family in need of family medical insurance?

What about kids are graduating from college with no prospects of a job and moving back home with mom and dad? What does that do to family formation and the need for goods and services?

Avoiding the Double-Dip?

Bernanke is certainly doing everything he can to avoid a double-dip, but it is highly unlikely QEII will do any good. I made the case in Three Reasons QEII Will "Backfire"; Pavlov's Dogs and the "No Choice" Argument Yet Again.

Please give that a read if you have not yet done so.

If Congress raises taxes and does not extend unemployment benefits I think a double-dip recession is a given.

Regardless, if "housing is the business cycle" then things prospects for jobs do not look good, whether there is a double-dip or not.

In conclusion, we are likely in for a period of low-growth or no-growth accompanied by painfully high unemployment for quite some time. Is that what the stock market has priced in?

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

1.5+ Million Non-Business Bankruptcy Filings in Fiscal 2010, 14% Increase

Posted: 09 Nov 2010 08:19 AM PST

CNNMoney reports Bankruptcy filings jump 14% in 2010

In the federal government's fiscal year 2010, which ended September 30, more than 1.5 million non-business bankruptcy filings were processed, according to data released Monday by the Administrative Office of the U.S. Courts. That's up more than 14% from fiscal 2009, when about 1.3 million personal bankruptcies were filed.

"As the economy looks to climb out of the recent recession, businesses and consumers continue to file for bankruptcy to regain their financial footing," Samuel Gerdano, director of the American Bankruptcy Institute, said in a statement. The ABI is a non-partisan private research group.

Gerdano expects the number of bankruptcies to continue rising in the months ahead as unemployment holds near 10% and access to credit remains tight.

The number of non-business bankruptcies filed last year is the highest since fiscal year 2005, when over 1.7 million personal bankruptcies were filed. The spike in 2005 came just before Congress amended the bankruptcy code, making it harder for Americans to complete the process, which sparked a rush to file before the changes took effect.

The Bankruptcy Abuse Prevention and Consumer Protection Act of five years ago made it harder for individuals to receive Chapter 7 bankruptcy protection, in part by increasing the costs associated with filing. Chapter 7 is designed to give individual debtors a "fresh financial start" by liquidating assets and discharging debts.

In fiscal 2010, Chapter 7 filings spiked nearly 15% to over 1.1 million, from 989,227 in fiscal 2009.

The facts show that in spite of lender sponsored legislation to make people debt slaves forever, 73% of bankruptcies were chapter 7.

Given there is no driver for jobs, and structurally high unemployment will be with us for as long as a decade, expect to see high rates of bankruptcies for a long time.

Please see see Common Sense vs. Academic Formulas; Fed Concludes Structurally High Unemployment is a Myth for a discussion of why the Fed is wrong when it concludes structural unemployment is "likely to be transitory rather than permanent".

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

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Mish's Global Economic Trend Analysis

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