Mish's Global Economic Trend Analysis

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• Weekend Diversion - Golf Trick Shots
• ISM Disappoints, Led by Decline in Employment
• Construction Spending "Once Again Defies Expectations" Much Weaker Than Expected; Four Reasons Economists Perplexed
• Investigating the GDP Deflator: Wildly Differing Results Depending on Your Choice

Weekend Diversion - Golf Trick Shots Posted: 01 May 2015 07:04 PM PDT It is amazing how good people can get at things. I would be hard pressed to even think about setting up some of these shots. Even if you are not a golfer you may appreciate this video. Link if video does not play: Bryan Brothers Golf Trick Shots. I like to golf. Breaking 90 is an excellent game for me. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

ISM Disappoints, Led by Decline in Employment Posted: 01 May 2015 01:03 PM PDT In addition to construction estimates missing by a mile today, ISM also disappointed, albeit not by much. The Bloomberg Consensus estimate for ISM was 52.0 but the report was a slightly weaker 51.5. It's the details that are interesting. There's a new unwanted wrinkle in the ISM report and that's weakness in employment, holding down the headline index to 51.5 in April, unchanged from March. Employment has been holding strong in other reports -- but not in the ISM report where the index is down nearly 2 points to a sub-50 level of 48.3 to indicate month-to-month contraction. This is the first time this reading is in contraction since May 2013 and it's the lowest reading since all the way back in September 2009. Other indications, however, are positive. New orders actually rose in the month, up 1.7 points to 53.5, and export orders are above 50 for the first time this year, at 51.5 for a 4.0 point gain. Production, at 56.0, is especially strong as are import orders at 54.0 for a 1.5 point gain. Prices, as in other reports, remain in contraction, little changed at 40.5. And there's solid breadth in the report with 15 of 18 industries showing composite growth in the month with strength in the auto industry specifically cited. This report is mixed though the decline in employment won't be raising expectations for next week's employment report for April. Note on Diffusion Indices I commented on employment in Richmond Fed Manufacturing Index Negative Second Month. It's important to note that a single firm hiring one person will counterbalance another firm firing 50. It's entirely possible employment is not as strong as it looks (not that 7 is a particularly strong number in the first place).  Some of these subcomponents are mostly noise. The overall trend of all the reports in general is not noise. The baseline for zero growth in the ISM is 50, for the regional Fed reports it is 0.  ISM Details Let's investigate all the details of today's report straight from the Institute for Supply Management Manufacturing ISM® Report On Business® released this morning. Index Apr Mar PP Change Direction Rate of Change Trend in Months PMI® 51.5 5.1.5 0 Growing Same 28 New Orders 53.5 51.8 1.7 Growing Faster 29 Production 56.0 53.8 2.2 Growing Faster 32 Employment 48.3 50 -1.7 Contracting From Unchanged 19 Supplier Deliveries 50.1 50.5 -0.4 Slowing Slower 23 Inventories 49.5 51.5 -2.0 Contracting From Growing 1 Customers' Inventories 44.0 45.5 -1.5 Too Low Faster 5 Prices 40.5 39.0 1.5 Decreasing Slower 6 Backlog of Orders 49.5 49.5 0 Contracting Same 2 Exports 51.5 47.5 4.0 Growing From Contracting 1 Imports 54.0 52.6 1.5 Growing Faster 27 All in all the report was about as expected. The details conflict with Richmond Fed and Dallas Fed. The former above. For the latter see 6th Straight Negative New Orders Reading for Dallas Fed Manufacturing Survey. As with the Richmond Fed, the Dallas Fed reported a slight increase in employment. Many of the individual numbers are likely noise. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Construction Spending "Once Again Defies Expectations" Much Weaker Than Expected; Four Reasons Economists Perplexed Posted: 01 May 2015 10:58 AM PDT Economists have been overly optimistic on the majority of economic reports for going on six months. Today the Bloomberg Consensus estimate for construction spending was for a 0.4% gain. The actual result was a decline of 0.6%. Construction spending once again defied expectations. March construction spending dropped 0.6 percent against expectations of an increase of 0.4 percent. On the year, construction spending was up 2.0 percent, down from February's annual increase of 2.7 percent. Both residential and public building declined. While weather can still be blamed for some of the decline, a basic weakness in the building sector was apparent. Private residential spending dropped 1.6 percent on the month with both single family and multi-family homes declined. In addition, residential construction excluding new homes, which captures home remodeling, also declined after gains in the previous two months. Nonresidential private construction provided a ray of sunshine -- it advanced 1.0 percent on gains in the office, manufacturing, and health care sectors. Public construction was down for a third straight month to its lowest level since February 2014. State and local government spending, the much larger portion of public construction, dropped in both February and March while Federal Government construction retreated after an 8.6 percent surge in the previous month. Construction Spending Construction Spending Percent Change From Year Ago Four Key Reasons Economists are Perplexed Weakness is "transitory" as the Fed explained on Wednesday. For discussion, please see Fed Cites Weather, "Transitory" Factors in FOMC Statement; No Hat Tricks; What About Consumer Sentiment?   Clearly the economy could use more Walmarts and McDonald's as there is not yet one on every corner. Forget about the fact that wages are going up and that will damper earnings and reduce the desire to open marginal stores. See Employment Compensation Costs (Wages and Benefits) Jump in First Quarter.   Millennials working multiple part-time jobs will soon buy a new home thanks to rise in hourly wage to $12.   We certainly need to build more public schools as retiring boomers will be going back to 8th grade en masse. Those key points undoubtedly explain why economists are so perplexed with all this weakness. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Investigating the GDP Deflator: Wildly Differing Results Depending on Your Choice Posted: 01 May 2015 12:46 AM PDT As noted in Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details I got the first quarter GDP forecast details correct. However, a bit of self-assessment with differing GDP deflators shows my prediction of close to zero growth could easily have looked rather silly. I asked Doug Short at Advisor Perspectives what the GDP would have looked like using various deflators: GDP (Implicit GDP Deflator) PCE (Personal Consumption Expenditures) CPI (Consumer Price Index) Shadowstats (Williams' Alternate CPI) Charts are shown below. Both Doug and I consider Shadowstats absurd, but we include it because many follow the number. For a recent critique of the measure please see Deconstructing and Debunking Shadowstats. clock on any chart for sharper image GDP Implicit Deflator (Official GDP) GDP with PCE as Deflator GDP with CPI as Deflator GDP with Shadowstats CPI as Deflator Results GDP (Implicit GDP Deflator): 0.2%  PCE (Personal Consumption Expenditures): 2.2% CPI (Consumer Price Index): 3.3% Shadostats (Williams' Alternate CPI): -1.2% Defending on your price deflator, GDP was between -1.2% and +3.3%. If you toss out Shadowstats, then the range is 0.2% to 3.3%. That's still a damn wide range. People accuse the BEA all the time of manipulating the deflator to make things look good, but if they easily could have done that this month for far better results. Over time, GDP is highest with the PCE and GDP implicit deflators. At least the BEA is consistent. Mean GDP GDP (Implicit GDP Deflator): 3.26% PCE (Personal Consumption Expenditures): 3.32% CPI (Consumer Price Index): 2.93% Shadostats (Williams' Alternate CPI): 0.79% Next quarter, because of rising energy prices, deflating GDP by the CPI will likely yield worse results than the GDP deflator. Some people will criticize the BEA because of it, while remaining silent about this quarter. As it stands, rising energy prices and the strong dollar will place downward pressure on second quarter GDP no matter which deflator one uses. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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