Mish's Global Economic Trend Analysis

Fed Apologist Ritholtz Interviews Fed Apologist McCulley
Investigating Consumer Confidence: 3-Month Low? 10-Month Low? Near Record High?
ISM Weaker Than Expected, Details Weak, Exports Contract Third Month
China PMI Contracts Fastest Since February-March 2009

Fed Apologist Ritholtz Interviews Fed Apologist McCulley

Posted: 01 Sep 2015 10:17 PM PDT

Bloomberg columnist Barry Ritholtz interviewed Paul McCulley, former chief economist at PIMCO, and often mentioned FOMC candidate on the Fed's performance.

The Podcast is over two hours long, so let's just go with Ritholtz's brief summary: McCulley Demands Apology on Behalf of the Fed.

McCulley noted those who claimed QE and ZIRP were going to cause inflation and the collapse of the dollar were totally wrong, and he demanded these critics of the Federal Reserve owe former Ben Bernanke an apology. Had the Fed Chief listened to them, we would have found ourselves in a modern day depression.

He is leery of those who believe the Government and Federal Reserve should have let the crisis run its course on its own, with zero interventions. He is especially harsh on the Austerians, whom he said made the recovery weaker than it need be by thwarting traditional Keynesian stimulus.

The full podcast is available on iTunes, SoundCloud and on Bloomberg.

Rebuttal

In a blend of a monetarist and Keynesian thinking, McCulley supports Fed policies of QE and is "especially harsh on the Austerians, whom he said made the recovery weaker than it need be by thwarting traditional Keynesian stimulus."

For starters, I dispute the notion that without QE and intervention that "we would have found ourselves in a modern day depression" as Ritholtz maintains. Ritholtz's claim is a poorly-formed hypothesis presented as fact.

Yes, it's true that many in the Austrian camp predicted a dollar crash and high inflation. But I am in the Austrian camp camp and debt deflation has been my model, and still is my model.

As for an apology, what about an apology from the Fed for blowing serial bubble after bubble of increasing amplitude?

It's inane to demand an apology from those who warned in advance, and correctly so, of the housing bubble and subsequent crash.

In a twist of irony, McCulley gloats over the alleged lack of inflation, but it's pretty clear he has his blinders on as to what inflation is and ways it can be spotted. In the case of Fed policy, inflation did not manifest itself in the CPI, but rather in asset bubbles, again and again.

Challenge to Keynesians

Only Keynesian and Monetarist fools (there is no more polite word), believe a low CPI is a big concern.

I repeat my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Consumer Price Deflation NOT Damaging

Even the BIS has concluded that routine consumer price deflation is no threat. For details, please see Historical Perspective on CPI Deflations: How Damaging are They?

Income Inequality and Leverage

China and the emerging markets are imploding right now. Leverage is as high as ever. Fed policy induced corporations to go into debt to buy back their own shares at absurd prices.

Janet Yellen pisses and moans about income inequality, as does Ritholtz. Both are blind to the fact the Fed is the direct sponsor of it all.

Unfounded Gloat

This Keynesian gloat about the Fed saving the world is laughable because the final chapter has not been written. Assets are arguably as overpriced now as they were in 2000, and 2007. As with Japan, another lost decade in the US is likely.

Demanding an apology on behalf of the Fed is like demanding an apology on behalf of a doctor who cuts off the wrong leg of a cancerous patient if the doctor gets it right the second time.

It's the Fed that owes us all an apology.

Barry, Paul, where the hell is that apology?

But Keynesians and Monetarists don't apologize. They just demand more and more stimulus and debt in the inane belief the cure for a debt problem is more spending and more debt.

The average 7th grader can easily see the fallacies of such nonsense.

Unfortunately, as students progress through high school and college, repeated brainwashing by professors in academic wonderland about the alleged benefits of easy money has warped a lot of minds, in this case, the minds of the interviewer and the interviewee.

Mike "Mish" Shedlock

Investigating Consumer Confidence: 3-Month Low? 10-Month Low? Near Record High?

Posted: 01 Sep 2015 11:05 AM PDT

Last week, three different measures of consumer confidence came out:

University of Michigan: Consumer Sentiment
Conference Board: Consumer Confidence Level
Gallup: Economic Confidence Index

Claim of Importance

Bloomberg states "Consumer sentiment is directly related to the strength of consumer spending."

Let's investigate that claim starting with a look at the latest results from each survey.

Consumer Confidence

On August 25, the Conference Board's "Consumer Confidence Level" soared well ahead of any Bloomberg Consensus estimate with a reading Bloomberg stated "will have forecasters scratching their heads."

Enormous improvement in the assessment of the current labor market drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report. This reading will have forecasters scratching their heads. The gain for this reading lifts the present situation component to 115.1 for a more than 11 point increase from July that points to consumer power for August.

The Yellen Fed has put great emphasis on the importance on consumer confidence readings and this report points to job-driven strength ahead for household spending.

Head-Scratching Sentiment

Three days later, the University of Michigan release was another head-scratching event. Bloomberg reported Consumer Sentiment in U.S. Declines to a Three-Month Low.

The University of Michigan sentiment number came in at 91.9, well below any guess in Bloomberg's Consensus Estimate Range of 92.7 to 95.0.

An early reading on the effect of global volatility is downbeat as the consumer sentiment index came in well below expectations, at 91.9 for the final August reading. The mid-month reading was 92.9 which roughly implies a pace near 91.0 over the last two weeks which is the softest since May.

Consumer Sentiment

Belief vs. Reality

In regards to consumer confidence, Bloomberg stated "The Yellen Fed has put great emphasis on the importance on consumer confidence readings and this report points to job-driven strength ahead for household spending."

Let's compare Yellen's belief to reality. Bloomberg conveniently provided this chart.

Here's a chart I put together last month on sentiment and sales.

University of Michigan Sentiment vs. Sales

To be fair, one needs to look at per capita spending and factor in boomer dynamics such as aging, etc. However, I do not have access to the conference board data, and the University of Michigan data on Fred is out of date.

Let's consider one more measure of sentiment.

Gallup Economic Confidence Index

On July 28, Gallup reported U.S. Economic Confidence Index Continues Downward, at -14.

Gallup's Economic Confidence Index continued its gradual, downward slide, reaching -14 for the week ending July 26. This represents a 10-month low for the index.

Last week's figure continues the generally downward trend that began in late January. At that point, the index peaked at +5 -- the highest weekly score Gallup has recorded since it began tracking economic confidence daily in 2008. Weekly figures have consistently been in negative territory since mid-March and have drifted gradually lower in recent months.

Gallup's Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse. The index has a theoretical maximum of +100, if all Americans rate the economy as excellent or good and improving; and a theoretical minimum of -100, if all Americans rate the economy as poor and getting worse.

The current conditions score fell four points from the week prior to its current score of -9, accounting for the entire decline in the overall index. This was the result of 23% of Americans saying the economy is "excellent" or "good" and 32% saying it is "poor." Meanwhile, 39% of Americans said the economy is "getting better," while 57% said it is "getting worse." This resulted in an economic outlook score of -18, unchanged from the previous week.

Gallup Economic Confidence

Polling Methods

Gallup: "Gallup is based on telephone interviews conducted July 20-26, 2015, on the Gallup U.S. Daily survey, with a random sample of 3,540 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia."
Conference Board: "The Consumer Confidence Survey uses an address-based mail sample design. The CCS mailing is scheduled so that the questionnaires reach sample households on or about the first of each month. The targeted responding sample size—approximately 3,000 completed questionnaires—has remained essentially unchanged throughout the history of the CCI."
University of Michigan: The group surveyed 64 more people than usual in August in order to better capture the reaction to the market events, according to Richard Curtin, director of the Michigan Survey of Consumers. Typically, 500 consumers are polled every month.

Questions

Do the difference in polling methods help explain the different results?
Is it possible those responding to mail-in campaigns are economically better off and more likely to take the time to respond than those in phone surveys?
Is survey language a factor? Reading comprehension?
Do people give different answers on paper than they might over the phone?
Is the University of Michigan sample size of 500 big enough to predict spending patterns for the entire nation?

Poll Comparison

Gallup "Economic Confidence" is at a 10-month low.
University of Michigan "Consumer Sentiment" is at a 3-month low.
The Conference Board "Consumer Confidence Level" is at the second highest level in 8 years.

The surveys are so out of line with each other, it is impossible that "sentiment" matches spending, no matter how one adjusts the data.

In fact, the above charts are so screwy that one might wonder if it's possible to accurately measure sentiment at all.

Assuming sentiment can be measured (and we have three different surveys that purportedly do just that), the usefulness of such wildly differing surveys is not readily apparent.

Yellen can believe what she wants, but faith in sentiment as a leading indicator or purveyor of future economic spending patterns is seriously questionable, at best.

Forced to select a single survey, I would go with a phone survey over a paper survey, and a large sample size over a smaller one - Gallup.

By the way, the University of Michigan and Gallup surveys are at least going the same direction this year. The Conference Board survey is the odd man out.

Mike "Mish" Shedlock

ISM Weaker Than Expected, Details Weak, Exports Contract Third Month

Posted: 01 Sep 2015 09:42 AM PDT

Those expecting a boost from the ISM report for August were disappointed today.

The Bloomberg Consensus estimate for ISM was 52.8, with a range of 51.5 to 54.0. The report was below any economist's expectation at 51.1.

The ISM index, at a lower-than-expected 51.1, is signaling the slowest rate of growth for the factory sector since May 2013. And the key details are uniformly weak.

New orders, at 51.7, are at one of the slowest rates of monthly growth of the recovery, since April 2013. Backlog orders, at 46.5, are in a third month of contraction. New export orders, at 46.5, are also in their third straight month of contraction and are at the lowest rate since July 2012.

ISM's sample wasn't hiring much in August, at 51.2 for a 1.5 point decline from July and the weakest reading since April. Production slowed and prices paid, at only a 39.0 level last since in March, points to deflationary pressures.

The good news for the economy is that this report failed to pick up the auto-led surge that lifted the factory sector noticeably in June and July. Still, the ISM is followed closely and will raise doubts, justifiably or not, over a September 17 rate hike.

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	Aug	Jul	PP Change	Direction	Rate of Change	Trend in Months
PMI®	51.1	52.7	-1.6	Growing	Slower	32
New Orders	51.7	56.5	-4.8	Growing	Slower	33
Production	53.6	56.0	-2.4	Growing	Slower	36
Employment	51.2	52.7	-1.5	Growing	Slower	4
Supplier Deliveries	50.7	48.9	+1.8	Slowing	From Faster	1
Inventories	48.5	49.5	-1.0	Contracting	Faster	2
Customers' Inventories	53.0	44.0	+9.0	Too High	From Too Low	1
Prices	39.0	44.0	-5.0	Decreasing	Faster	10
Backlog of Orders	46.5	42.5	+4.0	Contracting	Slower	3
Exports	46.5	48.0	-1.5	Contracting	Faster	3
Imports	51.5	52.0	-0.5	Growing	Slower	31

Key Points

Backlog of orders are in contraction
Growth in new orders plunged but still positive
Customer inventories surged (not a good sign for future orders)
Exports contracting faster for the third month
Prices have plunged

There's nothing in the ISM report to make the Fed want to hike, but the Fed will do what they want.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

China PMI Contracts Fastest Since February-March 2009

Posted: 01 Sep 2015 02:39 AM PDT

China manufacturing and services are both in contraction at the fastest rate since early 2009.

The Caixin China General Manufacturing PMI shows operating conditions deteriorate at fastest rate since March 2009.

Chinese manufacturers saw the quickest deterioration in operating conditions for over six years in August, according to latest business survey data. Total new orders and new export business both declined at sharper rates than in July, and contributed to the most marked contraction of output since November 2011. Lower production requirements prompted companies to reduce their purchasing activity at the fastest rate since March 2009, while weaker client demand led to the first rise in stocks of finished goods in six months. Meanwhile, softer demand conditions contributed to marked falls in both input costs and output charges in August.

Key Points

Output contracts at quickest rate in 45 months as new business falls solidly
Purchasing activity declines at sharpest rate since March 2009
Input costs and output charges both fall at marked rates

China Manufacturing PMI

Composite Contracts Most Since February 2009

The bad news in China does not stop with manufacturing. Markit reports the Caixin China General Services PMI has the fastest contraction of output seen since February 2009.

Key points

Composite output and new orders both contract for the first time in 16 months
Job shedding intensifies at manufacturers, while employment rises only fractionally at service providers
Composite input costs and output charges continue to fall

By now it should be perfectly clear to everyone that the entire global economy is cooling and the US will not decouple from that slowdown. Nonetheless, most economists, including those at the Fed, still do not see the obvious.

Mike "Mish" Shedlock

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Mish's Global Economic Trend Analysis

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