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Wednesday, December 5, 2012

Mish's Global Economic Trend Analysis

Charts of the Day: Consumer Debt Components Since 2003 and Since the Start of the 2007 Recession

Posted: 05 Dec 2012 01:08 PM PST

In response to Deflationary Trends in Consumer Credit, reader John, owner of 37 Fast Food restaurants writes ...

Hi Mish

I wrote last month regarding Obamacare and how it's influencing the unemployment rate.

Now that Obamacare is more firmly entrenched and the look back period has officially started, I see a lot of my fellow restaurant owners moving fast to hire part-time workers only. Keep your eye on the part-time increases in employment over the next year.

On another note, it would be interesting to see how student loan balances have gone up since 2004 compared to auto loans, credit cards and mortgages for the same time period.

John

Impact of Obamacare on Jobs

Please see Mish Obamacare Mailbag: Expect More Part-Time Jobs and how it's influencing the unemployment rate] for a collection of reader emails, including one from John, regarding the impact of Obamacare on jobs.

Impact of Recession on Consumer Debt

John's idea on charting student loan balances is an interesting one.

Doug Short at Advisor Perspectives does a phenomenal job with charts and Doug was kind enough to chart the comparison of various consumer debt ratios two ways, per my request.

Household Debt Since 2003

click on either chart for sharper image

Household Debt Since Start of 2007 Recession

Fed data for the above charts is quarterly.

As you can clearly see: mortgage debt, home equity debt, auto loans, credit cards, and other miscellaneous debt is all down since the start of the recession.

Overall consumer debt is down 8.6% but student loans are up 74.6%. This is what happens when government purportedly attempts to find solutions to problems.

The result is education costs have increased unabated, and millions of students have been turned into debt-slaves for life in a game of Student Debt Lotto.

The deleveraging of consumer debt is by definition deflationary, as is turning students into debt slaves.

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

Is Austerity, Shrinking Wages, and Firing of Public Workers a Bad Thing? One Eastern-European Country's Real-Time Experience

Posted: 05 Dec 2012 09:55 AM PST

The socialists and the Keynesians would have you believe that austerity is a bad thing, and that firing government workers when unemployment is already high is the wrong thing to do.

Anyone believing those myths needs to consider Euro Countries (and the IMF) Can Learn from Latvia's Economic Success.

In 2008–09, Latvia lost 24 percent of its GDP. It was heading toward a budget deficit of 19 percent of GDP in 2009 without a program of radical austerity.

A new Latvian government came to power in March 2009, when GDP was in free fall. It told people how bad the situation was, and the various social partners responded by signing up to a truly radical austerity program. One-third of the civil servants were laid off; half the state agencies were closed, which prompted deregulation; the average public wage was cut by 26 percent in one year. But this was a socially considerate program. Top officials were hit more, with 35 percent in wage cuts, while in the end pensions were not cut. In particular, public servants were no longer allowed to sit on state corporate boards and earn more than from their salaries, a malpractice that is still common in many European countries. The government exposed high-level corruption. Yet, many schools and most of the hospitals were closed.

This was a truly front-loaded program. Of a total fiscal adjustment of 17 percent of GDP, 9.5 percent of GDP was carried out in 2009. Two-thirds of the adjustment was expenditure cuts that are more easily executed in a crisis, and only one-third revenue increases, mainly through consumption taxes. The low corporate profit tax of 15 percent was maintained to stimulate business. Latvia needed international financial support, and fortunately the IMF, the European Union, and neighboring countries did both commit and deliver on time.

At the outset of the crisis, the IMF favored devaluation, but the Latvians resisted firmly with strong popular support. Throughout the crisis, the Latvian government has insisted on maintaining its flat personal income tax, as most other East European countries have.

Results According to the IMF

Latvia's economy continues to recover strongly. Following real GDP growth of 5.5 percent in 2011, growth is expected to exceed 5 percent again this year despite recession in the euro area. Labor market conditions are improving. The unemployment rate fell from 16.3 percent at the beginning of the year to 13.5 percent at the end of the third quarter, despite an increase in participation rates. Real wage growth remains restrained. Consumer price inflation has declined sharply, easing to 1.6 percent at end-October after peaking at 4¾ percent in mid-2011. Robust export growth is expected to keep the current account deficit at about 2 percent despite recovering import demand.

Latvia has a flat personal tax, low corporate tax, fired a third of public workers and the results speak for themselves: low inflation, high growth, and politicians re-elected.

Contrast Greece and Spain with Latvia. The latter fired huge numbers of public workers in one fell swoop, while implementing work rule changes and not hiking taxes. Greece and Spain raised taxes while doing relatively little about work rule reforms, pension reforms, or making it easier to fire workers.

Latvia rejected the IMF's recommendation for a progressive income tax, and as a result of the recovery, the IMF can no longer dictate Latvia policy.

Iceland is also in recovery after telling the IMF and the rest of Europe where to go.

The only mystery is why Latvia would want to join the eurozone giving up control down the road to a bunch of socialist nannycrats who will not like Latvia's low corporate tax structure or its non-progressive flat income tax.

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

Tuesday, December 4, 2012

Mish's Global Economic Trend Analysis

Student Debt "Lotto" Reality
Republican Infighting Over Fiscal Cliff; Senator DeMint Says House Speaker Boehner's Proposal Will "Destroy American Jobs"; Reflections on "Hard Choices"; Game Theory
Aging Population: Old Problem, New Reality; Reflections on Difficult Trade-Offs

Student Debt "Lotto" Reality

Posted: 04 Dec 2012 08:29 PM PST

In response to Trends in College Tuition vs. Bachelor's Degree Wages; Interesting Demographics of Student Loan Debt History I received an interesting email from "JMM" who writes ...

I realize you are projecting what you believe will happen in the future, and that geometric growth in student debt is unsustainable, but your argument on student debt should be tempered by the current economic reality. Those who finish a degree are better off not only in income, but in reduced unemployment. Employers making hiring decisions place an emphasis on college. That is the bottom line. That trend is not going to change for a long, long time. I have known some very intelligent people that never went to school. They were disadvantaged because of it. Yes, some geniuses and talents make it without education (Steve Jobs and NBA players for example), and some people win the lottery. That doesn't make the lottery an investment strategy. Thanks for your time, JMM

Thank JMM

I happen to like your analogy to the lottery, except in reverse.

Take for example the last mega-lottery with a payout to a single winner of nearly a half-billion dollars. I bought lottery tickets because for the first time in a long time.

The odds favored entry, (assuming a single winner although a bad assumption), yet nearly everyone was a loser. I did not win either.

The school "lotto" is not as bad, but it is very bad. Some do very well, many break even, and a large percentage lose. Earnings of those who do very well, may (on average) exceed those who don't, yet the net percentage of people benefiting may very well be negative.

Regardless, the sheer number of students getting totally wiped out by going into debt to attend college is staggering, and unsustainable.

Here is the simple math: What's unsustainable by definition cannot last. Trends in college costs are unsustainable.

Reader Emails

By the way, I received many interesting emails regarding student loans and will publish some shortly. Thanks to all who responded.

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

Republican Infighting Over Fiscal Cliff; Senator DeMint Says House Speaker Boehner's Proposal Will "Destroy American Jobs"; Reflections on "Hard Choices"; Game Theory

Posted: 04 Dec 2012 11:55 AM PST

Republican House Speaker John Boehner's has offered president Obama a proposal to generate $800 billion in new revenue. Obama rejected Boehner's proposal in one hour flat because it does not go far enough in raising taxes on the wealthy.

Indeed, all Boehner proposed was closing loopholes. Yet, closing loopholes to raise $800 billion over ten years is too much for Tea-Party activists such as Senator Jim DeMint, co-founder of the Senate Tea Party caucus.

Bloomberg reports Republican DeMint Criticizes Boehner's Deficit Plan.

House Speaker John Boehner's proposal to generate $800 billion in new revenue "will destroy American jobs" and Republicans should oppose it, Senator Jim DeMint of South Carolina said today.

The comments from DeMint, co-founder of the Senate's anti- tax Tea Party caucus, represent a strong indictment of Boehner's plan from a fellow Republican lawmaker. Boehner yesterday proposed a $2.2 trillion deficit-cutting plan that seeks $800 billion in revenue in the next decade from an overhaul of the tax code that would curb some breaks.

"Speaker Boehner's $800 billion tax hike will destroy American jobs and allow politicians in Washington to spend even more, while not reducing our $16 trillion debt by a single penny," DeMint said in a statement. "Republicans must oppose tax increases and insist on real spending reductions that shrink the size of government and allow Americans to keep more of their hard-earned money."

Other Republicans back Boehner's offer including House Majority Leader Eric Cantor of Virginia, Budget Committee Chairman Paul Ryan of Wisconsin, and Senate Majority Leader Mitch McConnell of Kentucky.

Boehner's Plan Dead-on-Arrival

Boehner's plan is dead-on-arrival regardless of how many Republicans are in favor of it.

The president will not accept any plan that does not hike taxes on the wealthy, and unlike a few months ago, Obama is prepared to offer little or nothing to get his way.

Reflections on "Hard Choices"

Last summer, Obama said he was prepared to make "hard choices".

In return for higher taxes, I had this three-point proposal

Ending collective bargaining of public unions
Passing national right-to-work laws
Scrapping the Davis-Bacon prevailing wage law

Negotiation tactics would have been easy.

Start by offering higher taxes on those making over $1 million, then work down to $250,000, putting pressure on the Democrats every step of the way. If Obama rejected the offer, the Republicans would have had the upper hand in who was to blame. If Obama accepted, we would have negotiated real reforms.

But No!

Republicans flushed a golden opportunity for "hard choices" right down the toilet.

Why?

Republicans were foolishly cocky as to their odds of winning the election.

As a result, we now witness massive infighting of Republicans, instead of massive Democrat infighting over "hard choices" a few short months ago.

The bottom line is we are going to suffer from higher taxes and get little in return for it, "not reducing our $16 trillion debt by a single penny" as Senator DeMint says.

Game Theory

At this point, game theory suggests both sides may have more to gain by doing nothing than compromising. If so, welcome to the fiscal cliff.

I am actually OK with that vs. the alternative of unwinding everything. We do need to address the deficit.

Unfortunately, game theory also suggest a deal in 2013, undoing the fiscal cliff, further kicking the deficit-can down the road.

Bright Opportunity Ahead

Looking ahead, I do see a shining light.
Rand Paul 2016!

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

Aging Population: Old Problem, New Reality; Reflections on Difficult Trade-Offs

Posted: 04 Dec 2012 09:29 AM PST

Here is an interesting video in which Bloomberg's Mia Saini looks at the effect of an aging population on a country's economy.

Link if video does not play: Old Problem, New Reality

As a consequence of the youth gap and a record low birthrate in the US, "the alternative would be to keep on increasing taxes or reduce benefits for the elderly".

The US birthrate per thousand was 122.7 in 1957, it was 63.2 in 2011.

Difficult Trade-Offs

In regards to the problem facing aging countries, Singapore prime minister stated "None of them have come to any very satisfactory solution because the trade-offs are difficult ones."

US demographics are better than Europe and Asia, but with US Medicare and Social Security promises related to costs far greater than elsewhere, the US is in no better shape.

There is no alternative to massively increasing taxes unless Congress comes up with genuine health care reform to rein in cost of medicine. Even then, age limits will need to rise and some rationing of services near the end of people's lives will be necessary.

Demographics are such that few politicians are willing to tell US citizens we cannot afford the promises we have made, so the pretending continues.

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

"Wine Country" Economic Conference Hosted By Mish
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Monday, December 3, 2012

Mish's Global Economic Trend Analysis

Deflationary Trends in Consumer Credit
More Nannycrat Insanity: EU Wants to Ban Youth Unemployment
ISM Manufacturing in Contraction; Expect Conditions to Worsen

Deflationary Trends in Consumer Credit

Posted: 03 Dec 2012 10:45 PM PST

A few charts from the New York Fed Quarterly Report on Household Debt and Credit will help put into perspective the deflationary forces facing the Fed.

Household Debt and Credit Developments in 2012 Q3

Aggregate consumer debt fell again in the third quarter, by $74 billion, continuing the nearly four-year downward trend in household debt. As of September 30, 2012, total consumer indebtedness was $11.31 trillion, 0.7% lower than its level in the second quarter of 2012 and down $1.37 trillion from the 2008 Q3 peak.

Mortgages, the largest component of household debt, continue to drive the decline in overall indebtedness. Mortgage balances shown on consumer credit reports continued to drop, and now stand at $8.03 trillion, a 1.5% decrease from the level in 2012 Q2.

Home equity lines of credit (HELOC) balances dropped by $16 billion (2.7%).

Non-mortgage household debt balances jumped by 2.3% in the third quarter to $2.7 trillion, boosted by increases of $18 billion in auto loans, $42 billion in student loans, and $2 billion in credit card balances.

Total Debt

click on any chart for sharper image

The deleveraging (deflationary) trend in consumer debt is unmistakable.

Number of Loans

There is certainly no jump in the demand for credit card, mortgage, auto, or home equity loans.

Loan Delinquencies by Type

Deleveraging of credit card and mortgage debt continues. Some deleveraging is via default. The rest is slow, steady debt reduction with reluctance to take on more debt.

The increase in student loans (and delinquencies as well) buck the deleveraging trend for two reasons

Student debt is government guaranteed
Student debt cannot be discharged in bankruptcy

Guaranteed or not, students have no way to pay back their debt as real wages for college grads declines while tuition costs soar.

Please see Trends in College Tuition vs. Bachelor's Degree Wages; Demographics of Student Loan Debt History for some very interesting as well as surprising charts on student debt demographics.

Non-Mortgage Balances

Auto loans have recovered a bit (primarily because cars eventually wear out). Yet, auto loan balances remain below the 2005 peak.

The only item preventing a huge plunge in non-mortgage debt is student loans.

The Fed has been fighting consumer deleveraging with round after round of QE but the above charts show it has not spurred consumer demand for credit. Those rounds of QE have, for now, put a bid on financial assets (stocks, bonds and commodities) but has done nothing positive for the real economy.

More specifically, those rounds of QE have artificially lowered interest rates, destroying those on fixed income in the process.

For a discussion as to how Fed policy is tantamount to outright theft for the benefit of banks and the wealthy, please see Hello Ben Bernanke, Meet "Stephanie".

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

More Nannycrat Insanity: EU Wants to Ban Youth Unemployment

Posted: 03 Dec 2012 12:42 PM PST

Youth unemployment is shockingly high in Greece, Spain, and Italy as shown by Europe's Most Tragic Graph by The Atlantic.

Young workers in Greece and Spain are facing an absolutely egregious work drought, where half of high-school and college-graduates ready to find a job aren't finding one. And 55% isn't the ceiling. Both economies are shrinking and unemployment is a lagging indicator -- as Americans have learned, the rate can keep going up after an economy technically starts growing. This economic tragedy can easily become a social disaster as young promising people either leave their country to work somewhere else or else turn to illegal or violent activities to protest policies wrecking their economies or lash out against a country that's leaving them behind.

EU Wants to Ban Youth Unemployment

Looking for a reason for the rise of the neo-Nazis in Greece? Look no further than economic depression and over 50% youth unemployment. So what to do about it?

Courtesy of Google translate from German of Frankfurter Allgemeine, please consider EU Wants to Ban Youth Unemployment.

The European Commission wants to oblige EU countries to all people under 25 to secure a job. How states are to implement the guarantee, it will not betray.

The Member States of the European Union should guarantee all people aged less than 25 years in the future, within four months some form of employment. These governments should issue a so-called youth guarantee, as stated in a regulatory package that wants the department responsible Commissioner László Andor imagine this Wednesday in Brussels.

Economic Idiocy

It would be nice if the economic illiterates in the nannyzone would stop and figure out why youth unemployment is so high.

The primary answer is work rules, pension rules, and other rules are so harsh that companies simply do not want to hire workers.

France is heading down the same idiotic path with an economically insane proposal by French president Francois Hollande "Make Layoffs So Expensive For Companies That It's Not Worth It"

Any clear-thinking person should quickly realize that if companies cannot fire workers they will be extremely reluctant to hire them in the first place.

Thus, it should be no surprise to discover French Unemployment Highest in 14 Years (And It's Going to Get Much Worse).

Moreover, Italy, Spain, France, and Greece are already suffering from massive public sectors. Those sectors need to shrink, not expand.

In France, Government spending amounts to 55% of total domestic output. For discussion, please see Hollande's Honeymoon is Over; 54% of Voters Unhappy; Unions Promise "War" in September.

Now the nannycrats want government to take over still more of total output instead of shrinking it, at a time when every country in the EU is struggling to reduce deficits.

Insanity does not begin to describe the stupidity of this proposal, which I might add (the EU offers no way to implement in the first place).

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

ISM Manufacturing in Contraction; Expect Conditions to Worsen

Posted: 03 Dec 2012 10:37 AM PST

US Manufacturing as measure by the November 2012 Manufacturing ISM Report On Business® is back in contraction.

The PMI™ registered 49.5 percent, a decrease of 2.2 percentage points from October's reading of 51.7 percent, indicating contraction in manufacturing for the fourth time in the last six months. This month's PMI™ reading reflects the lowest level since July 2009 when the PMI™ registered 49.2 percent. Comments from the panel this month generally indicate that the second half of the year continues to show a slowdown in demand; respondents also express concern over how and when the fiscal cliff issue will be resolved.

ISM at a Glance

Series Data	Nov Index	Oct Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	49.5	51.7	-2.2	Contracting	From Growing	1
New Orders	50.3	54.2	-3.9	Growing	Slower	3
Production	53.7	52.4	1.3	Growing	Faster	2
Employment	48.4	52.1	-3.7	Contracting	From Growing	1
Supplier Deliveries	50.3	49.6	0.7	Slowing	From Faster	1
Inventories	45	50	-5	Contracting	From Unchanged	1
Customers' Inventories	42.5	49	-6.5	Too Low	Faster	12
Prices	52.5	55	-2.5	Increasing	Slower	4
Backlog of Orders	41	41.5	-0.5	Contracting	Faster	8
Exports	47	48	-1	Contracting	Faster	6
Imports	48	47.5	0.5	Contracting	Slower	4

Expect Conditions to Worsen

It's tough to pin this slowdown on hurricane Sandy although I suspect some will try. Others will blame the "fiscal cliff" but that theory does not have much credence either. After all, this is the 4th contraction in six months, long before Hurricane Sandy or fiscal cliff worries.

Instead, I propose global QE in the US, China, and Europe has finally played out for all that it's worth and then some. Note that export orders have contracted every month for six months, and the backlog of orders every month for 8 months.

Eventually, employment had to catch up with those trends and it did. Employment fell 3.7 percentage points to 48.4.

Production is up 1.3 percentage points but with new orders and exports slowing rapidly, don't expect that to last.

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

Sunday, December 2, 2012

Mish's Global Economic Trend Analysis

Trends in College Tuition vs. Bachelor’s Degree Wages; Interesting Demographics of Student Loan Debt History

Posted: 02 Dec 2012 09:48 PM PST

According to the New York Fed, Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Moreover, student loans balances have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.

The Fed has some interesting charts on Student Loan Debt History through first quarter of 2012.

Debt levels are higher now, with student debt at $956 billion through third quarter. What caught my eye however, is skyrocketing debt in the age group 30-39.

First Quarter Overall Debt

Student Debt Under Age 30

Student Debt Age 30-39

Even if it took someone age 18, eight to ten years to finish college, they would still be 28 years old at most when they finished their education.

Yet, student debt in the 30-39 demographic group now exceeds that of the under 30 age group. Moreover, the under age 30 group accounts for less than a third of the overall student debt.

Points to Consider

Over-two thirds of student debt is held by those well outside the normal student demographic!
This trend is not entirely recession-related given that it has been steady since 2005.
Someone exiting military service would be covered for 36 months of in-state education by the GI Bill.
Someone working for a major employer for any significant length of time would likely have some or all education expenses paid for by the company.
Those aged 30-39 would be far more likely to have steady income than someone 18-24, thereby avoiding the need to rack up as much debt.

Have a Story to Share?

If you are 30 years or older, sitting on a pile of student debt, and are willing to tell your story how and why that happened, Please Email Mish.

If I get any interesting letters, I may share some of the stories.

Trends in College Tuition vs. Bachelor's Degree Wages

Meanwhile, as student debt piles up, wage growth for college grads certainly doesn't. Please consider a Shocking Chart on Tuition vs. Earnings for College Grads on The Fiscal Times.

Student debt levels have reached a new high – rising $42 billion in the last quarter to $956 billion, according to a report this week from the New York Fed. At the same time, tuition rates have seen a staggering 72 percent increase since 2000.

As if those two upward trends weren't hitting students hard enough – the average earnings for full-time workers ages 25-34 with Bachelor's degrees has also dropped 14.7 percent since 2000. The chart below from Citi shows the striking contrast:

Howard Dvorkin, author of Credit Hell, told The Fiscal Times last month: "It's hard to predict when the student loan meltdown could occur, but if the bubble explodes, the consequences will be devastating for the economy."

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

"Wine Country" Economic Conference Hosted By Mish
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US Fiscal Cliff Blame Game Between Geithner, Boehner; UK Deficit Cut Taking Longer Than Planned

Posted: 02 Dec 2012 09:27 AM PST

Agreement that something needs to be done with soaring deficits is easy to find, in the US and abroad. Actually doing something reasonable about huge deficits has proven impossible to date.

Fiscal Deficit Blame Game

Bloomberg reports Geithner Joins Boehner in Trading Blame Over Fiscal Cliff Talks.

U.S. Treasury Secretary Timothy F. Geithner and House Speaker John Boehner hardened their positions over the fiscal cliff, each blaming the other for a standoff that could lead to more than $600 billion in tax increases and spending cuts in January.

"There's not going to be an agreement without rates going up," Geithner said in a taped interview that aired today on CNN's "State of the Union." Republicans will "own the responsibility for the damage" if they "force higher rates on virtually all Americans because they're unwilling to let tax rates go up on 2 percent of Americans."

Republican Boehner said the White House is wasting time.

"I would say we're nowhere, period," Boehner said on the "Fox News Sunday" program. "We've put a serious offer on the table by putting revenues up there to try to get this question resolved. But the White House has responded with virtually nothing."

There's "clearly a chance" that there won't be an agreement in time to avert the fiscal cliff, Boehner said on the Fox program. "Just the threat of the fiscal cliff is already hurting the economy."

Geithner appeared on five talk shows today. In the interviews, taped Nov. 30, he challenged Republicans to make a counteroffer to the Obama administration's framework plan.

Republican Ball

Gene Sperling, Obama's top economic adviser, challenged Republican congressional leaders to put an offer on the table.

"It's for them now to come forward with their plan, with their details, so that we can start working quickly to getting an agreement," said Sperling, director of the White House National Economic Council, on "Political Capital with Al Hunt," airing this weekend.

"The ball really is with them now," said Geithner, the administration's lead negotiator on the fiscal cliff, on CNN. "They're having a tough time trying to figure out what they can do, what they can get support from their members for."

One good thing is happening in January. Tim Geithner is stepping down as US Treasury Secretary.

UK Deficit Cut Taking Longer Than Planned

The BBC reports Deficit cut is taking longer than planned

Chancellor George Osborne has admitted that curbing the UK's financial deficit is "taking longer" than planned.

But he told the BBC the government was "making progress" and that to "turn back now would be a complete disaster".

Mr Osborne, who delivers his Autumn Statement on Wednesday, said well-off people would "pay their fair share".

"The deficit is down by a quarter. There are a million more jobs in the private sector and to turn back now, to go back to the borrowing and the debt and the spending that Ed Balls represents would be a complete disaster for our country."

He added that some people were calling for more borrowing and others for more spending cuts, but the government had "got the right plan and we should stick to that plan".

As you can see, political bickering over needed budget cuts is rampant on both sides of the Atlantic.

It's important to maintain a global focus instead of looking at US problems in isolation. There is not a good fiat currency anywhere (and there cannot be by definition actually).

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

Saturday, December 1, 2012

Mish's Global Economic Trend Analysis

Italy Retail Sales Sharpest Drop in 17 Months; Germany Retail Sales Stagnate as Margins Squeezed; Eurozone Retail Sales Drop Sharply

Posted: 01 Dec 2012 05:49 PM PST

Dismal economic conditions in the eurozone accelerate to the downside as evidenced by falling retail sales. Let's take a look at the Eurozone in aggregate, as well as the three largest countries.

Eurozone Retail Sales Drop Sharply

The Markit Eurozone Retail PMI® shows Eurozone retail sales continue to fall sharply towards end of 2012.

Key points

Sales fall for thirteenth month running in November

German sales remain flat while Italy records another severe fall

Rate of decline in France slows to weakest in five months

Summary of November findings

The Eurozone retail sector remained stuck in a sharp downturn during the penultimate month of 2012, according to Markit's PMI® data. Sales fell for the thirteenth consecutive month, and remained well below the level seen one year earlier.

The PMI rose slightly in November to 45.8, from October's 45.3. The latest figure signalled a sharp fall in retail sales compared with one month previously, and the
average for the fourth quarter so far (45.5) is the second-lowest since Q1 2009. Moreover, the trend for 2012 so far (45.6) is the lowest annual average of any year since the survey started in 2004. The previous record low was in 2008 (46.1).

Retail sales across the single currency area fell on an annual basis for the eighteenth month running in November. The rate of decline was sharp, and
stronger than the average over this sequence. Year-on-year sales rose in Germany, but fell at a near-record pace in Italy. The annual rate of decline in France slowed since October, but remained sharp overall.

Comments

Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit and author of the Eurozone Retail PMI, said:

"November's set of numbers portrayed the weak position the Eurozone's retailers find themselves in going into the crucial festive season. Actual month-on-month sales continued to fall sharply, resulting in another marked drop compared with one year previously. The data are consistent with consumer spending having declined for five straight quarters come the end of the year.

Italy Retail Sales Sharpest Drop in 17 Months

The Markit Italy Retail PMI® shows sharpest drop in retail sales for seven months.

Key points

PMI falls to lowest since April

High street employment falls at solid rate

Sharper decrease in stock levels

Summary

Italian high street businesses recorded a further sharp decrease in sales in November, leading to more job losses in the sector. There was also a steep drop in purchasing activity as firms made efforts to reduce inventory levels. Meanwhile,
average prices paid for goods for resale rose at a modest rate largely on the back of higher oil-related prices.

The seasonally adjusted Italian Retail Purchasing Managers' Index® (PMI®) fell to a seven-month low of 35.5 in November, from October's reading of 37.3, signalling a further sharp month-on-month decrease in total high street spending. The headline
index has posted below the neutral mark of 50.0 continuously since March 2011, and remains below its average over that period.

In line with the sustained downturn in sales, November data showed that high street spending was down sharply compared with the situation one year previously. Furthermore, the annual rate of contraction was the steepest since May's survey
record. November saw actual sales again fall well short of planned levels, with the overall degree of underachievement the most pronounced for five months.

November data pointed to a further sharp decrease in retailers' gross margins, which anecdotal evidence suggested was the result of discounted selling prices as well as a fall in sales. The rate of decline was little-changed since the previous
survey period and faster than the historical trend. Also dampening profitability over the month was a rise in average purchase prices. Firms commonly linked the increase in their cost burdens to higher oil-related prices.

Germany Retail Sales Stagnate as Margins Squeezed

The Markit Germany Retail PMI® shows German retail sales continue to stagnate in November.

Key points

Month-on-month sales remain broadly unchanged

Margins squeezed amid sharp rise in wholesale prices

Actual sales underperformed initial targets in November

Summary

At 50.2 in November, the seasonally adjusted Germany Retail PMI was little-changed from 50.3 during October and, by remaining close to the 50.0 no-change value, signalled broadly stagnant month-on-month retail sales in Germany. This has been
the general trend throughout the second half of 2012 to date. Anecdotal evidence from survey respondents largely suggested that subdued consumer confidence was the main factor weighing on retail sales during November.

French retailers report slower fall in sales during November

The Markit France Retail PMI® shows French retailers report slower fall in sales during November.

Key points

Decline in sales eases to weakest in five months

Gross margins fall at slower, albeit still marked, rate

Further reductions in purchasing and stocks

Summary

The contraction in French retail sales continued in November, but at a weaker rate. Both the monthly and annual measures showed less marked declines. Sales once again disappointed relative to previously set plans. Gross margins continued to be squeezed, although the rate of decline moderated.

The headline Retail PMI® posted 48.8 in November, up from 46.0 in October. The latest reading was indicative of a moderate pace of decline that was the weakest since June. Where a decline in sales was recorded, this was generally attributed by panellists to a difficult economic climate, reduced levels of customer footfall and strong competition.

European House of Cards

This entire European house of cards comes crashing down the moment either Germany or France takes a sharp turn to the downside.

I believe both are a given.

As noted on November 29, French Unemployment Highest in 14 Years (And It's Going to Get Much Worse).

Germany will follow (in a major way) the rest of Europe soon enough. It is simply impossible for the German export machine to keep humming with a massive slowdown in Asia, and an outright disaster happening in Greece, Italy, Portugal, and Spain.

Warning bells are flashing loudly, but few hear the call.

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

Stalemate: Obama Warns of Prolonged Talks as Republicans Rebuff Plan

Posted: 01 Dec 2012 07:56 AM PST

The word of the day is "stalemate".

Last year the Republicans had a chance to accept spending cuts to tax hikes at a 10-1 ratio. They declined. Now president Obama does not want to bargain. Who can blame Obama (except Republicans)? We may disagree, but that is part of the platform that got him elected.

The Republicans do not want to bargain either. And who can blame them (except Democrats)?

Regardless, Republicans blew a golden opportunity last year and that chance is gone. Obama has the upper hand now, and nothing will change that setup.

I certainly am opposed to tax hikes without something substantial in return.

Yet, if Obama holds his ground, the only way to have some cuts across the board right now is for the fiscal cliff to happen.

Could it be that the best political outcome may actually be the dreaded "fiscal cliff"? The fiscal cliff will hit military spending but why shouldn't it? The US could easily defend itself on half its current budget actually.

While pondering those questions and thoughts, please consider Obama Warns of Prolonged Talks as Republicans Rebuff Plan.

President Barack Obama and House Speaker John Boehner stood their ground with opposing plans to avert the fiscal cliff and warned there was no quick path to a solution.

Obama has proposed a framework that would raise taxes immediately on top earners and set an Aug. 1 deadline for rewriting the tax code and deciding on spending cuts, according to administration officials.

It calls for $1.6 trillion in tax increases, $350 billion in cuts in health programs, $250 billion in cuts in other programs and $800 billion in assumed savings from the wind-down of the wars in Iraq and Afghanistan, according to the officials, who asked for anonymity.

Boehner said less than 30 minutes later during a news conference at the Capitol in Washington, that the proposal, presented to congressional leaders by Treasury Secretary Timothy F. Geithner, did nothing to move talks along.

"There's a stalemate, let's not kid ourselves," he said.

Stalemate Solution

The stalemate "solution" comes with its own set of problems.

Contrary to popular belief, the risk is not that too much is done, but rather that both sides unwind nearly the entire "fiscal cliff", achieving no budget reductions at all.

Speaking of which, it's high time we "stop kidding ourselves" about what is happening. There are no budget cutbacks at all under discussion. Rather the discussion centers around reductions in assumed increases, and politicians are having a tough time even with that.

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