Well the bond market is certainly giving up on the bearish case. Economic growth clocking in at 0.6%, yet most (but not all) of the inversion has now been removed from the curve, and only a residual 25% chance of a Fed cut by y/e remains priced in. Although credit spreads are still ridiculously tight, financial conditions are actually getting quite tight, with the real fed funds rate around 2%. So now you have a slowing consumer, businesses acting like we're going to have a second half boom, and monetary conditions actually tight enough to start removing the excess liquidity we all keep hearing about. Seems to me all the conditions for a recession are now in place. Try telling that to all the gamblers intent of buying stocks and selling bonds for the past couple of months though.
Old metrics for CPI has inflation running 3 points higher, Q3 06 jobs coming in negative in construction, well under initial guesstimates, GDP growth has been below population trend for 2 qtrs.
10% chance that we aren't in recession in Q4, the markets won't likely tank until Jan 08(though the action during the dog trading days of August will be telling.) How bad it gets from there, I have no idea.
Somewhat off topic, but I saw a site in Minyanville today called alexa.com. This site allows you to track web traffic for most web sites going back to 2002. You can see the page views, website rank by traffic, etc. I suggest you try it out with realtor.com. Anyone thinking the big turnaround in housing is right around the corner will be shocked by the total collapse in web traffic the site is experiencing. Try the 3 year tab and look at page views and web ranking. Total meltdown. I offer this tidbit as a little piece of info that may be useful.
Are you sure we aren't seeing a change in consumption? I had thought we were. Major retailers are making poor numbers (Wall Mart), along with general softness in retail. There are additional indicators such as truck and rail tonnage is down.
economic growth at 0.6% is somewhat misleading. well not misleading but history.The indicators of consumption in the data were on the strong side.the weakness emmanated from trade and inventories. economies around the world remain robust so exports should turn around and inventories should be replenished so that will be a plus.and residential investment will continue in a sad state but the rate of decline will be decreasing so it will not be as lare a drag as it has been. and i still think the permabear case will remain suspect as long as the unemployment rate sits at 4.5% and the initial claims numbers continue to hover arounf 300. show me the layoffs and i will join the ursine crowd.JJJ
egative economic effects of a recession or growth recession will not manifest as long as people still have jobs.
The key number is unemployment.
If that spikes then all bets are off.
As long as people are employed they can tread water for a long time.
recently posted a an annotated transcript of Nouriel Roubini's 28 Mar 2007 presentation at the American Enterprise Institute. His performance on that occasion was pretty gripping.
John M. | Homepage | 05.31.07 - 1:19 pm | #
Look at the workforce participation numbers, look at the revised employment numbers from Q3 2006 and look at the household survey numbers and you'll see the disconnect in the employment rate.
The nature of employment in this country has changed dramatically and they haven't figured out a new set of metrics that are both timely & sorta accurate.
Well the bond market is certainly giving up on the bearish case.
With the economy slow and the large amount of debt out there, these higher rates could mean trouble.
I think the bond market is being cautious here because low rates could let another liquidity monster out of the cage as they did in 2003 (the housing bubble). In this case Wall Street and the financial sector are the threat. I don't think the bond market wants to gamble again and possibly get creamed by another bubble.
I think the key question now is whether these higher rates will impact the consumer.
Mortgage rates have already risen significantly over the past few weeks. Not what the housing market needs now.
Come on guys. I can understand wanting to stick by your forecast, but to constantly run around saying the world is ending when the data has clearly turned better is ridiculous. Housing is still in trouble, but there has been virtually no impact to the consumer. There is a serious inventory build taking place which probably puts 2qGDP at 3%. Right now it looks as if the Fed has been quite prescient. Growth has slowed but likely to pick back up and inflation continues to come down slowly, but it's still too high. Why the chicken little routine all the time?
bs, a serious inventory build indicates increased GDP ONLY if purchasers of that inventory show up. Personally, I've always viewed increasing inventory with great suspicion as it means intake is exceeding outgo. It's meant I've missed getting the occasional stock of a good company, but more often it's meant I've avoided a company that turns out to be having problems. I see little reason to change my mind in this case.
Kett82, yes, I'd say Roubini was pretty much correct - so far. But he also thought there was a strong chance of a "severe recession" later this year, and that still seems remote to me. I still think CRE would have to slump significantly for a severe recession - and that is why I'm watching it so closely.
trader walt, I don't know about being "sophisticated analysts" - I feel Tanta and I have just been writing using common sense mixed with a little experience. But thanks!
You are asking those who see the economy as in trouble for a number of reasons to turn optimistic based on a brief period of better data. Brief periods of better and worse data are fairly common at all but the best or worst of times. The "come on guys" and "chicken little routine" comments are kinda like the pot calliing the kettle black, isn't it? Wouldn't calling you "Mary Sunshine" be an equivalent response from the pessimist camp? Analysis by label, and all.
As our host has pointed out, declines in housing starts as large as we have experienced are typically associated with recession. The tightening in lending standards we have seen is typically associated with recession. We see the unfolding of a financial disconnect of as-yet-undertermined seriousness. People who take these things seriously are characters from children's literature, compared to wonderful you? Don't see why I should believe that. The record so far is that CR and Roubini got the housing thing right. Based on that record, it's kinda early to roll out the "come on, guys" business.
By the way, gross and net domestic income both fell in Q1. The May FOMC minutes reported Fed officials looking to national income figures are perhaps a better measure of growth right now, because they agree better with jobs data. One day after that view was published, the income data disconnect from the labor market data in an even bigger way than the production data. Consistency among various data series is getting hard to come by.
The problem with Roubini is his selectivity in only presenting data which supports his view, then if the exact same data set comes out later less negative or even positive he is sure not to note it. Such routine bearish bias is my issue with him. Its a symptom of many blogs, CR does pretty well in following the data and reporting it consistently good or bad, i'd say the mortgage application index is the biggest instance of "oh its gone positive YoY, therefore we should discard it". Despite the problem with the index (compositional bias), it is always worth following.
Roubinis coverage of the last New home sales report was pretty sickening. Usually he will latch onto a "positive" report, delve into the numbers and show why things aren't so rosey. This time, because of the large negative median price drop, he just takes it at its face value when it was obvious a mix shift happened to cheaper homes in the South. If he was consistent and pulled every report apart i'd have a lot more respect for him. But he is "look at me i'm right, here is why i'm right, look at me look at me".
Fair point and I certainly didn't mean to slap labels on anyone. It just seems to me that the blog world tends to ignore any evidence contrary to the cemented view of the respective blogger (in this case Roubini).
I'm saying the consumer hasn't been hurt simply because there is very little evidence of reduced domestic consumption. I recognize some retailers have reported poor earnings but I can point to just as many that have done very well (i.e. the Tiffany's vs. WalMart's).
Housing is and has been weak. But this morning's GDP report confirms that the very weak 1q was due to housing, inventory, and trade. Inventory and trade are both rebounding very nicely in 2q. Wage and salary income was revised UP to 8.1% from 5.7% in 4q06 and up to 5.4% from 4.7% in 1q07. The consumption component of GDP was revised up to 4.4% from 3.8%.
All this tells me we had some serious weakness late last year and early this year. But much of that weakness is dissipating with housing the remaining weak spot. And I think that continues for a very long time. As long as the unemployment rate is low and incomes are solid, consumption won't go down (apparently). Given that 70% of our economy is consumption, seems reasonable to think we will hobble along for a bit.
Again...apologies for applying the "chicken little" labels...inappropriate. And thanks for the insightful responses. Don't get me wrong, I feel like the imbalances are large and growing, but it appears as though growth ex-USA is having a meaningful impact in helping the U.S. recover.
An inventory build is actually the one element that had been missing until now to potentially turn a consumer slowdown into a recession. Periods of negative economic growth are typically caused by business contractions as personal consumption rarely goes negative in real or nominal terms. If the consumer doesn't show up for the Q3 party businesses seem to now be gearing up for, then Q3&4 will be a repeat of Q1 in terms of inventory drag, and if the consumer has slowed to say 2% from 4.4% in Q1, then you'll be at or below zero gdp growth. With the housing atm closed, stagnant median incomes, and an unemployment rate that can't inch much lower without illiciting rate hikes from the Fed, I'm willing to bet that the consumer won't be in much of a mood to party like a rock star. I may be wrong, and when I'm convinced I'm wrong I'll start buying again instead of selling, but until then dress me up in a chicken suit and call me eyore.
Nice exchange. kharris took bs to task with reasoning and data, and bs took the "chicken little" critisism like an adult and came back with some reasoning and data of his own.
The inventory build apparently happened back in Q3, started to clear up in Q4 and was dealt with in Q1. Sort of a blink-and-you-missed-it inventory glitch. Ratios are still off the absolute lows, but there is some reason to think that inventories will be a smaller risk from now on. Inventory information is just lots more available now than in decades past.
Inventory information is just lots more available now than in decades past.
Plus companies process inventory differently than past decades... JIT and all. I doubt we'll see many 'inventory lead' recessions going forward. If we do see a lot of inventory growth something is seriously wrong.
K Harris - I agree. My point is another inventory build, which factory orders, chi ism, etc. point towards happening now, is not necessarily a cause for anything beyond short-term optimism unless you believe the consumer will have the ability to buy it down again. If you believe all is well with the consumer, then the Fed's forecast of a return to 2-3% growth looks reasonable. If you believe the consumer is going forced to reign in spending to something more in-line with real income growth, which is close to zero for the median consumer, then we are in a classic prelude to a recession.
And bs, I do see your argument, and shouldn't have fired back over the chicken little comment. I don't see the bearish case as an absolute by any means, just the most likely outcome as I currently see the world unfolding.
Well, if the consumer wasn't spending the last of their MEW and increasing credit card debt, and had spent at a pace of +3.7% or below, then we would have just had an inventory and housing led gdp contraction.
Better inventory management is no doubt a prime contributor to the stability we have seen in the business cycle since the early 80's, and why I've been thinking more along the lines of a prolonged slowdown rather than a recession. However, if the economy is bumping along at 1%, then a future quarter or two of inventory drawdown could be enough to tip things to the negative.
I'm not 100% clear on the inventory build story. Inv/Sales peaked around 1.3 (reading from the bus. iventory report) in Oct. 06 and probably bottomed around 1.25 in Apr 07. So inventories were decreased over this time period (sales appeared to be fairly constant). Now they are being rebuilt after a period of drawdown. Why is that a precursor to a recession? If anything, it would seem to indicate a more solid outlook from businesses.
If sales decrease and the ratio starts to rise again, then that is certainly a bearish sign for the economy. But again, I come back to the idea that sales won't go down as long as incomes are up and people have jobs. So far, both are true. Although I can't for the life of me figure out why we haven't lost more construction jobs in this housing downturn.
An inventory build is not in and of itself a prelude to a recession, and is, as you suggest, a source for optimism, at least in the short run. However, even a small inventory build that a tapped out consumer can't draw down could be problematic in the future. Businesses are stocking up for a 4%+ consumer, when the consumer may struggle to do 2% (in real terms), and that could be a problem come Q3 and Q4. I'm not trying spin good news into a bear story, but high business optimism combined with tightening monetary conditions and a slowing consumer have been a warning sign in the past. It's probably more timely to argue businesses are busy hobbling themselves with excessive leverage than excessive inventories right now anyway.
Copied this post from a employment questioneer on MSNBC. Interesting comment.
I own a company that works in the development of residential and commercial property in the Atlanta area. Our business is off by approximately 35 percent so far this year, and things are looking like that figure will continue to increase. I spent parts of this past week looking at projects that we completed during last year (2006). I would say that approximately half of the units of the commercial developments are still un-leased or have had the original businesses closed down. On the residential side, its even worse. Whole subdivisions where all the development work is 100 percent complete, there are no model homes. The developments are simply standing idle.
My conversations with friends who are in the same business are remarkably similar. Everybody is chasing operating cash. With nothing selling or leasing, most developers are falling farther and farther behind in making payments to their subcontractors. I also have friends who work on state road projects, they say the same thing about getting money from the state. Therefore the subcontractors are falling farther behind in making payments to their suppliers.
We have already cut our staff to half of what it was this time last year. Now, prices for services are starting to fall as businesses try to keep going. When I moved here eight years ago, everyone said that Atlanta was recession proof because of its diverse economy. Not so, large companies have been moving out of Atlanta. Its going to get ugly here. The worst is yet to come.
Anecdote only..
went to a bid opening today for a townhome project (affordable housing). The budget was about $140,000 per unit; the bid was about $115,000. And, there probably will be no 'undocumented' crews: everybody is down to the first team now and really competing for the work.
This is a very happy time if you are a non-profit developer of affordable housing - you are getting better quality and really good pricing at the same time.
Inv/Sales peaked around 1.3 (reading from the bus. iventory report) in Oct. 06 and probably bottomed around 1.25 in Apr 07. So inventories were decreased over this time period (sales appeared to be fairly constant). Now they are being rebuilt after a period of drawdown. Why is that a precursor to a recession? If anything, it would seem to indicate a more solid outlook from businesses.
Intentionally rebuilt after draw down? Are you sure?
I live in that world - supply OEMs who supply the retailers... they want continually declining inventory & faster turns... If they could have inventory levels less than period sales they'd go for it if they could replenish fast enough. I've heard of suppliers to Walmart that turn their inventory (all of it... factory-whse-store shelves) about 25 times a year. That's a replenishment of their whole supply chain every two weeks.
If I am understanding your measure of inventory ratio that results in a number way less than 1. There is nothing sacred in the current inventory to sales ratio that implies optimism... it's dead neutral at best.
But again, I come back to the idea that sales won't go down as long as incomes are up and people have jobs. So far, both are true.
That depends on two other factors... (1) how much of an effect MEW has on demand - we been debating that for awhile here AND (2) will consumers increase other forms of debt to augment income and past MEW?
Again here it is unclear & possibly a wash (more CC debt and somewhat increased income offset decreasing MEW).
I recognize some retailers have reported poor earnings but I can point to just as many that have done very well (i.e. the Tiffany's vs. WalMart's).
Niemann Marcus & Tiffanys(high end) vs. Big 3 auto, Walmart, Home Depot, Lowe's, Sears, Best Buy...
The market cap, market share and % of GDP of the latter is 5x bigger than the former, so who's cherry picking? Are you suggesting that the Champagne Charlies are gonna lead the country out of this rough patch?
i think that consumers are reining in their spending. and i think the main reason is the increased price of fuel.i see increases in the cost of grocery store visits. and although i don't really pay much attention to the price of fuel. i do look at my bank account balances, and thats where i notice these increased prices. i see consumer confidence reports have gone up from a month ago but i sense amoung friends and associates a conservatism about buying. nobody saying much, but nobody buying new homes, or new cars. not as much talk about a cruise or carribean vacation, etc.
I'm saying the consumer hasn't been hurt simply because there is very little evidence of reduced domestic consumption. I recognize some retailers have reported poor earnings but I can point to just as many that have done very well (i.e. the Tiffany's vs. WalMart's).
Gee.... I wonder what Tiffany's sales volumes are vs WalMart's?
Yes, high end retailers are doing fine which indicates that the top 1% or so of consumers is doing just great... problem is, the remaining 99% aren't doing so well. Another indicator of the rich-getting-richer and uneven income distribution.
One thing I've learned on this board is you have to be really careful what you say....very literal interpretations! I don't follow individual retail releases very closely. A quick scan of some recent results/earnings releases tells me Wal Mart has suffered the most, Target has done well but stated a "macro concern" going forward, Sears had higher sales but below expectations, etc. It seems as though the big box retailers have seen growing sales but at a decreasing rate. That does give me pause that it could be a precursor to consumer weakness.
I also looked at the ICSC/UBS retail chain store index (designed to measure a compilation of chain store sales from all major retailers). This index is released weekly. On a yoy basis, the latest release showed a 2.9% seasonally adj. increase. The past 6 weeks or so have been quite week and the latest read is actually an improvement. To put this in perspective, the yoy read on avg has been about 3.3% over the past 7 yrs. I hit a low of about -2% in Mar 00 following the nasdaq collapse and again -2% in early 2003. It peaked at 8% in March 04 right before the Fed started tightening.
Sorry for being so verbose, but I have no idea how to put a graph on here. This is a long-winded way of saying I do see some retail weakness, but nothing too concerning yet. I will do some more research on individual releases. You all seem to have much more knowledge on that front and are seeing weakness.
This is not good, the quality has deteriorated dramatically as well as likely understates the decline-
http://www2.fdic.gov/qbp/2007mar/qbp.pdf
10YR
-10/32 96 25/32
Yield:4.91%
Does Roubini tend to be bearish in general, or are his views pretty balanced? Just curious.
Well the bond market is certainly giving up on the bearish case. Economic growth clocking in at 0.6%, yet most (but not all) of the inversion has now been removed from the curve, and only a residual 25% chance of a Fed cut by y/e remains priced in. Although credit spreads are still ridiculously tight, financial conditions are actually getting quite tight, with the real fed funds rate around 2%. So now you have a slowing consumer, businesses acting like we're going to have a second half boom, and monetary conditions actually tight enough to start removing the excess liquidity we all keep hearing about. Seems to me all the conditions for a recession are now in place. Try telling that to all the gamblers intent of buying stocks and selling bonds for the past couple of months though.
Outsider: Does Roubini tend to be bearish in general, or are his views pretty balanced?
Roubini is routinely bearish, and is one of few academic economists so far over to the bearish camp. Here's his faculty page at Stern Business School (NYU). He's the founder of the Mother Of All Macro-Econo-Blogs, the Roubini Global Economics (RGE) Monitor
.
I recently posted a an annotated transcript of Nouriel Roubini's 28 Mar 2007 presentation at the American Enterprise Institute. His performance on that occasion was pretty gripping.
Roubini just goes where the data sends him.
Old metrics for CPI has inflation running 3 points higher, Q3 06 jobs coming in negative in construction, well under initial guesstimates, GDP growth has been below population trend for 2 qtrs.
10% chance that we aren't in recession in Q4, the markets won't likely tank until Jan 08(though the action during the dog trading days of August will be telling.) How bad it gets from there, I have no idea.
Somewhat off topic, but I saw a site in Minyanville today called alexa.com. This site allows you to track web traffic for most web sites going back to 2002. You can see the page views, website rank by traffic, etc. I suggest you try it out with realtor.com. Anyone thinking the big turnaround in housing is right around the corner will be shocked by the total collapse in web traffic the site is experiencing. Try the 3 year tab and look at page views and web ranking. Total meltdown. I offer this tidbit as a little piece of info that may be useful.
CR,
Are you sure we aren't seeing a change in consumption? I had thought we were. Major retailers are making poor numbers (Wall Mart), along with general softness in retail. There are additional indicators such as truck and rail tonnage is down.
economic growth at 0.6% is somewhat misleading. well not misleading but history.The indicators of consumption in the data were on the strong side.the weakness emmanated from trade and inventories. economies around the world remain robust so exports should turn around and inventories should be replenished so that will be a plus.and residential investment will continue in a sad state but the rate of decline will be decreasing so it will not be as lare a drag as it has been. and i still think the permabear case will remain suspect as long as the unemployment rate sits at 4.5% and the initial claims numbers continue to hover arounf 300. show me the layoffs and i will join the ursine crowd.JJJ
egative economic effects of a recession or growth recession will not manifest as long as people still have jobs.
The key number is unemployment.
If that spikes then all bets are off.
As long as people are employed they can tread water for a long time.
Dear CR
Surprised not to see a return of the Eeyore image to go along with this post.
But, are we seeing Eeyore vindicated?
Best regards,
recently posted a an annotated transcript of Nouriel Roubini's 28 Mar 2007 presentation at the American Enterprise Institute. His performance on that occasion was pretty gripping.
John M. | Homepage | 05.31.07 - 1:19 pm | #
thanks for the link!
Look at the workforce participation numbers, look at the revised employment numbers from Q3 2006 and look at the household survey numbers and you'll see the disconnect in the employment rate.
The nature of employment in this country has changed dramatically and they haven't figured out a new set of metrics that are both timely & sorta accurate.
Well the bond market is certainly giving up on the bearish case.
With the economy slow and the large amount of debt out there, these higher rates could mean trouble.
I think the bond market is being cautious here because low rates could let another liquidity monster out of the cage as they did in 2003 (the housing bubble). In this case Wall Street and the financial sector are the threat. I don't think the bond market wants to gamble again and possibly get creamed by another bubble.
I think the key question now is whether these higher rates will impact the consumer.
Mortgage rates have already risen significantly over the past few weeks. Not what the housing market needs now.
Come on guys. I can understand wanting to stick by your forecast, but to constantly run around saying the world is ending when the data has clearly turned better is ridiculous. Housing is still in trouble, but there has been virtually no impact to the consumer. There is a serious inventory build taking place which probably puts 2qGDP at 3%. Right now it looks as if the Fed has been quite prescient. Growth has slowed but likely to pick back up and inflation continues to come down slowly, but it's still too high. Why the chicken little routine all the time?
Roubini cites sophisticated analysts:
Tanta? CR? That would be you.
Housing is still in trouble, but there has been virtually no impact to the consumer
That's why every retailer except Nieman Marcus has failed miserably at beat-the-number since January.
puh-leaze
bs, a serious inventory build indicates increased GDP ONLY if purchasers of that inventory show up. Personally, I've always viewed increasing inventory with great suspicion as it means intake is exceeding outgo. It's meant I've missed getting the occasional stock of a good company, but more often it's meant I've avoided a company that turns out to be having problems. I see little reason to change my mind in this case.
Kett82, yes, I'd say Roubini was pretty much correct - so far. But he also thought there was a strong chance of a "severe recession" later this year, and that still seems remote to me. I still think CRE would have to slump significantly for a severe recession - and that is why I'm watching it so closely.
trader walt, I don't know about being "sophisticated analysts" - I feel Tanta and I have just been writing using common sense mixed with a little experience. But thanks!
Best to all.
Web traffic: youporn.com instead of realtor.com
http://www.idorfman.com/WebTraffic
bs,
You are asking those who see the economy as in trouble for a number of reasons to turn optimistic based on a brief period of better data. Brief periods of better and worse data are fairly common at all but the best or worst of times. The "come on guys" and "chicken little routine" comments are kinda like the pot calliing the kettle black, isn't it? Wouldn't calling you "Mary Sunshine" be an equivalent response from the pessimist camp? Analysis by label, and all.
As our host has pointed out, declines in housing starts as large as we have experienced are typically associated with recession. The tightening in lending standards we have seen is typically associated with recession. We see the unfolding of a financial disconnect of as-yet-undertermined seriousness. People who take these things seriously are characters from children's literature, compared to wonderful you? Don't see why I should believe that. The record so far is that CR and Roubini got the housing thing right. Based on that record, it's kinda early to roll out the "come on, guys" business.
By the way, gross and net domestic income both fell in Q1. The May FOMC minutes reported Fed officials looking to national income figures are perhaps a better measure of growth right now, because they agree better with jobs data. One day after that view was published, the income data disconnect from the labor market data in an even bigger way than the production data. Consistency among various data series is getting hard to come by.
k harris
Right on the mark: and Nicely put.
The problem with Roubini is his selectivity in only presenting data which supports his view, then if the exact same data set comes out later less negative or even positive he is sure not to note it. Such routine bearish bias is my issue with him. Its a symptom of many blogs, CR does pretty well in following the data and reporting it consistently good or bad, i'd say the mortgage application index is the biggest instance of "oh its gone positive YoY, therefore we should discard it". Despite the problem with the index (compositional bias), it is always worth following.
Roubinis coverage of the last New home sales report was pretty sickening. Usually he will latch onto a "positive" report, delve into the numbers and show why things aren't so rosey. This time, because of the large negative median price drop, he just takes it at its face value when it was obvious a mix shift happened to cheaper homes in the South. If he was consistent and pulled every report apart i'd have a lot more respect for him. But he is "look at me i'm right, here is why i'm right, look at me look at me".
k harris -
Fair point and I certainly didn't mean to slap labels on anyone. It just seems to me that the blog world tends to ignore any evidence contrary to the cemented view of the respective blogger (in this case Roubini).
I'm saying the consumer hasn't been hurt simply because there is very little evidence of reduced domestic consumption. I recognize some retailers have reported poor earnings but I can point to just as many that have done very well (i.e. the Tiffany's vs. WalMart's).
Housing is and has been weak. But this morning's GDP report confirms that the very weak 1q was due to housing, inventory, and trade. Inventory and trade are both rebounding very nicely in 2q. Wage and salary income was revised UP to 8.1% from 5.7% in 4q06 and up to 5.4% from 4.7% in 1q07. The consumption component of GDP was revised up to 4.4% from 3.8%.
All this tells me we had some serious weakness late last year and early this year. But much of that weakness is dissipating with housing the remaining weak spot. And I think that continues for a very long time. As long as the unemployment rate is low and incomes are solid, consumption won't go down (apparently). Given that 70% of our economy is consumption, seems reasonable to think we will hobble along for a bit.
Again...apologies for applying the "chicken little" labels...inappropriate. And thanks for the insightful responses. Don't get me wrong, I feel like the imbalances are large and growing, but it appears as though growth ex-USA is having a meaningful impact in helping the U.S. recover.
An inventory build is actually the one element that had been missing until now to potentially turn a consumer slowdown into a recession. Periods of negative economic growth are typically caused by business contractions as personal consumption rarely goes negative in real or nominal terms. If the consumer doesn't show up for the Q3 party businesses seem to now be gearing up for, then Q3&4 will be a repeat of Q1 in terms of inventory drag, and if the consumer has slowed to say 2% from 4.4% in Q1, then you'll be at or below zero gdp growth. With the housing atm closed, stagnant median incomes, and an unemployment rate that can't inch much lower without illiciting rate hikes from the Fed, I'm willing to bet that the consumer won't be in much of a mood to party like a rock star. I may be wrong, and when I'm convinced I'm wrong I'll start buying again instead of selling, but until then dress me up in a chicken suit and call me eyore.
bs and kharris,
Nice exchange. kharris took bs to task with reasoning and data, and bs took the "chicken little" critisism like an adult and came back with some reasoning and data of his own.
Adult conversation is so much more productive.
Thanks.
Turbo,
The inventory build apparently happened back in Q3, started to clear up in Q4 and was dealt with in Q1. Sort of a blink-and-you-missed-it inventory glitch. Ratios are still off the absolute lows, but there is some reason to think that inventories will be a smaller risk from now on. Inventory information is just lots more available now than in decades past.
Inventory information is just lots more available now than in decades past.
Plus companies process inventory differently than past decades... JIT and all. I doubt we'll see many 'inventory lead' recessions going forward. If we do see a lot of inventory growth something is seriously wrong.
bs and Spencer,
A buildup in inventory can be viewed as dangerous when the manufacturer states he has enough inventory and lays off work force.
And that is happening in the white goods manufacturing as reported earlier this week.
K Harris - I agree. My point is another inventory build, which factory orders, chi ism, etc. point towards happening now, is not necessarily a cause for anything beyond short-term optimism unless you believe the consumer will have the ability to buy it down again. If you believe all is well with the consumer, then the Fed's forecast of a return to 2-3% growth looks reasonable. If you believe the consumer is going forced to reign in spending to something more in-line with real income growth, which is close to zero for the median consumer, then we are in a classic prelude to a recession.
And bs, I do see your argument, and shouldn't have fired back over the chicken little comment. I don't see the bearish case as an absolute by any means, just the most likely outcome as I currently see the world unfolding.
Risk Capital,
Did you notice in the FDIC 1Q report that you linked for all FDIC-Insured institutions that:
Notional amount of derivatives: up 31.5% y-o-y
Assets securitized & sold: up 72.3% y-o-y
Securities gains & losses: up 127% y-o-y
Maybe dealer platforms are the new bagholders, or is it Fannie & Freddie?
Well, if the consumer wasn't spending the last of their MEW and increasing credit card debt, and had spent at a pace of +3.7% or below, then we would have just had an inventory and housing led gdp contraction.
Better inventory management is no doubt a prime contributor to the stability we have seen in the business cycle since the early 80's, and why I've been thinking more along the lines of a prolonged slowdown rather than a recession. However, if the economy is bumping along at 1%, then a future quarter or two of inventory drawdown could be enough to tip things to the negative.
I'm not 100% clear on the inventory build story. Inv/Sales peaked around 1.3 (reading from the bus. iventory report) in Oct. 06 and probably bottomed around 1.25 in Apr 07. So inventories were decreased over this time period (sales appeared to be fairly constant). Now they are being rebuilt after a period of drawdown. Why is that a precursor to a recession? If anything, it would seem to indicate a more solid outlook from businesses.
If sales decrease and the ratio starts to rise again, then that is certainly a bearish sign for the economy. But again, I come back to the idea that sales won't go down as long as incomes are up and people have jobs. So far, both are true. Although I can't for the life of me figure out why we haven't lost more construction jobs in this housing downturn.
An inventory build is not in and of itself a prelude to a recession, and is, as you suggest, a source for optimism, at least in the short run. However, even a small inventory build that a tapped out consumer can't draw down could be problematic in the future. Businesses are stocking up for a 4%+ consumer, when the consumer may struggle to do 2% (in real terms), and that could be a problem come Q3 and Q4. I'm not trying spin good news into a bear story, but high business optimism combined with tightening monetary conditions and a slowing consumer have been a warning sign in the past. It's probably more timely to argue businesses are busy hobbling themselves with excessive leverage than excessive inventories right now anyway.
Copied this post from a employment questioneer on MSNBC. Interesting comment.
I own a company that works in the development of residential and commercial property in the Atlanta area. Our business is off by approximately 35 percent so far this year, and things are looking like that figure will continue to increase. I spent parts of this past week looking at projects that we completed during last year (2006). I would say that approximately half of the units of the commercial developments are still un-leased or have had the original businesses closed down. On the residential side, its even worse. Whole subdivisions where all the development work is 100 percent complete, there are no model homes. The developments are simply standing idle.
My conversations with friends who are in the same business are remarkably similar. Everybody is chasing operating cash. With nothing selling or leasing, most developers are falling farther and farther behind in making payments to their subcontractors. I also have friends who work on state road projects, they say the same thing about getting money from the state. Therefore the subcontractors are falling farther behind in making payments to their suppliers.
We have already cut our staff to half of what it was this time last year. Now, prices for services are starting to fall as businesses try to keep going. When I moved here eight years ago, everyone said that Atlanta was recession proof because of its diverse economy. Not so, large companies have been moving out of Atlanta. Its going to get ugly here. The worst is yet to come.
Anecdote only..
went to a bid opening today for a townhome project (affordable housing). The budget was about $140,000 per unit; the bid was about $115,000. And, there probably will be no 'undocumented' crews: everybody is down to the first team now and really competing for the work.
This is a very happy time if you are a non-profit developer of affordable housing - you are getting better quality and really good pricing at the same time.
Inv/Sales peaked around 1.3 (reading from the bus. iventory report) in Oct. 06 and probably bottomed around 1.25 in Apr 07. So inventories were decreased over this time period (sales appeared to be fairly constant). Now they are being rebuilt after a period of drawdown. Why is that a precursor to a recession? If anything, it would seem to indicate a more solid outlook from businesses.
Intentionally rebuilt after draw down? Are you sure?
I live in that world - supply OEMs who supply the retailers... they want continually declining inventory & faster turns... If they could have inventory levels less than period sales they'd go for it if they could replenish fast enough. I've heard of suppliers to Walmart that turn their inventory (all of it... factory-whse-store shelves) about 25 times a year. That's a replenishment of their whole supply chain every two weeks.
If I am understanding your measure of inventory ratio that results in a number way less than 1. There is nothing sacred in the current inventory to sales ratio that implies optimism... it's dead neutral at best.
But again, I come back to the idea that sales won't go down as long as incomes are up and people have jobs. So far, both are true.
That depends on two other factors... (1) how much of an effect MEW has on demand - we been debating that for awhile here AND (2) will consumers increase other forms of debt to augment income and past MEW?
Again here it is unclear & possibly a wash (more CC debt and somewhat increased income offset decreasing MEW).
Who knows - we'll all learn something.
I recognize some retailers have reported poor earnings but I can point to just as many that have done very well (i.e. the Tiffany's vs. WalMart's).
Niemann Marcus & Tiffanys(high end) vs. Big 3 auto, Walmart, Home Depot, Lowe's, Sears, Best Buy...
The market cap, market share and % of GDP of the latter is 5x bigger than the former, so who's cherry picking? Are you suggesting that the Champagne Charlies are gonna lead the country out of this rough patch?
A metaphor for the US housing market:
FUVOO.COM
It starts out slowly enough... but in the end there's a pile of rubble and heartache.
i think that consumers are reining in their spending. and i think the main reason is the increased price of fuel.i see increases in the cost of grocery store visits. and although i don't really pay much attention to the price of fuel. i do look at my bank account balances, and thats where i notice these increased prices. i see consumer confidence reports have gone up from a month ago but i sense amoung friends and associates a conservatism about buying. nobody saying much, but nobody buying new homes, or new cars. not as much talk about a cruise or carribean vacation, etc.
I'm saying the consumer hasn't been hurt simply because there is very little evidence of reduced domestic consumption. I recognize some retailers have reported poor earnings but I can point to just as many that have done very well (i.e. the Tiffany's vs. WalMart's).
Gee.... I wonder what Tiffany's sales volumes are vs WalMart's?
Yes, high end retailers are doing fine which indicates that the top 1% or so of consumers is doing just great... problem is, the remaining 99% aren't doing so well. Another indicator of the rich-getting-richer and uneven income distribution.
Clyde-
"Maybe dealer platforms are the new bagholders, or is it Fannie & Freddie?"
I think that is the trillion dollar question.
One thing I've learned on this board is you have to be really careful what you say....very literal interpretations! I don't follow individual retail releases very closely. A quick scan of some recent results/earnings releases tells me Wal Mart has suffered the most, Target has done well but stated a "macro concern" going forward, Sears had higher sales but below expectations, etc. It seems as though the big box retailers have seen growing sales but at a decreasing rate. That does give me pause that it could be a precursor to consumer weakness.
I also looked at the ICSC/UBS retail chain store index (designed to measure a compilation of chain store sales from all major retailers). This index is released weekly. On a yoy basis, the latest release showed a 2.9% seasonally adj. increase. The past 6 weeks or so have been quite week and the latest read is actually an improvement. To put this in perspective, the yoy read on avg has been about 3.3% over the past 7 yrs. I hit a low of about -2% in Mar 00 following the nasdaq collapse and again -2% in early 2003. It peaked at 8% in March 04 right before the Fed started tightening.
Sorry for being so verbose, but I have no idea how to put a graph on here. This is a long-winded way of saying I do see some retail weakness, but nothing too concerning yet. I will do some more research on individual releases. You all seem to have much more knowledge on that front and are seeing weakness.