Look beyond the noise.

US Economic expansion.

Last week was all about the US employment report for March. The focus was so sharp that little else seemed to get much scrutiny. Given the frequency of revisions, one month is never enough to base sound long term opinions on, so I wont. There is a school of thought in the cynical blogosphere that weaker numbers were engineered lower thus giving the Fed justification for Q3. Given the proximity of the election when the decision is due, they will need all the help they can for justification without attracting Republican ire.

With the aid of a wider angle lens, I was not distracted by the unemployment numbers. I chose instead to focus on the nuts and bolts of the economy. Early last month I wrote about Class 8 truck demand Quiet in Class!..[ This continues a theme of mine centered on transportation of goods. Most recently that has been with reviews of BNSF rail freight volumes but earlier postings have been on the shipping industry The Perfect Storm and The Plimsoll line is clearly visible! ]… Last week saw the release of preliminary sales data for March Class 8 truck sales for North America. With the benefit of 3 months data for 2012, my earlier concerns for the economy can have some justification.  January 24,000 February 22,366 and March 19,682 against the 4Q 2011 average of 26,000. The preliminary number for March is 32% below March 2011. Why is that important? At the beginning of the year, the two main bodies for the truck industry were upgrading their forecasts for 2012. They centered around an annual expectation of 295,000 sales, well ahead of 200,000 needed to replace retiring vehicles and up 10%ish on 2011. March and April are normally the two most important months for sales as they herald the start of the haulage season fan-fared with the new year models, which normally carry a higher price tag. If April does not spring into life with renewed vigour, the order backlog (currently strong due to the ordering peak around December) will falter and the inventory level ( 62 days versus 52 in 2011) will rise. This, in the worst case scenario, could lead to awkward production gluts. In the third of my blogs on rail freight USA Freight Volumes I did suggest that the rise in container volumes (via rail) could be attributed to the sharp rise in diesel costs. This may have some correlation with the first decline in trucking jobs (0.1%) since July 2011 as seen in last weeks employment data.

US Government Debt

On Thursday we will see the release of the Monthly Budget Statement. I have seen one estimate so far ($203bn). If this is confirmed, it will be the first back to back $200bn plus months that I can remember. It would lead to a Q1 deficit slightly up on last year and close to the record set in 2009.  Since the depths of the recession in Q1 2009 the economy has recorded positive GDP and unemployment has (headline rate) dropped significantly. Why then is the deficit still growing at such an alarming and unsustainable rate? Easy, the government are buying growth. As I highlighted in America breaks records…Swiner in USA the end of 2012 brings about some major problems for the newly elected government. It is impossible to think that by then the economy will have garnered enough momentum to overcome the fiscal drag which will inevitably follow.


The latest inflation data will not rest easy on the authorities who made much of last months significant decline. They have blamed the unexpectedly sharp increase (3.6%) on poor weather in the fresh food producing areas. This has lead to overall food costs rising 7.5% year on year. This, however, masks far more important moves in two important staples. Vegetables are up 20% year on year with Meat/Eggs 11%. The recent significant fuel price hike had little influence on the rate as it has a small weighting within the index. Presumably it will show up in later months as products are priced to contain additional transport costs. It is clear that inflation will continue to be a drag on any monetary easing the authorities have planned. To continue my transportation theme (and remember 90% of goods travel at some point by sea) Chinese shipbuilding orders are down 40% on the first two months of 2011.

Last week also saw the release of the Purchasing Managers reports for March. Whilst the state version showed continued strength at 53.1, the independent HSBC report fell to 48.2. Why? Well the state report by the Federal Logistics and Purchasing department is heavily influenced by state and large companies in its sample of 800, whilst the HSBC has 400 mainly small and medium sized companies. These smaller companies are much more focused on the world economy. Weaker overseas demand has been a drag on growth but finance, or lack of it, has also played a part in the current weakness. The authorities started a pilot scheme in Wenzhou last week aimed at relieving some of the well documented problems of underground financing.



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Monday, April 9th, 2012 BNSF, China, Debt, National Debt, PMI, QE, Shipping, US Economy, USD 1 Comment

Employment, Quality not Quantity.

US Employment figures.

According to some journalists, last Friday`s release marked the turning point for the economy, putting it on a firm footing towards continued expansion. In the blogosphere however, a very different picture is being painted. A tsunami of wrath has been unleashed over the weekend, claiming that the significant revisions to population and employment have been doctored to give a lift to the current administration. Mistrust of the authorities handling of the data must have some political motivation. There are however, some very articulate, factual articles which do lead one to question the impressive employment growth in January. It is impossible to know from my lowly arena whether there is any foundation in these allegations, but I do have some observations of my own:

  • Since 1976 the net effect on employment (in January) due to adverse weather has been the loss of 424,000 jobs. In January 2012 that number was only 206,000.
  • The proportion of the population in employment is at a 30 year low.
  • Earnings growth is very weak at 1.9%
  • Total income taxation has not improved with the job creation.
  • Part-time employment remains little changed and very high.

The employment gains in January look impressive and well spread throughout the economy. It will take another two months to know exactly what affects the mild winter has had on the seasonal adjustments.

Since the end of the recession job creation has lacked quality. McDonald’s and Starbucks may keep on employing but they do not do much for the long term health or wealth of the economy. Since February 2010 food services have created 487,000 jobs. The sad fact is, disposable incomes are declining. The on-going cull of jobs in the finance industry along with 20-30% compensation cuts for those that remain, will just accentuate this process. According to the Bureau of Labour Statistics, blue collar inflation adjusted incomes fell 12 cents in 2011 (the steepest rate since the stagflation of 1980) with the economy as a whole falling by 16 cents.

US Government debt will grow by another $1 trillion this fiscal year, a level which is unsustainable and needs to be greatly reduced. With the income tax cut and unemployment extensions still to be concluded, the all important austerity discussions are still being kicked down the road. Debt and future medical/social costs are compounding at an alarming rate. The optimists in the investment community are gambling that ever larger quantities of QE will lead the economy into strong tax generation growth mode. If future corporate earnings are to meet their expectations, consumption will need to rise substantially from here. With the spectre of lower disposable incomes that scenario looks increasingly unlikely. Previous recession recoveries of the normal V shape, have been driven by a pick up in the real-estate market which followed the resurgence of industrial production due to restocking. This is a new economy and one that has never been seen before, standard recovery expectations should not be applied. It probably follows that the falling participation rate in the economy (people in registered employment) indicates growth in the black economy. This is a worrying trend and will reduce the governments ability to raise tax revenues significantly.

The UK and Europe were buoyed (last week) by the rebound in the Purchasing Managers Index (PMI) reports. Along with the US data, they helped drive share prices higher. I cant help reflect on this time last year that saw the same indices rally strongly only to fall back for the rest of the year. As we proceed through February we will get a slew of economic data for January. I believe this will be a sobering reminder of the much lower consumer activity. Retail sales are going to drop significantly and unemployment will grow still further from already elevated levels. The UK public debt could become a feature. January is the most important month for income tax collection. Tax on income and wealth in January 2010 was £ 27.347bn… and in January 2011 £ 33.092bn.

Similarly to the US, many poor quality jobs (in tax payment terms)  have been created in 2011 but many very high salary jobs have been lost. Total compensation in the City will be 20-30% lower and historically they have accounted for a large slice of the national income. The honeymoon period could be coming to an end. Government spending is still higher year on year, spending will have to be cut in real terms.

With the highs seen Friday and a low VIX level, it was a good time for me to initiate a PUT option on the FTSE. This will expire March 16th (fingers crossed). The Greek drama may well end in a deal to reduce debt (giving a short term fillip to markets) but it is only likely to result in anarchy. Happy trading!

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Monday, February 6th, 2012 Debt, GDP, National Debt, PMI, Predictions, UK No Comments
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