Category: Economy

What are the Leading Economic Indicators?

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Barry Ritholtz does a very good job of taking us through what is actually in the LEI, and he notes changes that might render it less accurate.

In terms of the recent numbers, which have been surprisingly upbeat, he notes that, “The 0.1% LEI reading was marginally positive primarily due to 3 factors: 1) increasing stock prices (.16); 2) Positive yield curve (.14); 3) An unfathomable 0.13% increase in building permits.”

I don’t place much stock in the stock market as a predictor, and the yield curve going positive is an artifact of the Fed dropping rates like a pole axed steer.

As to the increase in building permits, I gotta figure that there is just something wrong here.

In terms of the changes in the LEI, Ritholtz notes:

Recall that a few years ago, the LEI was reconfigured — mostly to include more financial factors, and less real world economic data. Inthat way, its a bit more like government data. The reconfigurations seem to be avoid showing negatives.

And I am inclined to agree.

Here is a question though: what happens when the statistics can no longer be fudged?

Go read it.

More Detail on What the PPI Numbers Mean

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Here is the more detail on the PPI that I promised in an earlier post:

I would note that of the news networks, I find that CNN is the most breathlessly optimistic, and their take on the PPI numbers is simply wrong, but even they got it a bit right about the seasonal adjustment for the end of the heating season:

The overall moderation in prices primarily reflected how the government adjusts its data to compensate for seasonal changes. Those adjustments showed gasoline prices falling last month even though motorists were seeing prices soar.

When CNN starts questioning official inflation numbers, it’s game over.

You will note that they scream to the high heavens that it’s down to 0.2%, of course the core rate is twice that, 0.4%, and the 0.2% is an artifact of already suspect seasonal adjustments.

When the total number is bad, they report core, when the core number is bad, they report total numbers, with a little caveat slipped in. CNN’s financial reporting sucked.

Barry Ritholtz puts this in some perspective:

Follow this if you will: Each year in the Spring, we get a fairly large seasonal adjustment. If memory serves, its about a ~7% increase in Energy for April. This year, however, energy prices are up so much in advance of April, that we only got a ‘modest’ one month energy increase of 5.2%. In other words, the market ran up in advance of the usual seasonal gains. Hence, a 5.2% increase looks like a reduction after seasonal adjustments. (Note: I need to double check the precise #s).

So does Dean Baker:

The core finished goods index rose by 0.4 percent in April. It has now risen at a 5.0 percent annual rate over the last quarter. The core intermediate goods index rose by 1.2 percent in April and has risen at a 12.4 percent annual rate over the last quarter. With productivity growth having slowed sharply, it is difficult to believe that these higher costs won’t be passed on at the consumer level. This is big news.

So we are looking at some very real, and very troubling inflation numbers. Barry Ritholtz has some nice graphs that I recommend.

Economics Update

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In inflation, it appears that producer prices may be a problem (also here), with the overall rate going up by .2%, and the core rate going up by 0.4%.

Of interest is that the first link, from Bloomberg, basically casts it as a “low inflation” story, and the second link casts it as a “high inflation” story. I’ll explain why the latter is wrong in a bit.

In any case, the market saw the rate as low, which drove the dollar down in expectation of further rate cuts in the US, and the expectation of rate hikes in the Euro zone.

In energy, we have crude hitting another record, above $129/bbl, and gas prices at the pump hitting a new record for the 13th straight day.

I Get Letters

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So I get this in my in box. It is not, as Bullwinkle says, “fan mail from some flounder”, though I think that some intellectual floundering definitely present.

Note that I have permission to reprint, and the only changes have been to email addresses.

#####@aol.com <#####@aol.com> Sun, May 18, 2008 at 8:28 AM
To: me

From an AOL address…How utterly appropriate

Since taking over Congress two years ago, everything has GOTTEN WORSE.

First, of course, it’s not been two years, it’s been 11/3 years. Congress came in on January 2007. It’s only 1½ years from the election, so now we know that you can’t count.

Gas is skyrocketing, and they campaigned and told us they would stabalize prices.

Actually, gas prices were not an issue in the 2006 elections, it was war and corruption. In fact the only people who are claiming that they can control gas prices are the Republicans, both through John McCain’s (and to her shame Hillary Clinton’s) gas tax holiday, and through the two months (most likely case the 6 months quoted is best case) that are under the Arctic National Wildlife Refuge.

The economy is failing and all they want to do is take more in in TAXES.

The economy is failing because our deficits are catching up to us. We need to balance the budget.

Furthermore, the economy is failing because the velocity of money is slowing….Rich people spend more slowly than poor ones, and so you want to get money going further down the scale.

The spending cuts instead proposal means throwing retirees out into the street and downsizing our military to the size of that of Norway. You arguing for that?

Republican profligacy, as evidenced by Ted Stevens’ bridge to no where, and Dennis Hastert’s road project to inflate the value of his land are Republithug innovations, thank you very much.

It’s why we are seeing a breakout in inflation, which is higher than reported.

The common theme is that President Bush is the problem.

He is a large part of the problem. His solution to the credit crisis is to eliminate oversight and regulations over financial institutions, as the abandonment of basic regulations was not what screwed this up in the first place.

While many of these problems go a long way back, starting with baby steps under Jimmy Carter, and proceeding to spring under Reagan, it’s clear that Bush has been long opposed to doing anything about this, and he is still largely trying to wish the problem away.

With the veto pen, and Mich McConnell being willing to filibuster a burp, there are limits to what can be done under our system.

Is president Bush a god or something.

Only to you guys, though I’m sure that when he leaves power, your worship will end. At that point, to paraphrase Richard Widmark you will be blaming the Eskimos.

Seems like the Dems have no clue what or how to do anything.

Truth be told, I’m not too happy at their relative lack of success in getting through their agenda, but the bulk of the Democratic members of Congress have limited experience with being in the majority, and they seem to be doing better month by month, albeit very slowly.

Oh by the way, dont think that the 57 STATES mentioned by Obama will go away. It is clear, Obama was referencing the 57 Muslim states. HGMMMMMM……I wonder what was on his mind when he made that comment.

Well, since you haven’t read the full quote, where he says that he won’t make it to Alaska and Hawaii, but will hit all the other states, it’s a brain fart on numbers, particularly since there aren’t 57 Moslem nations. To quote the Republican president Abraham Lincoln*, “It is better to stay silent and let people think you are an idiot than to open your mouth and remove all doubt,” as there are roughly 40, Wiki has 37, Majority Islamic nations.

The dems are certainly making this a better country, YEAH RIGHT.

They are trying, which is more than I can say for Republicans. I mean this in a very literal way.

I went to school, and served in the SGA Senate with, (convicted of corruption) Tony Rudy and Brian Darling (of Schiavo Memo Fame), classic modern movement conservatives, and I actually had fairly good social relationships with them.

They honestly believe that government is an unmitigated evil, and that government programs, even when they work, are evil, so their goal is to break stuff so that it does not work.

It’s why, after 38 years of Democratic rule in the house, you had corruption defined by a few bounced checks and one guy splitting salaries with ghost employees, where with the Republicans you had representatives preying on little boys, and an explicit pay-for-play bribery system.

It’s harder to be an honest Republican, because the only reason you are in government is money, power, and getting your way.

resp Paul P

Back at you.

BTW, you might want to use the comments instead in the future. I do read them.

*There are some disputes on the source of the quote. It has variously been attributed to Lincoln, Twain, and Franklin.

Economics Update

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On the good news side, Leading indicator increased 0.1% to 102, the first back to back gain in about 6 months. I’m calling a dead cat bounce.

One of the reasons is because of good news like, southern California house sales “surging” 22% from March to April, where the reporter ignores the fact that while this is a month-to-month gain, year over year, it’s still a 19% drop, and one of the weakest Aprils on record.

So Cal has a Mediterranean climate, which means that March is wet. People don’t house sit when it’s wet.

It also ignores the small fact that 34% of those sales were REOs, real-estate owned properties. So these were basically foreclosed properties.

It’s why California Luxury home prices fell for the 2nd straight quarter.

Not only are real estate prices still falling, but Commercial property prices are falling, the most since 2000. (A critique of the financial press on this in a later post)

In contrast to Bernanke and Paulson, Jean-Claude Trichet, head of the European Central Bank is saying that the credit crunch is ongoing. I think that this is true, and portends a major shift in the financial markets. (Again, I’ll go into more detail in a later post)

As to why, perhaps the fact that banks are doing accounting backflips to keep $35 billion in losses off of their balance sheets justifies a lack of faith in the financial markets and financial industry.

Of course, boneheaded moves like UBS blowing $24 billion by deciding to expand into asset based securities further erodes people’s confidence in financial “professionals”.

My cats could do better on the cat-turd futures market than these guys.

As a result, we are seeing another big LBO foundering, this time the the $51.8 billion Bell Canada takeover, what is (was?) to be the largest LBO ever.

Economics Update

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I guess for those of us in the US, the big 3 are employment, energy prices, and real estate. So, going in that order, we have:
nitial jobless claims rising to 371,000 last week, though as I always state, this is a noisy number, and you need a few weeks, or better yet months to extract real meaning, but, quoting the article, “The trend in claims is still upwards and we expect new highs over the next few months.”

Matt Trivisonno has the withholding tax numbers, you know the social security taxes that employers take out of wages below about $104K, and they are way down too.

Here are the pretty pictures:


Trending Down on a daily basis


And on a quarterly basis


And on a yearly basis.

As to why these numbers fell? Because no one is making anything in the US in April. Industrial production fell -0.7% in the US. The consensus estimate was -0.3% down, and March output was ajusted to +0.2%, down from +0.3%. Not good.

In energy, Crude fell below $122/bbl, which is good, but Gas hit a new record, $3.776 a gallon, the 8th record in 8 days.

In real estate, we have the inevitable article calling the light at the end of the tunnel, when it is more likely an oncoming train, in Orlando, Florids, one of the worst hit areas. Inventory fell slightly, and sales are up a bit (0.2%), and the rate of decline of existing home sales is a bit better.

Me, I’ll go with National Association of Home Builders/Wells Fargo monthly index, which fell again. The home builders are in the business.

I would also note that even with the Fed rate cuts, mortgage rates fall seem to be pretty stubborn about staying above the 6.0% line, so there won’t be any help for the market there.

Europe, on the other hand, appears to be doing fairly well, with GDP increasing 0.7% across the Euro Zone in the first quarter, led by a sizzling, for the developed world anyway, 1.5% increase for Germany.

This makes it far less likely that the ECB will cut rates. Actually it makes it more likely that the ECB will raise rates, and as a result, the US dollar is down today.

Volker Calls for More Regulation

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In testimony before Senator Charles Schumer’s (D-NY) Joint Economic Committee, Paul Volker called for more, and more effective regulation of the financial markets.

There is a back story to all of this. Volker was one of the Fed members who tried to keep depression era policies in place, with folks like Alan “Bubbles” Greenspan out maneuvering him on things like the emasculation of Glass Steagall by the Fed before the law was repealed.

Federal Reserve Repudiates Alan “Bubbles” Greenspan

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The Fed has decided that it will begin to examine ways of dealing with asset bubbles.

This contradicts with Alan “Bubbles” Greenspan’s dictum that, “it was in practice impossible to identify bubbles before they burst, and attempts to prick them by raising rates were likely to do more harm than good.”

Another well deserved nail in the coffin of Ayn Rand’s buddy’s reputation.

Economics Update

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The CPI rose less than expected 0.2%, though there was a huge delta in food, about 0.9%, 2.5% and 11% annually rates.

Look at my earlier posts on this issue, and you’ll see that the real inflation is far closer to 11% than it is 2.5%.

This has, for reasons unclear to me, led to the UD dollar strengthening in overseas markets.

Year over year foreclosures in the US are up 65%, and between the banks discounting these properties, and the builders discounting new homes, we have a way to go to bottom.

In investing, the dispute between Clear Channel, which had a deal to sell itself to a private equity firm, and the banks, who were trying to get out because they had no expectation of being able to resell the debt, has been settled. The buyout is now at 36$/share, as opposed to the earlier $39.20/share, so both sides took a haircut to get the deal done.

Still this indicates that the credit markets are still frozen.

Finally, we are back to the monoliner insurers. with MBIA and Ambac’s losses making the ratings agencies nevous.

If the ratings process was an honest one, they would have lost their AAA status over 6 months ago.

Economics Update

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Well, the financial news is reporting that consumer spending are up, but as Barry Ritholtz notes, “Retail Sales were rather unimpressive: Gasoline, Groceries, Food & Beverage were up, while pretty much everything else was flat to down. (see picture)

Also note that the real numbers are actually a reduction when adjusted for inflation.

In the “same as it ever was” department, we have crude oil and gasoline hitting a new record again, $126.98/bbl.

In real estate, The median single-family home price dropped 7.7% Q1, annualized, that is around a 30% drop, but you will see articles calling a bottom soon.

In banking, we have Bank of America saying that credit costs are up.

Translated from bank-speak, it means that they are having more late payments, defaults, and foreclosures.

On the good news side, Ben Bernanke is promising more free money through the Federal Reserve’s “sh%$pile for dollars” auctions.

Roubini Likes the Mortgage Proposal

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If you’ve been following my posts on the various bits of legislation to help homeowners, you know that I’m in general agreement with Dean Baker, an economist I highly respect*, that most of the proposals are more about bailing out banks than homeowners, and that attempts to prop up home prices do little more than make housing less affordable.

However, I also highly respect Nouriel Roubini†, and he likes the Frank-Dodd Proposal mortgage relief.

Seeing as how I’m not an economist, banker, or realtor, I thought that my readers (both of them) should see his take.

First, he admits that this would be nationalization of bad mortgages to a large degree, but he sees the lenders benefiting, after a 15+% haircut, because they get a guarantee, homeowners get to stay in their house, their neighbors don’t deal with the effects of vacant lender owned housing, and it is far less expensive to the taxpayer than a full bailout.

I still think that real estate needs bankruptcy reform, and allowing mortgages on a primary residence to be adjusted by bankruptcy judges would be the best reform both in the long and the short term.

*Not only did he call the housing bubble, he actually sold his home on that expectation in 2004, and he’s now renting.
†Perhaps the strident of the bear economists. The frightening thing is that to the degree he has erred, it has been because he has been too optimistic.

American housing | Map of misery | Economist.com

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The Economist is suggesting that, “America may well be only halfway through the house-price bust“.

They lead off with the scary picture:

Though I would note that this is now almost 6 month old data, so there would be a lot more red now.

They make the obvious point, that the delta in house prices is still not clear, with a number of different ways of measuring, with OFHEO covering sales financed by the GSEs, and the two different Schiller numbers.


Note that the gray area is projected, and I think that they ignore the possibility of overshoot in the buy/rent ratio.

They note the fact that banks are still tightening standards at an unprecedented rate, which will push house prices down, but they neglect to mention that the 5-6% fixed rate mortgage is historically low, and that if there is a return to the 9% rate, we would see even further downward pressure.

We’re Now Getting the Calls for a Housing Bottom

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This is the next stage of an asset collapse, the declaration that a bottom has been found, and it has no where to go but up now.

First, we have an OP/ED in the Wall Street Journal declaring the housing crisis to be over. This is suspect for two reasons:

  1. It’s made by Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York, and he has a financial interest in all this fixing itself.
  2. It’s a Wall Street Journal OP/ED

Additionally, the logic is just plain silly. He claims, among other things, that low interest rates will have housing bottom out, even while there are increasing inflationary and interest rates pressure.

He also believes that since the inventory is not at 11 months, near historic highs, it will turn around.

He could be dishonest, or he could be an idiot, but my money is on both.

I also think that he does not understand how much Alan “Bubbles” Greenspan distorted the market during his tenure as Fed Chair.

We are also seeing some bargain hunting in the financial markets, but again, we saw that, and the declaration of a number of times during the dotcom crash.

To put it bluntly the market is a fool some times.

Of more significance are reports like this, where we see those neighborhoods hit earliest hardest are seeing an up tick. Is this because they are cannibalizing from other neighborhoods that people perceive as still being on the way down?

I agree with the Rich Toscano, when he suggests:

So what does it all mean? One really helpful puzzle piece was supplied by SD Realtor a couple weeks back. He posted some data showing that while volume has declined in many higher end areas, it is actually up quite substantially in some of the areas that have really been crushed (e.g. Eastlake).

His conclusion was that the price declines have gotten so bad in some areas that buyers are starting to creep back in. But where the prices have been stickier, demand remains quite weak. This is a sensible analysis and I tend to agree. If this is what’s going on, and volume is still the good leading indicator it once was, those hard-hit areas are likely closer to the bottom than the rest of San Diego.

There’s one other twist to the question. The months of inventory figure has declined, but that measures sales against “want to sell” inventory. What’s arguably more important is the number of sales vs. “must sell” inventory. It could well be that even as the total amount of inventory declines, must-sell inventory is steady or even rising. I attempt to proxy this relationship with my sales-per-notice-of-default charts. Perhaps the next update of that chart will fill in some blanks, but given that we’ve just been at or near all time high default levels and that defaults generally represent future must-sell inventory, it doesn’t seem like there is a real danger that must-sell inventory will decline much any time soon.

Banks are still foreclosing, and the numbers are continuing to increase, and that is the data which we should consider.

Real Exports are Not Growing

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Interesting…When correcting for raw materials, and that is a lot of US exports, things like ore, food, and hides, exports are not growing.

Our export economy is that of a 3rd world nation. It’s raw materials and food, not finished goods.

One of the problems that we are facing is that if the dollar falls, we lack the domestic industrial capacity to pick up the slack. It has been dismantled over the past 30 years, and it may take it 30 years for it to recover in any significant way.

Economics Update

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We have another sign of recession, imports falling sharply in March, which indicates a decrease in consumer demand.

It also appears that the decisions by the Bank of England and ECB to target inflation may be putting an end to the brief dollar rally.

In energy, we have Oil settings new record, $126.20/bbl, and gas hitting a new record, $3.671/gal.

It should be noted that much of our trade deficit is oil, but the number dropped even with increasing oil prices. Things are slowing down a lot.

I would note that there are signs that the credit crunch is no spreading to insurance, with AIG posting a 1st quarter loss of $7.8 billion, and making plans to issue more stock to raise needed capital.

If the insurance industry goes balls up in any significant way, it’s going to be effecting a lot more people.

Finally, we have housing inventories continuing to rise, 3.5% in April, and 6% year over year.

Economics Update

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Tanta of Calculated risk notes that continuing unemployment claims are now above 3 million. Note that, unlike the weekly new claim figures, this one tends to show trends much better.

You may recall that recently the weekly data is showing a decline, the fact that the numbers are still rising means that people are spending more time on unemployment.

Because of inflation concerns, both the Bank of England and ECB leave rates steady have decided not to follow the Fed’s example and cut rates. Which has left the ECB rate at a 6 year high.

Normally, this would suggest a weaker dollar, but the dollar is doing pretty well against the Euro. No clue as to what is going on here.

Finally, another day, another record high in oil, $123.53/bbl at closing.