Retail Sales, Jobless Claims Quite Misleading; Commodities the One Bright Spot

If not for the seriousness of the situation it would be comical how the popular press manages to put a positive spin on things these days. CNN and other media outlets are cheering the surprise 0.5 percent increase in retail sales in May. That headline number certainly looks good on the surface, but it’s quite misleading.

Retail sales were up thanks to rising gasoline prices that jumped sharply in the month. Ex out gasoline and retail sales were flat in the period. The wholesale price of gas rose from $2.05 a gallon at the end of April to $2.51 by month’s end. Every 10 cent increase in the price of gas costs consumers an additional $13 billion or so a year. So far this month gasoline prices have risen another 12 cents a gallon, so perhaps we’ll get another boost to retail sales when June’s figures are released.

Another data point the cheerleaders were crowing about today was foreclosure rates, which dipped 6 percent on a month-over-month basis. We would love to see a turnaround in the housing situation, but the fact of the matter is it’s far too early to get excited about the economy bottoming. Foreclosures were still up 18 percent year-over-year and the monthly tally was the third worst on record. Moreover, it was the third straight month in which foreclosure filings exceeded 300,000 and an increasing number of foreclosures are on homes with conventional 30-year, fixed-rate mortgages—not an encouraging trend.

And then there were the weekly jobless claims which inched downward. But here again, the drop from the peak has been miniscule. And with the unemployment rate sure to top 10 percent by year’s end, we’re in no mood to pop champagne corks.

The run in commodity prices is the one bright spot. Much of the gain in commodities recently has to do with China rebuilding its inventories and supplying its growing economy. There is an outside chance that part of the move in commodities is in anticipation stronger growth to come here in the U.S., but that remains to be seen.

Of course, soaring commodity prices, and they are soaring across the board, could scuttle the economy. Crude oil, to name just one, topped $73 a barrel at one point today. They settled at $72.66, up more than 100 percent from their December lows.

Speaking of China, it’s in the driver seat these days, metaphorically and literally. The nation is one of the few bright spots on an otherwise bleak economic landscape. Growth there slowed with the global financial crisis, but massive government stimulus spending and measures to encourage domestic consumption are having the desired effect of ramping up growth again.

Earlier this week China announced that its auto sales rose 34 percent in May, with 1.12 million units flying off of dealer lots. Here in the U.S., by contrast, vehicle sales slumped 34 percent to 925,824 in the month.

China buying more cars than the U.S. is significant for several reasons. It draws attention to just how weak the U.S. economy is relative to our rising rival. It underscores the fundamental rising in commodity prices during the past few months, dispelling the idea that mere speculation is driving prices upwards. And in particular, China’s car craze serves as a pointed reminder that we live in a finite world.

In the U.S., new car sales might mean less gas ultimately consumed, if the car being replaced is a relative gas guzzler. In China the cars are largely being purchased by first-time car buyers who are adding to the country’s rapidly growing fleet. That means incrementally more gasoline (oil) will be consumed, leaving less available for our consumption. Throw in India, Brazil and other emerging economies where more people are driving each day and you’re talking real numbers. We're not being selfish with that statement, just pointing out that gasoline prices are headed higher for everyone.

Comments

[Old Trader:]

The potential in demand growth for oil from the emerging economies is why oil (via oil company stocks) is a core, long term holding in my portfolio (btw, my definition of "long term" is 3-5 years).

Jun 12 09:02 AM

[JM Schuler:]

Nice writing. I like it.

Jun 12 09:49 AM

[notsosmart:]

big resets are coming.the talking tv heads are a waste of time.watching stupid "family guy" is better than listening to green shoots,mustard seeds,goldilocks,etc.t... for yourself.in time oil will go through the roof unless we can find a way to make it out of granite counters(plenty of them around).when the beer swillers start staying away from the stadiums the will indicate the downward spiral is speeding up.so pay attention if the cameras ignore the empty seats.

Jun 12 09:55 AM

[Jimmy James:]

AUDIT THE FED. HR 1207 has already passed, now the companion bill in the Senate, S 608, needs everyone's support.

Jun 12 10:51 AM

[Techtrader10:]

Well thought out article, except for the last two paragraphs. First, new car sales figures. The only statistics are for "new car sales", in China there isn't a significant number of used cars, in the U.S. when the economy gets soft, used car sales go up, new car sales go down. Therefore China's new car sales would equate to "total car sales", while in the U.S. new car sales are only a portion of the total cars sold.

Second, gas consumption figures. The world is currently a wash in gasoline and oil. India is still a long way off from being a major consumer of gasoline and Brazil uses ethanol from sugar cane as a large source of energy for their cars, not to mention the major oil finds off their shores which will be used at home first and then exported.

The U.S. economy is going through a major adjustment from the "spending of the excess value of your house" to the "spend what you make" economy. Not only are consumers spending more within their means they are actually saving...a new experience for many. The "hot economy" of the past ten years will not be back any time soon.

Jun 12 11:04 AM

[dcb:]

increase money supply, bring in inflation, which kills dollar and bails out banks without imporiving the overall economy. what you are seeing is early stagflation.

Jun 12 11:55 AM

[toobad41:]

Excellent sentiments, Dr. Leeb. I have been think about third world countries as they are attempting to catch up to our standard of living. The primary driver for obtaining a better standard of living is energy. And that energy is oil. Natural gas to a lesser extent. Electricity is another but less so than petroleum products. Nuclear is another but has its draw backs. So I see petroleum products still at the top of the pecking order of all forms of energy. It still is the cheapest available (presently) and should be around for a long, long time. The problem I see is that world demand will be going up and up. Even as the U.S.A. begins to move towards alternatives to petroleum the rest of the billions of people in the world could care less what we do. As a world-wide commodity, oil has no peer. Some day it may be worth fighting for (like the last couple of battles we have started but may never finish). What better way can you offset the rising cost of petroleum products than to put money into the companies, energy sector ETF's, or oil commodities and reap the rewards. I get $8000 dividend each year from BP and it more than offsets my gasoline bill each year.

Jun 12 12:14 PM

[CLH:]

Dr have you changed? I dont believe you wrote such negative drivel back in the 1980s.

Jun 12 01:08 PM

[carey_jim:]

There is a speculative component behind the rising commodities prices and it is based on investors expectation of future inflation.

The expectation of future inflation is based on Fed actions that are designed to inflate away a portion of the debt.

Ironically, however, as the article points out, rising commodities prices might further deepen the recession and, in the long run, produce a rebound wave of deflation.

If deflation accelerates then the same speculators will drive the price of commodities back down.

Jun 12 03:02 PM

[Bjarne Jensen:]

You missed the point Dr. Leeb was making about car sales in China: That is, cars sales in China causes more oil consumption while US sales are generally replacement cars and doesn't add to oil consumption.



On Jun 12 11:04 AM Techtrader10 wrote:

> Well thought out article, except for the last two paragraphs. First,
> new car sales figures. The only statistics are for "new car sales",
> in China there isn't a significant number of used cars, in the U.S.
> when the economy gets soft, used car sales go up, new car sales go
> down. Therefore China's new car sales would equate to "total car
> sales", while in the U.S. new car sales are only a portion of the
> total cars sold.
>
> Second, gas consumption figures. The world is currently a wash in
> gasoline and oil. India is still a long way off from being a major
> consumer of gasoline and Brazil uses ethanol from sugar cane as a
> large source of energy for their cars, not to mention the major oil
> finds off their shores which will be used at home first and then
> exported.
>
> The U.S. economy is going through a major adjustment from the "spending
> of the excess value of your house" to the "spend what you make" economy.
> Not only are consumers spending more within their means they are
> actually saving...a new experience for many. The "hot economy" of
> the past ten years will not be back any time soon.

Jun 12 06:14 PM

[dragonpaw:]

China is simply doing it's best to fuel an economy that has run amok in a world that is spiriling downward uncontrolably. "Growth rates" in the 8-10% are unsustainable; doubling time in the 8-10 year range. And this has been going for how long?
Their attempt to internalize consumption ,versus exportation, can only go on for so long. The next downward leg of the markets world-wide will find China at the lead of the heap. FXI holders beware!
Unlike here in the US, they may choose to nationalize companies over-night when financials go bust. (Unlike here, where obamanationalists stretch this out into a months-long project.)
But unlike here, the take-over targets will not become the property of the US taxpayer (i.e. the deom-gogueic party). They will become the property of the newly-minted Chinese ruling billionaire oligarchy.
The more I think about it , maybe different only so much in name and number!

Jun 12 11:19 PM

[Chandragupta:]

Good article. Bang on target!

Jun 13 07:55 AM

[Ian R. Camp...:]

I agree with the author’s assessment. About 4 weeks or so ago a commentator coined the phrase ‘green shoots’. Everywhere you now look you can find the words ‘green shoots’, irrespective of for what news source the commentator works for or what country he/she works in. For example, if you review the articles posted on the StockResearchPortal.com Home Page ‘Today’s News’ feature you will find multiple articles that have used that term over the past three days. I find many article headlines to be ‘attention seeking’ rather than factual. I understand why this is the case – to attract readers to articles – but headlines are just that. It is important to read the articles in detail and form one’s own opinion as to whether the commentator writing the article reaches the right conclusion based on the facts at hand. With respect to ‘green shoots’ I suggest like any plant the root structure and the type of soil the plant is growing in both are fundamentally more important than what one observes above the ground. It is obvious that ‘seed cast on rocky ground’ cannot have the same long-term impact as ‘seed cast on rich earth where there is a long and growing season, a balanced amount of rain, and a farmer who weeds and otherwise cares for his crop prior to harvesting it’. Again, in my view this latter thought must bring into play the fact that the U.S. is the world’s largest economy and that it currently continues to face ongoing job losses, increasing deficits, reduced retail sales, and a current Administration that continues to talk about increasing Medicare and social services in a manner that to me suggests it is weighting those ’social benefits’ to a greater degree than it should until the U.S. economy begins to grow out of its current economic malaise. To take the analogy further, America is ‘fertilizing its soil with ‘bail-out’ and ’stimulus’ packages. To me the important questions are:

• Has America now recognized the damage it has done to its ’soil’ by overproducing from it?:

• Has America left it too late to fertilize and refurbish its ’soil’ in a way that prospectively will be meaningful?; and,

• If America hasn’t left it too late to rehabilitate its ’soil’ is it clever enough not to repeat the mistakes of the past that led to where the U.S. economy is today?

Jun 14 08:47 AM

[ding:]

Commodity prices will continue to go up as long as the dollar continues to go down.

Jun 14 01:02 PM

[Don V.:]

I agree with what Dr. Leeb is saying about oil and rising commodity prices. The problem I have with him is he continually says the same things over and over again . Buy gold and energy stocks and stocks other than u.s.. It gets old after 10 years of hearing the same thing. I believe we get it already..Lets come up with something new Steven please..

Jun 14 05:50 PM