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Econophile is Jeff Harding, a real estate investor and former lawyer in Santa Barbara, California. He is a principal of Montecito Analytics, LLC. He has many years of experience in business cycles, real estate investments, and finance. He also was financing director of a home builder. He was... More
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The Daily Capitalist
  • Obama Says It’s The “Recovery Summer” But The Fed Says It Will Take 5 or 6 Years! 5 comments
    Jul 16, 2010 1:34 AM

    From The Daily Capitalist

    President Obama was off pitching his stimulus plan Thursday in Michigan:

    The trip, part of a campaign dubbed "Recovery Summer" by the White House, is intended to reassure Americans the U.S. economy is returning to a sound footing in advance of the fall elections. ...

     On Wednesday, the White House released new data saying a surge in Recovery Act funding had raised economic growth in the second quarter of 2010 by as much as 3.2% and boosted employment by as many as 3.6 million jobs, compared to estimated levels in the absence of the stimulus.

    I wonder if President Obama reads the same data as I do? Aside from the fact that the numbers the White House presented are false, the data are revealing the beginning of an economic slowdown which are clearly contra to the Administration's claims that the economy is growing. The Fed is clearly worried as shown below in the minutes of its June meeting. In fact they expect years of slow growth. I wonder if Mrs. Romer talked to Chairman Bernanke before she boasted about her fake numbers?

    Here is an overview of data that came in just this week that reveals a slowing economy:

    Industrial Production

    After almost a year of strong gains, industrial production slowed in June. And it would have been negative without a surge in utilities output-likely weather related. Overall industrial production in June edged up 0.1 percent, following a 1.3 percent gain the prior month. The June increase was above the market forecast for a 0.2 percent drop. ...

     Overall, the industrial sector slowed in June, indicating that the recovery has lost a little momentum. The question is whether June's easing is temporary.

     However, manufacturing fell 0.4 percent in June, following a 1.0 percent jump in May. For other sectors in June, utilities output was up 2.7 percent while mining gained 0.4 percent.

     By industry, motor vehicles and parts weighed on overall production, dropping 1.9 percent. Manufacturing excluding motor vehicles declined 0.3 percent, following a 0.8 percent boost in May. Market group data suggest at least a temporary shift in production. While production of consumer goods fell 0.6 percent in June, output for business equipment gained 0.9 percent. Apparently, businesses are boosting investment in equipment as consumer spending is wavering.


    Business Inventories

    Just when inventories are beginning to gain steam, sales go down the tubes. Business inventories rose 0.1 percent in May, not much but a lot for business managers who are being hit by a 0.9 percent decline in sales. ... Data previously released show a 0.4 percent draw in manufacturing inventories, also well short of the 1.3 percent fall in manufacturing sales. Wholesalers will also feel the need to correct their inventories, which rose 0.5 percent in May at the same time that sales fell 0.3 percent.

    Retail Sales

    Retail sales declined in June while more goods piled up on business shelves in May, underscoring a dilemma facing the U.S. economy. Up to now, the recovery was fueled in large part by businesses rebuilding inventories depleted during the recession. But that process can't continue if consumers cut back on spending, as now appears to be happening.

     Retail inventories rose 0.3 percent and show gains across nearly all components. In alarming contrast, retail sales for May fell more than 1 percent and today's earlier report for June shows a 0.5 percent fall. Retailers have been warning their shareholders that a round of heavy discounting is in the cards given the necessity to move out inventory. Overall retail sales on a year-ago basis in June slowed to 4.8 percent from 6.9 percent the month before.

     The June decline was led by a 2.3 percent fall in motor vehicle sales. A decline in gasoline prices also pulled down gasoline station sales which eased 2.0 percent. Also showing decreases were furniture & home furnishings, building materials & garden equipment, food & beverage stores, and sporting goods & hobby stores.

     But it was not all negative. There were a number of clear winners. Consumers are still plopping money down for HD TVs, and new cell phones, and other electronic goodies as electronics & appliance store sales jumped 1.3 percent. Miscellaneous store retails saw a 1.1 percent boost while nonstore retailers gained 1.0 percent. Also seeing increases were health & personal care, clothing, food services & drinking places, and general merchandise. Within general merchandise, department store sales jumped 1.1 percent

    New York/Philadelphia Fed Manufacturing Reports

    The New York manufacturing region reports an abrupt slowdown in growth. The Empire State general business conditions index fell nearly 15 points to 5.08. Growth in new orders slowed to 10.13 from 17.53 suggesting the upward slope of the nation's factory recovery may already be tapering off significantly. Growth in shipments eased to 6.31 from June's 19.67 while employment eased to 7.94 from 12.35. Of concern, inventories backed up, to 6.35 from minus 1.23 in a build, given the easing in new orders, that will be of concern to the region's manufacturers.

     Negative readings, that is readings which show month-to-month contraction, are headed by unfilled orders which fell nearly 15 points to minus 15.87. Importantly, the decline in unfilled orders will not help employment. The workweek contracted to minus 9.52 from June's 8.64. Delivery times round out the negative readings at minus 7.94, down 18 points to indicate an abrupt easing in shipping delays.

     * * * * *

    The Philadelphia Fed's general business conditions index came in at 5.1 in July indicating a slower rate of growth than June's 8.0 reading. In an unpleasant warning, new orders fell to minus 4.3 to mark an end to a full year of growth. If new orders extend their contraction in next month's report, the health of the region's manufacturing sector will be in question. If the ISM report for July also shows contraction for new orders, the health of the nation's manufacturing sector will suddenly become a big issue.

     Unfilled orders, at minus 8.6, show significant contraction as they did in this morning's Empire State report. Delivery times, like the Empire State report, improved sharply in what is a negative sign for business activity. Shipments slowed to plus 4.0 from 14.2 though employment did show a modest gain at 4.0 vs. June's minus 1.5.

     This morning's industrial production report showed a decline in its manufacturing component and this report won't raise expectations for improvement in the next industrial production report. The manufacturing sector, which is leading the economic recovery, has lost steam far short of full recovery from its 2007 peak.


    Jobless Claims

    The number of people filing for unemployment insurance fell last week, but weak industrial output and a drop in wholesale prices point to a slowing in the economic recovery. ... Initial claims for jobless benefits fell a seasonally adjusted 29,000 to 429,000 in the week ended July 10, the Labor Department said Thursday. The four-week moving average, which smooths out weekly gyrations, fell 11,750 to 455,250.

     Manufacturing retooling centered in the auto sector, for this year delayed retooling, makes the report very difficult to read. The four-week average is the best handle and it's down 11,750 to 455,250 for the lowest reading since mid May. ...

     Whatever improvement there is on the initial side is offset by a big 247,000 jump in continuing claims to 4.681 million in data for the July 3 week. The four-week average for this reading is up 22,000 to 4.581 million for the highest reading since mid June. The unemployment rate for insured workers rose two tenths to 3.7 percent.



    The jobs picture in June was quite mixed as temporary Census workers were laid off and private hiring was positive but moderate. Also, the unemployment rate continued to dip even as the workweek slipped. Overall payroll jobs in June fell back 125,000 after spiking a revised 433,000 in May and after a 313,000 jump in April. The June decrease matched the market forecast for a 125,000 decline.

     Looking beyond the temporary effects of Census hiring and firing, private nonfarm employment increased 83,000, following a 33,000 rise in May. The latest figure fell short of analysts' projection for a 105,000 advance in private payrolls.

    There other signs of a slowing in the labor market. Growth in average hourly earnings eased to a 0.1 percent decline, following a 0.2 percent boost in May. The average workweek for all workers edged down to 34.1 hours compared to 34.2 hours in May. The market forecast was for 34.2 hours.

     The good news at face value in the June report was that the unemployment rate to 9.5 percent in June from 9.7 percent in May. However, the decrease was due to a sharp drop in the labor force.

     Overall, the June jobs reports points to a softening in the labor market. Private employment continues to grow, but at a more moderate pace. On the news, markets were uncertain of how to react as equity futures moved back and forth.


    Federal Reserve June Minutes

    Federal Reserve officials downgraded their expectations for the economy and said further central-bank action might be necessary if the economic outlook "were to worsen appreciably," according to minutes of their latest policy meeting. ... Quarterly projections released with the minutes showed that central bank officials expected growth to be slower this year than previously estimated and inflation through 2012 to remain even lower than forecast earlier. Their outlook for the job market also dipped, with expectations for the unemployment rate slightly worse through 2012. ... 

     They expected the pace of the recovery to be held back by uncertainty among businesses and households, persistent weakness in real estate, only gradual improvement in the labor market, waning fiscal stimulus and slow easing of credit conditions.

    [They must be reading The Daily Capitalist.]

    But here is the shocker--not to my readers--in which they believe that the economy won't get back to normal ("converge") for 5 or 6 years:

    Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants' interpretation of the Federal Reserve's dual objectives; most expected the convergence process to take no more than five to six years.

    I've been noticing that a lot of economists are now jumping on the slow growth bandwagon. As usual they look at yesterday's data and guess what's going to happen tomorrow. As most economists are either Keynesian, Monetarists, or Ne0-Classicists, I don't believe they have yet to grasp the negative implications of the inefficacy of government stimulus and the Fed's attempt at quantitative easing.

    I have been writing about the potential of a second half decline since last year and I believe the numbers are bearing me out and for the exact reasons I have been predicting. I don't claim omniscience, I may be just confirming my own biases, or perhaps it is just luck, as Nassim Taleb would say, but it certainly fits into the framework of Austrian theory.

    All charts courtesy of the Wall Street Journal

    Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants' interpretation of the Federal Reserve's dual objectives; most expected the convergence process to take no more than five to six years.

    Disclosure: No positions
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  • During a Depression the recessions are deep and intense and the advances are shallow and false, triggered by government debt.


    During an Expansion the recessions are shallow and weak, and the advances are deep and intense.


    We are now at the end of one of the shallow and false advances.


    Expansion: 1983-2001.
    Depression 2001-2019.
    Next Expansion: 2019-2037.


    Why did Plato love geometry? Because geometry is the form of Nature's thoughts.


    Excellent report.
    16 Jul 2010, 03:23 AM Reply Like
  • The weak, false "recovery" signals and periods during depression and the converse during expansion periods would be much like advances during bear markets and the converse, I take it. Makes sense.


    The article tied together lots of information for me also. Mention of clueless mainstream cheerleaders, I mean, analysts and White House spin reminds me that longtime skeptics of our debt-addicted, no-service "service" economy have probably been early, not wrong. I don't see how even a 5 or 6 year timeframe for the economy to return to it's normal growth path can be accomplished under present levels of government policies of waste, fraud and abuse. Even with Washington's cooked books and phony statistics.
    16 Jul 2010, 07:21 AM Reply Like
  • Yes. Another way of looking at it, Left-Field, a more meteorological view: during the Winter there are days and nights, but the days are shorter (and weaker) and the nights last longer. During the Summer, there are days and nights, but the opposite is true: the days last longer and are stronger, and the nights are shorter and weaker.


    It is very similar to advances in a Bear Market, and declines in a Bull Market: weak and destined to be reversed by the primary trend.


    I think the 'experts' in power are scared: they lie to us because they try everything the most educated geniuses in their field tell them to do and nothing works. You can't grow crops in a fallow field, no matter who you are. As Ecclesiastes says: 'There is a time for growth, and a time for rest.'


    They can't have this philosophical view, however, because Americans always want answers NOW, they always want things FIXED IMMEDIATELY. IF YOU CAN'T FIX IT, WE'LL FIND SOMEONE WHO CAN. (We voters are difficult and demanding hedonists, afterall.) So they lie: things are getting better; we have turned the corner; there is light at the end of the tunnel. Behind it all is the dread that they don't know what they are doing.


    During Day-Cycles, speaking metaphorically again, the Macrocosm (heaven) and the Microcosm (man) are on the same side, on the side of growth:




    During Night-Cycles, the Macrocosm is at war with Man:




    Another reason our leaders lie is that lying, for many of them, is how they got what they wanted out of life -- it becomes a habit that is nearly impossible to break, especially after it gives you wealth, power, pleasure, earthly success. That's what the Contract with the Devil is all about -- the more you put yourself first, the more pleasure and power you get. Until it suddenly ends. Then the banker or lawyer holding the contract is standing at your door.
    17 Jul 2010, 06:20 AM Reply Like
  • Michael Clark,


    The problem I see with this Night-Cycle is that this one looks really bad and deep. The US has gotten away with it's Contract With the Devil since WWII and the unwinding of the level of distortion we have now, combined with the longheld, ingrained mentality you described so well of our leaders, not to mention too many whining citizens, appears likely to be quite catastrophic.
    17 Jul 2010, 10:52 AM Reply Like
  • Leftie: I'm not sure how old you are, but the last Night-Cycle was pretty nasty too (1965-1983). America lost its first war; disintegrated into racial rioting and the burning of its cities; assassinated how many of its national leaders; experienced a kind of civil war with a wholesale cultural rebellion against its patriarchal leadership; witnessed the victories of communist rebellions on many fronts in Asia and Central America; witnessed the murderous Pol Pot regime in Cambodia, which eliminated 1 1/2 million of its own people, beginning with those who wore glasses and had a driver's license; had a president who said it was time to reduce expectations and accept poverty as a lifestyle (which was saintly, but not popular in the New Rome). The economy was in both a deflationary and an inflationary mode, similar to today but with unions in power and pushing for higher wages to chase the increasing prices. We had a Republican president who instituted price controls. Wild. A whole generation chose "sex and drugs and rock and roll" above "Let's be the Masters of the Universe". The women of the west decided they weren't going to be pushed around any longer, burning their bras as a symbol of this liberation -- much to men's delight. And then Herr Reagan appeared (see how light organizes matter) and Herr Volcker forced deflation down our throats raising the Fed Funds Rate to over 20% (the Prime Rate was 21%), which crippled inflation and crippled the exploding price of oil. In three years we had the hard deflation we should have had more gently over 18 years -- still, Volcker did his job. And the light began to return.


    (Man, was it easy to make money in those days when a money market account returned over 20%. No wonder the financial institutions dread higher interest rates. When rates are higher, no one needs them to profit on their investments. The middle man is cut out of the picture.)


    That was the lunar light we were living in. And we're living in it again.


    A difference is that we are SO DEEPLY IN DEBT now that we don't have the luxury of triggering inflation to save us from deflation. So let the unwinding begin. Yes, it will be painful. We need to remember that the excesses we experience on the way up we will also re-visit on the way down. There is a kind of eminent justice in all of this.
    18 Jul 2010, 12:18 AM Reply Like
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