Is it a soft patch? Or a downward trend?

Today’s ADP and ISM data are bad, which put a cloud of uncertainty on Friday Non-farm payroll data, the grand daddy of all data nowadays. But is the US economy heading toward a downturn here? Or we are just struggling through a classic soft patch? Thoughts?

what’s the positive outlook - “it can’t get any worse, right?!?”

I believe this is much more than just a soft patch. There is just an overwhelming amount of bad data points (e.g. today’s employment #'s, ADP, weekly jobless claims, consumer confidence, housing prices, consumer spending, weak Q1 GDP, manufacturing, etc.) Just look at the 10 yr. yield. What does that tell you? Is this anemic recovery all we get from the several trillion dollars pumped into the economy via deficit spending and the FED’s programs?

Correction.

This is another buying dip. The next dip will be the one that takes us out back.

I don’t think we’re reacting to anything that’s completely unexpected. It may fit in the “downside case,” but we don’t have any truly “shocking” news. This makes it feel more like a correction than a collapse. One thing I’ve been thinking about is how far stocks (or commodities) need to fall before it is considered a “collapse.” Maybe things were so bad in late 2008 that we feel that anything that isn’t a 40% drop must be just a correction. In terms of valuations, though, people are very jumpy. Earnings valuations are historically high, but some of that may be because Treasury rates are still relatively low. The tricky part is trying to figure out how much of this is connected to risk premiums. I suspect people are desperately reaching for yield, which would push down the risk premium and raise valuations. If you can’t afford to take risk, that is a problem. We may find that banks are much more exposed than most investors feel. If that’s the case, then we could be in for another 1932-like drop, because we don’t have banks that are lending to businesses, and that makes employment formation and gdp growth difficult. The slowdown in China, partly a response to inflation (linked to 1) fed policy, and 2) the Yuan peg) is likely to drag down US manufacturing of capital goods and commodities demand.

Isn’t a slowdown in China good? I believe there was an article in last week’s FT that noted that the slowdown in Chinese manufacturing growth is deliberately planned through rate tightening and lending restrictions. Edit: Link to article: http://www.ft.com/cms/s/0/5c9e34ae-8bf0-11e0-854c-00144feab49a.html#axzz1OWILSQQ5

This is no soft patch, it is just a continuation of the organic trend once you peel away the centralized planning and failed fiscal spending BS that has kept this sinking ship afloat.

Any actual analysis to back that statement up?

A slowdown in China is not necessarily bad, but it’s bad for people who weren’t thinking about that possibility. Most people (including me) have been surprised at the strength of the US manufacturing sector, since it goes against the idea that “we don’t make anything anymore, we just import it from China,” but China needs capital goods, and they are getting them from us (and others). A slowdown in China means that that source of strength is likely to be going away now. The key lesson here is that the manufacturing sector can do well, but we just are not likely to be employing a large proportion of Americans in that sector (though it has been a large source of the *increase* in employment recently). I actually agree to some extent with equity_analyst that what one’s seeing is the underlying economic weakness after the fiscal spending and monetary policy wears off. I’d say it’s more like a weakened bone (the economy) after a cast (fiscal spending, QE) has been removed, though. If there is still pain to go through because all that spending has done is kick the can down the road (which I’m not convinced is the case), then one is deciding about taking the pain now versus having had to bear the pain at some point earlier in the crisis. Given those choices, it is probably better to feel it now then back then, because we have had a little time to get prepared for it, whereas the 2008-9 crisis happened so quickly that few people had the chance to plan contingencies. So, although it will still suck to have to go through another downdraft, it is probably better that we have more room to plan for it. I disagree with equity_analyst that it is centralized planning, because true central planning requires the virtual absence of private property. The private sector blew itself to bits thanks mostly to the inability of banks to self-regulate (and their lobbying efforts to proclaim that they could), and the government was pretty much the only major actor left to try to pick up the pieces. So yes, there was a plan, and it came from the government, but that by itself doesn’t make it socialism. It’s very different from a regime which says that the private sector should not exist at all, which is what true central planning regimes are.

recycler Wrote: ------------------------------------------------------- > Isn’t a slowdown in China good? I believe there > was an article in last week’s FT that noted that > the slowdown in Chinese manufacturing growth is > deliberately planned through rate tightening and > lending restrictions. > > Edit: > > Link to article: > http://www.ft.com/cms/s/0/5c9e34ae-8bf0-11e0-854c- > 00144feab49a.html#axzz1OWILSQQ5 It’s probably not “a slowdown in China is good”, it’s mostlikely a cooled down Chinese real estate market is good. Other sectors of China’s GDP should still grow so that China is meeting its target 8-10% annual rate. If you look at all the major softlanding measures the Chinese gov is taking, they are designed to cool speculative lending, a good portion of which to various level of real estate developments. Back to the US, anyone have good equity research pieces on the financial sector and tech? These two sectors are beaten down quite harshly recently. I am gradually building my postions on the dip.

bchadwick Wrote: ------------------------------------------------------- > A slowdown in China is not necessarily bad, but > it’s bad for people who weren’t thinking about > that possibility. Most people (including me) have > been surprised at the strength of the US > manufacturing sector, since it goes against the > idea that “we don’t make anything anymore, we just > import it from China,” but China needs capital > goods, and they are getting them from us (and > others). A slowdown in China means that that > source of strength is likely to be going away now. > The key lesson here is that the manufacturing > sector can do well, but we just are not likely to > be employing a large proportion of Americans in > that sector (though it has been a large source of > the *increase* in employment recently). The “we don’t make anything anymore, we just import it from China” crowd is so absolutely wrong it’s not funny. In fact, it’s outright embarrassing. China is the leader in global manufacturing but the US is a very very close second. Japan and Germany are third and fourth but are way behind the US and China. Plus the US has a massive advantage in terms of productivity. This is also the same reason that only small proportion of Americans are employed in manufacturing. However, I think the trend is shifting and we will continue to see a mild but meaningful expansion of US manufacturing. > I actually agree to some extent with > equity_analyst that what one’s seeing is the > underlying economic weakness after the fiscal > spending and monetary policy wears off. I’d say > it’s more like a weakened bone (the economy) after > a cast (fiscal spending, QE) has been removed, > though. I understand the sentiment but I have not seen any significant research to support the notion that this is not a sustained recovery. Recoveries after a financial crisis are always very slow and painful and I simply can not believe that one month of soft economic data means a turning trend. Personally, I think the forecasters just got a little ahead of themselves. There is too much short term basis in the numbers resulting in overly optimistic forecasts followed by a miss or two and then overly pessimistic forecasts but overall, the trend is positive, albeit mildly. > If there is still pain to go through because all > that spending has done is kick the can down the > road (which I’m not convinced is the case), then > one is deciding about taking the pain now versus > having had to bear the pain at some point earlier > in the crisis. Given those choices, it is > probably better to feel it now then back then, > because we have had a little time to get prepared > for it, whereas the 2008-9 crisis happened so > quickly that few people had the chance to plan > contingencies. So, although it will still suck to > have to go through another downdraft, it is > probably better that we have more room to plan for > it. > Agreed. However I believe the real pain is still going to be another 5 plus years away. There is going to have to be some triggering event in order for the political realities of raising taxes or seriously cutting spending in order to deal with the last 10 years of misuse of power and political and corporate corruption and cronyism. > I disagree with equity_analyst that it is > centralized planning, because true central > planning requires the virtual absence of private > property. The private sector blew itself to bits > thanks mostly to the inability of banks to > self-regulate (and their lobbying efforts to > proclaim that they could), and the government was > pretty much the only major actor left to try to > pick up the pieces. So yes, there was a plan, and > it came from the government, but that by itself > doesn’t make it socialism. It’s very different > from a regime which says that the private sector > should not exist at all, which is what true > central planning regimes are. People have a difficulty in grasping a blended system. The US is not a capitalist society (private ownership) nor is it a socialist society (wealth transfers and centralized planning via tax incentives and subsidies). It has significant aspects of both systems. Unfortunately, too many people can’t get past simple political dogma and conduct unbiased fair analysis.

recycler, I liked your comments. As for “not making anything anymore,” I guess it depends on whether one is looking at it from the production or the employment angle. You are right that we actually do make a lot of stuff, a lot is assembled here from parts that are manufactured abroad, and there is a fair range of smaller local suppliers (remember the concern that if GM would go under, a lot of US parts suppliers would go under too. I haven’t seen the data, but if it’s supported, it would indicate that there are a fair number of parts manufacturers still here). The reason that we produce a lot is because US workers are quite productive in terms of output per hour worked, and this productivity justifies a wage differential that makes it feasible to employ American labor instead of Chinese labor. However, this high productivity also has the drawback that it takes fewer workers to produce the same amount of stuff, and so what we are seeing is that manufacturing can be strong, but the labor market in manufacturing isn’t. From an investment perspective, this suggests that manufacturing can perform well, but from a policy perspective, the challenge is that there aren’t as many jobs available for people who work on an assembly line, and that means that the large number of people (over 60%) who do not have a college education, are stuck without many options for income. The recovery will not feel like a recovery until there are broad increases in employment that can fuel consumption and provide the fuel for domestic businesses to grow and serve. I’ll comment on another bit of your post in a moment.

> bchadwick Wrote: > -------------------------------------------------- > > > I actually agree to some extent with > > equity_analyst that what one’s seeing is the > > underlying economic weakness after the fiscal > > spending and monetary policy wears off. I’d > say > > it’s more like a weakened bone (the economy) > after > > a cast (fiscal spending, QE) has been removed, > > though. recycler Wrote: -------------------------------------------------------> > I understand the sentiment but I have not seen any > significant research to support the notion that > this is not a sustained recovery. Recoveries after > a financial crisis are always very slow and > painful and I simply can not believe that one > month of soft economic data means a turning trend. > Personally, I think the forecasters just got a > little ahead of themselves. There is too much > short term basis in the numbers resulting in > overly optimistic forecasts followed by a miss or > two and then overly pessimistic forecasts but > overall, the trend is positive, albeit mildly. > To fit my analogy, when you take a weakened bone out of a cast, you hope it is strong enough to grow on its own. But if you remove the cast too soon, it will crack again if you put too much pressure. So there are at least two variables here: did one remove the supports too early, too late, or about right; and what kind of pressure are we going to put on the economy to grow? Maybe it has healed enough, or maybe not. The data that’s come out make us nervous that maybe it has not healed enough. The data points aren’t just below average. The jobs data is WAY below average, and it’s the ADP data and the NFP data, and the commodities slowdown and stock slowdown even before that, and ISM initial orders data is also down. It’s a broad sweep of macro indicators. Even emerging market data from Brazil, India, and China is starting to look iffy, although the concern there is more about policy-induced slowdowns as a response to inflation. The housing market is already double dipping, according to the Shiller data. I expected that, and perhaps there is some spillover to the rest of the economy. I was hoping that one might be able to divorce the rest of the economy from the housing market performance (an optimistic, but by no means certain outcome), but it’s possible that the housing issues are just too dire. My take on the employment is that employers are reacting to three large doses of uncertainty and simply postponing hiring decisions until they get more clarity. I generally don’t like “uncertainty” explanations, because uncertainty is also opportunity, but it’s the *change* in uncertainties, or the arrival of uncertainties that were once farther away and now dramatically closer that can have real effects. The doses of uncertainty have to do with: 1) does all this deadlock in Washington mean that aggregate demand will decrease dramatically if there is a government shutdown (reduced government purchases, more layoffs, etc.)? Maybe that stuff is necessary, but the short term implications for domestic demand are fairly clear if it happens 2) How will the Fed extricate itself from QE and QE2? Will interest rates shoot up? We know the end of QE2 is coming, but we have almost no idea about how it will happen. The Fed needs to reshape its balance sheet, which is a different thing from simply setting the Fed Funds rate higher. 3) How will Europe deal with the PIIGS? Right now, the high Euro is good for US manufacturing. If the Euro takes a swan dive, that’ll be good for German manufacturers that have good access to credit markets, but it’ll be bad for US manufacturers (and of course bad for German banks). The thing that is different here is that these are fundamental indicators that are turning. If it were simply stock prices, we could argue that there is a change in mood and valuations are changing as a result. We could argue that this is just people fooling themselves and buy at bargain prices until they recover their senses. What we’re seeing right now is not a change in valuation factors (though that may be happening too), but a change in fundamental indicators. This is a country that is still highly leveraged, with large number of houses still underwater, unable to be sold, and therefore with limited labor mobility. With banks still allowed to mark their balance sheets to more or less whatever they feel like, and not lending because they can make more money by borrowing from the Fed and lending to the US Treasury, instead of borrowing from the Fed and lending to US businesses, it seems to me that the burden of proof is on those arguing that this is a sustainable recovery. It might be, but it doesn’t take a crazy person to question whether the motor is going to be able to turn over when fiscal stimulus dries up and monetary policy tightens. If the macro indicators don’t improve by the end of this month, I suspect we will be getting QE3-lite. The tea partiers will have a fit, and may try to change the Fed’s charter to prohibit it, but the Fed clearly is prioritizing the full employment part of the mandate right now (and I personally think that is appropriate).

i think it all comes down to housing. the last eight months of house price declines would have felt a lot like 2007 if it weren’t for QE2. maybe this was a major motivator of QE2. Bernanke saw the turn in housing and thought, hmmm, people are going to notice the housing decline… unlesssss, i boost the price of everything else and keep cpi above 2% and keep everyone worried about inflation. with the amount of houses that the US govt owns as well as mortgage exposure, if house prices were to drop another 10-20%, the crisis of confidence in US finances would be extraordinary. cut house prices by 10%, then guess how much further prices would fall if the govies put all the homes they owned on the market? quite a bit i’m sure. a second leg in the housing crisis would further erode value and net worth of all US citizens, from the real and continued destruction of value via physical damage done to homes. i’m sure its difficult to quantify but the damage done to foreclosed homes is probably the major exagerator of the house price decline. anyway, with jobs data just now looking horrendous once again, i’d say the odds of another major leg down in housing is probable. without another round of QE, i’m sure we’ll see deflation in H2 and that will change everyone’s stance from buy commodities or die, to buy investment grade corporate bonds or die. i’m sure we’ll see the inv grade bond spread hit negative once again with in the next 12 months. maybe i’m just pessimistic but researching real interest rates during the period 1931-1937 has made it impossible for me to see it any other way. that said, based on that research, the stock market should keep it momentum until the Fed begins to tighten, even as house prices continue their decline. but i’m sure with Ben being one of the world’s top experts on the years 1931-1937, he’ll never tighten knowing the consequences…

We’ve all seen this chart: http://cr4re.com/charts/charts.html#category=Employment&chart=JobLossesRecessionStartMay2011.jpg This economy is coming back, whether you like it or not. There can be hiccups, but excepting that 1948 line, it’s generally pretty smooth. The economy is bigger than politics, policies and politicians. The only large risks I can see are if the Republicans are successfully able to negotiate huge near term spending cuts (which is unlikely even if they do procure large spending cuts in general; it’s always easier to cut the future dollar) or if they force the US to default.

sorry, the second leg of the GD selloff was sparked by a combination of fed tightening and spending cuts, but mostly spending cuts. yes, cuts or removal of liquidity is the #1 risk to the “recovery”. also, job growth and economic policies more closely reflect the 1931-1937 period than they do the 1945+ period. but this is unimportant, all this is important is whether a zero-interest rate environment can be maintained and for how long…

bchadwick Wrote: ------------------------------------------------------- > A slowdown in China is not necessarily bad, but > it’s bad for people who weren’t thinking about > that possibility. Most people (including me) have > been surprised at the strength of the US > manufacturing sector, since it goes against the > idea that “we don’t make anything anymore, we just > import it from China,” but China needs capital > goods, and they are getting them from us (and > others). A slowdown in China means that that > source of strength is likely to be going away now. > The key lesson here is that the manufacturing > sector can do well, but we just are not likely to > be employing a large proportion of Americans in > that sector (though it has been a large source of > the *increase* in employment recently). > > I actually agree to some extent with > equity_analyst that what one’s seeing is the > underlying economic weakness after the fiscal > spending and monetary policy wears off. I’d say > it’s more like a weakened bone (the economy) after > a cast (fiscal spending, QE) has been removed, > though. > > If there is still pain to go through because all > that spending has done is kick the can down the > road (which I’m not convinced is the case), then > one is deciding about taking the pain now versus > having had to bear the pain at some point earlier > in the crisis. Given those choices, it is > probably better to feel it now then back then, > because we have had a little time to get prepared > for it, whereas the 2008-9 crisis happened so > quickly that few people had the chance to plan > contingencies. So, although it will still suck to > have to go through another downdraft, it is > probably better that we have more room to plan for > it. > > I disagree with equity_analyst that it is > centralized planning, because true central > planning requires the virtual absence of private > property. The private sector blew itself to bits > thanks mostly to the inability of banks to > self-regulate (and their lobbying efforts to > proclaim that they could), and the government was > pretty much the only major actor left to try to > pick up the pieces. So yes, there was a plan, and > it came from the government, but that by itself > doesn’t make it socialism. It’s very different > from a regime which says that the private sector > should not exist at all, which is what true > central planning regimes are. What the Fed is engaging in is centralized planning and while that doesn’t have much to do with socialism, for the reason you state, ironically, the end results are the same. That is to say, the price discovery mechanism that drives equity prices and interest rates is completely skewed and does not represent true underlying fundamentals–the way this will be rectified is through a complete market failure. The Fed announced they were embarking on QE2 to the tune of $700B, which was roughly the equivalent of the to be issued Treasury debt, and so that supply was spoken for, which means that capital was forced to be deployed elsewhere, a condition that would not have occured otherwise. So while the desired wealth effect from higher stock prices looked like it was going to work, it didn’t because mainstreet and businesses got hit by the higher inflation that was also caused by Bernanke’s money printing. Any positive impacted from rising stock prices on the consumer was completely offset by the negative impact of higher inflation–this trade off was not 1:1, in fact, we are now worse off then before, and so the cycle will continue, until it can no longer go on, at which point market failure becomes the remedy. None of this should be surprising, as the results throughout history are exactly the same when a country tries to print money in order to spur economic growth. Bernanke is a fool and we are all going to suffer greatly for the deeds of the global central banking cartel and there elastic money ponzi scheme.

bchadwick Wrote: ------------------------------------------------------- > recycler, I liked your comments. Thank you Chad. I respect your analysis and commentary. It’s one of the few reasons that I keep coming back to this forum. > As for “not making anything anymore,” I guess it > depends on whether one is looking at it from the > production or the employment angle. You are right > that we actually do make a lot of stuff, a lot is > assembled here from parts that are manufactured > abroad, and there is a fair range of smaller local > suppliers (remember the concern that if GM would > go under, a lot of US parts suppliers would go > under too. I haven’t seen the data, but if it’s > supported, it would indicate that there are a fair > number of parts manufacturers still here). > > The reason that we produce a lot is because US > workers are quite productive in terms of output > per hour worked, and this productivity justifies a > wage differential that makes it feasible to employ > American labor instead of Chinese labor. However, > this high productivity also has the drawback that > it takes fewer workers to produce the same amount > of stuff, and so what we are seeing is that > manufacturing can be strong, but the labor market > in manufacturing isn’t. > From an investment perspective, this suggests that > manufacturing can perform well, but from a policy > perspective, the challenge is that there aren’t as > many jobs available for people who work on an > assembly line, and that means that the large > number of people (over 60%) who do not have a > college education, are stuck without many options > for income. The recovery will not feel like a > recovery until there are broad increases in > employment that can fuel consumption and provide > the fuel for domestic businesses to grow and > serve. > > > I’ll comment on another bit of your post in a > moment. Employment in the manufacturing sector has been steadily declining for decades due to both productivity gains and internationalization. I believe it accounts for around 10% of NFP. In order to get a recovery in the labor force we need to some how shift the skill base of this country. We’ve had a loss of around 2.2m construction jobs since early 2006. And not to disparage the hard working men and women in the construction industry but it doesn’t take much to swing a hammer. Our economy became abnormally dependent upon this industry to fuel consumption and it will take years (5 plus IMO) in order for our economy and the skill set of our workforce to adapt to a new reality. On a side note, NPR’s This American Life did an interesting show on job creation a couple weeks back. You can find the podcast here: http://www.thisamericanlife.org/radio-archives/episode/435/how-to-create-a-job. Specifically listen to Act 4. They focus on manufacturing in America and in particular, how a high school education plus a little bit of vocational training can open the door to the middle class.

bchadwick Wrote: > To fit my analogy, when you take a weakened bone > out of a cast, you hope it is strong enough to > grow on its own. But if you remove the cast too > soon, it will crack again if you put too much > pressure. So there are at least two variables > here: did one remove the supports too early, too > late, or about right; and what kind of pressure > are we going to put on the economy to grow? Maybe > it has healed enough, or maybe not. The data > that’s come out make us nervous that maybe it has > not healed enough. I like this analogy but I seen one little flaw. The economy, much like the body, will eventually heal itself. It’s still going to have a lot of rehab to go through and it may not have had the best doctors but it will get better. Plus, if a bone is kept in a cast too long, there will be too much muscle atrophy. There comes a time when the cast needs to come off and the afflicted body part must be left to its own resources to heal. I think we need to have some faith in the ability of the world and the economy to function and grown even in it’s current state. > The data points aren’t just below average. The > jobs data is WAY below average, and it’s the ADP > data and the NFP data, and the commodities > slowdown and stock slowdown even before that, and > ISM initial orders data is also down. It’s a > broad sweep of macro indicators. Even emerging > market data from Brazil, India, and China is > starting to look iffy, although the concern there > is more about policy-induced slowdowns as a > response to inflation. > > The housing market is already double dipping, > according to the Shiller data. I expected that, > and perhaps there is some spillover to the rest of > the economy. I was hoping that one might be able > to divorce the rest of the economy from the > housing market performance (an optimistic, but by > no means certain outcome), but it’s possible that > the housing issues are just too dire. > > My take on the employment is that employers are > reacting to three large doses of uncertainty and > simply postponing hiring decisions until they get > more clarity. I generally don’t like > “uncertainty” explanations, because uncertainty is > also opportunity, but it’s the *change* in > uncertainties, or the arrival of uncertainties > that were once farther away and now dramatically > closer that can have real effects. The doses of > uncertainty have to do with: > > 1) does all this deadlock in Washington mean that > aggregate demand will decrease dramatically if > there is a government shutdown (reduced government > purchases, more layoffs, etc.)? Maybe that stuff > is necessary, but the short term implications for > domestic demand are fairly clear if it happens > > 2) How will the Fed extricate itself from QE and > QE2? Will interest rates shoot up? We know the > end of QE2 is coming, but we have almost no idea > about how it will happen. The Fed needs to > reshape its balance sheet, which is a different > thing from simply setting the Fed Funds rate > higher. > > 3) How will Europe deal with the PIIGS? Right > now, the high Euro is good for US manufacturing. > If the Euro takes a swan dive, that’ll be good for > German manufacturers that have good access to > credit markets, but it’ll be bad for US > manufacturers (and of course bad for German > banks). > > > The thing that is different here is that these are > fundamental indicators that are turning. If it > were simply stock prices, we could argue that > there is a change in mood and valuations are > changing as a result. We could argue that this is > just people fooling themselves and buy at bargain > prices until they recover their senses. What > we’re seeing right now is not a change in > valuation factors (though that may be happening > too), but a change in fundamental indicators. > I agree with the three factors and your assessment of the market but I disagree with describing the indicators as turning. Growth is moderating but not contracting.