As the OECD cuts U.S. economic forecast again, it calls on the debt rattled U.S. to step up spending

As the OECD cuts U.S. economic forecast again, it calls on the debt rattled U.S. to step up spending

As we’ve learned, shovel ready projects are like unicorns – they sound great, but few have ever seen them. With the US National Debt hovering at $19.3 trillion and Gross Debt to GDP at 105.2% per USDebtClock.org (the scariest page on the Internet), the OECD’s call “government in the US to step up spending is bound to ignite a powder keg as the 2016 presidential election moves into high gear.

The U.S. economy will expand 1.8% this year, down from 2.4% last year, the OECD said. The forecast is down from 2.5% in November and 2% in an interim report in February.

The world economy is forecast to expand 3% in 2016, the same as in the earlier forecasts. Slower growth in the U.S. will be offset by slightly stronger performances in Europe and Japan, the OECD said.

Now it is up to governments in the U.S. and elsewhere to increase spending to jolt the global economy out of a “low-growth trap.”

Source: OECD lowers U.S. economic forecast, implores world policymakers to ‘act now’ to boost growth – LA Times

Great jobs number but…

Great jobs number but…

Friday we saw a great jobs number but… were the knock-it-out-of the ballpark numdr+evil+villainbers really indicative of a (finally) robust economy?  Hmmmm, methinks there is more to it all.  You’re shocked right?

I spoke with Matt Ray yesterday on America’s Morning news about the jobs report and how I thought the data could be misleading.  You can listen to our chat by clicking here. Today, after seeing the NFIB report, I decided the topic deserved a thorough analysis, so I’ve added a lot here to what we discussed.

To start with, this number can be quite volatile, so if we look at a three-month rolling average, the current gain is still 26,000 less than the average during the first six months of the year.  We did like to see a 0.4% rise in average hourly earnings last month, bringing the annual rate up to 2.5%, which is the strongest in the past six years. That bodes well for holiday spending, which ought to have companies like Amazon pleased as punch.  If we look at the labor-force participation rate however, that remained unchanged at 62.4%, which is 0.5 lower than in January.  This data point is one that causes yours truly much angst.  Think of this as a measure of what percentage of the population is rowing the economic row boat.  The more that row, the faster we can go.  Today we have roughly the same portion we had in the late 1970s, not exactly a robust growth period for the nation!

 

The news of the strong jobs report sent the markets into a tizzy as the probability of the Fed kicking off the first interest rate hike in more than nine years at their next meeting in December soared to 68%, which is almost double the odds of such a hike just one month ago.  One of the arguments for such an increase is that it would provide some assistance to savers, who have been struggling to earn much of anything on their savings.  Hmmmm, if the Fed raises rates, and yours truly still considers that unlikely given the bigger picture of the US economy and slowing global growth, it will likely only raise rates initially by 0.25%.  Over perhaps the following year it could theoretically get to 1%, which would in reality still do very little to help savers. The true beneficiaries would be those providers of money market funds that have been forced to eat the cost of overhead to give investors in such funds even the tiniest of yields.  This led to soaring share prices of companies like Charles Schwab, E*Trade Financial and TD Ameritrade Holdings on the jobs news Friday.

In contrast to Friday’s robust report, today’s report from the National Federation of Independent Businesses revealed that job creation came to halt in October, with owners adding a net 0.0 workers per firm in recent months.  55% reported hiring or trying to hire, which was up 2%, but 48% reported few or no qualified applications for the positions they wanted to fill.

If we look at other economic indicators, we see that things really aren’t as rosy as Friday’s job report would lead one to believe.

Last week started with the weakest headline ISM (Institute of Supply Management) Manufacturing report since December 2012 at 50.1, however many economists were expected a reading below 50, (which is a contraction) so this was actually better than expected. Whoop, whoop!  But, a painful portion of the grim report came from ISM Manufacturing employment, which is now at its lowest reading since August 2009 – good times! Thankfully manufacturing is a relatively small share of the total US economy, but we’d prefer to see more upbeat data. Overall manufacturing just looks awful, with everything but customer inventories lower year-over-year, as this next chart illustrates.

ISM manufacutring

If that didn’t drive it home, this next chart on US Industrial Production ought.  The Industrial Production index shown below is an indicator that measures real output for all facilities located in the United States manufacturing, mining, and electric, and gas utilities.  This index is generated using 312 individual data series.  The chart below shows how its longer-term upward trend from the depths of the financial crisis stalled towards the end of last year and is now trending downwards.

IP Trends

In fact, on a global level, manufacturing has been under pressure with the Global Manufacturing Purchasing Manager’s Index, (an indicator of the economic health of the manufacturing sector based on new orders, inventory levels, production, supplier deliveries and the employment environment) down to 51.4 from 52.2 a year ago. Remember that anything below 50 is a contraction. On the bright side, the number is a seven-month high.  In the US, the Manufacturing Purchasing Manager’s Index is down to 54.1 from 55.9 a year ago, but up from 53.1 last month.

Speaking of inventories… this next chart almost speaks for itself.  The wholesale inventory-to-sales ratio is at a level not seen out of a recession in decades, but  I’m sure that’s nothing to be concerned over!  Looking back at history, keep in mind the strides made in inventory management in order to keep inventories as low as possible to maximize returns. In a perfect world, the second a business gets an item into inventory, a customer grabs it right off the shelf.  The longer items sit on the shelf, the more money the business has sitting idle.  It is best to look at inventories relative to sales, as if sales double, it would be reasonable for a business to need to keep more inventory on hand. When we see inventories relative to sales rise dramatically though, that means that businesses are having more items sit on the shelves for longer, which is never a good sign.

Inventories to Sales

On a more upbeat note, the ISM non-manufacturing beat expectations mightily, coming in at 59.1 versus expectations for 56.5, down from last month’s 56.9. So the manufacturing sector is continuing to weaken while the services sector strengthens.  The good news is the service sector counts for a larger portion of the economy, however the fly in the ointment is that these two tend to move along much closer together and are now diverging to a point not seen since late 2000/early 2001.  This is cause for concern as we have every reason to believe the two will return to their historical relationship.  Given the global picture, at the moment it looks more like services will move towards manufacturing than the reverse.

If we look at construction, it is also struggling. Residential construction spending rose 61 basis points in September, driven primarily by gains in private residential spending, without which, the spending number would have actually declined month-over-month.

Recently the Federal Reserve released its Senior Loan Officer Survey reported that for the first time since early 2012, a net 7.3% of bankers reported tightening standards for large and mid-size firms based on a less certain economic outlook.  Most banks also reported weakening demand for most categories of mortgages since the second quarter while seeing credit card credit demand increase.  In response, banks reported having eased lending standards on loans eligible for purchase by Fannie Mae and Freddie Mac.  Tightening credit conditions are a headwind to economic growth, of which Chairperson Yellen and her team are highly aware.  We’re quite sure they are watching this data very closely.

Looking at the Global Economy…

Monday morning the OECD, (Organization for Economic Cooperation and Development) lowered its global growth forecasts for 2015 and 2016 to 2.9% and 3.3% versus 3.0% and 3.6% previously.  This comes just a few weeks after the International Monetary Fund predicted that the world economy would, in 2015, grow at its slowest pace since the financial crisis. We are particularly concerned with global exports as world trade has long been a strong indicator of global growth and so far in 2015, trade levels have been at levels typically associated with a global recession.  To further drive home our concerns on global trade, we looked at the reports coming from the largest shipping company in the world, A.P. Moeller-Maersk, which handles about 15% of all consumer goods transported by sea.  The CEO of A.P. Moeller-Maersk recently stated that, “The world economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting.”  Err, wait, what?!  They just reported trade levels that are typically seen during a global recession and this guy thinks it is even worse? Argh!  The company reported recently a 61% drop in third quarter profit as demand for ships to transport goods across the world hardly grew from a year earlier.

China, the world’s second largest economy, reported that its exports declined 6.9% year-over-year versus expectations for 3.8% and marked the fourth consecutive month of declines.  In India, exports of the top five sectors including engineering and petroleum fell by about 31% in September on a year-over-year basis. Keeping a wary eye out here!

To put the chart below in perspective, world trade grew by 13% in 2010, but has been slowing considerably since then.  The WTO (World Trade Organization) lowered its forecast in volumes to 2.8% from 3.5%, which is well below the 7% average for the 20 years leading up to 2007.

World Imports

Bottom LineWe are seeing diverging data coming out on the domestic economy and continue to be concerned with the weakness we see in global commodities, transports and particularly in global exports as they typically lead global GDP trends. The combination of new trade barriers being introduced faster than existing ones are being removed coupled with cyclical problems that include falling commodity prices and debt overhang are acting as headwinds to global trade, which harms economies all over the world.  While the US is the largest economy and is driven to a large degree by internal demand, it is not immune to the fates of the global economy.  As is such, the US manufacturing sector is teetering on the brink of a recession. Whether the service sector, which is typically correlated with the manufacturing sector, can remain strong is yet to be seen.

P.S.: It isn’t only global trade that is suffering from too much government intervention.  Today The National Federation of Independent Businesses released its Small Business Economic Trends Report which revealed that the single most important problem facing small businesses is (1) Government Regulation and Red Tape followed by (2) Taxes. The government could do a lot to stimulate the economy, by getting the hell of out it!

Shove It! A Greek Tragedy?

Shove It! A Greek Tragedy?

The headlines are once again dominated by the living Greek economic tragedy, vacillating between dire predictions of a Greek collapse and ensuing global financial calamity to ebullient, (and frankly rather ludicrous) stock market jumps of joy on hopes of a pseudo happily-ever-after. Conventional wisdom has been to lambast the Greeks with the usual damning triumvirate of a nation whose citizens are either lazy, stupid or evil… or all three. The nation is currently in a technical default, having failed to make payments already due on loans to the International Monetary Fund (IMF), but has claimed that it will make a single lump sum payment later in the month for all monies due in June. The size of the Greek debt relative to GDP is second only to Japan, which given its ability to control its own currency is a very different animal.

Debt2GDP

 

To put the level of Greek debt in context, at a total of $352.7 billion, it is about half of the $700 billion that was approved by Congress for the Troubled Asset Relief Program in 2008.   So in the context of global debt, it isn’t that big of a deal, what is a big deal however is the precedent the situation will set for the Eurozone, the second largest economy in the world. I can’t imagine just how much coffee and antacids have been consumed this week in Luxembourg, as all sides find themselves stuck between a rock and a hard place, with no clear common ground.

As for that excruciating austerity we keep hearing about, meaning the cuts governments were wailing about having been forced to endure. Errrr, hmmmmm, not so sure where that is coming from when we look at data from the IMF on the next chart….

EuroDebtByYear

Spending cuts? Where? All three countries have increased their debt to GDP ratios since the crisis began. So here’s the real scoop.

 

Greece has a massive government full of rules and regulations on darn near everything that makes it very difficult to start or run a business and a tax code that makes War and Peace look like a summer beach read. Now all these rules, regulations and taxes were put in place for ostensibly good reasons, like most bureaucratic shenanigans, “We need to protect hotel employees, cab drivers, restaurants, nurses, fishing boats, gardeners etc. etc. etc.” The problem is that when you add up all this “protection” for existing businesses, employees, consumers, tradespeople… it becomes increasingly tough to run a business.

 

To make up for just how tough it is, the government has made it a practice to promise people lots of safety in the form of pension systems, welfare aid, etc. The math here isn’t too tough to figure out. If on the one hand you make it really hard on people to get things done and on the other hand you provide ample support for a decent living for those who aren’t working for whatever reason, well you’ll have less people working their tails off, which means less money available to tax and spread around to those who aren’t working. But that’s ok, because hey, we are part of the Eurozone and can get debt cheap, so we’ll just borrow whatever we can’t get through taxation and spend that. No worries.

 

That worked for a while… until the market started looking at the math a bit more in depth and realized that Greece had reached the point where it really cannot sustain its debt any longer.

Greece is like the family with a single income earner holding down two jobs that pay slightly over minimum wage who needs to support a spouse, some kids, manage a $525,000 adjustable rate mortgage whose rate keeps rising, has two cars in the driveway in desperate need of rather costly repairs, a cousin who just moved in and has some serious health problems and found out today that the roof has a major leak. Now the bank keeps calling and telling you that you need to work harder and cut back on the spouse’s spending habit as your mortgage rate continues to rise and you are already late on a few months’ worth of payments and your credit cards are maxed out. Your boss is telling you that your skills are seriously lacking and your cousin says she can’t possibly live in that room you gave her unless she gets to redecorate it on your dime. At some point, you throw your hands up in the air and tell everyone to shove it!

 

Earlier this week, according to a report by the Financial Times, Greek prime minister Alexis Tsipras argued that,

 

“The pensions of the elderly are often the last refuge for entire families that have only one or no member working in a country with 25 per cent unemployment in the general population, and 50 per cent among young people.” That’s Greek for shove it.

 

How does a politician manage this type of pressure from back home? Ms. Merkel and Mario Draghi just aren’t that scary or persuasive!

 

So that’s where we are. The majority of Greeks have decided to go the “shove it” route and sent Yanis Varoufakis to deliver the message, in a rather debonair manner we might add, (that’s Yanis on the left in the picture below.) This has left Germany’s Angela Merkel, the European Central Bank’s Mario Draghi and France’s François Hollande in a tizzy as they try to figure out how to work with a Greek envoy that appears to be quite confident their game theory skills will eventually get them whatever they want. Italy’s Renzi, by the way, is mostly back home dealing with his nation’s struggling economy and the seemingly eternal roll of sitting between the U.S. and Russia – poor man has enough on his plate!

Greeks

 

So here we stand with Greece still wanting to be part of the Eurozone club, having never, even upon admission to the club, been able to satisfy the requirements for membership. To be fair, many nations who were let into the Eurozone club never have been able to meet them either.

 

Bottom Line: What does a Grexit mean for the rest of the world? First, it likely means a stronger dollar relative to the euro, at least in the near-term, as there will be a flurry of uncertainty given that (1) the Maastricht Treaty didn’t provide any way for a nation to exit the Eurozone and (2) there will be fears that other member nations may try to find wiggle room around their heavy sovereign debt loads, which will give some cause for concern about the future of the Eurozone. Eventually, all that flurry will likely pass as frankly a Eurozone without Greece is stronger than one with it. Holders of Greek debt will be hit hard, which means a lot of European banks, (primary holders of all that debt) are getting even more complicated. However, the Eurozone economy is still struggling, thus the ECB will continue on with its euro-style quantitative easing, which means that over the longer run, the U.S. dollar is likely to continue it bull run.

Greece – Lazy, Stupid or Evil?

Greece – Lazy, Stupid or Evil?

My regular readers are already familiar with what I like to call BUC

Lenores Law BUC

Lately I’ve been mulling over a new one, which applies quite well to the discussions around Greece, but I think is universally applicable – L4

Lenores Law L#

I was speaking with a friend of mine who lives in the States and she was asking me about the view of Greece from Italy, (I’m working from Genova, Italy at the moment) and commented on how the country really needs to get its act in gear and what is wrong with those lazy Greeks who want Germany to endlessly subsidize them.

Dog-with-perked-ears

 

My ears immediately perked up!  That sounds a lot like L4.

 

 

 

Yes, Greece is a disaster, but having been to the country, (I’m in love with Santorini and Mykonos) and having seen just how hard many of the Greeks work, my ire got up hearing that as the explanation for why the nation is struggling.  Let’s look at the data on just how lazy those Greeks really are.

Data compiled by the Organisation for Economic Co-Operation and Development (OECD) shows that in 2013, Greece had the second highest number of average annual hours actually worked per worker at 2,037 hours- only Mexico worked more!

How many hours for those diligent, finger-wagging Germans?  1,388 – two thirds the hours that those lazy Greeks worked! The Germans sit at number 34, BEHIND Russia, Ireland, United States, Italy, Portugal, Canada, Spain, Sweden, Belgium, France, Denmark and Norway!  Yes, the average annual hours worked in Germany in 2013 was LESS than Greece, Italy, Spain and Portugal!

So what gives?  Why is Greece and for that matter Italy, Spain and France struggling?

There is no easy answer for that, but lets take a quick look at the data.

According to data compiled by the World Bank benchmarked to June 2014, out of 189 countries ranked for ease of doing business, Greece was number 61 while Germany was number 14.  (The lower the number the easier it is.)  Italy sits at number 56, Spain at 33 and Portugal at 25.  For comparison, the United States is number 7.

For getting credit, Greece ranks number 71 while Germany was 23.

For getting electricity Greece ranks 80 while Germany ranks 3.

For enforcing contracts, Greece ranks 155 while Germany ranks 13.

So maybe it isn’t that those Greeks are lazy, stupid or evil.  Maybe they just have government bureaucracy that makes it excruciatingly difficult to earn a living, no matter how hard you work!  As a gentleman named Henry David Thoreau once said in “Civil Disobedience, “That government is best which governs least.”

Or as another fellow for whom I have a rather mad crush said, “Government is not the solution to our problem; government is the problem.”