Disco Balls, Donna Summer, Pipeline Pressures & the Great Housing Collapse
By Frank Barbera CMT. June 17, 2008
In a session packed with a great deal of economic data, the latest thermometer readings for the US economy continue to show a patient seriously laid up in the intensive care ward. To begin with, prices continue to soar with May Wholesale prices moving ahead at the fastest pace in six months for a single month period, and with a year-over-year rate of change still running at 7.24%, the PPI remains near a multi-decade high. Entirely unreported and with the most serious implications for where things are headed next, two measures of pipeline inflation continue to remain in long term high inflation territory. To start with, if we compare Wholesale prices to Consumer Prices, the PPI less the CPI, we find that with PPI now running at 7.24% annualized and (excuse me while I cough) CPI running at 4.08%, the spread between PPI less CPI widened out this month to 2.99%, near the highest levels since the late 1980's. A measure of Pipeline Inflation, the new highs in this gauge continue to suggest that Stagflation will be with us all for some time.
Above: Pipeline Inflation - PPI less CPI at a nearly 3% spread = very high.
Above: Soaring Crude Materials Index for PPI (thin line) versus PPI Finished Goods (thick line)
In addition to the PPI and CPI comparison, we can also examine the pipeline "pass thru" within the Wholesale price chain. To this end, the forward view is quite dim indeed as Crude Materials, the first wrung in the pipeline, are moving up at an annualized (hope you are sitting down) rate of 34.15% through today's report, compared with the 7.24% for PPI for Finished Goods. That's a whopping 27.74% percent of forward upside pricing pressure in the pipeline more powerful than anything seen in quite some time and confirming beyond question that the late 1970's have returned. With Donna Summer about to start a new tour in the summer months ahead, we can only wonder, will Disco balls be next?
Elsewhere on the "stagnation" side - check that, make it the "contraction" side of the economy -- we found out this morning that Housing (big surprise!) remains ultra depressed. Home Builders started construction on 3.3% fewer homes in May, with Housing Starts falling to an annual adjusted rate of 975,000, the lowest level since the last major recession seen in 1991. In addition, Building Permits fell by 1.3% in May to a seasonally adjusted rate of 969K with Permits for single family homes tumbling 4%. Finally, reflecting this ultra negative sentiment that is now the hallmark of the great Housing Collapse, the NAHB/Wells Fargo housing-market index fell by a point to 18, matching the prior record low seen in its 22-year history. The survey shows that about one in five builders think the housing market is good.
Above: the Wells Fargo HMI Index - Housing Confidence
In the chart above, we use the HMI ("housing market index") as a leading indicator for the broad trend in consumer spending. That's right, wealth effects, positive or negative, can dictate forward spending patterns and when prices are rising, homes are going down and people don't have enough income growth to keep up; people begin to feel poorer. In the case of the HMI, it tends to lead by several quarters the directional movement in Personal Consumption Expenditures, a fancy economic term for �spending.� In the chart above, we note that with HMI plunging to new lows, the outlook ahead for the next few quarters for this 70% Consumer spending driven US economy cannot be positive.
Of course, we always marvel at how the media manages to focus on the one grain of potential good news in any economic story, while managing to ignore the other 99% of bad news. So much gets swept right past the harried US public. Take for example the Retail Sales report issued just last week. On Thursday of last week, the Department of Commerce announced that Retail Sales for May 2008 grew by 1% versus April, and grew by 2.5% compared with year earlier (May 2007) data. At first blush, many economists heralded the better than expected data as a sign that US Consumers, freshly in receipt of some $41 Billion in government stimulus payment checks, were dutifully spending their new found riches at the stores and malls of the United States. This report came on the back of a reported surge of 1.80% in retail sales in April, leading some to wonder, if Retail Sales are doing so well, how could the United States possibly be in a recession?
Headlines and commentary following the news ran as follows:
From the NY Times:
"Retail Sales Rally, Stimulus Lends Boost"
"June 12 (Bloomberg) -- Retail sales in the U.S. rose twice as much as forecast in May as Americans snapped up electronics, clothes and furniture, evidence that they aren't hoarding their tax-rebate checks or using them just to pay for gasoline. The figures suggest that consumers, whose spending accounts for more than two-thirds of the economy, are helping stave off a deeper downturn. It's just amazing -- the American consumer's resilience in the face of everything negative,'' Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, said in an interview with Bloomberg Television."
"Associated Press - WASHINGTON - Retail sales jumped by the largest amount in six months in May as 57 million economic stimulus payments helped offset the headwinds buffeting consumers. The Commerce Department reported Thursday that retail sales soared 1 percent last month, the biggest increase since November. A wide variety of retailers enjoyed a good month, including the biggest increase at department stores and other general merchandise stores in a year. Recession? What recession?" asked Joel Naroff, chief economist at Naroff Economic Advisors. "Spending in April and May was solid in just about every category."
Not surprisingly, to the casual observer or viewer of financial news or news radio, (where virtually no analysis of the data is ever performed), the conflicting economic headlines from one week to the next must seem ultra confusing. Of course, a closer look at the data reveals the real hidden secret, the "devil in the details," which officials - and surprisingly many economists -- never seem to speak about: inflation. Sure, year-over-year rate of change data may remain nominally positive, but one has to recall that these figures reflect a "price times sales" equation. Under this outcome, sales may be decreasing or flat, while prices are rising and the aggregate volume data can appear healthy even though a fierce downtrend is taking place. Thus, the secret in viewing Retail Sales numbers is to adjust for inflation, which these days, with prices for virtually everything moving up at a robust pace is the chief driver behind outwardly deceptive economic headlines.
Above: Monthly change of Aggregate Retail Sales figures adjusting for inflation.
Now before going on, I want to be exceptionally clear. Over the years both myself and others have written about the utterly ridiculous process of reporting inflation known as "Core" Inflation, which excludes Food and Energy. Originally designed to supposedly "smooth out" and detect the underlying trend of inflation, the over focus on "Core Inflation" has become perhaps the most absurd concept that has ever besieged the "science" of economics. After all, we all have to eat and we all have to get around, so if Food and Energy prices are spiking, in the real world this is where we all live and this affects us all in a profound way.
Thus, when reporting inflation, we believe it is crucial to focus on the numbers that INCLUDE FOOD and ENERGY. Conversely, when looking at Sales data, it is unit sales growth that drives businesses forward, and unit sales growth (quantity) that reflects a healthy marketplace. In this case, allowing the inclusion of "rising prices" distorts the aggregate figure and in this case, where Retail Sales are concerned, the figures should be analyzed using Retail Sales after inflation.
In any case, while this is just my view, for what's its worth, backing out the inflation puffery underpinning last week's retail sales figures, the so-called 1% rise in retail sales vanishes to become a very uninspiring. 1% rise with a week showing four months running. This result very much agrees with the plunging consumer confidence and rising unemployment statistics reported elsewhere and sets a uniform picture. What’s more, if we then take this analysis a step further, we can look at the year over year Rate of Change gauge, again backing out the affects of inflation and we find, lo and behold, a long multi month downtrend in Sales. In fact, instead of the "biggest gain since last November" we actually just saw the first negative reading on aggregate Real Retail Sales since the last recession ended at the stock market bottom in 2003.
Above: Overall Retail Sales Adjusted for Inflation (ex - Food and Energy)
Above: Real Retail Sales ex-Inflation versus the Stock Market - now back into negative territory for first time since 2003 when last recession produced stock market bottom.
Above: 12 Month Rate of Change S&P Retailing Index "huge negative values" The stock market see's the recession. How come most economists can’tsee the recession?
All of this is enough to drive a person insane, especially when the stock market rallies on the inane interpretation of totally misleading headlines. In the chart above, we show the annual rate of change for the S&P Retail group which in recent months has plunged deeply into negative territory. If things are so great, how come the S&P Retailing Index looks like it just leaped out the 99th floor window? Come on! Time to get real! S&P Retailers have crashed over 33% since the highs just last February -- a lot worse than the market as a whole -- simply because they know that the trend has been relentlessly downward; they know that this hidden trend has not been reported, but guess what. It still shows itself in their earnings which are also way down. Compare the chart above to the prior chart of Aggregate Retail Sales ex-Inflation. Notice any directional similarities?
Above: S&P 500 Retailing Index down 33.33% from the high last Feb 2007.
In addition to the aggregate Retail Sales figure, a perusal of inflation adjusted Sector Retail Sales data shows a variety of negative trends. Year-over-year, we see US Auto Sales now probing multi-decade lows. Does that sound reminiscent of what we have seen reported each month by the likes of Ford and GM? You bet it does.
Above: US Auto Sales (New and Used) adjusted for Inflation
Above: Inflation Adjusted Retail Sales - US Bars and Restaurants, Food Services
Next, we see that with Oil prices surging, discretionary spending continues to get hit, and hit hard as Retail Sales for Bars, Restaurants and Food Service is also at a multi year low, falling deeply into negative territory over just the last few months. What about other major components of the economy? Well, furniture is moving into deep recession, a multi-year low as is spending for Electronics, TV's, and other Household appliances.
Above: Retail Sales adjusted for Inflation - Home Furniture and Furnishings
Above: Retail Sales adjusted for Inflation - Home Furniture, TV, Electronic Appliances
On the Apparel front, we see a pure dichotomy that is heavily gender based. For women, who spend in the aggregate three times as much money as men on clothing, the rate of change is still in "let the good times roll" territory although on some shorter time series we see signs of topping even there. Perhaps the "shop 'til you drop" mania of the last decade for young ladies is slowing drawing to a close with high Oil prices the ultimate arbiter. For men, the rate of change seems to be following the S&P with about a 12 month lag, and like virtually all the other time series is plunging to multi-year lows.
Above: Rate of Change for Women's Apparel Retail Sales
Above: Rate of Change for Men's Apparel Retail Sales
Above: New Home Sales still have a good distance to travel on the downside in order to reach the bottoming zone seen in 1966, 1970, 1974, 1979, 1981 and 1990. Downside momentum still very high.
Thus, we see no cause for a change in the overall analysis which continues to suggest that the US is falling deeper into recession, and that at present, there is no bottom in sight for either housing or the broad US economy.
At the close, stocks ended with a loss of 112.52 index points on the DJIA, with the Dow closing at 12,156.56 ending with a loss of .92%. For the S&P, Tuesday saw the index end with a loss of 9.21 index points to finish at 1350.93, while NASDAQ closed lower with a loss of 17.14 index points at 2457.64. The 10 Year Bond ended with a yield of 4.22%, down .03 basis points while nearby Gold ended at $887.00, up .70 per ounce.
© 2008 Frank Barbera