More 'Good' Pre-Election Economic News

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Consumer income had a nice rise in August thanks to extended unemployment benefits (not regular unemployment benefits). The final budget deficit figures for fiscal year 2010 have been leaked and the U.S. is supposedly only in the hole for a massive $1.3 trillion. The ISM manufacturing index came in at 54.4 and the the mainstream press is citing a strong manufacturing sector as the reason the U.S. stock market had its best September since 1939. Altogether, this news could be summed up as 'stupidity you can believe in'.

By almost every measure except the headline number, the ISM report was a disaster. The highest number inside the report was prices paid, an inflation measure, which came in over 70. Prices apparently went up a lot in August. This component had the biggest increase by far, which wasn't difficult because only one other component went up - inventories. Inventories usually pile up because sales are slowing down. The negative big gains were more than matched with negative big losses in the report. Order backlogs, supplier deliveries, employment, and the production components all had big drops. Well, that certainly should have led to a big stock market rally all right.

As for the supposed improved budget deficit figures, as of this August, $1.377 trillion dollars had already been borrowed to fund the federal government in fiscal year 2010. This number would have been $115 billion larger (for a total of $1.492 trillion) if there hadn't been 'financing by other means'. Financing by other means had a big increase in August and is projected to have another big increase in September. There are also substantial 'off budget outlays'. See http://www.fms.treas.gov/mts/mts0810.pdf for the August Treasury report on 2010 fiscal year spending. Makes you wonder if the U.S. government is using the Enron Accounting Manual to do its books.

Finally, some people might argue that an economy that is dependent on extended unemployment benefits for increased consumer spending could just perhaps be somewhat troubled. Few if any of these people write for the mainstream press of course, which generally treated the news of an increase in consumer income and a rise in the savings rate to 5.8% as just more rosy news. If this is such good news, obviously the U.S. should institute ultra super extended unemployment benefits. After all, look at what these policies have done for Europe – riots in the streets and turmoil in the bond markets. The euro has been rising though and obviously this must be due to improved manufacturing in the U.S., if you follow the logic of the mainstream press. If not, you might just conclude that there is a whole bunch of government manipulation of the markets going on.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Less Credit and Income = More Consumer Spending?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


As of June, consumer borrowing has now dropped 16 out of the last 17 months. Credit Card debt has fallen 21 months in a row. The personal savings rate in June rose to 6.4% from 2.1% before the recession began. Wages and Salaries are down 3.6% in the last two and half years. Despite decreased credit and income and increased savings, all three of which are negatives for consumer spending, GDP figures claim American consumers are buying more.

U.S. GDP growth has been fueled by consumer borrowing for many years. Consumer credit grew faster than GDP before the Credit Crisis hit, but is now moving in reverse.  June 2010 total credit card debt (revolving credit) has now fallen below the November 2005 level. American consumers over the decades have accumulated far too much debt and deleveraging is a trend that is likely to go on for many years. This is certainly a negative for an economy that has been built on consumer spending. Even with consumer credit staying steady, it would be hard for the GDP to rise.

The reduction in consumer borrowing is not a voluntary process. The big banks are cutting credit limits, cancelling cards and demanding pay downs. Consumers are choosing to save more though. The savings rate was only 2.1% in 2007. Then it was 4.1% in 2008 and 5.9% in 2009. It was 6.0% or over each month of the second quarter of 2010. More savings means less consumer spending and this trend is likely to continue as long as consumers feel insecure about the economy.

According to the BEA (Bureau of Economic Analysis), wages and salaries of U.S. workers have declined only 3.6% since the first quarter of 2008. This small drop is really surprising considering the unemployment rate was 5.0% in December 2007 and was 9.5% in July 2010. More government jobs and government subsidized jobs prevented this number from being much worse.

Even more amazing, total personal income actually increased by 1.5% during this time. How is this possible during a recession?  Examining the figures indicates that there was a 27% increase in 'Government Social Benefits to Persons' in the last nine quarters. These various forms of stimulus payments, which are essentially welfare, along with government subsidized employment, were paid for by the approximately $3.5 trillion in deficit spending in 2008, 2009, and 2010. This has been the major source of funds for consumer spending recently.

So even though consumers have been borrowing less, the government has been borrowing more and giving the money to consumers to spend (or at least to some consumers). This is equivalent to the 'bread and circus' of Roman times. It is not a sustainable model for economic growth. Nor is it even honest to claim that this is actually economic growth. We don't exactly live in an age of financial honesty however - and that is another trend that can be expected to continue.

Some of the data for this article can be found at: http://www.bea.gov/national/nipaweb/TableView.aspSelectedTable=58&Freq=Qtr&FirstYear=2008&LastYear=2010).

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

U.S. Consumer Spending: Not Indicating Economic Recovery

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Commerce Department released figures for February consumer spending on March 29th. The report indicated that consumer spending was up 0.3% in February, but personal incomes were flat. The savings rate was lower though, dropping to 3.1% from 3.4% in January. Spending increases were highest for necessities, such as food and clothing. Spending on non-durables actually fell. Nevertheless, somehow the mainstream media looked at these figures and concluded, "Both the spending and income figures in Monday's report point to a modest economic recovery".

Now for a dose of reality.

If income is not going up, but consumer spending is going up, there are only three possible explanations. Consumers have either gotten increased credit and are borrowing more, they are spending savings, or they are selling assets.  If they are spending savings or selling assets to support their spending, the economy is in very bad shape, somewhat similar to the way it was during the Great Depression in the 1930s. Since the savings rate was still a positive number, consumers were not taking more money out of their savings accounts than they were putting into them. So consumers were still saving, but at a lower rate. The 'Personal Incomes and Outlays' report (that's its official name) doesn't analyze buying and selling of assets, but does have a figure on 'Personal Income Receipts on Assets' that includes interest and dividend income. This number decreased by $16.5 billion in both February and January and that may indicate that the public is quite possibly a net seller of assets. Consumer credit is also not handled in the report, but the latest figures from the Federal Reserve indicate that revolving (read credit card) consumer credit declined at a 2.5% annualized rate in January.

While the sources for the supposed increases in U.S. consumer spending are murky at best, the amount of consumer spending in and of itself is not a determinant of whether or not economic recovery is taking place. The increased spending needs to come from economic growth and not government spending. If it comes from more government spending, better numbers are just a shell game and are actually an indicator of just how troubled the economy really is.  U.S. consumer spending rose $34.7 billion in February. Of that amount, $16.6 billion came from an increase in federal government transfer payments. That is only the one-month change in federal spending being funneled directly into consumer's pocket. Government support for the U.S. economy has increased substantially and in myriad ways since the beginning of the recession in December 2007.

While consumer credit has declined significantly since the Credit Crisis began, government borrowing has increased to make up the slack. This is why the U.S. is facing a $1.6 trillion budget deficit in fiscal year 2010.  The record levels of government borrowing are propping up the entire U.S. economy, including consumer spending. Governments don't spend more when economies recover; they spend less. Only when U.S. government spending begins to decline sharply and reports come out that consumer spending is increasing should investors consider believing that economic recovery is really taking place.

Disclosure: None

NEXT: Market Says U.S. Treasuries Riskier Than Corporate Debt

Daryl Montgomery
Organizer,  New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Commodities, the Dollar and More Government Fantasy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Natural Gas storage report was released yesterday morning and storage was up 54 BCFs versus expectations of a rise of 51 BCFs. Within a few minutes the near term futures contract dropped at least to $2.705 (it may have gone lower). The about to expire contract closed at $2.843 down 6.7 cents from the previous day. The oil storage report was mixed on Wednesday and Nymex oil dropped below $70 a barrel subsequently, but has poked above $73 this morning. The oil/natural gas price ratio has gotten as high as 26 (if they were completely interchangeable, the ratio would be 6, it has averaged 8+ over the long term), well above the last peak of 22 in 1990. Oil is about to enter its seasonally weak period and natural gas its seasonally strong period. Regression to the mean should start taking place this fall.

The calendar should be creating a bullish environment for gold and silver as well. They tend to be strong between August and February. Gold was trading around $960 this morning on Comex and silver around $14.75. Gold has been hoovering just under the key breakout level of $1000 for some time now. Watch it closely. Once this breakout takes place, the short term target price is somewhere between $1200 and $1300.

Gold historically trades counter to the U.S. dollar, but they can become decoupled. In a global inflationary environment, decoupling will eventually occur. For the moment, the U.S. dollar is weak . For the last 6 days, the dollar has traded at least part of the day below its key breakdown level of 78.33. This is the second time so far that the dollar has stayed below this level for several days. When the stock market rallies, the dollar has been selling off and this has been going on since last March (it's not a normal pattern). If stocks rally further, it should kill the dollar. The dollar may tank regardless since the technical picture is weak. The powers that be will want to save it however. So we will have to wait to see what happens.

The stock rally has been explained as taking place because the U.S. economy is recovering. At least in some cases, valuations are as ridiculous as they were at the top of the tech bubble in 2000. Take a look at the Dow's PE for instance. This morning, the government released more 'good news' that seems to fall into the 'that can't possibly happen' category. Personal spending was up 0.2% last month, but incomes were unchanged. Even though incomes were unchanged, total wage income went up (during a time of increasing unemployment). Spending has supposedly been rising for the last three months, well ahead of income, even though the savings rate is 4.2%. Separate reports indicate that available consumer credit has been cut drastically. So even though U.S. consumers don't have the income and don't have access to credit, they are somehow spending more. I really think the U.S. government should release its statistical reports on stationary that has pictures of pigs flying in the background. That way the public would know how much credibility the numbers have.

NEXT: A Break in the Bull and China Stops Shopping

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.