How Good are February Retail Sales Figures if You Consider Inflation?

 

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.

Unadjusted for inflation, U.S. retail sales rose 1.1% in February. There may have been little or no gain if price increases are accurately taken into account.

Retail sales going up in the beginning months of the year should surprise no one because this is when companies typically raise prices. Anyone who goes to Starbucks is aware of this practice. It pervades a number of industries across the spectrum. Clothing prices are being hit particularly hard this year with jumps in prices estimated to be around 10% for the spring season (already underway in February). Mainstream media reports on February retail sales did glowingly mention that sales at clothing stores were higher while neglecting to report that higher prices were the reason.

This is not the only source of price increases in early 2012 however. Year over year, gasoline had the second  greatest percentage increase (10.3%) in the retail sales report. This can be considered a measure of energy inflation and not an indication that more product is being sold. A rough approximation of food inflation can be garnered from the Food and Beverages category. Year over year this increased by 3.7%, while the U.S. population is estimated to have grown only 0.7%. If inflation is the actual driver of higher retail sales, it would be reasonable to assume that the one area with chronically lower prices — electronics — would see a decline in sales. Year over year, sales in the Electronics and Appliance category did indeed fall by 1.4%.

Interestingly, the biggest increase in any retail sales category was in Building Materials and Garden Supplies. This was up 13.8% year over year. It is quite possible that the unusually warm winter weather pushed garden supplies purchases into February, instead of March (the numbers are seasonally adjusted and much higher garden supply sales in February would be magnified because of this). Prices for many building materials are rising sharply as well however. Lumber has been the one major exception, but even lumber prices rose this February.

Retail sales account for approximately 70% of the U.S. GDP, so how they behave gives a good indication of how the economy is performing.  Higher inflation is not an indication of a better economy though, it indicates just the opposite. The U.S. retail sales numbers are not adjusted for inflation, nor are the CPI numbers an adequate indication (they underestimate the actual inflation rate significantly). Analysis of the February report indicates that inflation is allowing the government to report better numbers. Investors need to keep this in mind. 


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Retail Sales and Employment Not as Good as First Reported

 

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.

There has much cheerleading in the mainstream press lately about the improving employment situation and strong 2011 holiday retail sales. Just released figures indicate it may have been much ado about nothing.

Retailers depend on the holiday season for their yearly profits. Major efforts were made in November to get people to start buying early. This worked and retail sales were up 0.4% during the month. Strong early numbers don't necessarily mean overall numbers will be greater however. It can simply mean that buying activity was frontloaded and the later numbers will then be weak. This is exactly what happened. Retail sales were up a whopping 0.1% in December (retail sales are not adjusted for inflation, the number would be negative if it had been).

Looking inside the report shows how incredibly weak the consumer is. Excluding autos, which are highly volatile, retail sales were 0.2% lower -- the first drop since May 2010. Core retail sales, which exclude autos, gasoline and building materials were down 0.1%. Even though it was the height of the holiday buying season, spending at electronic and appliance stores was down 3.9% and spending at department stores was down 0.2%. Once again, if the numbers had been adjusted for inflation they would have been even worse.

So how come U.S. consumers aren't spending more now that the employment situation is supposedly getting better?  Well, maybe it's because it isn't. The big news lately has been the declining weekly claims which have fallen below the traditional 400,000 per week that indicates recession. However, for the first week of 2012 they came in at 399,000 -- back at recession levels. This was up from the 372,000 reported the previous week (three states including mega-sized California didn't send in their claims numbers for this report).  Of course, the mainstream press blew the trumpets about the "good", but highly questionable, 372,000 number, just as it did for the 200,000 jobs that were allegedly created in December 2011.

Among these jobs were 42,000 new messenger positions. While it's more likely that 42,000 messengers were hired in December than 42,000 nuclear physicists, that doesn't mean it is believable. Messengers work in a field with declining employment. The December jobs report has been criticized as having "statistical adjustment" problems. Non-statisticians generally refer to this as lying about the numbers. Of course, the appearance of suddenly improving economic news (not to be confused with an economy that is actually improving) at the beginning of a presidential election year should not be surprising.

As the election season heats up, there will be a desire for the government to report that economic conditions are better than they actually are.  This does not mean the news will necessarily be good, it will just be better than it actually is. Expect the bad news to come out after the November election.  Until then, invest with caution. 

Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

October Consumer Confidence Well Into Recession Territory

 

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 October Consumer Confidence number fell to 39.8. It is once again approaching the all-time lows that occurred at the bottom of the Great Recession. The number has never reached the 90 level since 2009, which is the cutoff for a healthy economy. The continually poor levels of consumer confidence  bring into question whether the last recession ever really ended.

While U.S. consumers are gloomy about almost all aspects of the economy, they are most pessimistic about employment prospects. Only 3% of U.S. consumers think that jobs are plentiful. While it is true that this number could have been lower during the 1930s Depression when millions of ordinary Americans went hungry and were homeless, the lowest possible value is only zero. And the current reading could actually be zero since zero lies within the statistical margin of error for the survey. In contrast, those who say jobs are hard to get came in at 47% and that would definitely had been much higher during the 1930s.

The Present Situation Index — how consumers see the state of the economy currently — was a very dismal 26.3 in October. This number has remained at fairly low levels for four years now. What has caused the overall consumer confidence  number to rise has been expectations for a future improvement in the economy. The government and mainstream media has continually told U.S. consumers the economy is getting better and will continue to get better. So, consumers have told the survey takers that don't see things as being in good shape now, but they were hopeful about the future. Consumers are starting to lose hope however. The future expectations number fell from 55.1 in September to 48.7. Apparently, you can only fool the public for so long.

The "don't believe what you see with your own eyes, but believe what the government tells you" efforts are still going strong however. Media reports cited better retail sales and a big stock market rally since early October as indications that the U.S. economic situation is improving. Retail sales may have indeed gone up since they are not adjusted for inflation and higher prices make them look better even if fewer units are being purchased. As for the wild behavior of the stock market, explosive rallies are common in bear markets and not in bull markets. They can also occur at any point because of liquidity injections into the financial system from central bankers in Europe, the UK, and the U.S. as would happen during a banking crisis like the one currently taking place in the EU. They don't last for long however.

No matter how you look at the consumer confidence, the numbers are ugly. They are not just indicating recession, they are shouting recession. Only 11% of Americans think that business conditions are good.  The Present Situations Index has dropped six months in a row. Some of the components are at rock bottom levels. Yet, the government and mainstream media keep reporting that the economy is on track for improved growth in the second half of 2011. How can such diametrically opposed views be reconciled? The simplest way to explain the discrepancy is that someone is lying. Any guesses as to who that might be?


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Economic Reports Indicate U.S.Economy Heading Down

 

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.

Default notices on U.S. home mortgages rose 33% in July. Retail sales and food services rose only 0.0% -- adjusted for inflation they were negative. The CPI inflation measure for August came in at 0.4%, almost as high as it was in July.  Weekly jobless claims rose again this week, coming in at 428,000.  All are pointing to an economy in trouble.

The Great Recession began in the housing market after subprime loans started to default in large numbers in 2007. The U.S. economy will continue to have difficulties until all the excesses are ringed out of house prices. Government policy has instead been geared toward stabilizing the market with temporary fixes. The Federal Reserve instituted a number of programs to funnel money into the mortgage markets to protect the banks that had too much exposure to real estate loans and the Obama administration has created programs like HAMP (Home Affordable Mortgage Program) to lower the foreclosure rate. Banks themselves have avoided or delayed foreclosures as long as possible because they don't want the properties on their books. All the government's efforts have certainly slowed down the rate of foreclosures and that may ultimately be all that they accomplish. A 33% increase of foreclosure notices in July indicates a new wave of foreclosures is likely next year.

Meanwhile, U.S. retail sales are declining if you take inflation into account. Retail sales increased strongly with rising home prices in the first years of the 2000s, but after the housing market turned south they have yet to recover. They have been held up by trillion dollar plus annual federal budget deficits, Federal Reserve money printing, and government stimulus programs including the 'Cash for Clunkers' gift to the auto industry. Despite all of these efforts, retail sales and food services were up 0.0% in July (the same 0.0% for jobs created in August). The mainstream media reported 0.1%, but this is only the retail sales component of the report. The report is not adjusted for inflation, so even if retail sales rose 10% a year, but inflation was also 10%, there would be no actual growth (although that is not the story you would get from mainstream news sources).

Retail sales are crucial for the U.S. economy because they make up approximately 70% of GDP. If they don't grow in real terms (after being adjusted for inflation), it is difficult for the economy to grow. To get a quick read on how the retail sales numbers are being impacted by rising prices all that is necessary is to look at the gasoline sales subcomponent. There is no reason to think Americans are using a lot more gasoline from year to year, if anything less is being used. Yet, year over year gasoline sales are up 20.8%. This is caused by inflation. Retail sales and food services overall were up 7.2% year over year. Adjusted for a realistic inflation rate, this number would be somewhat negative. 

That is not to say that the government is reporting an inflation rate that high. The just released CPI for August was 0.4% or 4.8% on an annualized basis. It was 0.5% in July or 6.0% on an annualized basis. Alternative inflation measures from ShadowStats.com indicate actual U.S. inflation is several percentage points higher than the official numbers indicate. ShadowStats.com calculates its inflation numbers the same way the U.S. government did in the 1970s. Since there have been many changes in how U.S. inflation is determined since then, it is not meaningful to compare current numbers to the past ones since doing so is like comparing apples to oranges. The ShadowStats numbers indicate that inflation is much higher now or if you don’t accept that, then you are left with the absurd conclusion that high inflation didn’t exist in the 1970s (you will find that this is the case if you use current methods to recalculate the 1970s inflation numbers).

The other major drag on the U.S. economy -- lack of jobs -- also seems to be getting worse. Weekly claims rose again this week to 428,000. Over 400,000 is considered a recessionary level. With the exception of a few weeks, these have been continually over 400,000 for almost three years now, indicating an ongoing recession (despite all the claims to the contrary of a recovery). The trend is actually worse than it appears however. These numbers should strongly regress toward the mean (move back to the long-term average), but haven't as of yet. As a recession goes on and on eventually everyone that is going to be laid off eventually has been and that should cause this number to decline for statistical reasons even if the economy isn't improving. That it has managed to stay at such high levels for almost three years is truly amazing.

The overall picture provided by U.S. economic reports indicates a flat or declining economy with rising inflation. Little progress seems to have been made in the last three years. The new credit crisis arising in Europe is only going to make matters worse. The U.S. economy was merely weak before Lehman Brothers defaulted, but it fell off a cliff after that.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Will Stocks Continue to Rally After Quadruple Witch?

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.


Today is one of four days during the year when index futures, index options, stock options and stock futures all expire. The market has rallied throughout September into the quadruple witch, but will it continue to do so?

As has been the case with every rally since the bottom in 2009, volume this September has been below average on the Dow Industrials. Low volume is an indicator of lack of enthusiasm for a trend and indicates the trend is likely to reverse soon. Nevertheless, stocks have managed to defy the lack of buying support and hold up for almost a year and a half now. This is theoretically impossible in a free market. It is very possible in a manipulated market however where one or a few large players control the game. In such circumstances, some tip sheet on Federal Reserve liquidity pumping would be the best guide to be used for trading stocks.

The mainstream media has been giving the rally as much support as possible as well. Weekly unemployment claims which invariably fall around holiday weeks, not surprisingly went down the week before and after Labor Day. Instead of reporting this as business as usual, the cheerleading media claimed it was new evidence of an improving economy. Retail sales supposedly had a minor jump in August, although the report was not credible. The smoking gun was the auto component which barely declined over August 2009 when Cash for Clunkers was giving auto sales a huge boost. Independent industry sources showed a huge drop in sales year over year, but somehow government statisticians know nothing about it. Both reports were replete with missing data, so some component numbers were merely wishful thinking estimates. The mainstream media didn't manage to report this key information. A consumer confidence survey today indicated confidence dropped to its lowest level since August 2009. The cause for the drop was consumers getting really gloomy about the future prospects for the economy. Apparently they are increasingly tuning out the information they are getting from the government/media complex and believing what they see with their own eyes instead.

So even though the economy is continuing to deteriorate, government statisticians are doing their best to hide this from the public. The mainstream media is doing its best to help them out by not questioning any number they produce no matter how unreliable or unbelievable it is. The Fed and other central banks and treasuries (think the one trillion dollar euro-TARP program) are doing their best to keep the world financial system afloat in a sea of liquidity. The most obvious evidence for this is a range of assets - stocks, bonds, and commodities - are all rising at once. This happens if there is more money in the system, otherwise traders would need to sell one asset in order to get funds to buy another. When they can bid up every asset, there has to be more available money and less risk aversion, which makes no sense given all the problems that currently exist.

Given the current environment, stocks can certainly continue to go up. Investors should assume the Fed will do everything possible until at least the election on November 2nd to make the market look good. There is no free lunch however. While liquidity driven markets can go higher and last longer than anyone thinks possible, they can also drop faster and much further than anyone would imagine. And this can take place suddenly. Constantly keeping the liquidity trough full also risks massive and sudden inflation. Don't expect to hear about this from the mainstream media though because they will be too busy telling you not to worry because everyone knows that liquidity fattened pigs can fly - or at least that's what the latest government report said.

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.

August Retail Sales: Debunking Mainstream Media Coverage

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 August retail sales numbers were out this morning and media reports stated they were up 0.4%. Stock futures immediately rose because this was ahead of a 0.3% expected gain - or was it?  Buried in the middle of the government's press release was this statement, "The Census Bureau [the issuer of the report] does not have sufficient statistical evidence to conclude that the actual change is different than zero."

September 14th is primary election day in a number of U.S. states. It is amazing that political polls are reported more accurately by the press than government economic numbers. Like all political polls, most of the economic numbers are derived from surveys. All surveys have sampling bias, as well as other biases, that introduce errors. It is standard procedure for the U.S. media to report the sampling bias (such as plus or minus 3.4%) when reporting on any political poll. The mainstream media almost never does this with government economic reports even though their sampling error rates can be far more significant. While the mainstream media will report a political race as too close to call because of the margin of error in the polls, it will almost never say that that the numbers from a government report are meaningless gibberish because of statistical error.

The more accurate reporting of August 2010 retail sales is +0.4% (plus or minus 0.5%), so the number could actually have been minus 0.1% and the headline could have stated, 'No Conclusive Evidence Retail Sales Grew in August'. This is just the error from statistical sampling however. Unlike political polls, government economic reports have other serious problems. Incomplete data is one of them. As I mentioned in a previous article, the weekly unemployment claims for the first week of September was missing data from 9 out of 50 states, so the numbers for those 9 states were simply made up (and when the government makes up numbers for some reason it seems to err on the side that makes things look better).  Is there any missing data in today's August retail sales report?  The following items were not available:

Appl., TV and cameras
Computer and software stores
Building mat. and supply dealers
Beer, wine and liquor stores
Pharmacies and drug stores
Men's clothing stores
Women's clothing stores
Shoe stores
Department stores (incl. L.D.)
Other general merchandise stores
Warehouse clubs and supercenters
Electronic shopping and mail order houses
GAFO (firms that specialize in department store type merchandise)

The lack of data should be a reason to lack confidence in the final number in this report. Lack of consistency with other reported data is an even bigger concern. According to today's retail sales release, auto sales and parts were only 1.5% lower in August 2010 than they were in August 2009. Industry source Autodata found that the drop in auto sales between these dates was 21%. This problem could be reconciled if the government reported the change in auto sales as -1.5% (plus or minus 100%). It would also be a good idea if the government used the plus or minus 100% for all of its numbers. That would give the public a clear indication of how accurate they are, although it is highly unlikely the mainstream media would report it.
The government's press release on August retail sales can be found at: http://www.census.gov/retail/marts/www/marts_current.html

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.

Reconciling Bad Economic Data and Good Earnings

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.


So far this earnings season, company reports indicate that business is going gangbusters. U.S. economic reports are painting exactly the opposite picture however. This may not be as contradictory as it appears on the surface.

As for earnings, Intel reported record numbers yesterday, after Alcoa upgraded its forecast for global aluminum sales and U.S. railroad company CSX said shipments were up considerably. This morning however U.S. retail sales numbers disappointed again, falling 0.5% in June following a 1.1% drop in May. Mortgages for home purchases fell to a 14-year low. According to the non-farms payroll reports, close to a million people net left the U.S. labor market in May and June because jobs were so scarce that they simply gave up looking.  Later today, the Federal Reserve is expected to lower its expectations for second half U.S. economic growth.

One of the important things to note is that both Intel and Alcoa are global companies. While many people assume that the U.S. is Intel's major market, it isn't. East Asia dominates Intel's sales. Strong Intel numbers generally indicate a robust East Asian economy. Growth has indeed been strong there. Intel's biggest growth sector by far was servers, which were up 170%. These are used for the Internet. Intel also cited cloud computing as a driver of sales. It is possible for a new technology to grow while the economy declines. The best example of this is the growth of radio during the Great Depression 1930s.

As for Alcoa, its projections may prove to be much too bullish. Industrial metals appear weak across the board and this indicates global manufacturing could turn negative in the next few months. CSX's good numbers were dependent on auto shipments. That market in the U.S. peaked in the third quarter of 2009 because of the Cash for Clunkers program. In the June retail sales report, autos were the weakest component.

Investors should not make judgments for the U.S. economy based on figures for global companies, especially when the U.S. is only a minority of their business. The U.S. economy can be much weaker than Asian economies. Asia was in the driver seat pulling the world out of the Credit Crisis recession and the U.S. followed. The U.S. may lead once again though bringing the world into the next recession.

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.

Retail Sales Drop in May Shouldn't Be a Surprise

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 U.S. government released its Retails Sales report for May this morning. Analysts expected an increase, but sales dropped 1.2%. The markets were surprised that American consumers were spending less even though the unemployment rate is stuck around 10% and credit card debt has dropped for 19 months in a row.

The expectations for higher retail sales came from the massive amounts of federal government stimulus being pumped into the economy. There is a $1.6 trillion dollar budget deficit projected for fiscal year 2010 (the deficit for 2009 was $1.42 trillion) and this money is making all the economic numbers look much better than they would otherwise. The deficit alone is approximately 11% of the official U.S. GDP number (which is grossly overstated), but still represents less than half of all federal government spending.  Investors should ask themselves: Given all of this support, how weak is the U.S. consumer?

This is an important question because the U.S. has built an economy based on consumer spending, which reached 72% of GDP before the Credit Crisis. The consumer also became very over indebted in the 2000s and the saving's rate hovered around zero mid-decade.  To spend more, consumers need more income and credit (the amount available from savings is limited). A jobs recovery is needed to increase consumer income and even Washington admits that that is not happening in the foreseeable future. As for credit, the big banks are borrowing from the Federal Reserve at zero percent, but are not passing the savings on to the consumer. They are also decreasing credit card lines, not increasing them. Autos are one of the only areas where cheap credit has filtered down to the consumer level.

Auto sales have also directly benefited from government programs like Cash for Clunkers. There were no special government programs active in May and auto sales fell 1.7%. The drop in retail sales was essentially across the board though. Department stores were down 1.8% and general merchandise sales decreased 1.1%. Hardware stores were really hit hard with sales falling 9.3%. The only bright spot was a 3.3% drop in gasoline sales. This took place because gas prices dropped, not because less gas was purchased. The Retail Sales numbers are not adjusted for inflation.

For some time now, the message coming out of Washington has been one of economic recovery. This has been based on economic numbers pumped up by incredible levels of stimulus. The retail sales report today and the employment numbers in general show that stimulus is not working so well this time around. The basic idea for excess government spending is that it jumpstarts the economy just as an electric jolt jumpstarts a battery. If the battery is really dead however, no amount of electricity brings it back to life. The same is true for stimulus in a dead economy.

Disclosure: None

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.

A GDP Canary in the Inflation Coal Mine

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.


Singapore recently reported that its 2010 first quarter GDP increased by a whopping 32.1%. While a huge growth rate like this would be OK for an emerging market in its earliest stage of growth, Singapore is already an advanced economy. China, which is behind Singapore on the development curve, saw a GDP expansion of 11.9% in the beginning of this year and inflation is already starting to show up there.

While countries are always trying to increase their GDP growth rates, this is one of those areas where the proverbial 'too much of a good thing' can lead to trouble. There is a desirable band of GDP growth for every economy. Too little is not enough to keep the population employed and happy, too much creates more demand for resources than available supply and this causes inflation. The desirable level of economic growth for the U.S. is generally believed to be around 3% a year. It can be much higher for an emerging market.

Singapore is a trading economy and its current huge growth is an indication of how much Asian trade is picking up. It's first quarter GDP was a record increase. The central bank just began raising interest rates to tighten credit. Singapore also boosted its inflation forecast to the 2.5% to 3.5% level as a result of its GDP numbers. It will indeed be lucky if it can keep its inflation rate that low.

China's consumer prices were up 2.5% in March. China's economy grew by 8.7% in 2009, while the U.S. and EU economies stagnated. China is now arguably the second largest economy in the world and if it hasn't already moved ahead of Japan, it will do so very soon.  Almost half a trillion dollars in stimulus in a $4.9 trillion economy can be credited for maintaining China's spectacular growth rate. Stimulus creates inflation as well as growth though. The growth numbers were all very high for the first quarter. Retail sales were up 19.6%. Fixed asset investment was up 25.6%. Exports were up 29%. China, like most Asian economies has based its economic expansion model on export growth.

Not everyone in the world can be a net exporter however. Someone has to be buying those exported goods and that someone is the United States. The U.S. trade deficit widened by 7.4% in February (this subtracts from U.S. GDP and requires borrowing from foreign sources in order to fund it) and the deficit with China widened. The U.S. trade deficit is going up again because imports are rising faster than exports. The media reported that Wall Street economists were surprised. Apparently having a PhD in economics doesn't mean you can grasp the concept that increased exports from one country lead to increased imports in another. Many of these same economists also say there will be no inflation in the U.S. even though the government is engaged in substantial money printing.

Disclosure: Not relevant.

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.

An Analysis of Retail Sales Media Coverage

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.


Retail sales look like they increased 8% to 10% in March 2010 according to the International Council of Shopping Centers. Assuming the numbers are correct, and this is perhaps a very big assumption, a number of mitigating factors led to the unusual rise, including an Easter holiday that fell right in the beginning of April and very mild weather in March after a February filled with snowstorms. Nevertheless, mainstream media reports heralded that "consumers are finally coming out of hiding" and that happy days are here again.

Today's New York Times had some of the most positive reporting stating that the U.S. consumers' mood has gone from panicked to cautious to "almost a bit giddy" - a quote from Mark Zandi, chief economist for Moody's Economy.com. In coverage elsewhere, Jackson Bros., Boesel & Co. noted that this is season when chain store sales increase and that they saw interesting possibilities in Woolworth, Grand Union, and J.C. Penney.

Today's coverage in the Times noted that "import cargo volume in March also suggested a strong month for retailers", having risen for four months in a row and being up an estimated 6% in March according to the National Retail Federation.  Other publications reported that rail freight loadings in the week that ended March 21st gained more than they usually do in March and had hit a new high for the year. The implications are of course that this indicates that retail sales will be getting better in the future.

The Times upbeat coverage also included "sales are simply much stronger than companies had expected,” and the improvement extends to some of the most costly items including autos with Ford, Toyota and General Motors having robust sales increases in March. The Times did concede that incentives such as no-interest loans may have been responsible. Other sources reported that one major automaker had its third straight monthly gain of around 50% and its highest sales since last June. Dodges, De Sotos, Plymouths, and Fargos were apparently flying off the lot in March... March 1931 that is.

While the New York Times article was published on April 7, 2010, the other articles cited were published 79 years ago in early April 1931 - two years before the economy hit bottom during the Great Depression and many more years before the U.S. managed to crawl out of the economic devastation that the downturn had caused. Rosy media reports in 1931 did not mean that the economy was getting better and it is quite possible that don't indicate that in 2010 as well. Mainstream media wants to tell the 'everything is getting better' story and managed to do so in 1931 when the U.S. economy was actually falling off a cliff. Investors should assume little has changed with media reporting since that time.

What has changed since the 1930s is that the Federal Reserve is pumping huge amounts of liquidity into the financial system and the government is spending huge amounts of money it doesn't have to keep the economy functioning. Retail ETFs, such as RTH, XRT and PMR, are trading at two-year highs. While a realistic analysis of the macro picture may not justify such high stock prices for retailers, liquidity is responsible for the ongoing rally. The party should continue as long as the Fed continues to supply free booze. One it stops doing so, expect one big hangover.

Disclosure: None

NEXT: Why China is About to Change Its Currency Policy

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.

Inflation and 'Adjustments' Explain Retail Sales and Inventory Reports

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 just released reports on February retail sales and January inventories and business sales. As usual, the mainstream media republished the rosy view of the reports contained in government press releases. Even a cursory examination of the actual data indicates serious problems in the U.S. economy still linger and there is little if any reason to think things are getting better.

Retail sales are important because they represented 72% of U.S. GDP before the Credit Crisis. Without a continuing real increase in them, a sustainable economic recovery can't take place. Increases caused by inflation not only don't indicate recovery, but also indicate additional problems. The government's retail sales numbers are not adjusted for inflation. The place to look for inflation in the report is the gasoline sales figure, since if anything less gasoline is being purchased now than before the Credit Crisis. This number gives you a ballpark sense of whether or not the change in numbers was caused by inflation as opposed to selling more items. Year over year U.S. retail sales were up 3.9% in February. Year over year gasoline sales were up 24%. It is quite clear that inflation is behind the 'recovery' in retail sales and this is bad news.

The 'Manufacturing Trade and Inventories and Sales' report for January demonstrates the incredible impact of the government's statistical 'adjustments' can have on the numbers it publishes.  Inventories were reported as flat in January, but business sales were up 0.6%, the eighth consecutive rise. Table 2 in the report, entitled Percent Change in Sales and Inventories, tells a different story however. The change in the unadjusted numbers from December 2009 to January 2010 state that total sales were down 13.3%. This number was up 0.6% after adjustment. Sales for retailers were down 22.9% before adjustment. They were up 0.2% after adjustment. The chart can be found at: http://www.census.gov/mtis/www/mtis_current.html.

Surveys of consumer sentiment indicate the public has a very different view of the U.S. economy than the government's public relations (a term invented early in the 1900s so the word propaganda didn't have to be used) story usually reprinted without question by mainstream media outlets. The University of Michigan survey, out the same time as the retail sale and business sales and inventory reports, showed a decline in consumer sentiment in February. The 12-month outlook had a fairly sharp drop. The last Conference Board consumer survey indicated a collapse in consumer confidence. Apparently consumers are reacting to their actual experiences with the U.S. economy and not the fantasy economy that exists only in government statistical offices in Washington, D.C.

Disclosure: None

NEXT: Moody's Sovereign Debt Assurances Should Concern Investors

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.

2009 Retail Sales Deconstructed

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.


U.S. retail sales for December 2009 were down 0.3%. News outlets reported this as a surprising turn of events. While I am tempted to agree with that viewpoint, it is only because there is enough inflation in the system to make retail sales look better. The retail numbers are not adjusted for price increases and this should always be kept in mind when viewing them. Higher retail numbers don't necessarily mean a better economy.

The Commerce Department reported retail sales were up 5.4% year over year. It would have been almost impossible for them to be lower, since December 2008 was when the Credit Crisis was close to its worse point. Nevertheless, three major retail categories - Electronic and Appliance Stores, Building Materials and Garden Equipment and Supplies, and Furniture and Home Furnishings - had lower sales in December 2009 than they did a year earlier. These three retail sectors are dependent on the health of the real estate market. 

So what went up to improve the numbers?  Gasoline sales rose 34% year over year and by themselves accounted for almost 50% of the total increase in the raw numbers.  This is pure inflation. It is not likely that actual gasoline use is up, especially with the Cash for Clunkers program having subsidized more fuel-efficient vehicles for American motorists.  Sales for Motor Vehicle and Parts Dealers were up 6% from 2008 and this accounted for another 19% of the increase in the yearly total. Government bailouts and stimulus programs are responsible for this increase. If you removed the inflation factor, and gasoline sales represent  only some of the inflation that might be in the numbers, and government programs that directly created higher sales, how much improvement would there have been?  Not much and there may have been none at all - so much for economic recovery.

There was one other important piece of information in the report for December that has significant ramifications. Sales at non-store retailers were up over 10% in 2009. Shifting of buying to the Internet is a strong negative for retailers doing business in physical stores, which are still struggling because of the economic downturn. This indicates that commercial lending, currently one of the major weak points in the U.S. banking system, will be even more troubled than it would have been from just the recession alone. Investors should assume more bailout money will be needed and this problem will go on longer than anticipated. However, as the retail sales report shows, government money can prop up an ailing sector of the economy, can make the economic numbers look better, and can create inflation, but it can't necessarily buy a recovery.

Disclosure: Not applicable.

NEXT: Toothless CFTC Tries to Bite Gold and Silver

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.

Short Bonds When Retail Sales Improve

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.

U.S. November retail sales were released on December 11th. The mainstream media described the positive numbers as a 'surprise', which has been the operative word for a number of better than expected government reports lately. The reason they have been a surprise and better than expected is that evidence from non-government sources contradict them. Same store sales for major retailers in the month of November have been generally dismal. Yet U.S. government statisticians somehow found a 1.3% increase in overall retail sales. As I have said many times, the statistics are recovering, it's just the economy that's not doing well.

The November retail sales report is the first one issued using a 'revised' sample. The sample is changed every two and a half years. While reported sales improved after changing the sample (government changes frequently seem to produce better numbers), they were doing well in the preceding few months before the revision. Retail sales were up 1.1% last month and 2.4% in August. The August numbers were the result of the U.S. government's 'Cash for Clunkers' program, a free-money giveaway to U.S. consumers so they could buy cars. Interestingly, the October numbers were up because of auto sales as well, these supposedly increased by 7.1% - and this was after 'Cash for Clunkers' was long over. It is quite amazing the American consumers can keep buying cars and trucks despite high unemployment, an already huge debt load and reduced credit availability. Where does the money come from?

U.S. retail sales numbers are based on a mail survey to 5,000 retail establishments out of a total of as many as three million. The numbers are adjusted for seasonal variation and holiday and trading day differences. Amazingly, they are not adjusted for inflation. So reported retail sales can be higher if the number of sales are decreasing, but prices have gone up. They therefore can indicate more inflation, improved economic activity, or a combination of the two. The place to look to see if inflation is the impetus behind increasing retail sales numbers is gasoline sales. These are approximately steady in volume at this time of year, so a big rise indicates higher prices. And what item in the retails sales report had the largest rise? It was gasoline sales by far. As a further check, U.S. import price numbers for November can be examined. These were released the same day as the retail sales report and are a pure measure of inflation. They were up 1.7%, even more than the 1.3% increase in retail sales.

While the retail sales figures are somewhere between suspicious and a good confirmation of inflation, the market did not react that way. In the short-term traders believe any number published by the U.S. government, no matter how absurd. Gold had a sharp drop when the report came out, although it should have risen on the inflation implications. Stocks and the U.S. dollar went up, although inflation is a negative for them. Bonds sold off and interest rates rose. This is the one safe haven for investors on higher retail sales news, since interest rates will go up because of a better economy and because of inflation, so the reason for the higher retail sales numbers is not important. The long-end of the yield curve will move the most. There are a number of ETFs that the average investor can use to short bonds (or go long on interest rates since interest rates move up when the price of bonds go down), such as SHV, PST, TBT and TMV (listed from least to most aggressive). Interest rates are starting to move up so it looks like shorting bonds is are a win/win trade.

Disclosure: Long gold, TBT, TMV

NEXT: Five Reasons That Gold is Going to Rise: A Response to Nouriel Roubini

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.

A Recovery Reminscent of 1990s Japan

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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Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... Again

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.

The Latest from Fantasy Land

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.

Our Video Related to this Blog:

AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

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.

Market Doesn't Believe Retail Sales Report

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.

Our Video Related to this Blog:

As we have reported in this blog many times, the U.S. government has been blatantly manipulating its economic reports for years now. Nevertheless, the market generally believes them despite their internal inconsistency or the existence of other information that is strongly contradictory. This willingness to believe seems to have broken down today with the release of the Retail Sales Report for January. The numbers were good and way above expectations. Instead of rallying as it should have, the stock market tanked.

According to the government statisticians, retail sales rose 1% in January. The forecast among economists (who can't be trusted either) was for a drop of 0.8%. Perhaps this discrepancy was just too great for the market to buy it. The report furthermore had a big gain in apparel purchases, even though same store sales data for clothing chains showed a big decline. A number of retail industry watchers commented on this discrepancy and other anecdotal evidence that seemed to contradict the government's view. There seemed to be a consensus that the numbers would just be revised downward next month.

Looking inside the report, this is indeed what happened for December's numbers. Originally reported down 2.6% (not 2.7% as most media stories stated), the drop for December is now an even more horrendous 3.0%. The January rise of 1.0% would be from this lower number, or only up 0.6% above the number first reported. The news media always fails to point this out and this leaves a gaping loophole for creating good news where none exists. The real numbers, which are much worse, only come out a month or two later and the media pays little attention to them. There have been cases in other government reports where the revisions downward were so significant that even though there was a 'rise' in the numbers for the current month, the total was actually lower than the first number reported the month before. So even though the numbers are actually declining, they were reported as going up. This does not appear to be the case for the January Retail Report however. The good numbers seem to rely more on the falsification of the figures.

There was one another oddity in this Retail Sales Report as well and that is how it was covered by the news services. Articles were unusually short and details limited - this immediately made me suspicious of course. I had to search to find more extensive coverage (filled with negative commentary from everyone interviewed) and this has not happened before. It will be interesting to see if the new scepticism on the market's part spreads to the even more absurd inflation, jobs, and GDP reports. If it does, when the economic news actually does become better, no one will believe it.

NEXT: Deepening Global Recession Means More Inflation

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.

Retail Sales Plummet, More Trouble in Banks

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.

Our Video Related to this Blog:

Retail sales dropped 2.7% in December, far more than Wall Street's prediction of 1.2% (just another example of how to this day Wall Street is continually underestimating the impact of the Credit Crisis on the economy). For the year, retail sales were down 0.1%, the first drop since the series has been reported by the government. Since retail sales have accounted for approximately 72% of the U.S. economic activity in recent years, whether or not they rise or fall has a strong impact on GDP. Since the Credit Crisis is by no means over yet, clearly indicated by today's news about Citibank, HSBC and Deutsche Bank, retail sales are likely to continue to be weak into the foreseeable future.

The drop in retail sales in December was a record sixth drop in a row. Virtually all areas of retail sales showed declines. Auto sales fell by 0.7 percent and are down 22.4 percent year over year. Excluding autos, retail sales were down 3.1%, the most ever since the report has been published. Retail sales did not drop during the recession of 2001, the only recession in history where this unlikely condition took place (this was only possible because of vast consumer credit expansion at that time which we are now paying for with the current Credit Crisis). When interpreting retail sales figures, it is important to realize that they are not adjusted for inflation. Gasoline sales dropped by 15.9% in December, but this is the result of falling oil prices, not a big decline in actual sales. While some of the drop in the December report took place because of lower prices, most of it did not. On the other hand, much of the gain reported in retail sales in the last several years has been a consequence of price rises and not a better economy.

The Credit Crisis backdrop is not likely to improve any time soon either. Three international banks made the news today. Deutsche Bank announced it expected a $6.4 billion loss for the fourth quarter. A brokerage report cited the need for global bank HSBC to raise up to $30 billion in new capital, citing 57% of its loan exposure was in the troubled UK and US markets. Finally in a deal between the dead and the dying, Citigroup and Morgan Stanley are creating a new business entity consisting of Citigroup's Smith Barney's unit and Morgan Stanley's wealth management (some would say mismanagement) business. Morgan Stanley gets a controlling interest and Citigroup gets $2.7 billion in desperately needed cash.

For many years, Citibank was the largest bank in the United States. If the U.S. government hadn't bailed it out both behind the scenes and more publicly in November 2008, it would possibly already be out of business. Citigroup was created by a merger of Citibank and Traveler's Insurance in 1998. This was hailed as a brilliant move by Wall Street. Only four years later Citigroup spun off Travelers Insurance (many things Wall Street considers brilliant fall apart within a few years or so). Ten years later the financial supermarket approach that Citibank built itself on is disintegrating, much like the entire global banking system.


NEXT: The Real Deflation is Taking Place in Bank Stocks

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.

Eonomics Reports - From Very Bad to Even Worse

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.

Our Video Related to this Blog:

The jobs report this morning was as bad as expected. The stench of economic decay emanating from the figures was unfortunately magnified by a number of other recently released economic indicators. Several days ago, Consumer Confidence for December came in at 38 - an all-time low. Yesterday, many retailers released their same store holiday sales and they were the worst in at least four decades. Lost in today's news about U.S. employment was the Wholesale Inventory report which showed a record decline in sales that blew away the previous record, set only one month ago. While the jobs report was bad enough on the surface, things are even worse than the headline numbers indicate.

The BLS reported that the U.S lost 524,000 jobs in December and the unemployment rate went up to 7.2%. Job losses for November and October were revised upward to 584,000 and 423,000 respectively. The BLS has constantly revised the monthly job losses higher in the two months following their initial release all year long (the press doesn't emphasize or even acknowledge that this takes place). Without further revisions to November and December figures, the total job losses for 2008 is 2.6 million. This figure was last exceeded in 1945, when the U.S. was transitioning from a war time to peace time economy.

In total, 11.1 million people were unemployed in December. This figure does not include part-time workers who can't find full-time work, nor discouraged workers that have just given up looking for a job (the U.S. unemployment rate would be 13.5% if both categories were included). While full-time employment is falling, part-time workers grew to 8 million from 7.3 million in November. As usual, only three categories gained jobs -government, education (which is mostly government) and health care (apparently people are becoming increasingly sick because of the economy). Even though governments at all levels in the U.S are in retrenchment mode, they have continually hired more and more workers all year long according to the BLS. If you extrapolate this trend into the long term, you will see that eventually government will employ 100% of the American labor force. For some reason this makes me suspicious.

Looking at business conditions from the wholesale perspective, an even gloomier picture emerges. Wholesale inventories (goods held by distributors who buy from manufacturers and sell to retailers) fell 0.6% in November and sales fell by a depression level 7.1%. The decline in sales shattered the old record of a 4.5% drop, which was just set in October. Wholesale inventories make up about 25 percent of all business stockpiles. They are a leading indicator of future retail business - and a double digit decline in just two months does not augur well for the economy next spring

NEXT: The January 8th Meeting of the New York Investing meetup

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.

A Black (Plague) Friday for Retail

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.

Our Video Related to this Blog:

Profit for most U.S. retailers is determined by sales from the day after Thanksgiving (known as Black Friday) to the end of the year. There is an old saw in the trade that retailers actually lose money up to Thanksgiving day, and that shopping the next day determines the tone for the holiday season. As of now, that tone looks like it's going to be pretty cacophonous. Retail sales are being hit by a negative wealth effect caused by declining home and stock prices and a reduction in employment and available consumer credit. Without a good holiday shopping season, a wave of retail bankruptcies should be expected next spring - and this is one industry the Fed is not likely to bail out.

This past spring there were eight mostly mid-size retailers that went under, including Sharper Image, Levitz, Fortunoff and Linen 'n Things. In July the department store chain Mervyns declared bankruptcy and on November 11th, Circuit City. Crushing debt levels accumulated during the credit craze days in the early 2000s is what led to the first bankruptcy filings. The high debt load, which is common throughout the industry, combined with a tanking U.S economy will be responsible for the much bigger number of retail failures next year. The set up for Black Friday is bleak. In October, the consumer confidence figures were the lowest on record, literally falling off a cliff. Consumer spending plunged 1%. Same store sales were the worse in 35 years, with apparel retailers generally suffering the most. Discounters, such as Walmart did well however.

Don't expect relief from home prices or the stock market either. The just released Case-Shiller report has U.S. home prices falling 16.6% year over year in the third quarter. The stock market may close the year with the biggest drop on record, although it's too early to make that call. S&P 500 earnings were estimated to be down 21% in October, with financial and consumer discretionary firms bearing the brunt of the losses. Amazingly, brokerage analyst earnings estimates for 2009 have S&P profits increasing 17%, even though many of their own companies are only surviving because they are on the government dole. Recent reports have also indicated hefty outflows from mutual funds, close to 20% of the total so far this year, with investors increasingly losing confidence in the U.S. stock market.

Historians estimate that there was a 35% chance of surviving the bubonic form of the Black Plague during the Middle Ages. Hopefully, the survival rate in U.S. retail will be higher than that. Even healthier chains are closing large numbers of stores however. This pattern is likely to accelerate further and not just because of the bad economy. Rising real estate values have increased rents and have made the break even point for profit much higher than it used to be, just as sales are falling. The Internet of course, offers a cheaper alternative. Expect a lot of empty stores in the future. Also a lot less jobs in the industry. This in and of itself has major implications since retail is the largest employer in the private sector.

NEXT: When Silence Isn't Golden

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.