Paper Money - A US Real Estate Bubble Blog

Production Pullback: Industrial Production December 2008

Posted: 16 Jan 2009 09:04 AM CST

Today, the Federal Reserve released their monthly read of industrial production showing truly dramatic declines to the aggregate production and widespread declines across many industries, particularly those related to consumer spending, construction and business vehicles, resulting in a significant year-over-year decline to the total index of 7.82% as compared to December 2007 and a 2.00% decline since November.

"Final product" consumer durable goods continue to show weakness falling 21.12% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the 32nd consecutive month by 23.18% on a year-over-year basis.

Construction supply production has been showing the most severe contraction seen in at least the last 20 years with wood products falling 22.19%.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.

Question(s) of The Day - Will the Feds Ever Learn?

Posted: 16 Jan 2009 07:24 AM CST

I hate to belabor this point BUT…

As of mid-December Paulson was "…expecting no other major financial institution to fail…"

So, what about today's $138 billion bailout of Bank of America?

Wasn't this one just too obvious?

Countrywide Financial was a complete sham and Merrill Lynch was a disaster waiting to happen… Kenneth Lewis must resign in disgrace no?

Now the Obama Administration is looking to revive the Paulson's old "Bad Bank" concept… Will the government ever learn from its mistakes?

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey January 2009

Posted: 15 Jan 2009 03:08 PM CST

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for January showing a continued deterioration of the regions manufacturing sector with the current activity index indicating substantial contraction at –24.3.

The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.

As you can see by the following chart (click for larger version), during the past three post-recession expansion periods, the "current" diffusion index generally vacillated between 0 and 35 while the "future" index left the period of contraction at an elevated level and eventually joining the "current" index.

Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the "current" index generally indicating that recession is upon us.

As you can see from the charts below, and now having been officially confirmed by the NBER, the business outlook survey again very accurately predicted the start of the current recession and further continues to indicate contraction.

Also, today's results now certainty show that any recent parallel to the stagflationary eras of the 70s and early 80 have given way to a stronger stag-deflationary force bringing down prices, new orders and employment simultaneously.

The following chart shows the latest results of the "current new orders" "current prices paid" and "future employment" components (click for larger versions).

Notice that that current orders, future employment and current prices paid are all now trending down.

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.

Mid-Cycle Meltdown?: Jobless Claims January 15 2009

Posted: 15 Jan 2009 02:23 PM CST

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted "initial" unemployment claims increased 54,000 to 524,000 from last week's revised 470,000 claims while "continued" claims dropped 115,000 resulting in an "insured" unemployment rate of 3.4%.

It's important to note that although the last several reports have indicated a slight decrease in the seasonally adjusted initial jobless claims, the non-seasonally adjusted numbers are showing very large increases.

The following chart shows the recent trend in non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both "initial" and "continued" (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows "population adjusted" continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows "initial" and "continued" claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a "monthly" average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.

Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a "flattening" period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the "mid-cycle slowdown" where for various reasons growth has generally slowed but then resumed with even stronger growth.

Until late 2007, one could make the case (as Fed chief Ben Bernanke surly did) that we were again experiencing simply a mid-cycle slowdown but now those hopes are long gone.

Adding a little more data shows that in the early 2000s we experienced a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing "initial" and "continued" unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

The most notable feature of the post-"dot com" recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

It is now completely clear that the potential "mid-cycle" slowdown that appeared to be shaping up in late 2007, had been traded for a less severe downturn in the aftermath of the "dot-com" recession, and now has we have fully entered, instead, a mid-cycle meltdown.