Economic "Run Down" - Weakness Emerges
Today's flood of economic releases, due to the closure of the markets tomorrow for the Thanksgiving holiday, did not leave a lot to be thankful about. Following yesterday's downwardly revised release of GDP the economic data released today from durable goods orders to the Kansas City Fed are all pointing at renewed weakness in the economic fabric.
Durables orders in October were pulled down by a drop in civilian aircraft orders and a more disconcerting drop in the New Orders index which declined 0.7% for the month which followed a 1.5% decline in September. (Note: Septembers decline was also revised down from the 0.6% estimated decline originally.). The issue with New Orders is that we have seen a degradation of three critical areas for future economic growth and employment across economic releases as of late: New Orders, Backlogs and Inventories.
Drawdowns in inventories, without subsequent replacement, is an indicator of business outlook about the economy due to current demand levels. If businesses are concerned about levels of aggregate demand they began to work off existing stock piles of inventories. While this does provide a potential for a future economic push as inventories are restocked eventually - the message that businesses are sending currently is that the economy is weakening.
In order to keep current employment levels at businesses as new orders for products slow down businesses began working off the backlogs of orders on their books. The weakness in new orders, as shown in the chart above, closes tracks the ebb and flow of the Streettalk Economic Output Composite Index. This EOCI is a VERY broad economic composite index, as we have discussed previously, which is currently pushing levels that have normally been associated with recessions. The weakness that we are seeing in New Orders, Backlogs and Inventories across the spectrum are likely confirming the same.
Kansas City Fed
Confirming the weakness in manufacturing, as discussed above, one of the components of the Streettalk EOCI is the Kansas City Fed Manufacturing region. The report released today for November showed a drop of 50% from last months read of 8 to currently a level of 4. Weakness was exactly where we expected to see it with activity slowing in nondurable goods, production and shipments. Furthermore, new orders and order backlog indexes were negative. As we stated above these two areas do not bode well for employment going forward and the employment index for the region dropped to its lowest level of the year.
Furthermore, the EOCI index will very likely turn down again in November as more and more reports come in confirming that the bump in manufacturing in August and September has likely passed. That bump, which the mainstream media firmly attached to as the resurgence of the American economy, was related to the restart of manufacturing, and the filling of pent up demand, related to the Japanese earthquake. The majority of the effect has very likely run its course.
The University of Michigan Consumer Sentiment index did hold steady in the last half of the month as indicated by a full-month 64.1 composite reading that was little changed from 64.2 in the first half of the month.
However, with oil prices surging in the month, the failure of the "super committee" opening up the potential for more squabbles on capital hill and the Eurozone crisis jumping from country to country like a windblown wildfire, it is extremely likely that the minor bounce seen in November will quickly evaporate. This was also shown in the expectations component, which is the composite's leading component, which fell nearly one point to 55.4.
Furthermore, if you compare November with October, you will find that the very minor improvement in sentiment was loaded entirely in the first half of the month. This potentially confirms our thesis that the impact of higher oil prices, policy debacles and the Eurozone may already be squelching further improvement.
Lastly, the personal income and spending report pretty much confirmed what we already knew. The decline in oil prices in October eased the inflationary pressures mildly on consumers. Food and Energy costs as a percent of Wage and Salary disbursements declined mildly in the month but still run well over 20%. However, the recent surge in November will reverse that effect quickly.
While October did witness a rise in personal incomes this must be kept in context. The year over year change in personal incomes for October is the lower than it was in August and substantially lower than the peak witnessed in February.
As reflected in the recent downward revision to GDP for the 3Q consumer spending slowed markedly. As stated previously the surge in oil prices in November will likely show up in the retail sales data with increases in sales in gas stations particularly heading into the Thanksgiving holiday. However, the rises in personal consumption expenditures are being derived by declines in the personal savings rate. With more and more of disposable incomes going to cover the basics necessities, such as food and energy, it leaves little else for discretionary spending. This is why you are seeing a huge push by retailers to extend the "Black Friday" shopping day to as much as two full days to make up for the shortfalls in spending normally seen in one day historically.
None of these reports today are particularly encouraging. The reality is that the consumer is weak and any disruption from Europe will be quickly felt in the U.S. and the emerging markets. This was the case in point today with the release of the China factory output survey which fell to the lowest level in 32 months. There world is now globally interlinked and while economists and the mainstream media, may want to argue that the U.S. can somehow escape a recessionary drag from Europe - well, there is a possibility the Unicorns exist too.