Weldon's Money Monitor
BOOO---YAHHHHH ... the US Unemployment Rate fell to 4.9% during August, matching the 'all-time' low of 4.9% set in August of 2001.
HOOOO----RAAYYYY ... it's all good in the US economy, right ???
You might think SO, given the 'spin-doctoring' of the data by the pop-media, with claims of 'strong employment growth', and rising incomes' airing all over the place. But, to think that would be WRONG. Indeed, despite the fact that Payroll Employment rose 169,000, we contemplate and thus focus on the following tangent facts:
• Working Age Population ... rose 268,000 ... or 99,000 MORE than Payrolls rose.
• August's growth is BELOW the 3-month average of +195,000 ... and by extension, was the LOWEST in three months.
• Ex-Service Sector, Employment has FALLEN for three consecutive months, with a net decline of 52,000 jobs
• Working Part-time for Economic Reasons ... rose +88,000
• Could Only Find Part-time Work ... rose +58,000
• Employed, Less than High School Diploma ... fell (-) 251,000
• Mean Duration of Unemployment ... rose to 18.9 weeks, up from 17.6 weeks on 'average' posted in July and 17.1 in June.
• Median Duration of Unemployment ... rose to 9.4 weeks, up from July's 9.0 weeks, and the 8.9 weeks seen in April.
Further, when we dissect the Household data on Job Creation, we note that the following major component-sectors have posted a DECLINE in Employment over the last 12-months:
• Office and Administrative Support
In the meantime, the following component-industry sectors have posted rising Employment over the last 12-months:
• Natural Resources
• Business and Financial Operations
INDEED, there are several macro-points worthy of note herein:
First, we can CLEARLY see the polarization of wealth/income within the combined facts noted above, as per the sharp DECLINE in those Employed who hold less than a High School Diploma ...
... AND the decline in 'production' and 'administrative support' jobs, usually lower paying fields requiring less specified and intense 'academic' skills ...
... especially, in the era of highly-efficient, cutting-edge productivity gains generated by the automation of production facilities, and office administrative support tasks.
This is EXACLTY what we have been talking about for YEARS ... symptomatic of the FACT that it takes LESS human labor/time input to create the same, or increase, output of goods and services ...
... and ... for less labor input cost.
VOILA ... it's the 'missing-link' ... as pertains to the COMPLETE LACK of wage-income reflation. Continuing in this vein, we also note the areas of actual 'strength':
• Business and Financial Operations Management ... payrolls rose 1,175,000 in the last 12 months
• Construction jobs rose 513,000 in last 12 months
• Natural Resource and Mining jobs soared by 855,000 in last 12 months
What makes this all the more interesting, other than noting the gains in monetarily EFLATED sectors ... is the fact that these same sectors revealed the strongest numbers in terms of Hours Worked, and Average Earnings ...
... against which, we note that the MAJORITY of other sectors, posted outright DECLINES along three data-points, Employment, Hours, and Income:
• Hours Worked, Natural Resource and Mining ... 46.1 hours in August, up from 45.9 hours in July, 45.6 hours in June, and up big from the 44.4 hours worked per week posted last August-04.
• Hours Worked, Motor Vehicle Industry ... 43.1 hours, up HUGE from the 41.4 hours per week posted in May
• Average Weekly Earnings, Construction ... $769.89 in August, up significantly from the $758.93 posted in July, and up $14.09 year-over-year.
• Average Weekly Earnings, Natural Resource and Mining ... $871.88 in August, up HUGE from $851.76 in July, and a monstrous $67.22 per week rise compared to August of 2004, representing a sizable reflation of +8.4% yr-yr.
• Employment, Specialty Contractors ... posted the LARGEST percentage increase during the month of August, of ANY industry sub-sector, by creating 18,300 new jobs during the month. Indeed, an increase in Real-Estate jobs was the second largest, by sector.
Yet, when we look at the broader picture, not including the monetarily reflated financials, construction, or natural resources and real-estate, we see a LOT of NEGATIVE numbers. For example, noting the large increases in Hours Worked posted above, we note the following sectors that posted DECLINING hours worked during August:
• Leisure and Hospitality
• Wholesale Trade
• Private Service Production
Indeed, we could make a case to suggest that even in the LABOR market, reflation is disinflationary, in terms of natural resource and financial paper reflation, versus disinflation in the discretionary-consumption sector.
So, where IS the ... reflation.
Is there reflation ... in savings ??
Is there reflation ... in income ??
Ooooops, guess NOT, since 'real' income is DEFLATING, as is consumer savings, which sits at a RECORD LOW, and, is NEGATIVE. Prior to grabbing the scalpel and dissecting the data, we note the visual aid on display below, revealing the PLUNGE into NEGATIVE territory, and, a new RECORD LOW, in the US Savings Rate (as a percent of disposable income).
GEE, it was NOT long ago that US consumers SAVED ten percent of their disposable income ... indeed, it was as recently as 1994.
Carving the data provides an even MORE OMINOUS picture. Note the data-details extracted from the Commerce Department's report on US Income and Consumption Expenditures:
• Personal Spending ... up +1.0% during the month of July, coming hard on the heels of June's equally large increase of +1.0%.
• Personal Income ... up +0.3% in July, on the back of June's increase of +0.5%
In other words ... the two-month, nominal, cumulative increase in Spending, at +2.0% ... is MORE than TWICE the increase posted by Income, at +0.8% for the two months combined.
Worse yet, the details are WORSE YET.
• Rental Income ... down (-) $3.3 billion ... the second monthly decline, for a total erosion of (-) $ 7.6 billion
• Non-Farm Proprietors Income ... deflated by (-) $3.0 billion during the month, a major shift from June's income increase of + $15.5 billion
And, perhaps most disturbing, given the US consumer's over-reliance on ASSET reflation, for INCOME ...
• Personal Income, Receipts on Assets ... up only + $7.8 billion, or LESS than HALF the rise posted in June, at + $18.0 billion ... representing a single-month a decline of (-) 56.7%.
AND, if NOT for a CUT in income taxes ... the DISINFLATION posted in Disposable Income would have been MORE pronounced. Note:
• Disposable Personal Income, After Taxes ... $27.2 billion in July, down significantly from June's income of $45.9 billion
Indeed, BEFORE taxes, the monthly decline in Income was (-) $25.4 billion, after taxes it was (-) $18.7 billion.
INDEED, with the hurricane re-construction costs putting even more pressure on the fiscal front, at a time when the fiscal front is in full retreat ... does ANYONE seriously believe, that tax cut support for the US worker/consumer will be maintained, into 2006 ???
Thus, there is little reason to seek a turn-around in savings ...
... UNLESS ... consumption deflates dramatically !!!
Note the dour-data-details on US Savings:
• Disposable Income, Less Outlays = Savings ... NEGATIVE (-) $58.8 billion, during July, swinging into the red versus the barely positive + $0.9 billion in savings posted for June.
YES folks, the decline in 'savings' is TWICE the size, in billions of dollars, as is the increase in ALL after-tax income ... in July alone.
Folks, we are talking about an annualized pace of decline in Savings, equal to nearly a TRILLION DOLLARS over a twelve month period, pegged at (-) $708 billion over 12 months.
Clearly, this is unsustainable, and just as clearly, consumption MUST take a 'hit', for this dynamic to 'correct'. It is NOT going to do so, via any expansion in wage-income, as can be concluded via a perusal of the labor market statistics detailed in the first few pages of today's Monitor.
We SPOTLIGHT the following commentary offered within the TEXT of the report issued last week by the Commerce Department ...
... "Negative personal saving reflects personal outlays that exceed disposable personal income. Savings from current income may be near zero, or negative, when outlays are financed by borrowing, or selling investments or other assets."
YES, it is that last passage that piques our macro-interest, ala the thought, that IF debt-creation were to become more difficult for the average consumer (ie: if the Fed goes to far, with rate hikes) ... then ... in order to maintain consumption patterns ...
... the consumer might be tempted to SELL his ASSETS ...
... which of course, offer the ONLY source of 'income reflation' currently available, AND, the only places in which US wealth has been 'stored'.
Thus, we note some other OMINOUS statistics related to Savings:
• Savings has now declined by a WHOPPING (-) $106.4 billion in just the last two months.
• Savings has declined in six of the last seven months
• Savings has DEFLATED by a monstrous (-) $462.2 billion over that seven month period, covering the year-to-date since January 1st.
YES, savings being depleted at a HALF TRILLION over the last seven months, also, like the month-month rate, equal to a near ONE TRILLION DOLLAR PER YEAR PACE, pegged at (-) $792 billion.
In total, on an annual, year-to-year basis ... the US Savings Rate has plunged from +2.1% in 2002 ... to +1.8% in 2003 ... to +1.2% in July of last year ... and has collapsed in 2005, now pegged at just +0.3%.
And, worse still:
• Disposable Personal Income in Chained 2000 US Dollars, has PLUMMETED during the year-to-date, falling from a total of $8.393 trillion as of the end-4Q 2004 ...to $8.172 trillion in July.
In other words ... 'real', non-monetized, Disposable Personal Income has DEFLATED by nearly a QUARTER TRILLION DOLLARS in the year-to-date (minus $221 billion to be exact).
And, the icing on the cake comes in the form of a disinflating Personal Consumption Expenditure Core Deflator, which has slipped back below the 2% level over the last two months, and in the process, has broken down, by violating the low seen in early 2004 ...
... and ... as can be seen in the chart visible at the top of the next page, the core PCE Deflator appears to have PEAKED, in line with previous secular peaks, in the 2.5% region. This is perhaps the MOST influential inflation indicator, in terms of monitoring the prospects for further Fed tightening, basis inflation vigilance, and, it has just turned from 'red' ... to 'yellow'.
AND, the Income and Spending report covers JULY ... long before the word Katrina had become one associated with death and destruction. We cannot imagine, given the $4.25 per gallon price for gasoline charged this weekend in NYC ... that consumers will be SO willing to spend MORE than they earn, in September.
Fitting right in line with RECORD LOWS in US Savings, we also note the RECORD PLUNGE in the Chicago PMI, as a precursor to a MOST informative national ISM Report released on Friday. IN fact, the ISM Survey is particularly 'enlightening' since it gives us HARD CORE evidence as to exactly HOW the consumer responded in August, as per the less-than-stellar Payroll data, and the still-to-come Katrina Disaster.
Thus, we find the 'action' in Imports as highly significant, for its SEVERE and ACCELERATING erosion, right in line with the entire macro-theses we laid out in our post-Jackson Hole Greenspeak-Monitor. Observe the evidence ala the chart on display below, revealing the SHARP decline and violation of the macro-uptrend in place since the lows set in 2001.
We can more clearly define the Import-reflation trend ... utilizing the smoothed 6-Month Moving Average, plotted in the (shortened-time frame) chart displayed below.
VERY clearly ... a double-top, a breakdown, and a trend violation.
Better yet, we grab our trusty macro-data-scalpel, and CARVE baby, to note:
• Differential Between ISM Import Index and ISM Headline PMI Index (Import index minus PMI):
Feb-05 ... plus + 5.4 points (Imports 'over' PMI)
Mar-05 ... plus + 3.7 points
Apr-05 ... plus + 3. 4 points
May-05 ... plus + 2.5 points
Jun-05 ... plus + 0.4 points
Jul-05 ... minus (-) 1.9 points
Aug-05 ... minus (-) 0.2 points
Not only has the Import Index PLUNGED from a reading of 60.7 in February, but it has PLUNGED below the Headline PMI for the last two months in a row ... and, moreover, making August all the more significant, the negative differential was 'achieved' via a monthly decline in BOTH indexes.
Observe the relative declines in ISM indexes posted since February:
• Production ... down (-) 0.8 points
• PMI Headline Activity ... down (-) 1.7 points
• Supplier Delivery ... down (-) 3.4 points
• Employment ... down (-) 4.8 points
• Export Orders ... down (-) 4.1 points
• Imports ... down (-) 7.4 points
And, while the Price Index had been far below its March peak of 73.0, plunging to a sub-50 reading of 48.5 last month, it soared once again in August, on the back of rising petro-prices, spiking by 14.0 full points, to 62.5. Indeed, more on prices, later.
Observe the visual angle, provided by the charts on display below. First, we note the history of the ISM Headline Activity PMI, revealing that a break below the May low of 51.5 would not only take the index perilously close to a break of the 50 level, but it would also violate the uptrend in place since the 2001 low.
And noting the chart perspective offered below, we observe the smoothed 18-Month Moving Average of the ISM Headline Activity Index ... dating all the way back to 1965. A rough, seat-of-the-pants analysis suggests that directional moves in this longer-term moving average tend to last a couple of years. Further, the latest uptrend was steep and prolonged, perhaps the third sharpest rise EVER recorded, and, it appears to have PEAKED. Note that each of the previous steep increases, and downside reversals, were followed by DEEP and prolonged DECLINES.
Dissecting the 'Manufacturing at a Glance" section of the Survey, we note HEAVY use of the word "slowing". In fact, within the "Rate of Change" series as applied to each of the Indexes, out of 13 possible replies, TEN are reported as "Slowing" ...
... while the ONLY one that is reported as "Faster" ... is the INCREASE in inventories !!!
The other two includes Prices, reported as "Increasing From Decreasing", hardly a 'positive'.
The ISM goes so far as to use the word "slowing" when it describes the likely result as per 3Q GDP prospects, as generated by the current ISM index readings, again, implying a SUB-1% rate of annualized growth in 'real' GDP.
Observe the 'violence' of the swing between positive, and negative, as per the breakdown of replies contained in the New Orders index survey:
• July ... Percent Reporting Higher Orders, 32% ... more than TWICE the Percent Reporting Decreasing Orders, pegged at 15%.
• August ... Percent Reporting Higher Orders, 29% ... barely one-third more than the Percent Reporting Decreasing Orders, which JUMPED to 21%.
• New Orders Index ... plummeted by 4.2 points during August alone.
• Production Index ... plunged by 5.3 points during August alone.
Hence, and worst of ALL, the impact on Employment is NEGATIVE:
• July ... Percent Reporting Higher Employment, 18%, down 2 percentage points from August ... but, still, almost TWICE the Percent Reporting Lower Employment, pegged at only 11%.
• August ... Percent Reporting Higher Employment, 16% ... barely higher than the Percent Reporting Less Employment, which JUMPED to 14%.
SO, taking it all together, we have ...
... a dramatic slowdown in new order flow, which, given the build in inventories, has immediately fed thru to slowing output, which is weighing on an already 'heavy' labor situation, thus crimping import demand.
We have NO basis to expect a true, 'real', economic-reflation.
Yet, we DO have the basis to expect further DISINFLATION in consumer paper-asset-wealth-reflation, coming from BOTH sides of the aisle, as applies to the consumption-affordability side, AND the corporate-margin-labor-support side.
We have ... raw material price REFLATION that is DEFLATIONARY.
We have ... the exact scenario we have LONG feared, and discussed.
We evidence the very first page of the ISM Survey, and the text of the commentary carried in the second paragraph of the report:
... "This month's comments from supply managers indicate a great concern over recent new highs in the energy commodities. Many express concerns as to whether current business strength can be sustained if high energy prices persist."
The individual comments contained in the "What Respondents are Saying" section of the report, are more 'acute' and specific. Note:
"... Concerned with oil prices, and the impact on the products we buy" ... from Electronic Component and Equipment business.
"... The worry is interest rates and oil prices. These two items will eventually stall future growth." ... from Fabricated Metals biz.
"Employee pricing in the automotive market has created a ripple-effect in the supply chain." ... from Textiles.
Indeed, what we 'hear' ... is that final goods deflation only serves to intensify the pressure on margins, amid intermediate and production based businesses.
What we hear ... is a cry for help, in terms of the COMPLETE LACK of final demand pricing power.
Let's get out our chart-spotlight, and focus on the intensifying inflation in a variety of commodities, from oil to metals and softs, we find the 'usual suspects' acting up again.
Clearly, our LEAD focus remains Natural Gas, a commodity that we have been bullish on for not only the last few weeks, but for the last few months, and years as well. Note the action from last week, which, despite wild downside gyrations, ended with prices at NEW ALL-TIME RECORD HIGHS.
Worse yet, the 'technical pattern' detailed in the chart above strongly suggests that Natural Gas has only just now broken out to the upside, and begun a whole new leg, in an ongoing, secular, bull market.
Here again, like with Gasoline, where our $3 per gallon thoughts of three years ago were met with ridicule, we ask ... why not, $20 Natural Gas ???
For sure, the supply-demand situation was NOT nearly as INTENSE on each of the last four occasions when the 6-week rate-of-change in Natural Gas prices, to the upside, occurred, as evidenced in the chart below.
In other words, the odds that the price inflation ends now ... are very LOW.
Thus, the odds of a macro-land-mine detonation ... are increasingly HIGH.
AH HAH ... few seemed to have noticed, that the hurricane disaster has impacted the Copper market as well, driving the red-eco-metal to yet another ALL-TIME RECORD HIGH, as evidenced in the weekly chart below.
GEE, does anyone really think this is something the Fed should use, as a reason to HIKE rates further, as a sign that the economy is about to reflate, as might be implied by the metal with the PhD in Economics ???
Certainly, NOT. Not as would be otherwise implied by the FACT that, relative to the price of Crude Oil, Copper currently sits near NEW ALL-TIME LOWS ... as seen in the chart on display below, in which we plot the ratio.
Indeed, on this basis we might be tempted to call copper ... cheap.
Okay, so how about $5 Gasoline, $20 Natural Gas, and $2 Copper ??
Okay, how about $1000 ... per ounce ... for Platinum ???
Indeed, almost there, as noted in the chart below. In fact, we have to ask ourselves, can it be REAL, can we be sitting here talking $1000 Platinum as we once suggested, upon the introduction of the Monitor way back in 1998 ??
Again, like Natural Gas, on a long-term macro-basis we COULD suggest that it is only just now breaking out to the upside, by violating the 1980 high.
But also, here too ... in the parallel universe, where inflation becomes DISINFLATIONARY ... we observe that even with Platinum breaking above its ALL-TIME SECULAR BULL MARKET HIGH set in the last great reflation rally of 1971-1981 ... Platinum, at nearly $1000 per ... is really, breaking DOWN ...
... relative to Heating Oil, as implied in the chart below (using Heating Oil to capture a longer historical perspective, since HO traded on the NYMEX long before CL futures were introduced).
We CAN, and will say it ... at $1000 per ounce, Platinum is disinflating.
And, not to be left out, another major player in previous periods of rampant commodity reflation, we note that Sugar is making a bid to join the party, as defined in the weekly chart perspective offered below, revealing last week's push above the ten-cent per pound level.
Taking a longer-term look at Sugar, defined by the Monthly chart on display below, we ask ... why not, and Gasoline at $5, and Natural Gas at $20, and Platinum at $1500 ... why not 20c per pound for sugar ???
What the heck, since we are already taking some literary latitude today, why not ... 400 for the CRB Index, which is pressing to NEW HIGHS, breaking out above the previous multi-year high set this past April.
Indeed, here again ... even with the CRB Index surging and threatening to violate its ALL-TIME HIGH of 337.60 set during the November of 1980 ... we could say, that the CRB Index is in the midst of a MASSIVE DEFLATION, relative to the energy complex ...
... as defined in the long-term, macro-monthly chart on display below, in which we plot the CRB Ratio relative to the energy-heavy Goldman Sachs Commodity Index, or GSCI.
On this basis, the CRB is making a NEW ALL-TIME LOW, and, more ominously, is breaking BELOW the level seen during the DEPTHS of the ECO-DEMAND DEFLATION ... and ... HOUSING MARKET DEFLATION ... experienced during the 1973-74 mini-depression, a situation caused by, gasp, a spike in energy.
But there is more, much more ... as we note the ominous looking chart on display below, in which we plot the ratio between the S+P 500 Stock Index, and the CRB Index. We could say that relative to commodity price inflation, the 'eco-derived-value' of the stock market has NOT reflated at ALL.
As per the SAME S+P/CRB Ratio chart, on display below, we note the intriguing Fibonacci 'grid' overlaid to cover the entire bull market reflation from the early eighties. This chart strongly suggests that a breakdown in the S+P relative to the CRB, below the previous low, would represent a DEATH BLOW to the US consumer, margin versus wealth wise, as defines the consumer's ability to service debt sans income reflation ... without a sharp slide in consumption.
Unless commodity prices are ARRESTED NOW ... the overlay chart below might provide a horror-show idea of what kind of wealth disinflation might be in store for the US consumer, as defined by the paper equity market.
So, $20 Natural Gas, $5 Gasoline ...and 800 for the S+P 500 ????
The questions are ... will the Fed move to diminish the odds of the afore mentioned price matrix, and if they do, will an end to the rate-hike campaign be effective enough to offset the rising disinflationary tide ???
In terms of the question, will they ??? ... we note the chart below, as the market moves to price in an END to the Fed rate hike campaign, by the end of this year, at the latest.
BUT, will an end to rate hikes, help sustain asset/wealth reflation as the SOLE source of 'income' growth, needed to maintain consumption growth ???
We look at the incredibly TIGHT credit spreads as an outlier, a macro-anomaly implying LESS turbulence, rather than reflecting the intensifying cost-competitive environment, to which the US consumer may fall victim. Thus we note the potential breakdown in the spread plotted in the chart below, detailing the path of the Goldman Sachs Corporate Bond Index, relative to the US 10-Year Note (price).
BINGO ... note the final chart of the day.
In this unique and intriguing picture, we overlay our Ratio spread plotting the Goldman Sachs Corporate Bond Index relative to the US 10-Year Treasury Note ... against ... the S+PM 500 Stock Index ... on a weekly basis dating back to the introduction of the Goldman index in 2002.
Clearly, a further 'weakening' in the Corporate Bond market relative to Treasuries would bode ILL, for the overall wealth reflation in US equities.
Sure, crude is lower today, and Gasoline prices are already dropping at the pump ... all the way back down to $3.10 in New Jersey, from this weekend's quote of $3.25, and they could head back below $3 ...
... but, let's not so quickly forget, they were never above $2.75 to begin with, before the latest surge.
Even another FIFTY-CENT decline in Gasoline prices would NOT undo the damage already done, consumer sentiment wise, and for SURE, a decline in energy prices will do NOTHING in terms of sparking wage-income reflation.
The US consumer is hurting, he knows it, and yet is putting on a brave face. We only wonder how that face looks once the summer sunshine fades, and the pale prospect of winter, and holiday shopping, begins to emerge.
We remain bullish on the USD, Gold in foreign currencies, and continue to expect the US Yield Curve to flatten, amid brightened prospects for both the long, and short-end of the US Fixed-Income market.
Further, we are VERY wary in terms of the US stock market, and continue to seek the technical set-up needed to promote a bearish campaign.
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