Archive for February 25, 2010

The Great Wall Of Humpty

February 25, 2010 2 comments

The big storm we were supposed to get rages on, I suppose. So far, it is underwhelming – due predominantly to the fact that the temperature today was well above freezing, which tends to limit accumulation. The 18-24 inch total that my town was supposed to receive is less than a handful of inches at this point. Isn’t it just like meteorologists to neglect thinking about something like the temperature?

In related news, stock market investors continue to do their best to neglect thinking about the macroeconomy. Stocks took a dive early today, with the S&P down around 20 points early on, as the economic data surprised on the negative side for the third day running. At some point, a repeated occurrence starts to look like a trend, and while I am not too impressed by the big miss in Durable Goods (core durables -0.6% versus expectations for +1.0%, although with an upward revision to the prior month it doesn’t look as bad but the trajectory worse), the surprise in Initial Claims probably should no longer be a surprise. With economists guessing an improvement to 460k…continuing to refuse to believe the last month’s worth of data…Claims instead worsened to 496k. Since this was the survey week, expect some changes to economists’ forecasts for February Employment, due next Friday.

The rise in Initial Claims is getting quite hard to ignore. Not only is the series failing to continue to improve, it arguably may be worsening again (see Chart, source Bloomberg).

Not yet definitively heading higher, but definitively not heading lower!

This is actually more alarming than you might think, even if the true rate of ‘Claims is around 450k-475k. Why? Because that is just where Claims were prior to September 15, 2008, when Lehman declared bankruptcy. In other words – all of the “improvement” we have seen in the data over the last year has done nothing but retrace the unsustainably-bad data we saw immediately following the financial calamity. All of the king’s horses and all of the king’s men haven’t managed, despite all of the liquidity added and all of the government spending thrown away bravely committed to the fray, to improve what was the underlying condition of the economy prior to Lehman. Payrolls, too, show the same thing: in the six months ended July 2008, the nation lost 144k jobs per month; in the most-recent six months, 128k per month (with Dec and Jan yet to be revised).

Until now, the rejoinder to that observation could have been “but in August and September 2008, things were worsening; now, they are improving, so they are just ships passing in the night.” That argument seems a little more forced when the recently-improving trend – in employment, housing, confidence – has stopped improving.

To the list of things that have stopped improving, we must add the fortunes of corporate America. The stock market has seemed tired and aimless recently, although at the current level the S&P is still beneath where it was in the summer of 2008 (mid-1200s), so maybe it’s cheap (just kidding…it was just really rich back then!).

It may be that we have just hit one of those inevitable ebbs and flows in the data. But I am struck by the fact that we have hit a wall right here…right about where Humpty originally fell off it. I suppose I should have anticipated that; to the extent that government spending crowds out private spending (which it does by sucking all of that money up when it issues bonds), there should be no lasting effect from that government spending unless it alters economic incentives sufficiently (and salutatory changes in economic incentives tend to derive from tax changes, not from spending changes). I’m just surprised it seems to have worked that way so cleanly.

In the natural cycle of things, eventually, people get tired of hunkering down and start to look for things to change for the better. If the government merely stays out of the way, the natural tendency of people to believe that bad times eventually get better will lead to organic economic growth. So far, we can’t seem to trust the government to stay out of the way, however. We needed one or two of the Fed actions (although it wasn’t clear at the time just which ones until they finally created the Commercial Paper Funding Facility and bank liquidity improved almost overnight), but I wonder how much better off we would be right now if Congress had just stayed out of it.

On Friday, economic data includes the unexciting revisions to Michigan Sentiment and Q4 GDP. No major revisions to these data are expected. More interesting are the Existing Home Sales for January (Consensus: 5.50mm from 5.45mm), which economists still think will bounce in the same story as the New Home Sales reasoning went: a big plunge last month on the original expiry of the homebuyer tax credit should be retraced this month. Or so they say. As before, this is sort of a one-sided risk: a bounce is roughly expected; a continued deterioration is bad news.

The first good look at February data, in the form of Chicago PMI (Consensus: 60.0 from 61.5). The last print was higher than any reading in 2007, before the crisis…but remember that this is a rate-of-change measure. Business that is recovering from a deep recession should be improving at a high rate. It would be very disturbing, but consistent with the other recent data, to see Chicago PMI back into the mid-50s although that would represent a large decline indeed.

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