RECESSION WATCH: This is getting more serious.
US economic growth revised down, and downward revisions are never a good sign.
Economic growth in the US for the second quarter was revised down from an annualized rate of 1.7% to 1.3%, the lowest since the third quarter of last year. The slowdown was evident across businesses and consumers: business investment growth slowed from 7.5% in the first quarter to 3.6%, while growth of personal consumer spending slowed from 2.4% to just 1.5%. (Markit)
Lance Roberts at streettalklive has a great analysis of the revisions. One excerpt:
Exports, as discussed previously, have made up roughly 40% of corporate profits since the end of the last recession. The recent announcements by CAT, FDX, NSC, UPS and others, all discussed the rising weakness with international trading partners – primarily in the Eurozone and China. Not surprisingly we saw a decrease of $0.3 Billion in exports in 2Q GDP. This was a 110% decrease from the previous estimate of a $3.1 billion increase. This decrease in exports is very important as it relates to current forward earnings estimates and the belief that the U.S. can remain decoupled from the rest of the world. The following chart shows this is clearly not the case.
Real final sales, which measure GDP less the change in private inventories, also slipped back below the recessionary warning line as expected. Historically, whenever the year-over-year change in real final sales has fallen below 2% the economy has been in, or was about to be in, a recession. The 2011 recessionary warning of final sales was averted by the “mother nature”effect, as we have discussed previously, as the impact of an unseasonably warm winter, falling energy prices, and the restart of a post-Japanese earthquake manufacturing shutdown, all collided to give the economy a boost. Those tailwinds are not currently in the cards of rescuing the economy this time around.
Orders for long-lasting goods fell sharply in August in the US, according to official data. Orders fell 13.2% on the previous month, a near record fall and the largest seen since the record 14.3% decline in January 2009. Orders, excluding volatile transportation goods, were down 3.3% in the three months to August compared to the prior three months, and with its forward-looking properties, suggest an ongoing deterioration in the manufacturing output trend.
These orders data suggest that manufacturing looks set for the worst quarter for three years in the third quarter, possibly stagnating, which is similar to the downbeat message from business surveys such as the PMI.
Lance Roberts keeps scaring us:
The chart below shows the annual changes in Durable Goods Orders as well as Nondefense Capital Goods Ex-Aircraft. Historically, when the annual rate of change of these two indexes have simultaneously printed a negative reading the economy was in, or near, a recession. As of the most recent report Durable Goods Orders showed a -6.7% annual decline while Nondefense Capital Goods showed a -3.1% decline.
(…) looking at core capital expenditures using a 3-month change of the annual rate of change – we can clearly see a weakening economic environment. Historically, when this indicator, like so many others, has declined below -2% the economy has either been in, or was about to be in a recession. Today, this indicator sits at -4.07%.
Unsurprisingly, orders lead actual outlays…
…but also hirings …
…and corporate spreads. Hey, you, high yield seekers, you’ve been warned!
The heightened danger of a business cycle slump that follows from a protracted shrinkage of new bookings for core capital goods is reason enough for creditors to demand greater compensation for default risk. Indeed, the record clearly indicates that the high yield bond spread tends to widen when core capital goods orders decline. (Figure 4.) (charts from Moody’s)
But don’t totally despair. This chart from Doug Short reveals a small uptick in DGO ex-everything-falling!
Next week, we get September final PMIs.
Slowing growth in China is taking a brutal economic toll on Appalachian coal mines, which have rich deposits of high-grade coal used to make steel.
(…) Now, the Chinese economy is slowing and so is its steel industry. That has sent the price of coal used for steelmaking down nearly 50% to $170 a metric ton. Those coal producers who counted on Chinese sales are reeling. (…)
China’s metallurgical coal imports dropped to 2.6 million metric tons in August, from an average of 4.5 million metric tons per month through July. Now coal mines are closing throughout Appalachia.
In Appalachia, average mining costs are about $65 to $75 per ton. A ton of thermal coal is currently selling for $52 a ton on the spot market, making it impossible to operate some mines at a profit.
Before the China steel market took off, metallurgical coal was valued much like thermal coal and was often sold to power plants where it was burned like lower-grade coals. (…)
That changed with China’s industrial boom. Up until 2004, the price for metallurgical coal stayed below $40 a ton in the U.S. Prices hit an all time record of $330 a metric ton in the second quarter of 2011 after flooding in Queensland, Australia, disrupted coal supplies headed for China. (…)
Now the China spigot is closing. The Chinese steel industry—which consumes half of all metallurgical coal mined each year—faces the possibility it could operate at a loss in 2012 for the first time as a result of overcapacity and weak steel prices, according to the China Iron & Steel Association. That would mean tougher times in West Virginia, where rail, barge, trucking and other jobs depend on coal.
(…) Hit by headwinds from overseas, Japanese industrial production in August was down 1.3% from a month earlier—a much steeper drop than the 0.4% forecast of economists surveyed by Dow Jones Newswires and the Nikkei, and the fourth decline in the past five months. The core consumer price index in August was down 0.3% from a year earlier, the fourth straight month of decline, as deflationary pressures continued to act as a drag on the economy. (…)
On a positive note, retail sales in August were up 1.8% from a year earlier, after a fall in July. Auto sales led the way, up 20%, while machinery sales were off 10%.
Mizuho Research Institute economist Hidenobu Tokuda warned that domestic demand, which had been supporting production as overseas demand weakened, was also likely to weaken, particularly after budgeted funds for subsidizing fuel-efficient vehicles finally ran out last week. The subsidies had helped boost car sales.
The euro-zone economy has probably entered recession, according to the latest Eurocoin indicator, while a jump in the inflation rate limits scope for further monetary policy easing.
The London-based Centre for Economic Policy Research and the Bank of Italy said on Friday that their Eurocoin indicator—which provides a monthly estimate for economic growth in the euro zone before publication of official quarterly gross domestic product figures—rose to -0.32% in September, from -0.33% in August.
The gauge has pointed to a contraction in the euro-zone economy in each of the three months of the third quarter. The measure also indicated a drop in GDP in each of the three months of the second quarter. (…)
In a separate report, the European Union’s official statistics agency, Eurostat, said on Friday consumer prices in the 17-nation currency bloc rose by 2.7% in the 12 months to September, up 0.1 percentage point from the annual pace of inflation in August. (…)
France’s statistics agency Insee on Friday said consumer spending dropped in August from July, as households in the euro zone’s second-largest economy reduced purchases of appliances and clothes.
And now this:
(…) According to documents presented at the weekly cabinet meeting Friday, the government expects its revenue from household income taxes to rise 23% next year, while revenue from business taxation is expected to rise almost 30%. (…)
The budget is built around a growth forecast of 0.3% this year, with the economy expected to pick up in 2013, when it is forecast to expand 0.8%.
From the FT:
The official forecast of 0.8 per cent growth next year is above most independent forecasts, but Mr Moscovici said: “I am certain that if Europe steadies, then we are going to achieve this 0.8 per cent or more.”
The budget forecast that French public debt would peak at 91.3 per cent of GDP in 2013, falling steadily to 82.9 per cent in 2017. It predicted growth of 2 per cent in each of the years from 2014 to 2017 when Mr Hollande has pledged to eliminate the deficit for the first time since 1974. (…)
The government said the burden of €10bn in new taxes on business in 2013 would fall on big companies, mainly through the removal of various tax deductions and exemptions: small and medium-sized companies are to be spared.
Likewise, the €10bn to be raised from households will hit top earners – 90 per cent of taxpayers will see no increase, the government promised.
Hmmm…and now that:
(…) The finance chief of Volkswagen AG, one of the region’s strongest car makers, warned this week that not all the region’s auto makers could survive without government aid. (…)
Fiat Chief Executive Sergio Marchionne said a painful restructuring of the European industry looks inevitable. (…)
“What was feared to be a bank contagion has now become a consumer confidence contagion and an unemployment contagion,” Ford of Europe Chief Stephen Odell said. “This is now gaining its own momentum and going in a direction people didn’t think it would go.” (…)
European auto sales are on track to drop for the fifth year in a row. Last month, registrations of new cars in the European Union fell to their lowest monthly level since the European auto makers’ association started collecting the data in 1990. (…)
Europe has eight million more units of capacity to cut (…)
Spain unveiled a package of regulatory overhauls, tax increases and spending cuts for 2013, gaining a short-term market reprieve as concerns mount over Prime Minister Rajoy’s ability to stabilize the economy.
(…) Spending will actually rise by 5.6% under the new measures, which include €13 billion ($16.7 billion) of tax increases and spending cuts. The spending increase is largely the result of a 34% rise in debt-servicing costs, as the government shied away from making some politically difficult spending cuts. (…)
See the spiral in action?
Madrid promised to implement a long list of EU policy recommendations, including the elimination of overlapping regulations set by different levels of government, further loosening of rigid labor laws and placing limits on early retirement.
It also promised to set up an independent agency to monitor budget policy and to offer new tax incentives for small businesses.
Speaking at a news conference after the government’s weekly cabinet meeting, Finance Minister Luis de Guindos said the government continues to study the possibility of an aid request.
“The government is in contact with the countries involved…to see what the different possibilities are and how they would work,” he said.
In addition, Spain announced that it will take around €3 billion from the state’s pension reserve fund. (Rajoy Raid on Reserves for Pensions Highlights Poll Needs)
(…) “Emerging and developing economies account for the bulk of global growth now, so if there is a substantial slowdown in emerging and developing economies, it doesn’t bode well for the recovery,” said Abdul Abiad, deputy chief of the IMF’s world economic studies research department. (…)
The relative calm of the past two years could well be temporary, however, as there is a “significant risk” that advanced economies could experience another downturn, the fund said in one of the analytical chapters of the IMF’s World Economic Outlook. (…)
South Korea’s factory output fell for a third consecutive month in August as strikes in the automobile sector and two typhoons slowed business activities, paving the way for the central bank to deliver another policy rate cut.
Industrial production fell a seasonally adjusted 0.7% from a month earlier in August, following a revised 1.9% drop the preceding month, according to Statistics Korea. In June, industrial production also fell by 0.5%.
The Ministry of Strategy and Finance said in a statement that the weak factory output was due largely to a partial strike by auto workers who had scaled down the production in August by 116,000 vehicles.
Two typhoons that hit the country in August also led to sluggish investment in production facilities and construction, said the ministry statement. (…)
The new leading indicator, a closely watched reading to predict economic conditions ahead, edged down to 100.1 in August from the preceding month’s revised 100.3. A reading above 100 suggests conditions are likely to improve.
“The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices,” said Bank of Korea Gov. Kim Choong-soo. “Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations.” (…)
The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen (an academic adviser to the People’s Bank of China) said. This contributes to a monetary-policy dilemma for Chinese authorities, he added. While markets have looked for signs of more forceful action by China’s leaders to rekindle growth, some officials attribute the government’s caution to fears of reigniting inflation.
“On the one hand, China needs to stabilize growth, but on the other hand China is very worried about a property-price rebound,” Mr. Chen said. (…)
The Federal Reserve has now embarked on a very dangerous strategy, buying $40bn of mortgage-backed securities each month for an indefinite number of years. That could lead to high inflation, to destabilising asset bubbles and to legislative changes that limit the Fed’s future powers. (…)
In short, the ECB, like the Fed, is now locked into a high-risk strategy.
The European Central Bank should not impose extra economic conditions on nations using its bond- buying mechanism, and the International Monetary Fund shouldn’t have an oversight role, said Italian Prime Minister Mario Monti.
Sure, just give them the money!
SME confidence slips again in third quarter Confidence among small and medium-sized enterprises dropped further in the third quarter, as the country’s economic growth continued to slow down.
The SME confidence index stood at 46.71 percent, down 7.44 percentage points on the previous quarter, according to the bank’s research.
Rial continues to fall despite use of multiple-rate currency system
The tightening of US banking sanctions and an EU ban on oil imports since July have caused the the rial to fall more than 50 per cent against the US dollar since the beginning of this year. (…)
The bank, in co-operation with the industries and mines ministry, launched a “currency trading centre” through which importers of essential commodities, such as meat, sugar, vegetable oil, grain and medicine, can trade in US dollars at the official rate of IR12,260.
This is less than half the rate on the open market, where one US dollar bought IR26,880 rials on Thursday. (…)
Natural gas prices leapt to their highest level since December to cap a rally that has sent the fuel up 19% since last week, as stockpiles grow more slowly than analysts expected and the onset of the winter heating season looms.
The surge highlights the striking reversal of fortune in the natural-gas market. On April 19, concerns about booming production had left prices down 36% for the year. But since then the cost per million British thermal units has shot up 73%, to $3.297 on Thursday.
Through March and April 2012, new$-to-use gave many hints that this looked like a true “buy low-sell high” case. No longer.