NEW$ & VIEW$ (1 OCTOBER 2012)


The last of the Mohicans on an eventual U.S. recession is ECRI’s Lakshman Achuthan. Doug Short makes a point of keeping track of Achuthan’s interviews and comments and of his 4 recession indicators. See Doug’s excellent blog for more details but here’s the gist of it:

The latest updates to the Big Four was today’s release of the August Personal Income data (the red line in the chart below), which dropped 0.9 percent over the previous month. As the average of the Big Four indicates (the gray line), economic expansion since the last recession was flat or contracted during three of the eight months in 2012. The average for August, down 0.4 percent, is the sharpest month-over-month decline of 2012. The data, of course, are subject to revision, so we must view these numbers accordingly. When ECRI’s Achuthan made his July assertion that the indicators were rolling over, the data didn’t appear to support the claim. However the latest numbers are showing some troubling signs of reversal.

High frequency stats for U.S. point down (chart explanations)


Punch Here’s my take on the consumer side: first, the facts: 

U.S. Real Take-home Pay Declines But Consumers Keep Spending

Adjusted for price inflation, disposable personal income fell 0.3% during August. On a y/y basis, growth held up at 1.8% but three-month growth was slightly negative for the first time since November. The monthly decline reflected a steady 0.1% gain in nominal terms. That rise equaled the 0.1% uptick in total personal income which followed a downwardly revised  0.1% July gain, originally set at 0.3%. A 0.1% (3.7% y/y) rise in wages followed a like uptick in July and three-month growth was a diminished 2.4%.

Despite the decline in real income, inflation adjusted personal consumption expenditures ticked up 0.1% (2.0% y/y) following a 0.4% July rise. However, showing moderation was three-month growth of 1.4% which was half of that six months ago.

Nominal spending advanced 0.5% (3.6% y/y) during August. Also adjusted for inflation, spending on goods rose 0.4% (3.8% y/y) last month lifted by strength in vehicle sales (10.6% y/y) and home furnishings & appliances (6.2% y/y).

Firm spending growth in the face of a diminished income gain reduced the personal savings rate to 3.7% last month, its lowest since April. However, these figures remain up from November’s low of 3.2%.

Income-squeezed Americans refuse to tighten their belt. When in “need”, they simply dip into their savings. That could be the “savings grace” for the rest of the year.



Wages and salaries have been growing at a 1.7% annualized rate since April and at a slow 1.2% rate in July-August. Extrapolating these trends and accounting for rising state and local taxes (total taxes are up at a 3.0% annualized rate since April), nominal disposable income has effectively stalled. If that trend continues into 2013, i.e. if employment growth does not accelerate meaningfully, monthly nominal disposable income will nearly flatten.

The “Income Cliff”

imageIf so, the YoY growth rate in nominal disposable income will dive from its current +3.3% to +1.6% by March 2013 and +1.2% by June. By then, even a low 3.2% savings rate would not prevent the growth rate in nominal consumer expenditures to decline from its current 3.6% YoY to 2.4%.

The deflator for PCE is currently +1.5% YoY (+2.0% a.r. in last 3 months). Were that trend to extend into 2013, growth in real expenditures would not exceed +1.0% YoY by next June. That would likely trigger a U.S. recession.



High five  Oh! By the way, did we discuss the fiscal cliff? That’s 3 months away now!

Expect Higher Tax Bill in 2013  No matter which party comes out on top in the November elections, nearly every working American is likely to pay higher taxes in 2013 than 2012.

In an effort to stimulate demand and put more money into consumers’ pockets, Congress temporarily lowered the Social Security tax withholding rate to 4.2% from 6.2% for 2011 and earlier this year extended it into 2012. The holiday in the so-called payroll tax is set to expire at the end of this year, and so far neither party has expressed much interest in another extension.

The two percentage point reduction in the payroll tax would reduce government revenue by about $110 billion per year, according to an analysis by PIMCO. (…)

But even if other tax increases aren’t triggered in the so-called fiscal cliff, the expiration of the payroll-tax holiday is going to mean less money in consumers’ pockets next year. For someone earning the 2011 median income of $50,054 that translates into $1,001.08 a year or about $40 less in a biweekly paycheck.

The increase also affects pretty much every working American. While 46% of households don’t pay federal income tax, which is phased out for low earners, just 18% of households avoid the payroll tax, according to the Tax Policy Center. That means even people with low incomes can expect a higher tax bill in 2013. (…)

Pointing up  $110 billion in higher payroll taxes would shave PDI by 0.9%, right from the get go in 2013. The theoretical “fiscal cliff” would suddenly morph into a real life “income cliff”.

Critical chart:


Storm cloud Student-Loan Defaults Mount Again

The Education Department said Friday that of the students whose loans came due after October 2009, 9.1% had defaulted within two years.

imageThat is up from 8.8% in the previous two-year reporting period and almost double the rate of five years earlier.

The report provides a window on a small subset of student loan borrowers, since it only counts defaults that occurred in the first several years of repayment.

The report doesn’t take into account borrowers who have been allowed to postpone payments for a set period due to “hardship,” such as unemployment. (…)

A study released by the Pew Research Center Wednesday showed that 40% of households headed by someone younger than 35 years old have student debt.

The Pew report found that for the lowest fifth of earners in the U.S., student debt amounted, on average, to 24% of household income in 2010—a bigger share than for any other income group.

That was up from 15% in 2007, the year the recession began, since many households lost jobs, took pay cuts and took on student debt in the intervening years.

The Pew report, which used Federal Reserve data, found that among all student borrowers, the average student-debt balance rose by 14% to $26,682 between 2007 and 2010, after adjusting for inflation.

Storm cloud Jobs Outlook Seen Weak as U.S. Companies See Need for Cost Cuts  Weakening demand is forcing new and accelerated cost reductions at companies from Bank of America Corp. and Hewlett-Packard Co. to Staples Inc. and Eastman Kodak Co., dimming the outlook for an already struggling U.S. labor market.

Even as consumer confidence and housing show signs of recovering, sales for businesses in the Standard & Poor’s 500 Index fell 0.9 percent from a year earlier in July through September, the second consecutive quarterly drop and biggest decline since 2009, according to analyst forecasts compiled by Bloomberg. A 1.2 percent gain projected for October-December still is smaller than the 5.4 percent rise in this year’s first three months.

A global slowdown triggered by Europe’s debt crisis is exacerbated by the potential impact of the impending U.S. fiscal cliff of changes in taxes and government spending. All this is pushing finance chiefs back to the drawing board, with some limiting hiring and investment and others slashing more jobs than originally announced. Such belt-tightening will dominate employment prospects for the rest of the year. (…)

Bank of America, the second-biggest U.S. lender, is speeding up a 2011 plan to trim $8 billion in expenses and more than 30,000 positions. Hewlett-Packard, the world’s largest personal-computer maker, will slash 29,000 jobs instead of the 27,000 it announced in May. Staples is accelerating its shutdown of 15 American stores as consumers shift to using fewer traditional office products such as folders.

The share of U.S. chief executive officers planning to add employees or expand investment during the next six months declined in the third quarter compared with April through June, while a bigger share said they’d cut jobs and spending, according to the Business Roundtable survey conducted Aug. 30 to Sept. 14. The group’s economic-outlook index slumped to 66, the lowest since 2009, and the portion of CEOs who anticipate sales will fall more than doubled to 15 percent from the prior period.

Storm cloud Global Trade Slows

Global trade is stalling, dimming prospects that exports will buoy the U.S. economy in the coming months.

The World Trade Organization just projected the global volume of trade in goods would expand only 2.5% this year, down from 5% last year and nearly 14% growth in 2010. A Dutch government agency, the CPB Netherlands Bureau for Economic Policy Analysis, estimates it fell outright in June and July. (…) (Chart below from FT Alphaville)

World trade momentum - 3 month sequential average - Dutch CPB

Global trade had grown an average of 6% a year over the past two decades, faster than the overall global economy, as globalization opened markets and led to integrated global supply chains. (…)

Still, at China’s biggest ports, volumes are falling. Shanghai, the world’s largest port by volume, saw a 6% decline in shipping containers passing its quays in August compared with the year earlier. “Exports continue to be a challenge,” said Ming Mei, chief executive of Global Logistic Properties, which owns warehouses in China and Japan.

Similar pressures can be seen elsewhere in Asia. Sri Lanka had been experiencing strong export growth since the end of the civil war in 2009 and a shift of production away from China where wages are rising quickly. But now it appears the island nation’s apparel exports will drop this year, said A. Sukurman, head of Sri Lanka’s Joint Apparel Association Forum, a trade group, and owner of Star Garments Ltd., a supplier to brands such as Abercrombie & Fitch, Ann Taylor and Lands’ End.

Storm cloud Japan’s manufacturers count cost of high yen
Tankan survey shows deepening gloom among exporters

(…) According to the central bank’s much-watched Tankan survey of business sentiment, published on Monday, the key measure of confidence among big manufacturers slipped to minus 3 from minus 1 in June. That was the fourth straight quarter in which pessimists outnumbered optimists, and the longest string of negative readings since Japan emerged from a long post-Lehman slump just over two years ago.

Just 11 per cent of big manufacturers – defined as having equity capital of more than Y1bn ($13m) – said current business conditions were “favourable,” while less than one-tenth expected favourable conditions for the remainder of the current fiscal year to March.

The strong currency accounts for much of the gloom. Exporters expect the yen to stay below 79 to the dollar, on average, until March. That is little changed from the current rate of about 78, but well short of the levels many need just to break even. (…)

FT Alphaville adds:

And the September business confidence survey by the Bank of Korea yielded a result of 67, down from 71 in August — a fall which Nomura says presages another decline in exports:

Korean business confidence survey + export orders - Nomura
Eurozone crisis hits advertising spending
ZenithOptimedia cuts global forecast

ZenithOptimedia has cut its forecast for global advertising growth this year to 3.8 per cent, compared with its June forecast of 4.3 per cent and its expectation last July that the quadrennial boost of the Olympic Games and the US election would drive growth of 5.9 per cent.

The Publicis-owned media services agency has also cut its forecast for 2013, from 5.3 per cent growth to 4.6 per cent, and for 2014, when it predicts growth of 5.2 per cent rather than 6.1 per cent. (…)

Pointing up The new forecast confirms the growing importance of internet advertising, which is set to rise from 16 per cent of global spending in 2011 to 21.4 per cent in 2014.

Spanish Banks Beat Expectations

A new audit shows Spain would need less capital for its banks than initially estimated, clearing the way for the cleanup of the ailing sector at a time of uncertainty about the country’s finances.

The €53.75 billion ($69.34 billion) figure offered Friday takes into account tax deductions linked to losses and is below the €62 billion estimate Spain gave in June. It will form the basis for the calculation of how much Spain will need to draw from a €100 billion bailout obtained from the European Union. (…)

The stress tests analyzed the ability of the country’s 14 largest banks to absorb losses in an extreme scenario of a 6.5% decline in gross domestic product through the year 2014. They concluded that seven banks would have capital shortfall in such a situation. (…)

The test also assumes that land prices decline 50% through 2014. However, as FT Alphaville revealed, directly from Oliver Wyman’s report:

It is important to note that the new profit generation ability of the banking entities declines in the adverse macroeconomic scenario. However, more of the new profits generated by the entities are used to absorb projected losses under adverse conditions.

In other words, Spanish banks need to generate profits during the next 2 years.

High five  Spain stress tests fail to dispel clouds
Investors wary of how banks will deal with shortfalls

Moody’s take:

However, the recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios. (…)

Spain’s approach is explained with the statement that capital requirements in any stress test must be different in the base and adverse case, because macroeconomic conditions under the adverse scenario have a very low probability of occurrence. Ours, by contrast, measures capital needs against a consistent benchmark under our base stress and adverse stress scenarios. (…)

Money  Money According to our estimates, banks will need between €70 billion and €105 billion of capital to recognize their embedded losses upfront and still meet the 8% or 10% capital requirements established in previous legislation, RD 2/2011. We use different capital thresholds in our stressed scenario (8% or 10%), versus the independent firm’s threshold of 6% in its stressed scenario, along with other methodological differences such as the time horizon for the recognition of losses. (…)

Fingers crossed  In our view, the Spanish government’s success in attracting independent private investors as shareholders to the bad bank will be a good litmus test of whether its asset valuations are sufficiently conservative to restore market confidence. Past efforts to attract private capital to bad banks have failed because investors expect assets to be transferred at a price that would allow for near-term disposition with a reasonable return.

Eye rolling smile  Spain Expects a Wider Budget Gap

The Spanish government said the effort to clean up an ailing banking system will widen its budget gap and increase its debt load.

imageIn its 2013 budget plan presented to Parliament on Saturday, the government said that the bank aid will inflate its budget deficit to around 7.4% of gross domestic product this year, which is above the deficit target of 6.3% of GDP for 2012 it has committed to with the European Union. (…)

Meanwhile, the Spanish government again raised its estimate of last year’s budget deficit to 9.44% of GDP from the previously reported 8.96% of GDP, to take into account measures to help its banks. It is the second time the government restated the 2011 budget deficit.

Lightning  [image]Greek GDP to Shrink Further

Greece’s economy is expected to contract more than projected in 2013, its sixth year of recession, under the weight of the next round of austerity measures demanded by international creditors.

The Greek government sees the economy contracting at an annual rate of 3.8% next year, a senior government official said, in line with private-sector economists’ expectations and suggesting that earlier forecasts from Greece’s international creditors were overly optimistic.


Pointing up  Earnings season starts next week. I have already reported on the very weak guidance since Q2 results came out. ISI calculates that since September 12, of the 30 companies that have commented on Q3 results, 27 have reduced guidance and only 3 upped it.

Analysts Cut Profit 52% as Europe Valuations Hit 2-Year High  Analysts are lowering estimates for European earnings growth by 52 percent, clashing with investors whose confidence in the European Central Bank helped send equity valuations to a 2 1/2-year high.

While the Euro Stoxx 50 Index surged 25 percent over the past four months, matching the three biggest rallies in the past decade, more than 12,000 estimates compiled by Bloomberg show net income will grow 13 percent next year, down from the 27 percent forecast in January. The gauge is trading at 9.5 times next year’s projected profit, near the highest since April 2010. (…)

Estimates for 2012 earnings at Euro Stoxx 50 companies have fallen to 238 euros a share from 268 euros at the start of the year and 251 euros four months ago, according to Bloomberg data. Forecasts for the S&P 500 in 2013 have fallen 2.2 percent in the past four months to $116 a share. Projections for the MSCI Asia Pacific have slipped 1.4 percent to $11.20 per share, Bloomberg data show.

U.S. Steel, Union Make a Deal

The United Steelworkers union said it ratified a new labor contract with U.S. Steel that includes a 4.5% wage hike and bonuses, but also no-strike provisions and greater contributions toward health-care plans.

Under the pact, wages will be increased 2% the first year, effective Sept. 1, 2013, followed by a 2.5% hike effective Jan. 1, 2015. Employees will also receive lump sum payments of $2,000 on Oct. 15, 2012, and $500 on April 1, 2014.

China’s Workers Are Revolting

Migrant workers have been a key contributor to China’s rapid growth—but if employers and policy makers want to attract the next generation, they’ll need to improve conditions.

[image](…) Xin Meng, an expert on China’s labor market at Australian National University, calculates that most rural migrants spend only seven years away from the farm. They arrive in the city in their late teens and return to the country aged around 25 to raise children. Of the 380 million-strong rural population aged 16 to 40, just 100 million are working in the cities.

To see why, look no further than discriminatory policies that deny rural migrants and their families access to the benefits of city life. Ms. Xin’s survey work shows that in 2011, 13% of migrant workers had unemployment insurance and 20% had health coverage—compared with 66% and 87%, respectively, of urban residents. The destruction of schools for migrant children in Beijing in 2011 shows how welcome migrants’ families are in China’s major cities.

Mexico House Passes Labor Reform

Mexico’s lower house of Congress passed a long-awaited labor reform Friday, in the biggest effort in decades to inject new dynamism into an economy where a third of the labor force is employed informally.

New rules proposed by outgoing President Felipe Calderón will make it easier and cheaper for firms to hire and fire, create new types of temporary employment contracts which require no compensation when they expire, contracts involving payment by the hour, and the regulation of outsourcing practices. (…)

“I would expect a big jump in Mexico’s labor productivity. Payments by the hour, for example, will give firms more margin to adapt themselves to clients’ demands,” said Bank of America/Merrill Lynch’s chief Mexico economist Carlos Capistran. (…)

 Study: Generation Y Is Financially Smarter Than Boomers

(…) The article noted that young people are participating more often than before in corporate retirement plans and contacting financial planners more than they used to. They are paying down credit-card debt faster than their elders. (…)

According to a March survey by TD Ameritrade, young people today begin saving at an earlier age than their parents did.

Members of Generation Y, defined as those born from 1977 through 1989 (now aged roughly 23 to 35), reported starting to save for retirement at age 24, on average. Gen X, born between 1965 and 1976, started at age 28.

The boomer generation, born between 1946 and 1964, didn’t start until age 35. And the previous generation, born from 1930 through 1945, reported waiting until age 38. The margin of error on those numbers is 2.2 percentage points. (…)

Data from Fidelity Investments, as well as interviews with young people themselves, make clear that young Americans are choosing to save.

Fidelity notes that automatic enrollment typically starts people at a 3% contribution rate. The average contribution level for people aged 21 to 33 is 6%, suggesting that people are intentionally boosting their savings rate.

 Barron’s Alan Abelson:

We suggest that investors got a shot in the arm from the news that the NFL settled its lockout of the refs by kicking in some more dough and firing the fill-ins whose attention often seemed elsewhere, especially in keeping track of who did what on close plays. It dawned on Wall Street that it’s just the kind of thing that got the masses all riled up and if, heaven forbid, rigid accountability for bad calls spread to the investment arena, it would lead to wholesale sacking of strategists and analysts. Thousands of poor souls would find themselves adrift without notable skills to perform even the most humble of tasks.



I try to post the daily NEW$ & VIEW$ before 10:30am ET. Starting today, subscribers to NTU free daily email will get it earlier. It will now be sent between 11:00am and 1:00pm ET.

Also,welcome to the large number of new readers and subscribers to NTU and thank you to all of you who took the time to comment and write. Red heart

This last one on BofA deserves to be at the very bottom of this post:

BofA Takes New Hit  Bank of America agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co., in the latest financial-crisis aftershock to rattle the banking sector.

Bank of America’s total exposure to crisis-era litigation is “seemingly never-ending,” said Sterne Agee & Leach Inc. in a note Friday. (…)

“We find it simply amazing the sheer magnitude of value destruction over the years,” said Sterne Agee in the note issued Friday. And “the bill is surely set to increase” as the research firm expects the bank to reach other legal settlements over the next 12 to 24 months. Bank of America is still engaged in a legal clash with bond insurer MBIA Inc., which has alleged that Countrywide wasn’t honest about the quality of mortgage-backed securities it issued before the financial crisis.

BofA’s Law of Large Numbers  Investors often downplay the impact of big legal settlements. Bank of America is again an example of why that can be a mistake.

Still, investors should remember just how much litigation is costing. Including the third-quarter charge, the bank has put aside $11.6 billion for litigation expense since the start of 2010. Assuming the bank breaks even in the third quarter, it will have posted net profit for that same period of $2.3 billion.

In other words, without the tax-adjusted litigation expense, profit would have been about three times higher. That doesn’t include $3.5 billion in additional legal costs for things like paying lawyers. What’s more, the bank has incurred substantial, separate costs to deal with demands that it repurchase soured mortgages; the bank has created a separate, $16 billion reserve for such claims. And, of course, such issues are a huge time sink for management trying to turn around the bank.

Although the bank is addressing matters on the litigation front, it still faces a number of legal issues. As Fitch Ratings said Friday, these will continue to create headwinds both in terms of “management attention and earnings generation.”

Cleaning up past messes can prove costlier than investors realize.


2 thoughts on “NEW$ & VIEW$ (1 OCTOBER 2012)

  1. An excellent composite of data. I’d like to comment on one observation –
    “U.S. Real Take-home Pay Declines But Consumers Keep Spending”

    this is a transitory psychological event. real take-home pay may take a dip, but it takes a while before it dawns on the average consumer that he/she must rein in his/her appetites. Appetites do not change directions as quickly as paychecks do.

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