NEW$ & VIEW$ (17 OCTOBER 2012)


U.S. inflation trends are critical at this stage. With nominal disposable income growth in the 2.5-3.0% range, small variations in inflation mean a lot for consumers and the whole economy. Most pundits rapidly dismiss non-core inflation even though food and energy are large budget components that have a meaningful influence on discretionary spending when income is as tight as it is.

The first pair of charts below (left YoY, right MoM) shows CPI-Food, rising 1.6% YoY in September and at a 1.6% annualized rate during the past 3 months. Not a big threat short term.

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The next charts are for gasoline, up 6.6% YoY  and at a 83% a.r. over 3 months. Gas prices have retreated a little in the past two weeks but they remain 8% above last year. Gas prices declined 8% to $3.22/g between October and December 2011, requiring a big drop from the current $3.75/g average in order for the CPI to ease much from here.

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In addition, core CPI is not as soft as most people say:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.6% annualized rate) in September. The 16% trimmed-mean Consumer Price Index increased 0.2% (2.6% annualized rate) during the month.

Over the last 12 months, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, the CPI rose 2.0%, and the CPI less food and energy rose 2.0%


The median CPI has been rising at a steady 2.4% annualized rate over the last 3 months.

Also, keep in mind that total CPI is a key component of the Rule of 20 equity valuation method. Rising inflation hurts P/Es.

Where Are Consumers Getting Income to Spend?  In some ways, consumer behavior is back to where it was before the Great Recession. But consumers’ behavior seems irrational given sluggish income growth.

Personal income increased just 3.5% in the year ended in August, and wages and salaries alone were up 3.7%, according to data collected by the Bureau of Economic Analysis.

The average weekly paycheck isn’t even keeping up with inflation. Real weekly pay is down 1.3% since it peaked in October 2010, according to the Labor Department.

To explain the disconnect, some economists are wondering whether government measures of total income may be undercounting how much money consumers have to spend on cars, homes and iPhones.

That idea shows up in the examination of tax-witholding data done by two separate economists: Jim O’Sullivan, chief U.S. economist at High Frequency Economics, and Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research.

After adjusting for tax-law changes, Mr. O’Sullivan found the 13-week average of withholdings for employment-based income is rising 4.5% over the past year. That is almost one percentage point higher than the BEA’s tally of the increase in wages and salaries over an equivalent time period. (…)

Ms. Schnapp looked at daily income-tax withholdings over two-month periods to smooth out volatility. She found yearly withholding growth has accelerated by 2.1 percentage points since June, hitting 5.1% in the August-September period. In comparison, yearly growth in BEA’s wages and salaries has hovered around a slower 3.5%.

Looking at the data, Ms. Schnapp found the BEA methodology misses growth when the economy shifts gears, either speeding up or decelerating. (…)

Maybe, maybe not. Will we ever know? Meanwhile, the savings rate is declining, suggesting that Americans, once again, have difficulty accepting lower standards of living.

Storm cloud  U.S. Industrial Production Weak in Q3

imageUS industrial production rose a stronger-than-expected 0.4% in September. However, the fall in August was larger than previously thought, with output slumping 1.4% against a previous estimate of -1.2%
after Hurricane Isaac disrupted oil and gas production in the Gulf of Mexico. The latest improvement therefore largely reflected a 1.5% rebound in utilities’ output.

Looking at growth over the latest three months to remove some of the volatility in the monthly numbers, industrial production fell 0.1% in the three months to September compared with the previous three months.
That represents the first quarterly decline for three years.

More importantly, manufacturing production rose just 0.2%, highlighting ongoing sluggish growth of US factory output. A 0.7% drop in production in August was also revised to show a larger, 0.9%, decline. This also means manufacturing output fell 0.1% in the third quarter.
The weakness of manufacturing means that the goods producing sector is likely to have acted as a drag on economic growth in the third quarter, offsetting some of the positive contribution which is expected from rising
personal expenditure. (Markit)

Pointing up  One little noticed positive: Construction rose 1.3% after edging up 0.1% in August. This 1.4% gain since August is the first positive after 3 miserable months (May-July) during which construction output dropped 2.7% (11.2% a.r.). A revival in construction is absolutely necessary for employment to accelerate.


Open-mouthed smile  US house builder sentiment at 6-year high

Hopefully, builder sentiment is a leading indicator.


FRED Graph

Here’s what will boost starts:

Inventory Frustrates Buyers, But Lifts Sellers’ Prices

Housing inventory continues to move in one direction: down.

The number of homes for sale in September dropped by 2.2% from August, by 17.8% from last year, and by 34.3% from two years ago, according to data from, a listings website.

Slightly more than 1.8 million homes were listed for sale in September, the third lowest level of the year, behind January and February, which are traditionally the slowest months of the year for home sales.

Median asking prices rose by 0.8% in September from August.

Just out this morning:  Surprised smile  Sep Housing Starts:+15% to 872K vs. 765K expected and 758K (revised) in Aug. Permits 894K vs. 810K expected and 801K (revised) in Aug

872,000 !

Smile  U.K. Unemployment Declines as Payrolls Surge to Record: Economy  U.K. jobless claims unexpectedly fell and payrolls rose to a record high as the London Olympics helped boost hiring.

UK total employment levelThe number of people in work surged 212,000 to 29.6 million in the quarter through August, the highest since records began in 1971. The surge in payrolls was led by part-time hiring. While the number of people in full-time employment rose 88,000, part- time employment jumped 125,000.

The decline in claims was the third consecutive drop and it left the claimant-count rate at 4.8 percent. The June-August jobless rate measured by International Labor Organization methods declined to 7.9 percent, the lowest in more than a year, from 8.1 percent. (Chart from Scott Barber)

Confused smile  Spain Aid Hits Obstacles  A potential Spanish request for financial aid is becoming caught up in tangled diplomacy between euro-zone capitals, despite Madrid’s new willingness to push ahead.

Ah! Europe!

(…) Spanish officials say they want to be sure that other euro-zone countries will accept their aid request before they make it, because a “no” could trigger renewed turmoil in markets. Germany is balking, Spanish officials say.


German officials insisted Spain hadn’t indicated it wants aid.


Aides to German Chancellor Angela Merkel have admitted in recent weeks that they would rather Spain didn’t ask for aid. Among the chancellor’s concerns, say people familiar with her thinking: An aid request, and ECB intervention, might only stabilize markets for a few months. After that, Spain might need a bigger bailout, and markets might train their sights on Italy.

And in any case,

German officials said Tuesday that they see no signs that Spain is closer to asking for aid. Spanish Prime Minister Mariano Rajoy reassured Ms. Merkel in a phone call on Tuesday that Spain isn’t about to make the request, said people familiar with the matter.


Moody’s Investors Service said Spain’s sovereign-debt rating remains investment grade, concluding a review by the ratings firm that some had feared would result in a downgrade to junk status.

Fiscal union highlights EU divisions  Summit agenda issues still subject to major debate

EU leaders are set for their first big debate this week on a German-led push to establish a fully fledged fiscal union for the eurozone, with serious differences remaining between Berlin, Paris and other capitals on many of the key components.

A separate eurozone budget, single European banking supervision, binding budget contracts for eurozone member states, and some form of jointly backed borrowing to finance a eurozone treasury are on the agenda for the European summit, although no decisions are expected. (…)

But this week’s summit is only intended as a first discussion, with final decisions in December. (…)

December of what year?

Thailand Surprises With Rate Cut

The Thai central bank follows its counterparts in South Korea and Australia, which have also cut rates in recent weeks.

The central bank’s Monetary Policy Committee lowered the one-day repurchase rate to 2.75%, its third cut in the past year but the first since January.

“The easing monetary stance is meant to cope with escalating risks” from the global economic slowdown, BOT Assistant Gov. Paiboon Kittisrikangwan told a news conference. “Going forward, the impact from weak exports will eventually weigh on income, consumption, and investment… Global economic risks could reduce [Thailand’s] economic momentum to a level that may not be sufficient to sustain growth.”

French toast! Martini glass

Crédit Agricole to Sell Greek Unit

Crédit Agricole said it will sell its Greek banking arm Emporiki to Alpha Bank for €1 ($1.31), and said its bottom line will take a hit of €2 billion as a result of the sale.

Winking smile  The FT is now writing tombstone:

Citigroup – Pandit’s legacy
Outgoing CEO’s record is terrible, but few could have done better


3 thoughts on “NEW$ & VIEW$ (17 OCTOBER 2012)

  1. Great site, better than calculated risk, less rah rah, better on capital markets….

    A lot of us find Strauss & Howe’s “The Fourth Turning” a useful analytical framework. Don’t shy away from distributional issues, they are key.


  2. spending habits learned over a decade are not readily renounced just because of a change in income, just as an overweight person does not change their eating habits despite health issues.

    (this can also be seen in reverse where people who grew up in the depression remained cautious with their money, even when it became more plentiful.)

    Unfortunately, this appetite for expecting to obtain more than you can afford (both personally and from the government) dooms us to really bad economic consequences down the road.

  3. think’s make HMMM …
    thank you for your analysis correct
    spending (untill the people have some reserve) will be ok after finish this reserve than really will come the shock ..
    usefull your article
    have a nice day

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