NEW$ & VIEW$ (1 OCTOBER 2013)

More Than 800,000 Federal Workers Are Furloughed


Shutdown Would Cost U.S. Economy $300 Million a Day: IHS

Lexington, Massachusetts-based IHS, a global market research firm, estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia. (…)

Bank of America Merrill Corp. projects that a two-week closing would curb fourth-quarter growth by 0.5 percentage point, while closing for all of October would shave 2 percentage points from GDP, Ethan Harris, co-head of global economics research, wrote in a note to clients. (…)

While federal employees were repaid after the 1995-1996 furlough, a longer shutdown may prompt them to start paring their spending.

“Each day the shutdown drags on, the more federal employees will discount the possibility that they won’t get back to work anytime soon, and they will pull back on their spending,” Mark Zandi, chief economist at Moody’s Analytics Inc., said in an e-mail.

Few Parallels With Most Recent Shutdown

The country’s most recent shutdown, 17 years ago, offers at best a rudimentary road map for what may happen.

(…) “The biggest difference by far is that the last one was all about spending, and this one is not. It’s about policy,” said former North Dakota Sen. Byron Dorgan, who was in the Democratic leadership at the time.

The budget fight in late 1995 and early 1996 between GOP House Speaker Newt Gingrich and Mr. Clinton was bitter and at times dramatic. But it was at heart a fight over taxes and spending, and it began and ended with protracted negotiations between the two sides.

Neither is the case today. As the price of a budget deal, congressional Republicans demanded a delay in the implementation of President Barack Obama’s health-care law, a position that Mr. Obama and Democrats have said was nonnegotiable.

“The difficulty here is that Republicans have no achievable endgame,” said Daniel Meyer, a former Gingrich chief of staff who went on to serve as White House liaison to the House for President George W. Bush. (…)

Many who had ringside seats last time say they are struck by how different the main actors are this time.

In 1995, Mr. Gingrich was a central force, while the current House speaker, John Boehner, is struggling to shepherd an unruly GOP caucus.

In the Senate, Majority Leader Harry Reid, a Democrat, remains a steadfast ally to Mr. Obama and has no reason to give ground on the health-care law. Mr. Dole, on the other hand, was running for president in 1996 and wanted to broker a compromise.

Minority Leader Mitch McConnell, who has a record of deal-making in the Senate, now faces a primary challenge in his home state of Kentucky and has little interest in antagonizing his base by opposing efforts to curtail the health-care law.

Mr. Gingrich is equally mystified over how this might end.

Republicans, he said, “have an establishment wing that would like to see this all end and go home and do something nice. And we have a fighting wing that wants to force real change. That is a very deep split.”

According to the Congressional Research Service, there have been 17 federal government shutdowns since 1977, most lasted only a few days, none lasted more than three weeks, and none caused lasting damage to the economy. (FT)

Chicago PMI Kicks Off the Week on a Positive Note

While economists were expecting the headline reading to come in at a level of 54.5, the actual level was 55.7.  This was enough for the highest level since May’s reading of 58.7.

Of the index’s seven sub-components, this month we saw month/month increases in five components while Employment and Prices Paid were the only categories that showed declines.  Relative to a year ago, today’s report was equally as impressive.  Here again, Inventory and Prices Paid were the only two categories that declined relative to last year’s reading, while the remaining five categories are higher now than they were last year.

Employment Outlook Still on Track for Tapering

Politics aside, the trend in employment remains paramount in handicapping the odds of QE tapering. Accelerating monthly payroll gains prompted the Fed to act in early ’94. Monthly payroll gains have averaged 184k in the last 12 months, a level inferior to ’94. However, the
surge in small business hiring intentions could accelerate the pace of job gains in 2014 and set the stage for tapering (see Exhibits 5 and 6).


In addition, weekly jobless claims hit 305k last week and the four-week average currently stands at 308k. Granted there have been some data distortions earlier this month, last week’s number was distortion free. The current level of claims is the lowest since May 2007 and the sub-300k territory is in sight. As highlighted in Exhibit 7, the pace of monthly payroll gains tends to accelerate when claims dip under 300k. (NBF)


Amazon to Hire 70,000 Workers
For Holiday Selling Season

Amazon plans to hire 70,000 seasonal workers for its U.S. warehouse network this year, a 40% increase that points to the company’s upbeat expectations about the holiday selling season.

The online retailer expects another 15,000 temporary hires in the United Kingdom, a 50% increase over the prior year. (…)

Amazon’s holiday hires—totaling 85,000 for both the U.S. and U.K.—tops the stated plans of major competitors.

Wal-Mart, for instance, said this week it will add about 55,000 seasonal workers this year and Kohl’s Corp. is targeting 50,000. Target Corp.’s estimated 70,000 in seasonal hires is 20% lower than last year, the company said, reflecting the desire by employees to log more hours at work.

U.S. small business borrowing rises in August, slowly

(…) The Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1 percent to 116.6, the highest level since August 2007. The index registered 115.4 in July, revised from an initial reading of 117.7, PayNet said on Tuesday.

Historically, PayNet’s lending index has correlated to overall economic growth one or two quarters in the future. (…)

Because small companies typically take out loans to buy new tools, factories and equipment, more borrowing could signal more hiring ahead.

But the sluggish pace at which borrowing is increasing makes accelerated growth in jobs unlikely, PayNet President Bill Phelan said. (…)

Delinquencies of 31 to 180 days fell in August to an all-time low of 1.48 percent of all loans made, according to the Thomson Reuters/PayNet Small Business Delinquency Index.

Accounts overdue as a percentage of all loans have fallen steadily since rising as high as 4.73 percent in August 2009.

Restaurant Performance Index declines in August

From the National Restaurant Association: Restaurant Performance Index Edged Down in August Amid Fading Operator Expectations

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 100.7 in August – up 0.6 percent from July and the first increase in three months. In addition, the Current Situation Index stood above 100 for the fifth consecutive month, which signifies expansion in the current situation indicators.

A majority of restaurant operators reported positive same-store sales in August, and the overall results were an improvement over July’s performance. … Restaurant operators also reported stronger customer traffic levels in August.

Apartment Market Tightens as Housing Costs Jump

The average monthly rent in the third quarter was $1,073, up 1% from the prior quarter, the largest quarterly gain in a year, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. Compared with the third quarter a year ago, average monthly rent was up 3%. None of the 79 markets tracked by Reis saw rents fall.


The rental increases were stronger than industry watchers expected and represent a turnaround from the past several quarters when it appeared that rent growth was slowing, reflecting falling demand for apartments as more families decided to buy homes. But as mortgage rates jumped over the summer, following big increases in home prices, the rising cost of homeownership has priced many families out of the housing market. (…)

New York City remained the nation’s most expensive market in the third quarter, with average rents climbing 2% from the prior year to an average $3,049. But cities in the West had the strongest rental growth, particularly in technology-centered cities. Seattle led the nation with a 7% rent gain when compared with a year earlier, for an average rent of $1,124; San Jose, Calif., saw rents climb 5.2% to an average of $1,686.

Some argue that rents can’t keep climbing at the current pace. In the past five years, rents have risen 7.6% nationally, according to Reis, and in excess of 10% in some markets.

(…) But there’s another reason why some expect the rent increases to slow: a flood of new supply on the horizon. Some 170,000 new units could hit the country’s largest 54 metropolitan markets this year—about 120,000 have already been finished—followed by 190,000 in 2014 and 300,000 more units in 2015-16, according to Luis Mejia, director of multifamily research for CoStar Group, a real-estate data firm. (…)

During the third quarter, the national vacancy rate—which hit 8% in the aftermath of the financial crisis—slipped to 4.2% from 4.3% in the prior quarter and 4.7% a year ago. (…)

Pointing up  Speaking of housing, KB Homes’ recent results revealed a 20% YoY drop in new orders per community. KBH’s California order growth dropped 35% YoY and its unsold spec home count surged 64% sequentially.

Bumper Crop Stalks Corn

Corn prices have tumbled 37% this year, making the grain one of the worst-performing U.S. commodities. Many investors are wagering that prices could fall even further as farmers harvest what looks to be a record crop.

The weak market for corn comes just 13 months after prices soared to a record settlement of $8.3125 a bushel as the worst U.S. drought in decades battered the Farm Belt. The high prices prompted farmers to plant the most corn acreage in 77 years this spring, and weather has been mostly favorable for growing the yellow kernels. Meanwhile, demand for U.S. corn from foreign buyers and ethanol producers has been sluggish.

As a result, corn futures in September dropped to their lowest level in three years. On Monday, corn for December delivery fell 2.8% to $4.4150 a bushel on the Chicago Board of Trade. That was the lowest closing price for a front-month contract since Sept. 2, 2010, and down 47% from the record last August.(…)

The U.S. Department of Agriculture estimated on Sept. 12 that the corn harvest will total a record 13.8 billion bushels, 28% larger than last year’s crop and 5.7% greater than in 2009, the prior record.

Corn prices tend to hit their lows of the year during the harvest, which is in its early stages in the Midwest, analysts said. Weather forecasts indicate little chance of an early frost that could hurt yields. About 12% of the harvest was completed as of Sept. 29, according to the USDA.


Goldman Sachs Group Inc. recently forecast that corn prices will fall to as low as $4.25 in the next three months. Many money managers, meanwhile, are betting on lower prices. Bearish positions in corn futures held by managed funds outnumbered bullish bets by 126,345 contracts as of Sept. 24, compared with a 104,211 advantage for bearish bets a week earlier, according to the U.S. Commodity Futures Trading Commission.

Smile Further declines in corn prices could have broad repercussions. The lower prices will benefit poultry and livestock producers that feed the grain to animals, as well as packaged-food companies. That should temper price increases in the grocery aisle.

Sad smile But cheaper corn will pinch farmers’ profits, potentially leading them to curb purchases of farm equipment, and to switch next year to planting other crops.

High five Some experts think corn prices are poised to climb. They argue that U.S. exports, which have been weak due to last year’s high prices and competition from rival grower Brazil, could pick up soon as lower prices tempt buyers in Asia.

Some analysts also say market participants may be overestimating the size of this year’s crop, citing chilly, wet weather this past spring.

“There was a fair amount of corn that, because of the cold rains in the spring, wasn’t planted,” said Kelly Wiesbrock, who tracks agricultural companies as a portfolio manager at San Francisco investment adviser Harvest Capital Strategies LLC. “The number of unplanted acres isn’t going to go down. So my sense is that the price of corn has bottomed.”

Euro-Zone Recovery Is Tepid

Eurostat, the European Union’s statistics agency, said Tuesday that unemployment in the euro zone edged lower for a third straight month in August. But the small improvement in the number of unemployed people to 19.178 million in August from 19.183 million in July wasn’t enough of a change to affect the rate, which held steady at 12%—just below the high of 12.1%.

The jobless rate rose in Italy, to 12.2% from 12.1%. It stayed at 26.2% in Spain, indicating continued suffering for households in that country and ongoing pressure on the government’s finances.

There were some brighter spots in the raft of releases, however.

The unemployment among under-25-year-olds edged down to 23.7% in August from a record of 23.8% in July and June.

Germany’s Unemployment Unexpectedly Rose in September

The number of people out of work climbed a seasonally adjusted 25,000 to 2.98 million, after gaining by 9,000 in August, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to the median of 27 estimates in a Bloomberg News survey. The adjusted jobless rate rose to 6.9 percent from 6.8 percent.

Italy in Disarray as ECB Pledge Keeps Nation From Brink

Italy’s government is on the verge of collapse and two of its most senior executives have lost the confidence of shareholders. Thanks to Mario Draghi’s promises, bond investors see the turmoil as more of a blip than a crisis. (…)

Without Draghi “little would have stood in the way of catastrophe,” Nicola Marinelli, who helps oversee $180 million as portfolio manager at Glendevon King Ltd. in London, said in an e-mail. “Italy would be facing very high refinancing rates, difficulties in issuing bonds at auctions, and the clear prospect of going out of the euro or defaulting on its debt.”




Devil  Let’s all realize that central banks are now playing backstop for inept politicians in all the Western World. Politicians can play all their games without worrying about their economic or financial consequences. The Fed was pretty open about that after the last FOMC when it admitted that possible government shutdown and debt ceiling crisis were part of their worries. Politicians no doubt noticed that.

Europe’s Car Makers Face Aging Population

European populations are getting older, driving less and turning to car-sharing, suggesting woes will continue for car makers like Ford, Renault, Opel and Fiat.

(…) Some industry executives and consultants warn that Europe’s economic crisis isn’t just sparking a temporary downturn in car sales, but is also accelerating a more fundamental decline in consumer appetite for cars—a decline that may presage more plant closings, job cuts and economic pain well into a broader recovery.

A combination of factors—rising fuel prices, more-durable vehicles, the car’s decline as a status symbol and fewer youth getting licenses, among them—has made buying new cars less of a habit for Europeans.


While some of those factors are playing out in the U.S., where auto sales have roared back to pre-slump levels, there is one difference: America’s driving-age population is still growing, while the number of driving-age Europeans is projected to shrink. (…)


IHS Automotive, an auto-industry forecaster, predicts European passenger-car sales will climb to 14.7 million vehicles in 2020, 8% short of their 2007 peak, from an estimated 12.2 million this year.

Some car makers see a glimmer of hope, arguing that sales have fallen so far in six years that Europeans will fuel a modest recovery when they replace aging cars. The average car age in Europe’s top five markets climbed to 8.7 years in 2012 from 7.9 years in 2009, according to the Roland Berger Strategy Consultants. (…)

More than any other of those structural trends, demographics is working against Europe. In the U.S., the population aged 15 to 65 is set to expand well past 2020, according to United Nations data.

The same population in Europe, in contrast, appears to have peaked in 2011, because of decades of declining birthrates, and the U.N. projects that it will contract 1.4% over the next decade.

A 2012 Morgan Stanley report projected that Europe’s aging population alone could depress sales by 400,000 cars a year over that period. (…)European youth who are coming of driving age also are less inclined to operate and own cars.

Across much of the developed world—including in the U.S.—fewer young adults have been getting their drivers’ licenses than in previous decades, according to a study by the University of Michigan Transportation Research Institute.

But many young adults in Europe appeared to be turning away from cars faster than youth in the U.S. even before the crisis. In Europe’s biggest markets—Germany, France and the U.K.—the under-30 crowd used cars for a smaller proportion of their total travel as of the mid-2000s than they did in the previous decade, according to research by BMW AG’s Institute for Mobility Research; Americans under 30 used cars for about the same proportion of their travel over roughly the same time period, it found. (…)

Such shifts have been especially pronounced in crisis-stricken parts of Europe, where unemployment has stolen legions of entry-level car buyers. But even in car-adoring Germany, Europe’s strongest economy and largest car market, the share of new cars bought by those under 30 fell to 2.7% of total auto sales in the first half of 2013 from nearly 6% in 1999, government data show; the population size of that age group remained roughly the same over that time.

Even before the crisis, young Germans’ attachment to cars appeared to be waning. Among households of people aged 18 to 34, 72% owned one or more cars in 2008, down from 80% in 1998, according to German-government data analyzed by the BMW research group.

Europeans, like Americans, also have been driving fewer miles per year since the mid-2000s, reducing wear and the need to replace cars as often. (…)

Europe’s dense public-transportation system has made it easy for Europeans to forgo owning cars. So has a surge in car-sharing services, from companies such as Avis Budget Group Inc.’s Boston-based Zipcar Inc. and ride-sharing networks such as Paris-based Blablacar that offer an option to drivers who don’t want to own cars. (…)

Some auto executives suggest that Europe’s aging population and economic woes mean its car market may come to look like that in Japan.

There, decades long economic stagnation and a declining driving-age population have suppressed annual car sales to 30% below their 1990 peak. 

(…) with a factory-capacity glut already—and Europe’s demographic and other long-term challenges—AlixPartners’s Mr. Aversa predicts the industry will likely have to cut capacity equal to another five to seven plants in Europe over the next five years. Even that, he says, would fall short of the roughly dozen factories it would need to shut to be profitable.

Some union leaders agree that the combination of trends may mean their workers’ pain will continue past any modest recovery. (…)

US carmakers happy to feel growing pains
Just four years after rescue, the issue now is meeting demand

(…) Demand in the US for cars is running almost 80 per cent higher than in 2009, when GM and Chrysler were forced into government-managed bankruptcies.

Growth for the Detroit Three has been particularly rapid as sharp improvements in their product line-ups have helped Ford and Chrysler regain lost market share and GM maintain its position.

However, the restructuring – in which GM alone closed three assembly plants, on top of three in the previous two years – is also forcing manufacturers to cope with systems whose capacity is significantly smaller than before. Manufacturers, which made tens of thousands of workers redundant during the downturn, are now struggling to recruit and train staff fast enough to meet the resurgent demand.

Pointing up  Be careful not to fall into the simple extrapolation trap. The CalculatedRisk chart below shows that car sales are back to their previous 4 cyclical peaks if one accepts that the 1998-2007 levels were boosted by the irrational exuberance that characterized those years and are unlikely to repeat anytime soon.

Unilever warning knocks consumer shares
Group highlights emerging market weakness

Shares in Unilever fell by the most in two years on Tuesday after the world’s second-largest consumer goods group issued a profit warning, blaming the slump in emerging market currencies.

The maker of Ben & Jerry’s ice cream and Dove soap said it expected underlying sales growth of just 3 to 3.5 per cent in the current quarter, compared with 5 per cent in both the first and second quarters.

More than half of Unilever’s sales – 57 per cent – come from emerging markets, including India, Thailand, Brazil and Russia, which have seen their stock markets and currencies fall this year because of concern about the timing of the US Federal Reserve’s decision to wind down its easy-money policies.


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