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Sub-par Income Can Not Cap Spending, Savings Rate Near 5 Year Lows

“Despite expectations that following several months of subpar income growth offset by rampaging spending and thus a plunging savings rate, March incomes would rise by 0.4%, while spending would be flat, this did not happen, and instead both spending and incomes rose by the same amount, or 0.2% in the past month. Worse, when adjusting for inflation, real disposable income rose just 1.1% compared to last March, and just barely above the 0% breakeven. On the other side, real spending was up 2.2% Y/Y just barely above the 2% recessionary threshold. And even that number is misleading as spending on Total Goods (including durable, already known as being quite abysmal, and non-durable), dropped by $32.8 billion in nominal dollars. What was the offset? Why a massive surge in consumption expenditures on services, which rose by $53.8 billion, which absent the spending aberation for September 11, 2001, which was reversed in the following month, was the biggest monthly increase on record! What drove this record services spending spree is anyone’s guess.

Durable Goods spending- down:

Non-Durable spending- also down:

… but Services Spending- up, up, up… Record up in fact:

Real disposable income: oops.


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Confidence Falls More Than Expected in Europe

Economic confidence in the euro area decreased more than economists forecast in April as the 17- nation currency bloc struggled to emerge from a recession and the bailout of Cyprus renewed debt-crisis concerns.

An index of executive and consumer sentiment dropped to 88.6 from a revised 90.1 in March, the European Commission in Brussels said today. That’s the lowest since December. Economists had forecast a decline to 89.3, according to the median of 26 estimates in aBloomberg News survey.

Business confidence and investor sentiment in Germany, Europe’s largest economy, dropped more than expected in April. European Central Bank President Mario Draghi said on April 19 that the economic situation in the bloc hadn’t improved since the beginning of the month. At the same time, Draghi expects the economy to recover from a recession later this year and economists forecast growth in the second quarter, a separate Bloomberg survey shows.

Today’s survey “supports other evidence that the euro zone is experiencing its longest recession on record,” said Jennifer McKeown, senior European economist at Capital Economics in London….”

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Old Man Buffett’s Favorite Indicator Has Ground to a Near Halt

“After a big first quarter rail traffic has come out of the gate extremely soft in Q2.  The average pace of year over year expansion in intermodal traffic was a very healthy 5.3% in Q1, but has averaged just 0.08% so far in the first 4 weeks of the second quarter.  This is a trend that has been developing since early March as the pace of expansion has averaged just 2.11% since the first week of March.  Overall, that brings the 12 week moving average to 4.01%.  That’s still a healthy pace, but the recent slowing is a trend worth keeping a close eye on.  If rail traffic is any indicator it’s possible that economic growth peaked in Q1.

Here’s more from AAR…”

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Lotz of Data to Chew On This Week

Data for the week

“….The first week of any month is always big, and so this Wednesday (May 1) through Friday will be jam packed with fresh ISM reports (for Korea, China, Europe, and the US), initial jobless claims, and of course the big Non-Farm Payrolls report on Friday.

Monday and Tuesday will also be big, as we get Personal Income and Spending, Chicago PMICase-Shiller, and Consumer Confidence.

Other big events this week include auto sales, the ADP jobs report, and FOMC decision, productivity, the trade balance, and construction spending.

By the end of Friday we should know a lot more about the economy.”

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U.S. Flash PMI Falls More Than Expected

“April Flash PMI is out.

The headline index fell to 52.0 from last month’s 54.9 reading.

Economists were looking for a smaller decrease to 53.9.

Any number over 50 indicates expansion, so this reading says American manufacturing is still expanding, but at a slower pace than last month.

Below is a full breakdown of the sub-components of the index: …”

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Eurozone Factory Output Shrinks for a 15th Consecutive Month

“Euro-area services and factory output shrank for a 15th month in April as the currency bloc struggled to emerge from a recession, adding to pressure on the European Central Bank to do more to boost growth.

A composite index based on a survey of purchasing managers in both industries held at 46.5, London-based Markit Economics said today. That’s in line with the median of 26 economists’ forecasts in a Bloomberg News survey. A reading below 50 indicates contraction. The euro area’s woes were compounded today by concern global growth may falter after a report showed Chinese manufacturing expanding at a slower pace this month….”

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China’s Preliminary PMI Contracts More Than Expected

China’s manufacturing is expanding at a slower pace this month on weakness in global and domestic demand, fueling concern that the world’s second-biggest economy is faltering.

The preliminary reading of 50.5 for a Purchasing Managers’ Index (EC11CHPM) released by HSBC Holdings Plc and Markit Economics compared with a final 51.6 for March. The number was also below the median 51.5 estimate in a Bloomberg News survey of 11 analysts. A reading above 50 indicates expansion.

China’s stocks slumped as the data provided further evidence of an economic slowdown after weaker-than-estimated numbers for gross domestic product last week prompted banks including Goldman Sachs Group Inc. to cut full-year forecasts. In Washington, central bank Governor Zhou Xiaochuan said April 20 that a 7.7 percent first-quarter expansion was reasonable and “normal,” highlighting reduced expectations after 10 percent- plus rates during the past decade.

“This paints a picture of a continued painfully slow recovery for China’s manufacturing sector,” said Yao Wei, a Societe Generale SA economist based in Hong Kong. “The government needs to help translate the easy liquidity conditions into real growth.”

President Xi Jinping’s officials are grappling with constraints on export demand, property-market overheating, the risks associated with a surge in so-called shadow banking, and weakness in consumption because of a campaign to rein in official perks such as spending on banquets.

The Shanghai Composite Index fell 2.6 percent, the biggest decline in three weeks.

European Contraction…”

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Rail Traffic Continues to Fall

“Recent rail trends have weakened substantially from very strong levels earlier this year.  The latest weekly reading came in at 3.3% year over year, but continues a trend of low single digit readings.  This latest data brings the 12 week average to 4.4%.  That’s still a healthy level, but well off the March high of 3.6%.  In this environment I guess any growth is good growth so this has to go down as a moderate positive for the economy even though the trend is negative.

Here’s more via AAR…”

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Philly Fed Manufacturing Index Falls Unexpectedly

“The Philly Fed’s April business outlook survey is out.

The headline index unexpectedly fell to 1.3 from last month’s 2.0 reading. The consensus estimate predicted a rise to 3.0.

The unemployment sub-index plunged from 2.7 in March to -6.8 in April.

The new orders sub-index declined from 0.5 to -1.0.

Below is the full text from the release:

April 2013 Business Outlook Survey

Manufacturers responding to the Business Outlook Survey reported near steady business activity in April. The indicator for overall activity remained slightly positive this month, but other broad indicators were mixed. Indicators for new orders and employment were weaker this month. The survey’s broad indicators of future activity suggest that firms expect continued growth, but optimism waned compared with last month.

Indicators Suggest Steady Activity…”

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$GS: U.S. Suffers a Consumption Setback

“I recently posted two pieces discussing that the peak of economic growth was likely behind us.  (See here and here) In particular both pieces addressed personal consumption expenditures and their importance to the overall strength and direction of the economy.  To wit:

“…personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation.  As PCE goes – so goes the economy.”

The importance of consumption on the overall economy should not be overlooked.  While, in the economic cycle, it is production that comes first, as it provides the income necessary for individuals to consume, it is ultimately consumption that completes the cycle by creating the demand.  This is the problem that government, and the Fed, face today.

Despite repeated bailouts, programs, and interventions – economic growth remains mired a sub-par rates as consumers struggle in a low growth/high unemployment economy.  Businesses, which have been pressured by poor sales, higher taxes and increased government regulations, have learned to do more with less.  Higher productivity has lead to less employment and higher levels of profits.

The dark side of that equation is that less employment means higher competition for jobs which suppresses wage growth.  Lower wage growth and incomes means less consumption which reduces the aggregrate end demand.  In turn, lower demand for products and services puts businesses on the defensive to “do more with less” in order to protect profit margins.  Wash, rinse and repeat.  This is why deflationary economic environments are so greatly feared by the Fed as that virtual spiral, between production and consumption, is incredibly difficult to break.

This brings us to the latest report from Goldman Sachs entitled “The Consumption Setback” (via Zero Hedge) which discusses the reality that consumer is slowing down which will likely have a negative impact on future growth.  This is a fairly sharp turn from their previous stance of an economic comeback in 2013 which I have previously argued heavily against.

A Consumption Setback

Coming into this year, we expected a notable slowdown in real personal consumption expenditures (PCE) from around 2% in 2012 to a 1% (annualized) pace in the first quarter of 2013. The main reason was the hit to disposable income resulting from…..”

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NY Fed Study Expects Student Debt to Become a Drag on the Recovery

“Students with large loan burdens, because of the debt taken on for their educations, likely are not buyers of expensive items such as homes and cars. Perhaps all of their debt makes them less attractive candidates for loans. Or, they may believe their obligation will leave them bankrupt.

The results of a study by the New York Fed show what almost everyone with a high school education knows about student loan debt:

Student loans have soared in popularity over the past decade, with the aggregate student loan balance, as measured in the FRBNY Consumer Credit Panel, reaching $966 billion at the end of 2012. Student debt now exceeds aggregate auto loan, credit card, and home-equity debt balances — making student loans the second largest debt of U.S. households, following mortgages. Student loans provide critical access to schooling, given the challenge presented by increasing costs of higher education and rising returns to a degree. Nevertheless, some have questioned how taking on extensive debt early in life has affected young workers’ post-schooling economic activity….”


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A Weakening Yen Helps to Boost Japanese Exports

Japan’s exports exceeded estimates in March and the trade deficit narrowed from the previous month after declines in the yen made the nation’s products more competitive in overseas markets.

Overseas shipments rose 1.1 percent from a year earlier, the Finance Ministry said in Tokyotoday. The median estimate of 22 economists surveyed by Bloomberg News was for a 0.2 percent increase. The trade shortfall was 362.4 billion yen ($3.7 billion) from 777.5 billion yen in February….”

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Beige Book Shows Moderate Growth Across All Districts

“The Federal Reserve said the U.S. economic expansion remained “moderate” amid gains in manufacturing, housing and autos that offset weakness in defense-related industries in some regions.

“Most districts noted increases in manufacturing activity since the previous report,” the central bank said today in its Beige Book business survey, which is based on reports from the Fed’s 12 regional banks from late February to early April. “Particular strength was seen in industries tied to residential construction and automobiles.”

Most regions said “residential and commercial real estate improved markedly” as housing prices rose in many areas and demand for home loans was “steady to slightly up,” the Fed said. Consumer spending “grew modestly” even as some regions said sales were curbed by rising gasoline prices, higher payroll taxes and winter weather. “Employment conditions remained unchanged or improved somewhat,” the report said.

Several policy makers, including Federal Reserve Bank of New York President William C. Dudley, have said the Fed should maintain record monetary stimulus after an April 5 report showed employers added 88,000 workers in March, the smallest gain in nine months. The Federal Open Market Committee said in March that it will continue buying $85 billion in bonds each month until the labor market “improves substantially.”

Renewed Pledge…”

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Factory Production Falls Unexpectedly in March

“Factory production in the U.S. unexpectedly dropped in March, adding to recent signs that manufacturing is cooling.

Output at factories fell 0.1 percent after a 0.9 percent increase in February that was larger than previously reported, figures from the Federal Reserve showed today in Washington. The median estimate in a Bloomberg survey of economists called for a 0.1 percent rise. Total industrial production climbed 0.4 percent as colder-than-normal temperatures drove the biggest gain in utility use in six years.

Output is slowing as companies restrain inventory-building and global markets soften at a time the U.S. is poised for a projected easing in second-quarter growth as automatic cuts in planned federal spending take effect. Companies such as rail-car maker Greenbrier Cos. expect a better second half, a sign business investment is unlikely to retrench.

“The prior month was very strong so there is probably a return to more normal growth,” Josh Dennerlein, an economist at Bank of America Corp. in New York, said before the report. “The next couple of months are when we could see some weakness as the hit from the sequestration trickles through the economy.” Even so, “manufacturing is still going to be growing,” he said.

The median estimate for total industrial production of the 82 economists surveyed by Bloomberg called for a 0.2 percent gain. Projections ranged from a drop of 0.5 percent to an increase of 0.7 percent. The prior month was revised up to a 1.1 percent increase from a previously reported 0.8 percent advance.

Manufacturing Production…”

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U.K. Inflation Unchanged, Still Persistent Above Central Bank Target

U.K. inflation was unchanged in March, extending its run above the Bank of England’s target and maintaining a squeeze on consumers.

Consumer prices rose 2.8 percent from a year earlier, the Office for National Statistics said in London today. That matched the median forecast of 36 economists in a Bloomberg News survey. In a separate release, the ONS said factory-gate prices rose 0.3 percent in March from February and were up 2 percent from a year earlier.

U.K. consumers are under pressure from rising prices and a fiscal tightening that’s deeper than that implemented byMargaret Thatcher during her premiership. While the government has broadened the BOE’s scope to add to stimulus even as inflation remains above its 2 percent goal, a majority of the Monetary Policy Committee voted to maintain the size of the bond-purchase plan this month.

“More inflation misery is coming for consumers,” said Rob Wood, chief U.K. economist at Berenberg Bank in London. The pace of inflation will probably accelerate further in the coming months, he said. “The BOE seems unlikely to engage in more asset purchases in the next month or two.”

The pound was little changed against the dollar after the data were published. It traded at $1.5289 as of 10:17 a.m. London time, from $1.5285 yesterday.

U.K. inflation has been above the BOE’s target every month since December 2009.

Recreation Costs….”

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China GDP Misses Estimates, Commodities and Stocks Get Slammed

“Stocks dropped and commodities fell to a nine-month low after China’s economic growth unexpectedly slowed in the first quarter. U.S. equity-index futures declined, while the yen strengthened.

The MSCI All-Country World Index slid 0.5 percent at 9:55 a.m. in London, with the Shanghai Composite Index capping a 10 percent retreat from this year’s peak. Standard & Poor’s 500 Index futures lost 0.5 percent. The S&P GSCI gauge of 24 raw materials dropped 1.2 percent, led by gold and silver, which dropped more than 6 percent. Oil sank below $90 a barrel and copper retreated to an eight-month low. Japan’s currency appreciated for a third day against the dollar, advancing 0.3 percent to 98.09.

China’s economic growth lost momentum as factory output weakened last month, according to data from the National Bureau of Statistics in Beijing. A report from the Federal Reserve Bank of New York may show manufacturing in the region expanded for a third month in April. Citigroup Inc. and Charles Schwab Corp. are scheduled to report earnings today.

China’s data are confirming the underlying concern about its economic outlook,” said Koji Toda, the chief fund manager at Resona Bank Ltd. in Tokyo, which oversees about 15 trillion yen ($153 billion). “Profit-taking is dominating the market as it seems like the yen won’t weaken beyond 100 per dollar soon.”

The Stoxx Europe 600 Index fell 0.9 percent as a gauge of basic-resources producers slid to the lowest level since October 2011. Randgold Resources Ltd., a miner of the precious metal in West Africa, and Kazakhmys Plc, Kazakhstan’s biggest copper producer, lost more than 6 percent in London trading.

Metal Producers…”

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Old Man Buffett’s Favorite Indicator Starts to Slow

“The latest rail data from the AAR showed another weak year over year reading at just 0.2%.  This brings the 12 week moving average down to 5.25% from a recent high of 6.75% and is likely to slow substantially from here.  Looking at the recent data and current trend it would not be surprising to see ~3% readings in this data by the time May rolls around.

For now, the data is still consistent with a growing economy, but it will be interesting to see how this data pans out as the summer rolls around.  We’ve now had 4 consecutive weeks of negative average readings so hopefully this is not a developing trend.

The AAR has more details: …”

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