Thursday, February 13, 2014 - The Popsicle Economy

The Popsicle Economy

by Sinclair Noe

DOW + 63 = 16,027
SPX + 10 = 1829
NAS + 39 = 4240
10 YR YLD - .02 = 2.73%
OIL - .02 = 100.35
GOLD + 11.00 = 1303.80
SILV + .25 = 20.59

According to the latest AAII Investor Sentiment Survey, over the last week the number of self-described bulls jumped to over 40% while bears plunged from over 36% to 27%. Did all those people suddenly become timing experts or is this an indication that it’s time to take profits?

The number of Americans who applied to receive unemployment benefits rose last week and the gradual decline in claims since last year appears to have halted. Initial jobless claims climbed by 8,000 to a seasonally adjusted 339,000 in the seven days ended Feb. 8.

RealtyTrac reports monthly foreclosure filings — including default notices, scheduled auctions and bank repossessions — reversed course and increased 8% to 124,419 in January from December. One month does not make a trend, but the foreclosure rebound pattern is not only showing up in judicial states like New Jersey, where foreclosure activity reached a 40-month high in January, but also some non-judicial states like California, where foreclosure starts jumped 57% from a year ago, following 17 consecutive months of annual decreases. As a whole, 57,259 US properties started the foreclosure process for the first time in January, rising 10% from December but still down 12% from last year.

On a monthly basis, retail sales decreased 0.4% from December to January (seasonally adjusted), and sales were up 2.6% from January 2013. Sales in November were revised down from a 0.2% increase to a 0.1% decrease.

In its monthly budget report, the Treasury Department said that the deficit for January was $10.4 billion. For the period from October through January (the first four months of this budget year), it totaled $184 billion. That is down $106 billion from the same period a year ago and puts the country on track for a further improvement in the budget deficit.

The Congressional Budget Office is projecting that the deficit for the current budget year will decline to $514 billion. That would be the smallest imbalance in six years. The deficit last year was $680 billion. The CBO's deficit projection for this year would represent a drop of 24% over the 2013 deficit. The CBO's latest forecast issued earlier this month projected that the deficit will decline to $478 billion in 2015 before starting to rise again in 2016 and keep heading higher for the rest of the decade.

As we know, Congress agreed to approve a suspension of the federal debt limit through March 2015. If it sounds like a bipartisan agreement, that doesn’t really describe what happened; more like a game of chicken taken to extremes, and hope for avoiding another head on collision. Ted Cruz’s best efforts notwithstanding, the United States will not dabble in first-time debt defaulting until next year, at the earliest.

Dallas Federal Reserve Bank President Richard Fisher made a speech the other night and blamed Congress for the sluggish economy. Fisher said: “For far too long, the greatest obstacle to our nation’s prosperity, has resided in this building right here: the Congress of the United States.”

Fisher said Congress has repeatedly failed to develop a tax or fiscal policy that would boost the economy. He pointed out an editorial in the Financial Times this week that concluded – ”Fiscal policy is still not an ally of U.S. growth,” and then added, “Fiscal policy is not only not an ally of U.S. growth, it is its enemy.”

This week when Janet Yellen testified before House lawmakers we learned more about how she's thinking about the labor market. In her prepared remarks she pointed to concerns including the long-term jobless as well as part-time workers who would like more work. And during her testimony, she indicated she believes the increase in unemployment since the financial crisis is cyclical, related to the business cycle and related to demand.

The reason that's important is if you think it's cyclical, then you think monetary policy can help. That's opposed to structural unemployment which is longer-term and due to fundamental shifts in an economy, which would require fiscal and regulatory policy response.

Another key aspect of the labor market story is the decline in the labor force participation to a 35-year low. Yellen told lawmakers while a significant part of this decline is structural due to demographics, she said some of it may be cyclical. The difference between unemployment and being out of the labor force is not just statistical: if you are unemployed you are job ready, if you're out of the labor force it takes a big effort to get back in the labor force.

America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth. If the Fed and/or Congress wants to see economic growth, it starts with jobs.

Comcast is acquiring Time Warner Cable. It's a $45 billion deal that would combine America's top two cable TV companies for a total of about 30 million subscribers, who are already among the least-happy customers in all of Corporate America. When it comes to customer satisfaction cable companies rank very low, and Comcast and Time Warner rank among the worst. The history of mergers suggests customer service might only get worse for these two companies. Coupling companies typically struggle to knit together their massive systems, and customers get lost in the process. When Comcast bought AT&T Broadband for $50 billion in 2002, customer billing problems led to such a backlash that the company ultimately launched a "Think Customer First" training program.

A BusinessWeek study of 28 mergers between 1997 and 2002 found that customer-satisfaction ratings dropped significantly after the unions, with the effect lasting for years. Cable companies suffered some of the biggest drops in that study. If there's any reason to hope, it's that both companies are suffering from the broader long-term trend of customers dropping cable subscriptions in favor of other alternatives. One of those alternatives is broadband Internet, which both companies also offer. Maybe they can learn from their mistakes. Yeah, that’s not going to happen.

After years of lamenting the factory sector’s diminishing role in the American economy, many American firms are counting on the domestic energy boom, rising overseas labor costs and stronger domestic demand to revive the long-stagnating manufacturing sector. The International Monetary Fund, the iMF, has just published a paper that says a US manufacturing renaissance is probably not gonna happen.

Manufacturing has become an increasingly smaller share of U.S. economy for the better part of a century. At the end of World War II, more than a third of all U.S. workers held manufacturing jobs. That figure fell below 10% in 2008 and manufacturing employment has failed to rebound to prerecession levels, according to Labor Department data.

After the Great Recession, a depreciating dollar, falling natural gas prices and declining unit labor costs boosted U.S. manufacturing production, the IMF economists write. Recent data shows that several durable goods sectors have rebounded strongly after the recession, potentially foreshadowing a strong manufacturing presence in the global marketplace, they said.

In 2010, the manufacturing sector grew by 6.8%, outpacing the nation’s growth in gross domestic product of 2.5% that year. Increasing consumer demand in the U.S. and abroad propelled factory output. Exports grew 11.5% in 2010.

Manufacturing exports could provide “non-negligible growth opportunities” for the American economy, especially as new technology allows energy companies to tap massive domestic deposits of natural gas and oil reserves, IMF economists added. The shale energy boom could add up to 0.3 percentage point a year to growth by 2020.

But a surge in manufacturing — as a share of the U.S. economy — has failed to materialize. Growth in the manufacturing sector trailed the overall economy in 2011 and 2012, according to Commerce Department data released last month. The pace of export growth has tapered off since 2010 and  manufacturing employment increased more slowly than total U.S. payrolls the past two years.

Still, the IMF economists said that the U.S. energy jolt, combined with further dollar depreciation and swelling consumer demand from China, India and other emerging markets could gradually increase U.S. manufacturing output over the longer term.

Despite the boost from energy, the researchers found the U.S. is unlikely to be able to significantly offset the gains made in many emerging markets as companies move their operations where manufacturing is less expensive.

Paul Krugman writes: Bloomberg reports on the soaring prices of trophy apartments in Manhattan. The biggest sale so far was former Citigroup head Sandy Weill’s apartment, which he sold for $88 million to the daughter of a Russian oligarch. But $100 million listings are out there.

For a bit of perspective: the median full-time worker in the United States makes about $40,000 a year. So it would take the typical worker 2,000 years to earn enough to buy the Weill apartment.

Still, people like Weill are exemplars of the free market at work. They work in an industry that delivers clear value to the economy, and has never relied on government bailouts. Oh, wait.

Even if you have a pricey Manhattan apartment, it’s still snowing in New York. More than 700,000 people, including residents of Georgia and South Carolina hit by a heavy blast of ice a day earlier, were without power as the storm made its way up the coast, closing much of Washington and threatening to drop up to 18 inches of snow in some areas.