Recovery Fades in UK; UK Trade Deficit Hits Record; US Trade Deficit Shrinks; Jobless Claims Drop or Not?

The recovery in the UK has faded, with manufacturing, housing, and services all weakening in August. In response the BOE Mulls ‘Second Wave’ of Stimulus

Bank of England Governor Mervyn King may have to embark on a new round of bond purchases as Britain’s rebound from the worst recession since World War II fades.

Manufacturing, services and construction all faltered in August and the housing market weakened, surveys showed last week. That suggests 200 billion pounds ($309 billion) in bond purchases by the central bank since March 2009 and record-low interest rates may not be enough to keep up the economy’s momentum in the deepest budget squeeze in more than six decades.

“They are more likely to loosen policy further before they tighten it,” Alan Clarke, an economist at BNP Paribas in London, said in a telephone interview. “The danger is acting too late and not soon enough.”

BNP economist Clarke says Bank of England officials could probably justify further bond purchases using their new forecasts, though the current strength of price pressures makes it less palatable for them as they seek to preserve their inflation-fighting credentials.

“Clearly they are concerned that loosening in an environment where the latest GDP figure is 1.2 percent and the latest inflation figure is above 3 percent would undermine their credibility,” he said. “That’s the trap they’re in.”

Quantitative easing did nothing for the US, nothing for Japan, and nothing for the UK (at least for the real economy). Yet central bankers seem committed to the strategy.

UK Trade Deficit Hits Record

Economists in the UK were disappointed to see U.K. Trade Deficit Widens to Record

The U.K.’s trade deficit widened to a record in July as purchases of chemicals and oil drove imports to the highest level in two years.

The goods-trade gap widened to 8.7 billion pounds ($13.4 billion) from 7.5 billion pounds and June, the Office for National Statistics said today in London. The median of 13 forecasts in a Bloomberg News survey was for a 7.5 billion-pound deficit. Exports fell 0.9 percent and imports rose 3.1 percent.

While the jump in imports may signal strength in domestic demand, weakening exports suggest the economy is failing to benefit from the weakness of the pound, which has fallen by a about a fifth on a trade-weighted basis since the start of 2007.

US Trade Deficit Narrows

Economists in the US were surprised to find US Trade Deficit Narrows, Unemployment Claims Drop

The trade gap shrank 14 percent, the most since February 2009, to $42.8 billion, the Commerce Department said today in Washington. The deficit was less than the lowest forecast in a Bloomberg News survey of economists.

Overseas shipments increased 1.8 percent to $153.3 billion, the highest since August 2008, while purchases from abroad declined 2.1 percent. Economists projected a deficit of $47 billion, according to the median of 73 estimates in the Bloomberg survey. Forecasts ranged from $43 billion to $52 billion.

Trade subtracted 3.37 percentage points from growth in April through June, the most since record-keeping began in 1947. The Commerce Department on Aug. 27 lowered its estimate for second-quarter growth to a 1.6 percent annual rate from the previously projected 2.4 percent. A final estimate for the quarter will be released Sept. 30.

Increased exports vs. imports will be a positive factor in GDP, so perhaps we will not see a negative 3rd quarter GDP. Nonetheless I expect surprises to be to the downside.

Jobless Claims Drop or Not?

Weekly unemployment claims fell this week as did the 4-week moving average as noted in Weekly Claims Drop to 451,000, 4-Week Moving Average at 478,000; Where to From Here?

One thing I missed was 9 states including California did not track claims because of Labor Day. From the preceding Bloomberg article...

Nine states didn’t file claims data with the Labor Department in Washington because of the Labor Day holiday, a department official told reporters as the figures were released. California and Virginia estimated their claims, and the U.S. government estimated the other seven.

Because of the holiday and more importantly because nine states made estimates, I do not think anyone can trust this drop in claims at all. Look for big revisions next week.

Mike "Mish" Shedlock
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Goldman Marks Top in Municipal Bond Market?

History shows that whatever Goldman is peddling in a big way to cities, counties, or retail investors, be it interest rate swaps or derivatives, or advice, those investors would be better off not taking it.

With that in mind, please consider Goldman in Bond Deal

Goldman Sachs Group Inc. is about to start selling municipal bonds directly to mom and pop.

The New York company plans to enter a partnership this week with Chicago securities firm Incapital LLC to sell bonds issued by U.S. states, cities and towns to individual investors, according to a person familiar with the situation.

The arrangement will make billions of dollars of municipal bonds underwritten by Goldman available for sale by at least 85,000 brokers in Incapital's distribution network of broker-dealer firms.

The move allows Goldman to branch out into a lucrative area of the fixed-income markets, a haven for retail investors scared off by volatility in the stock market and riskier corporate credit markets. While some municipalities are facing budget crises, it is rare for municipal bonds to default. Such securities yield more than certificates of deposit or other ultra-safe investments and are tax-free in most cases, making them a staple in retiree savings accounts.

Ultra-Safe?

Words like "ultra-safe" portend a hint of disaster. Remember when home prices could never go down? Now retail investors are plowing into municipal bonds and municipal bond funds as the next safe-haven.

Even if there is not a series of municipal bond disasters coming up, yields are so compressed, that investing in municipals makes little sense. The timing of Goldman Sachs into such offerings is icing on the "best to stay away" cake.

Look for Goldman to bet against the worst of the crap they intend to feed to retail investors.

Mike "Mish" Shedlock
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Weekly Claims Drop to 451,000, 4-Week Moving Average at 478,000; Where to From Here?

Weekly Claims fell this week to 451,000 but that number is still consistent with an economy losing jobs.

Please consider the Unemployment Weekly Claims Report for September 9, 2010.

In the week ending Sept. 4, the advance figure for seasonally adjusted initial claims was 451,000, a decrease of 27,000 from the previous week's revised figure of 478,000. The 4-week moving average was 477,750, a decrease of 9,250 from the previous week's revised average of 487,000.

Unemployment Claims



The weekly claims numbers are volatile so it's best to focus on the trend in the 4-week moving average.

4-Week Moving Average of Initial Claims



The 4-week moving average is still near the peak results of the last two recessions. It's important to note those are raw numbers, not population adjusted. Nonetheless, the numbers do indicate broad, persistent weakness.

4-Week Moving Average of Initial Claims Since 2007



No Lasting Improvement for 8 Months

There has been no lasting improvement since December 2009, eight months ago. The above chart is slightly off, the Fed has not updated the series yet today. The last data point is at 451,000.

To be consistent with an economy adding jobs coming out of a recession, the number of claims needs to fall to the 400,000 level.

At some point employers will be as lean as they can get (and still stay in business). Yet, that does not mean businesses are about to go on a big hiring boom. Indeed, unless consumer spending picks up, they won't.

Questions on the Weekly Claims vs. the Unemployment Rate

A question keeps popping up in emails: "How can we lose 400,000+ jobs a week and yet have the unemployment rate stay flat and the monthly jobs report show gains?"

The answer is the economy is very dynamic. People change jobs all the time. Note that from 1975 forward, the number of claims was generally above 300,000 a week, yet some months the economy added well over 250,000 jobs.

Also note that the monthly published unemployment rate is from a household survey, not a survey of payroll data from businesses. That is why the monthly "establishment survey" (a sampling of actual payroll data) is not always in alignment with changes in the unemployment rate. At economic turns the discrepancy can be wide.

With census effects nearly played out, It may be quite some time before we weekly claims drop to 400,000 or net hiring that exceeds +250,000.

Want to know why some businesses aren't hiring? Please consider Creating Jobs Carries a Punishing Price

Where To From Here?

Three weeks ago there was a weekly claims print above 500,000. That number will roll off the 4-week moving average next week.

Assuming another 451,000 print next week, the 4-week moving average would be about 465,000 - a decline of another 12,000 or so. Even still, the number will nothing to crow about. Moreover, I am still expecting lots of state cutbacks so that could have an impact. However, claims have been generally in 450,000 range for 8 straight months of sideways movement so we can easily see more of the same.

Mike "Mish" Shedlock
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65% Fear Double-Dip, 71% Say US is Fundamentally Broken, Net 32% Expect to Reduce Spending

It is quite clear the US economy is sliding back towards recession, if not still in it. The average consumer understands that, yet the average economist doesn't.

How is it that the average consumer has a better grip on the economy that the average economist? Regardless of the answer, here are some interesting survey results from Americans Fear "Double Dip" Recession & European Financial Problems.

• 92% say the US is still in recession
• 65% fear a ‘double dip’ recession
• 57% are fearful about running out of money in the next year
• 44% could easily see their family slipping into bankruptcy if things get worse
• 42% say they will spend less money than they did over the last 3 months, while just 10% will spend more. 48% report their personal spending will likely stay even
• 09% say the US is in a 1930s style economic depression
• 72% say Europe’s financial problems likely to hurt US
• 42% say that they or their spouse has had wages or salary reduced
• 34% say they or their spouse lost their job or has been laid off
• 33% have taken on more hours or another job to try and make ends meet
• 28% dipped into a planned retirement account like an IRA or 401K because they needed the money
• 09% have had their house foreclosed on
• 08% had their child delay college (or graduate school) or drop out to save money
• 20% expect their personal finances will recover by the end of 2011, 27% say after the end of 2011, 24% say their personal finances won’t ever fully recover

“Attitudes towards the current economic climate should be very concerning for those who sell consumers goods and services. The perception that the economy is likely slowing down again is leading consumers to tighten their belts and keep their wallets and purses closed. Consumer marketers will need to figure out how to best dial up the perceived value of what they are selling in order to stay on track”, said Bradley Honan of StrategyOne.

For a discussion of whether or not the recession has ended, please see NBER Likely to say "Recession Ended" July 2009; Assessing the Real Time Probability US Back in Recession

At this juncture, the debate as to whether the recession has ended or not is actually moot. The pertinent factor is: If there was a recovery, it now seems over.

Looking ahead, attitudes rule. With consumer spending weak and weakening, and now that the stimulus has run its course, the odds the 3rd and/or 4th quarter GDP numbers will be negative are quite high, as are the odds of double digit unemployment numbers by the end of the year.

Mike "Mish" Shedlock
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Olympic Disaster in Vancouver, Taxpayers on Hook for $1 Billion "Ghost Town"

It boggles the mind to think that anyone can possibly think of Olympics as doing anything more than throwing taxpayer money straight down the toilet. Of course vendors and real estate agents do not give a damn about the long-term consequences as long as a quick buck can be made.

Now it's payback time as Vancouver taxpayers on hook for $1-billion as most Olympic Village units unsold

Sixty-six per cent of Vancouver’s pricey Olympic Village condos remain unsold — a total of 483 units at the massive False Creek development that served as athletes’ housing during the two-week 2010 Games.

Vancouver Mayor Gregor Robertson, whose city remains on the hook for more than $1.03 billion of the cost of the project, predicts it will take a “full two-year term” to sell the remaining units.

The suites, which are priced anywhere from $400,000 to $5 million each, have been subject to the HST since July.

The city’s investment in the project includes a $750-million loan plus undisclosed interest payments, $120 million still owed to the city for the land and a $110-million outlay for 252 affordable housing units.

Today, six months after the 2010 Olympic Games, the village resembles a ghost town.

Walking down the empty streets last Saturday afternoon, it was hard to find anyone actually living in the $1.2-billion former Olympic Village.

Even the security guards conceded there’s not much to do at the “showcase” Millennium Water development, where only 254 condos have been sold.

Fortunately Chicago dodged a bullet as it was foolishly attempting to "win" the upcoming 2016 Olympics. In this game, winning the bid is a guaranteed loss for taxpayers.

Mike "Mish" Shedlock
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Consumers Shun Credit Cards - Credit Card Usage Drops, Debit Card Usage Rises

Consumers have had enough of high interest rates on credit cards but its a case of one plastic for another. Bloomberg reports Cardholders Prefer Debit as Credit-Card Use Falls

Americans are shunning their credit cards and using debit to avoid incurring more debt, said Javelin Strategy & Research.

Total payment volume for debit cards surpassed credit-card volume for the first time in 2009 and will continue to eclipse it in 2010, according to a report released today by the Pleasanton, California-based market-research firm that specializes in financial services.

At San Francisco-based Visa Inc., the world’s biggest payments network, the total payment volume for debit cards increased by 7.9 percent in 2009 to $883 billion as credit-card volume declined by 7.3 percent to $764 billion. Volume for debit cards at No. 2 MasterCard Inc. in Purchase, New York, rose by 5.8 percent and 2.8 percent at No. 4 Riverwoods, Illinois-based Discover Financial Services.

Fifty-six percent of consumers said they had used a credit card in the past month compared with 87 percent who said they had in 2007, according to the study, which surveyed 3,294 people in November 2009 for that question. Other findings were based on data collected online from 5,211 respondents in March 2010 and 5,000 consumers in November 2009. If the rate of decline continues, 45 percent of consumers will reach for a credit card in 2010, the study said.

Long-Term Shift

Another cause for reduced credit-card use is financial reform aimed at protecting consumers, which has decreased the number of new cards given and cut available spending limits, the Javelin report said. Federal legislation that limits overdraft fees, caps on fees banks charge merchants for debit-card transactions and credit-card legislation mean banks have to recoup losses and are only giving cards to the most creditworthy borrowers, the study said.

Younger people also favor debit over credit because of the immediate nature of making a payment, which means the shift to debit will be long-term, said Van Dyke. And since younger cardholders favor the convenience of debit cards, they won’t turn to cash or checks, he said.

Purchase transactions generated by credit and debit cards in the U.S. totaled more than 27 billion from Jan. 1 through June 30, according to the Nilson Report, an industry newsletter in Carpinteria, California. Debit-card purchases accounted for 65 percent of all sales, up from 62.3 percent, the Nilson Report said.

Total Revolving Credit



Revolving Credit Percent Change From Year Ago



Reasons For Decline In Credit Usage

• Bankruptcies
• Other Loan Writeoffs
• Consumers Paying Down Debt
• Increasing Favoritism Towards Debit Cards
• Gift Cards
• Bank Lending Standards Increase
  

Unprecedented Drop in Revolving Credit

This is all part of an overall secular shift in consumer attitudes towards credit and debt, and bank attitudes towards lending. It's a good thing but Bernanke will not see it that way.

Mike "Mish" Shedlock
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European Credit Stress Returns With Vengeance - Irish, Portuguese Bond Spread at All Time High - Yen Soars - Gold Hits All Time High

The risk aversion trade was back in play today with treasuries, the dollar, the Yen, and gold all rallying while the Euro and European government bonds (except German Bunds) were under significant pressure.

Please consider Stocks, Irish Bonds Drop, Gold, Yen Rally on Europe Concern

Stocks slid, while Greek, Portuguese and Irish bonds tumbled, gold rose to a record and the yen surged to a 15-year high versus the dollar on concern Europe’s debt crisis will worsen. U.S. and German bonds rallied.

The MSCI World Index slid 1.1 percent and the Standard & Poor’s 500 Index lost 1.2 percent at 4 p.m. in New York. The gaps between 10-year German bond yields and Irish and Portuguese debt grew to all-time highs, while the German-Greek yield spread increased to the widest since May. The yen rose to as little as 83.52 per dollar as the Bank of Japan refrained from increasing bank loans. Ten-year Treasury yields lost 10 basis points to 2.6 percent. Gold futures closed at $1,259.30 an ounce.

Banks led stocks lower on concern European lenders will require more capital to compensate for holdings of bonds in the region’s weakest economies. Germany’s banking association said yesterday that the nation’s banks need to raise $135 billion and Pacific Investment Management Co. said Greece still faces “substantial” default risk.

“The challenges haven’t gone away,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $103 billion. “The European debt worries that haunted us earlier this year are showing up again. Even as last week we had a couple of economic signals that weren’t as bad as we thought, the headwinds have been around.”

The rally in gold, Treasuries and the yen came as investors sought assets perceived as the safest. Even after a 750 billion euro ($960 billion) bailout for the weaker economies in the euro zone, investors are skittish about sovereign debt of some nations -- and about the banks that hold the region’s government bonds. A default by Greece could trigger the collapse of banks with large sovereign-bond holdings, says Konrad Becker, an analyst at Merck Finck & Co. in Munich.

The German bund yield dropped 8 basis points to 2.26 percent. Greek bonds plunged, pushing the yield on the 10-year security up 28 basis points relative to bunds to 942 basis points, the most since the European Union and International Monetary Fund crafted the bailout package in May.

The German-Irish 10-year yield spread climbed to as wide as 380 basis points, the highest since Bloomberg started compiling the data, from 343 basis points. It was at 372 basis points as of the close of trading in New York. The Portuguese-German spread reached 356 basis points, also a record, from 333 basis points. Wider spreads signaled increased concern that the most indebted European nations will struggle to fund budget deficits.

Stocks Rally Halted

The S&P 500 dropped for the first time in five days, halting its longest streak of gains since July. Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. dropped at least 2.2 percent to pace a retreat in 77 of 80 financial companies in the index. Oracle Corp. rallied 5.9 percent after naming Mark Hurd, former chief executive officer of Hewlett- Packard Co., as a president.

Japan’s and Australia’s central banks signaled the outlook for U.S. growth is deteriorating, making it tougher for them to set monetary policy. The Reserve Bank of Australia extended a pause in raising interest rates “for the time being” today, even after the nation’s gross domestic product rose the most since 2007. The Bank of Japan said it’s prepared to add more monetary stimulus after last week’s emergency decision to expand a credit program.

Dollar, Yen Strengthen

The dollar strengthened against all 16 major currencies except the yen and franc. The Dollar Index, which gauges the currency against six major trading partners, rallied 1 percent to 82.827.

Gold Record Close

Gold futures for December delivery rose 0.7 percent to $1,259.30 an ounce on the Comex in New York, its highest closing price ever. Copper for delivery in December fell 0.8 percent to $3.4705 a pound in New York. Crude for October delivery retreated 0.7 percent to $74.09 a barrel on the New York Mercantile Exchange.

Another name for the risk aversion play is the deflation play. There is plenty of room for the dollar, treasuries, gold, and German government bonds to rally while the rest of the commodity complex drifts lower.

Mike "Mish" Shedlock
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