New Deal democrat's blog

April 2009: The Deflationary Bust Deepens

This morning the BLS reported that consumer inflation ramined unchanged (seasonally adjusted) in April, (rising 0.2% NSA). Year-over-year prices have fallen -0.7% into deflation. YoY consumer deflation is only surpassed by 1949 in the post-Depression era.

The first 4 months of inflation data are still in accord with the optimistic scenario I laid out in January:

In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.

Maybe letting GM go Bankrupt isn't such a great idea

Marketwatch reports that

Initial jobless claims rose 32,000 to a seasonally adjusted 637,000 in the week ended May 9, the Labor Department reported. ....

[A]nalysts have focused on the recent downward trend in claims. Claims hit a peak of 674,000 in late March.

Economists had expected claims to move higher this week. Roughly 27,000 hourly employees of Chrysler were laid off in the wake of the company's bankruptcy filing. There were also layoffs at parts suppliers.

A spokesman for the Labor Department said the government could not quantify the exact number of layoffs stemmed from Chrysler. But the increase in claims did come from the automotive sector.

In other words, take out Chrysler, and we would've been under 600,000. Not great by any stretch of the imagination, but a move in the right direction.

Geithner announces plan to regulate derivative trading

Treasury Secretary Timothy Geithner just announced that

Today, ... the Obama Administration proposes a comprehensive regulatory framework for all Over-The-Counter derivatives.

Moving forward, the Administration will work with Congress to implement this framework and bring greater transparency and needed regulation to these markets. The Administration will also continue working with foreign authorities to promote the implementation of similar measures around the world to ensure our objectives are not undermined by weaker standards abroad.

Unregulated, un-reported, and un-collateralized derivates are a huge part of the reason behind the biggest financial crisis since the Great Depression in which we find ourselves.

I have been very critical of President Obama and Secretary Geithner previously for their kowtowing to banksters, but the framework unveiled this afternoon is Big News, and it is (yes, truly) Good News. The text of the announcement and some instant analysis below.

April retail sales: Consumers stay zombified

The Census Bureau reported this morning that:

Retail trade sales were down 0.4 percent (±0.7%)* from March 2009 and 11.4 percent (±0.7%) below last year. Gasoline stations sales were down 36.4 percent (±1.5%) from April 2008 and motor vehicle and parts dealers sales were down 20.7 percent (±2.3%) from last year.

This drop was not anticipated by most observers.

As with March, it appears that almost all of the decline in consumer sales vs. a year ago is cars and gas. (Update: Ex-gas and cars, YoY retail sales are flat to -0.1%).

Last month's decline failed to take into account the early Easter from last year vs. this year. Thus we should probably average the two months' data, for a decline of -.9% YoY.

U3 and U6 Unemployment during the Great Depression

A frequent meme propounded in the economic blogosphere is that U6 unemployment, running near 17% now, is a truer measure (and there are good reasons to believe it is), so that means we have unemployment already approaching Great Depression levels of 25%. Left out of the comparison is the fact that U3 and U6 measurements didn't exist during the 1930s. So, is the 25% unemployment peak for the Great Depression a fair comparison to U6 unemployment today?

N. Andrews compared historical versions of unemployment statistics with the modern U3 and U6 versions, published as "Historical Unemployment in Relationship to Today" , has an answer. He writes:

What do Corporate Insiders Know?

One well-known contrary sentiment indicator for what the next direction of the stock market is corporate insider trading. In the aggregate, insiders are more likely to purchase their company's stock when they think it's cheap, and to sell when it is expensive. In that way, they also tell us something about the health of the overall economy.

At the exact market bottom in March, when people thought the economy was about to drop into a black hole, I copied the insider trading graph from Barron's (which is a terrific weekly financial magazine and the best way imho to educate yourself about what is really going on in the markets and to become more sophisticated about the economy. Anyway, I digress). Here's what caught my eye about the graph then:

Unemployment and Recovery

The BLS reported this morning that in April the U3 unemployment rate increased to 8.9%. This is a .4% increase from March, and is what I expected.

This is one of those cases where "less awful" actually ought to give rise to some hope. Before Black September, when we had a shallow recession confined to Wall Street and housing-related trades, the worst month for payroll loss was -175,000. By November the loss was -597,000, and from December through March losses were clustered near -700,000 a month!.

April's payroll loss of -539,000 is ~140,000 less than the last 4 months. If this new trend continues for another 3 months, payroll losses will vanish and the economy might actually begin to add jobs by August.

NAPM's Manufacturing Index suggests Recession bottom near

Last Friday the ISM Manufacturing Index for April was released. It was all but ignored in the economic blogosphere. It shouldn't have been.

Along with auto sales, it is one of the very first economic releases for the month of April. Also crucially, it is a leading economic indicator. The ISM Manufacturing index has typically bottomed a median 2.5 months (a mean of 4) before the end of post WW2 recessions. The latest it bottomed was the month of the end of the recession, the earliest 9 months.

In other words, this is an early indicator with a long and successful track record.

So, why does the NAPM's Manufacturing Index suggest the bottom of the recession is near ...?

The Continuing(!) Effect of the Oil Shock on the Recession

The effects of the Oil Shock that took prices to $100+/barrel in 2007-2008 are gone now, aren't they?

Before the Black September market/401k meltdown, aside from housing and finance, the chief drag on Main Street was the shock of Oil prices rising relentlessly from $55 dollars/barrel in January 2007 to $147/barrel in July 2008. This was the 4th such Oil Shock, the previous shocks all causing recessions in 1973-74, 1980, and 1990. Last summer people weren't talking about how their retirement accounts had been cut in half, or how unemployment was skyrocketing, they were talking about how it took $50 or $100 to fill up their cars or SUVs. Suddenly mass transit and carpooling were popular again.