Weekly Economic Update: April 21, 2011

Volume 59, Number 4 | April 21, 2011

This was a light week for economic data, but not a good one.  It appears that higher oil prices and the supply disruptions from the Japanese earthquake are beginning to catch up with the US economy.  Meanwhile, the already moribund housing sector appears to be taking another turn for the worse.  The lack of good news has shifted the consensus for growth lower to roughly 3%.  We would have to say that we are roughly in the consensus now, seeing no reason for an immediate collapse in growth – especially coming off the soft first quarter – but expecting no upside surprises in 2011.  We continue to worry about the outlook for 2012, and will remain concerned unless the current episode of sluggish growth is enough to pull oil prices back down to say $80 a barrel and reduce long term interest rates to 4.5% or less for a conforming thirty year fixed rate mortgage.  Neither change seems imminent – so we expect a slogging along with disappointing growth and low inflation, until the next disruption from debt ceilings or European bailouts or African wars tests the sustainability of our tepid expansion again.

A Bump in the Road

Initial claims for unemployment posted a second straight week over 400,000, signaling that problems with the Japanese supply chain are starting to hit second quarter US auto production.  Last week when claims jumped to 412,000 (now 416,000 after revision) from 385,000 the previous week, it was dismissed as a byproduct of claimants waiting for the start of the new quarter in order to maximize benefits.  This week’s reading of 403,000 indicates that the rise is more than an anomaly.  Detailed data on claims by state – which lags by one week – clearly shows that auto related shutdowns following the Japanese quake were at the core of the rise.  Hefty bumps in states with Toyota production like Kentucky, Indiana and Alabama confirm the pattern.  Almost every auto state plus the west coast – where shipping activity from Japan has been curtailed — showed above average claims.  The outlier was Michigan, as the D3 were not hit as hard as Japanese producers by the parts shortages.  Now Toyota tells us that they will not be back to normal US production schedules until nearly the end of the year.  Other Asian manufacturers are less transparent, but may be just as heavily affected.  Keep in mind that these producers are trying to bring back the US first, as they have stronger demand here than at home as Japanese spenders have cut back significantly.

The sharp drop in The Philadelphia Federal Reserve Index to 18.5 in April from an elevated 43.4 in March suggests that oil price hikes may finally be creating demand destruction.   The Philly Fed index has traditionally been more sensitive to oil prices given the concentration of chemical producers in the area.  This month, the share of firms receiving higher prices minus those receiving lower prices continued to rise to 27.5 in April from 22.6 in March, probably as chemical firms tried to pass through rising feedstock prices.  The sharp drop in orders to 18.8 from 40.3 probably reflected a combination of the reaction to price hikes and moderation because from such elevated levels trees can’t grow to the sky.  Regardless, it was another signal that the good news from earlier stimulus is increasingly being blunted by new headwinds, leading firms to ratchet down their expectations for future growth.

A Gaping Pothole

The ongoing decline in home prices as the housing sector tries to find a bottom is still the most dangerous threat to the US economy.  The primary asset for virtually all middle class households in America is their owned – but probably mortgaged – home.  Every dollar in value lost creates two dollars in lost equity.  This week, the Federal Housing Finance Agency said comparable prices were down 5.7% in February from a year ago.  The National Association of Realtors said that the median price for an existing home sold in March was down 5.9% from a year ago – with 40% of all sales called distressed (foreclosure or short sale) and 35% of all sales were for cash. The NAR reported that sales of properties below $100,000 were particularly strong.  The National Association of Homebuilders confidence index fell back to 16 in April from 17 in March.  Despite a rise in March starts and permits from weather depressed levels in February, the March levels were well below those in January or the average for the fourth quarter.

Industry sources talk of an ongoing shift in attitudes toward housing.  Not only is it no longer considered a sound investment, it is considered a detriment to getting a better job as it limits mobility.  Young people are increasingly looking for rentals and shared living arraignments to minimize their housing costs as the easiest way to compensate for the soft job market.  A recent recruiter survey found that this spring’s college job market will be twice as good as last year – with only 22 applications for every available job!  Though optimists see a recovery for housing as household formation rebounds, we believe that household formation – like labor force participation rates – is in retrenchment as young people seek cheaper alternatives to their own dwelling unit.  Even at less than 600,000 new housing units and mobile homes produced this year, we may still be adding to the excess housing inventory.  Right now the best hope for the industry is $10 gasoline which will make far flung suburban homes redundant and call for new center city gentrification.


Chinese Income Redistribution   

The Chinese central government announced a significant revamping of their income tax system this week.  Under the new law, no one earning less than 3000 yuan a month (roughly $5500 a year) would owe any tax.  This increases the exemption by 50% from 2000 yuan last year, and excludes roughly 50% of current tax payers.  The Government expects to make up for this loss by increasing taxes on wealthier individuals, with seven brackets replacing nine and more taxpayers shifted into the top 45% bracket.  The authorities particularly indicated they would crack down on collections from those receiving dividends or interest.  In a related announcement, the Government indicated that anyone receiving interest from a loan payment would now owe tax.  The government has become much better at collecting taxes, with revenues up 39% over the past year – well in excess of the 18.1% nominal increase in GDP.  Still, only a small fraction of income is taxed – less than 3 trillion yuan in a 40 trillion yuan economy.  The redistribution of income to lower income households and individuals is part of the push for a consumer economy – and nicely timed to blunt the growing anger over rising food and energy prices.

Another indication of shifting income in China comes from an article on container traffic from the South China Morning Post.  Data in the article indicate that the ports serving the Pearl River Delta (PRD) in the south are seeing far less growth in traffic than those serving the Yangtze River Delta (YRD) and Northern provinces.  Specifically, total container traffic at Hong Kong, Shenzhen and Guangdong has just been surpassed by traffic at Shanghai, Ningbo and Qingdao.  The ports in the PRD are seeing just 3% more traffic than a year ago, while those in the north are seeing 15% gains.  Among the six largest ports in the country, container traffic was up 8.6%.  It is comforting to see an industry generated number like this confirm the government’s estimate of real GDP growth.  Moreover, the significant difference between PRD and YRD traffic growth reinforces the view that export industries are moving from high priced Guangdong into China’s interior (reached by the Yangtze, which goes all the way to western Chongqing).  Booming growth in the interior suggests both rapidly rising incomes for lower income households and an ongoing need for substantial construction as infrastructure in these areas are brought up to eastern standards.




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Hong Kong
















North & South




Source: South China Morning Post

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