The beginning of a sea change in household deleveraging

- by New Deal democrat

The Federal Reserve's report on household debt burdens was released earlier this week covering the January - March quarter. I have been watching these series since before the Great Recession. Indeed, when household debt burdens started to decline, that was one of the final signs that the Recession was about to start. Further, I long suspected that, before this cycle was over, households would set new all time lows for debt service. With the exception of one quarter in 1980 (as to total financial obligations), that happened in the final quarter of last year.

First, a refresher. According to the Federal Reserve,

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio.

I've combined the two measures into a single graph. Total financial onligations are in blue and debt service payments are in red:



I have noted a number of times that refinancing increased in 2011 and 2012 with new record lows in mortgage rates, and probably played a major role in keeping the economy from tipping back into recession.

Now, for the first time in four years, household deleveraging has stopped. Whether we have already hit the absolute bottom or not is impossible to say, but it certainly appears that the bottoming process has begun.

It's also worth noting that the willingness of households to re-leverage, even slightly, bespeaks increasing confidence about the future. Recall that this has also shown up in recent consumer confidence readings, which have made 5 year highs, and in Gallup's consumer spending data, which has been strong ever since last December, even in the face of the payroll tax increase. This is also of a piece with the new post-recession lows in the savings rate.

I believe thie is the beginning of a very slow sea change.

A note about the CPI

. - by New Deal democrat

Consumer prices for May were reported on Tuesday as having risen +0.1%, in line with my prediction based on gas prices of +0.2% +/-0.1%.

I haven't been making these forecasts just as an exercise in crystal ball gazing (well, okay, maybe just a little), but also as a way of elaborating on a theme I've been writing about for a long time -- the major but largely unremarked impact of the secular increase in gas prices on the consumer economy.

What I've been trying to show, among other things, is that the relative change in gas prices has been the driving determinant in whether wages fall behind, keep up with, or increase vs. the general price level since gas prices bottomed in 1999. With gas prices finally plateauing or even declining slightly in the last year, real wages have started to increase again.I believe this is an important reason why the economic expansion has so far survived both the payroll tax increase and Sequestration.

Will Oil Finally Break Through the 98 Price Level?

The 98 price level has provided strong resistance for oil prices this year.  Yesterday prices closed at 98.58.  Let's see if the upward momentum continues today.

Condolences to Professor Thoma

Professor Thoma of Economists View just announced that his wife has passed away.  On behalf of all here at the Bonddad Blog, we want to extend our deepest sympathies.

US Industrial Production Slowdown

The latest contraction in the ISM manufacturing report indicates the US manufacturing sector is slowing.  There have been signs this was happening for the last few months.  First, we've seen weak readings from some of the regional manufacturing reports.  For example, here is the latest Empire State report:

The May 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined marginally. The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. The prices paid index declined eight points to 20.5, indicating a slowdown in selling price increases, while the prices received index was little changed at 4.6. Employment indexes were mixed, showing both a modest increase in the number of employees and a slight decline in the length of the average workweek. Indexes for the six-month outlook were generally lower, suggesting that optimism about future conditions had weakened.    

And  the latest Philadelphia Fed Report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

Richmond also shows a slowdown:

In May, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — gained four points settling at −2 from April's reading of −6. Among the index's components, shipments recouped seventeen points to 8, the gauge for new orders slipped two points to finish at −10, and the jobs index subtracted six points to end at −3.

 We also see this slowdown in the overall industrial production numbers coming from the Federal Reserve.

The above chart breaks the US down into market groups.  In 4 of the last 7 months we've seen weak readings from the final products and non-industrial supplies sector.    Non-durable goods have printed weak readings in 3 of the last 7 months, and non-energy has printed weak readings in 2 of the last 3 prints.

Let's look at the anecdotal reports from the latest ISM report to get some more insight into this section of the economy:

• "Customers are anticipating resin price decreases and holding back orders." (Plastics & Rubber Products)
• "Slight uptick in overall business but not substantial." (Textile Mills)
• "Government spending has tightened, which has moved out program awards and caused some reduction in force." (Computer & Electronic Products)
• "Market outlook is relatively flat, with some promise of raw materials inflation relaxing." (Electrical Equipment, Appliances & Components)
• "General economy seems sluggish and pensive. Buyers are not buying much beyond lead times." (Fabricated Metal Products)
• "Downturn in European and Chinese markets is having a negative effect on our business." (Machinery)
• "We are having a difficult time hiring skilled employees." (Transportation Equipment)
• "Business continues to increase, but over the past 20 days we have seen the trend flatten." (Furniture & Related Products)
• "Market was holding strong until mid-month — then softened." (Wood Products)
• "Decline in sales for FYQ2 over same period a year ago due to softer demand [in] both domestic and exports." (Chemical Products)

Summing up the information we get the following points:

• The overall domestic economy is "sluggish and pensive" with a "flat' outlook and some markets have recently "softened."  Cuts to government spending are having an impact.
• The international slowdown is also hurting.  

In addition, consider the excess capacity in the system:

In another sign of recent weakness in the manufacturing sector, capacity utilization in the US has stalled, as demand remains soft. US industries are producing significantly below their capacity and "5.5 percentage points below long-run average" according to the Fed. We are certainly far under the 82-85% level at which economists believe that the traditional measures of inflation are expected to rise.

The sky is not falling.  But things are definitely grinding lower. 

Market/Economic Analysis: Colombia

From the latest Minutes of the Colombia Central Bank on May 31:

The latest information on the performance of the economy in the first quarter of 2013 suggests that this slowed down in comparison to what had been seen at the end of last year as was predicted in earlier reports.  The indicators for that period are influenced by the lower number of working days in February and March.

In the first quarter of the year, household consumption grew at rates that were slightly lower than the ones registered in the fourth quarter of 2012.  According to the figures from the Retail Monthly Sample (MMCM in Spanish) published by DANE in March, the annual growth of sales was 0.9% in the first quarter (less than the 3.3% for the last quarter of 2012).  This performance could be explained by an annual drop in the sales of vehicles (-11.4%).  In contrast, sales of other goods grew 4.0% in the first three months of the year.  

.....

With regards to the supply indicators, the news shows mixed performance.  Production of coffee continues to expand at favorable rates.  Energy related mining showed positive growth in petroleum production while coal production was affected by labor problems and environmental penalties.  The industrial sector registered significant deterioration during the quarter.  In March, the index of industrial production excluding threshing shrank 11.5% in annual terms.  Based on this rate, industrial production showed an annual contraction of 6.0% in the first quarter.  

So households are still spending, albeit at slower rates.  The real problem is in industrial production.  This exact same situation is playing out in the US.

As a result, the central bank has been cutting rates for stimulate growth:

Colombia sure likes to keep the markets on their toes.

On Friday, the country cut its benchmark interest rate for the fifth consecutive month. While previous cuts came in at 25bps increments, the central bank took out the axe this time around and chop rates by 50bps to 3.25 per cent – the lowest in Latin America.

So, let's take a look at the Colombia ETF's daily chart:

 Since the beginning of February, the market has been moving lower.  But remember that this move lower has been very disciplined.  There has not been a massive volume spike indicating a selling climax.  Instead we see a nice pattern of lower lows, followed by consolidation, followed by another disciplined move lower.  Prices are below the 200 day EMA are are using the 10 and 20 day EMAs as technical resistance.  While the CMF is indicating some volume moving into the market, momentum is negative.

The weekly chart shows that the current price level is around the 38.2% Fib level for the 4Q11-1Q13 price move. While we do see a slight uptick in volume over the last few months, it does not indicate a selling climax.

Could Economic Blogging Get Any More Boring?

Stop me if you're read this before.  The EU is in a recession, the US is in slow-growth mode and China is rebalancing its economy.  The sluggishness in developed economies is slowing the growth of emerging economies.  Well - you have read that before.  In fact, that's all anyone has been writing for the last year to year and a half.

Consider this paragraph from the latest policy announcement by the Bank of Korea:

Based on currently available information, the Committee considers the moderate economic recovery in the US to have continued but economic activities in the euro area to have remained sluggish, while emerging market countries such as China have shown slightly lower economic growth than initially anticipated. The Committee expects the global economy to sustain its modest recovery going
forward, but judges that the uncertainties related for instance to the possibility of an earlier-than-expected tapering off of US quantitative easing policy and to the implementations of fiscal consolidation in major countries remain as downside risks to growth 

Compare that statement to the release of December 2012

Based on currently available information, the Committee considers the moderate economic recovery in the US to have continued, but the sluggishness of economic activities in the euro area to have persisted. Economic indicators in emerging market countries have shown signs of gradual improvement. The Committee expects the global economy to exhibit a modest recovery going forward but judges the downside risks to growth to be large, owing chiefly to the euro area fiscal crisis and to the fiscal consolidation issue in the US.

And here's the September 2012 announcement:

Based on currently available information, the Committee considers the economic recovery in the US to have weakened somewhat and the sluggishness of economic activities in the euro area to have deepened. Growth has continued to slow in emerging market countries as well, due mostly to the impact of the economic slumps in advanced countries. The Committee expects the pace of global economic recovery to be very modest going forward and judges the
downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US.

Not much difference, is there?

And don't get me started on how often the Fed has used the word "moderate" in the Beige Book.  

I read a ton of central bank announcements.  They all contain a general outline of the then current economic environment.  For the last year and a half, they could all just say, "that thing we wrote last month?  Ditto."

I just wanted to mention from a writing about the economy perspective, it's just really boring right now.