How Many Hours of Work Does it Take to Buy...

The reason that economists adjust nominal data to "real" numbers is that they are trying to create a better picture of general welfare after adjusting for inflation.  If an economy produces $100 worth of widgets one year and $150 worth of widgets the next, the dollar increase doesn't tell you much if the price of a widget also rose from $100 to $150.  In that case the economy has still produced one widget in the year, so welfare has not changed and theoretically real GDP should be flat.

At a fundamental level, "real" economic numbers are an attempt to measure output against time.  In the previous example, the data was adjusted to have a more clear picture of the number of widgets produced per year.  For humanity, time is really the only scarce resource there is.  Therefore, the number of hours worked that it takes a person to buy an item is the true measure of welfare.

Today's employment report showed that average hourly earnings fell slightly to $23.58.  Below are charts of the number of hours that it has taken to purchase a home, a barrel of oil, an ounce of gold and "an S&P 500," at the prevailing hourly wage of the era.  In general a downward slope would mean that societal welfare is increasing because it would take fewer hours to buy the same good.

Duration of Economic Expansions

From time to time one may still hear analogies linking our current economic period to the Great Depression.  Most know that the Depression consisted of two separate recessions, one which started in 1929 and the other in 1937.  The intervening period was technically an expansion but wasn't much to write home about.  

Our current economy is also often compared to the 1970s because the stock market went sideways for about a decade during that time as well before ultimately culminating in the early 80s inflationary recession.

If each of those periods are comparable and we sit in an economic purgatory between one recession and another, it might be at least mildly comforting to think that the next recession could still be a year away. The economic expansion between 1933-1937 lasted 50 months and the expansion from 1975-1980 lasted 58.  Our current expansion is still only 39 months old.  Just a babe!  A full list of economic expansions can be found here.

ISM as Recession Indicator

ISM was reported at sub 50 for the 3rd month in a row.  Does that mean that a recession is imminent?

Below is a chart of ISM stripped down to only include times that the indicator has been below 50 for at least 3 months in a row.  There have been roughly 17 periods in which ISM has had a 3 month sub-50 streak.  Of those 17 times, 6 have been outside of a recession: 1951, 1967, 1985, 1995, 1998 and 2003.

US Population Age Distribution

From the 2010 census, the distribution of the US population by age and gender.  A nice visualization of how demographic bubbles move through the system.  The first baby boomers are hitting 65 but the meat of the generation is still a few years out.  Meanwhile the echo boomers are just starting to hit their 30s.

July Economic Data Summary

Over the course of any month there is a heap of economic data that is released by various governmental and quasi-governmental organizations.  The data can come so quickly that it's often difficult to keep track of what has shown strength or weakness and which indicators are beating or missing Wall Street estimates.  To try and help summarize what was released in July, below is a list of 32 of the more important economic releases last month.  Of these 32 releases, 14 (~44%) missed expectations.

Tupperware Commentary 2Q12

An interesting take on the world economy from Rick Goings, CEO of Tupperware, an extremely global company:

I spent a lot of time this last month doing not only big group but one on one meetings with the investment community, not only in the United States but more and more focusing on Europe where people tend to hold longer. And but one of the key questions I’m asked almost everywhere I’m, is people want to tap into what are we seeing out there and what do we hear out there?

They understand that the bulk of our sales and profits are outside the U.S., which by the way is only 5% of the world’s population and this is an important question because the perspective one has, if they are getting their news from Wall Street Journal, Financial Times, CNBC or even many U.S.-based analyst reports, one would think that the world is in chaos and it’s bleak out there.

And yet, we just did a review and quite frankly, our perspective is there’s more firm places, more (inaudible) firm out there in the world and things look pretty good and look better than we’ve seen in years. Here’s a brief scan.

In Europe, contrary to what you may read, Europe is not going to fall into the Mediterranean, although it sells newspapers. Politicians there are showing a never before level of commitment and flexibility as they work to hold euro land together. And they are driven by two major things, the desire for peace and economic necessity.

But I do the review and I say well, CIS under Putin, Medvedev, Russian style but it works and we feel good. Nordics look good, Germany looks good. We get down into Turkey, looks good. Greece, who cares, it’s too small, Italy, 66 governments since the Second World War, its stability Italian style.

And then we turn it up, Benelux looks good and it is interesting in France, even under Holland, an interesting perspective. Most of the dramatic changes in governments with regard to repositioning government spending to be less happened under mid land who was an extreme left wing. So we, because he had the ability to bring the assembly within, so I feel, okay, about Europe.

Turning to Latin America, a few topline points in major markets, I already mentioned about the PRI in Mexico. So I feel good about that. In Venezuela, it appears Chavez’s grip is slipping, plus he’s sick, Brazil, fifth largest population in the world, sixth largest economy in the world and a real bright future.

In Asia, finally, 40% of the population, China, India, Indonesia and the driving force is going to be the explosive growth of their middle class, which is going to move from $500 million to $1.7 billion by 2020. In each of these markets, importantly, we have been awarded the status Superbrand. This is interesting, because we’ve never advertised.

Now, I know when somebody reads the recent talk of China’s economy slowing, two things are important to remember. Number one, it’s still growing at 7.5% and number two, the government which is very directive has been proactive with the stimulus and matter of fact, they cut the borrowing rates to stimulate the economy twice in one month.

So, net-net, before I turn it over to Mike, a final thought. When you put it all together, we’re confident in our portfolio and our future. We’re not going to hit on all cylinders in every quarter.

Philly Fed Economic Activity Indicator

Philly Fed data was released this morning and was disappointing again with the diffusion index at -12.9, meaning that 12.9% more respondents reported contraction than expansion.  There were also some special questions asked as part of the release that I thought were worth reposting here.

CSX 2Q12 Conference Call Highlights

"Automotive was a key driver in the industrial sector, growing 27% as North American light vehicle production increased 25% in the quarter. The chemicals market grew 1% with the frac sand and petroleum products being the primary drivers.

"In the construction sector, growth in building products was offset by a decline in aggregate shipments due to the completion of several stimulus projects.

"In the agricultural sector, volume declined across all major commodities. Corn shipments to the Southeast for animal feed were lower as a strong local wheat crop displaced Midwestern corn. Phosphate shipments declined as buyers delayed purchases in the expectation of moderating commodity prices. Finally, ethanol shipments softened as a result of lower gasoline demand. Looking forward, the Automotive market will continue to drive growth in the industrial sector. In addition, we continue to see growth opportunities in chemicals and Metals, particularly in commodities that support the oil and gas industry. In the construction sector, aggregate shipments will remain challenged, while recovering housing starts will drive continued growth in building products. Finally, we expect the agricultural sector to be stable with an increase of phosphate shipments being offset by a lower ethanol demand."Coal revenue declined 14% as strength in Export Coal partially offset significant weakness in utility coal volume. Domestic utility tons declined 37% as natural gas prices remain low, leading to the continued displacement of coal at some utilities. In addition, electrical generation declined in the Eastern United States. Partially offsetting this weakness, export coal volume grew 41% to 14.7 million tons in the quarter as demand was strong for U.S. thermal coal.

"Looking ahead, even though the market for export coal is volatile, we clearly expect to exceed the ton shipped in 2011 as the demand for U.S. coal will remain strong in the second half although not at the level we saw in the first half. At the same time, domestic utility volumes are expected to face continued challenges due to low natural gas prices, above normal inventory levels and environmental regulations. Headwinds should begin to moderate somewhat through the balance of this year.

"And if you look at the average age of the automobiles and the light trucks in the United States, they're some of the highest numbers that they've been post-World War II. The ability to secure financing and particularly longer-term financing in the range of 6 years has proved to be positive for the consumers as they go to purchase automobiles. Chrysler, for example, are adding third shift to their Belvidere plant. Hyundai Montgomery is adding third shifts to their plant. So I feel nothing but positive things about the automotive industry as we go forward."

How Does Housing Compare to the Tech Cycle?

Even though Bank of America is trading lower, today's quarterly release capped off what was a surprisingly good quarter for major US Banks.  In general, loans and deposits both showed growth, capital levels are extremely high and credit quality is significantly improved from where it was during the crisis.  Similarly, the housing sector has had some healthy reports as well recently (see previous post).

Seeing as how housing and banking were at the epicenter of the previous crisis, what does the fact that the two sectors are recovering say about where we are in the current economic cycle?  To try to help discern how this cycle compares to previous cycles, below is a chart comparing the performance of housing (ITB) and Financials (XLF) in this cycle to Technology (XLK) in the last one.  The chart shows relative performance of ITB, XLF and XLK compared to the S&P 500.  ITB and XLF are shown from 2006 and 2012 and XLK is shown between 2000 and 2007.

After the sharp collapse of technology stocks relative to the S&P from 2000-2002, XLK languished on a relative basis for the next four years before finally starting to outperform in 2006.  Similarly, both XLF and ITB showed steep drops and have continued to be losers since.  Now, years later, they may finally be starting to show signs of a turn.  XLK continued to steadily outperform the S&P 500 through 2012.  However, by the time XLK turned in 2006, the general economy only had one year left before it began to contract.

Housing Starts Showing Signs of Life

Housing starts were reported this morning for June at the highest level since October 2008.  The housing sector may still be operating at a low level, but it looks for now like it has at least broken out of the range that it had languished in for several years.

Retail Sales June 2012

Retail sales were reported this morning for June and were weak again.  For the third straight month, retail sales declined, which is a reasonably rare occurrence.  Since 1992, there have been 4 periods that retail sales have declined in three straight months.  Two of those periods happened in 2008; one of those periods lasted for 6 months.  Below is a list of negative retail sales streaks:

Looking at the bigger picture, retail sales growth has slowed to just a 3.8% y/y increase in June.  The slowing trend doesn't necessarily indicate recession, but certainly demonstrates that the rapid growth phase of the economic cycle is over.  As recently as this time last year retail sales were up 9.2% y/y, but  now it looks like there isn't the same slack in the economy that there was then to generate large growth numbers.

Comments From Marriott 2Q12 Call

 Fastenal had negative things to say about the industrial/manufacturing outlook, but Marriott is a little more upbeat on its North America business:

I know that first and most important question you may have is, are you seeing a slowdown in North America, and the answer is no. There's plenty of evidence of continuing strength in our lodging business in North America.

An interesting response to a fiscal cliff question:

I think that if you're talking about the fiscal cliff of the expiration of the Bush tax cuts, the Obama employment tax cuts and maybe deficit impact, as well as the government cuts...I would say today that there is no impact of that threat on the numbers we've put on the books or the bookings that we're seeing. And we have certainly not made any effort to factor in a what-if. And obviously, we haven't given you '13 guidance anyway. But I think, by and large, this is going to be a question about what happens politically and how that translates into a U.S. economic performance in 2013 and beyond. It may be that it becomes relevant in the fourth quarter, but I doubt it. I think this is much more likely to be a question of how it gets factored into real economic growth, maybe a little bit attitude and sentiment as we're doing bookings in the fourth quarter but doubtful in terms of the impact to actual Q3 and Q4 numbers.

Also, not related to any outlook, but I like to file away useful information like this:

China is probably about 1 million rooms across the country as a whole. The U.S. is 5 million rooms. China will clearly see that 1 million rooms double and then double again over the course of the next period of time. It's going to imply substantial supply growth year-over-year for a number of years to come. But there's every reason to believe that demand is going to be growing with it.