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Car sales still strong


March vehicle sales came in a bit less than expected (13.06 mil. vs. 13.25), but they are still up by a robust 11.4% relatively to year-ago sales, and have risen at a 25% annualized rate over the past six months. Since hitting their recession low in Feb. '09, vehicle sales have soared 40%, marking what is truly a V-shaped recovery.

Manufacturing continues strong


The Institute for Supply Management's survey of manufacturing companies continues to show relatively robust strength. The current level of the index strongly suggests that GDP growth will continue to improve this year from last year's 3% level.


Upward price pressures continue, unfortunately. This is fully consistent with the CEO of Walmart's warning yesterday that consumers could see some significant inflation at the retail level this year as higher commodity and input prices are passed along.


Employment conditions remain very healthy. Overall, today's ISM report was strong. There's a lot of underlying strength in the economy that is underappreciated by those who continue to focus on all the things that are still wrong with the economy (e.g., the still-high level of unemployment, the ongoing weakness in housing, the dreadful state of the federal budget and unfunded liabilities, the rather tepid recovery to date, and the rise in oil prices). In my view, what's wrong is well known and it's very old news; it's priced into the market and it's impact has been mostly absorbed by market prices. What's more important is the change on the margin (e.g., improving manufacturing conditions, a pickup in the pace of hiring, a new mood in Congress that will almost certainly result in slower spending growth and at least some positive tax reform), and that is very positive.

Jobs report somewhat stronger than expected


This chart of the 2-yr Treasury yield—which is the market's best guess as to the average level of the Fed funds rate over the next two years—has jumped to its highest level since last May. Today's jobs report provided further impetus to the market's increasing confidence in the economy's ability to grow, and that in turn has resulted in the expectation that the Fed will begin to raise short-term rates sooner than previously expected. I hasten to add that the market still doesn't see much of a chance of a rate hike any time this year, but expectations are rising steadily for a series of hikes in 2012. So while the market is still relatively downbeat on expectations for the economy, it is becoming less so in the face of stronger-than-expected economic statistics such as today's jobs report.


The unemployment is moving lower, though it's still quite high. At the current pace of jobs growth, we should see continued modest declines in the unemployment rate.


This chart compares private sector employment according to the two competing surveys that are taken each month. Since the recession low, the establishment survey has uncovered 1.8 million new jobs, while the household survey has recorded 2.1 million. Both surveys are showing that private sector jobs have increased at an average of 140K per month since the recent recession low, with the average of the two showing a rather impressive 300K being added in March. We're definitely making progress, and I expect to see things pick up further when Congress recognizes the need for serious budget reform.


In a similar vein to what we saw with the Monster employment indices yesterday, this chart highlights the significant difference between demand for private and public sector jobs. Government expanded hugely following the 2001 recession, while the economy as a whole and especially the private sector recorded only a moderate amount of growth. We are now two years into what should prove to be a multi-year battle to shrink government so as to strengthen the private sector. Based on recent trends and the need for most state and local governments to trim their budgets and renegotiate union benefit packages, there will be perhaps a million more workers currently in the public sector who will be forced to migrate to the private sector in coming years. This adjustment will be painful and contentious, but it's necessary if we are to reduce the government's outsized influence in the economy and help the economy become more efficient.

Interesting labor market developments


I haven't shown this chart for several months now, mainly because it wasn't telling us anything new—hiring activity had turned up a bit, but was nothing to write home about. In the past few months, however, there has been a very impressive pickup in the mining index. The mining sector (which includes mining, quarrying, and oil and gas extraction) is on fire, which further suggests that the broad-based strength in commodity prices reflects a good deal of genuinely strong demand. Speculation can be practiced by commodity producers just as easily as by commodity purchasers; a producer has merely to keep his stuff in the ground rather than dig it out and sell it. If producers were speculating on higher prices they wouldn't be so eager to hire people to get the stuff out of the ground. But if they see their orders running much stronger than expected even as prices rise, then they would be eager to ramp up production.

It's been hard to quantify the contributions of easy money and supply/demand to commodity prices, and tempting to lay the lion's share of the blame on easy money and the weak dollar. This data suggests that the contribution of strong demand should not be underestimated. That in turn keeps the scales from tilting too much in the direction of inflation and instead more balanced between inflation and growth, and that's relatively good news.

The disparity in highs and lows on this chart also illustrate one reason why it is taking so long for the economy to recover. It's not easy at all for workers to shift out of the flagging real estate and finance sectors into the mining sector. The economy has shifted gears in a rather radical fashion that doesn't lend itself to an equally radical shift in the resources of the labor force.

Mark Perry has some more detailed commentary on the Monster index here.

Fed expectations update


This chart shows the market's expectation of where the Fed funds rate will be in one year's time. The one-year forward funds rate is expected to be 50 bps, which equates to approximately one very modest "tightening" of monetary policy (the funds rate target is currently 25 bps). Thus, no matter what you may hear people saying about what the Fed is expected to do over the next year, the current market consensus is one tiny move up in short-term interest rates sometime around February or March of next year.

Now, for things to actually turn out that way, I would argue that the economy is going to have to prove very sluggish, growing at no more than a 3.5% rate, and inflation is going to have to stop rising. Last year the economy grew 2.8%, and few forecasters are predicting a significant pickup (I think we could see 4%). Meanwhile, on a 3-mo. annualized basis, all measures of inflation have turned up meaningfully: the CPI is 5.6%, up from a low of -13.1%; the core CPI is 1.8%, up from a low of -0.2%; the PCE deflator is 4.0%, up from a low of -8.6%; and the core PCE deflator (the Fed's preferred measure) is 1.4%, up from a low of 0.2%.

Fed governors are not exactly unanimous in their opinion of the need to continue with QE2. Some argue that QE2 should be suspended next month, while others feel comfortable running QE2 through June as previously announced. What happens will be largely driven by the numbers. If inflation continues to pick up, the hawks are going to become more numerous and vocal, even if the economy doesn't pick up. Given the weakness of the dollar (at or near all-time lows in both nominal and real terms against a broad basket of currencies) and the strength of commodities (with most trading at all-time highs and up sharply in the past two years), I will be very surprised if inflation does not continue to heat up.

Finally, even if the Fed does raise rates sooner than is currently expected (something I expect), I doubt that this will be bad news for the equity markets. It would almost certainly be disruptive for the Treasury market, since rates out to 10 years are largely driven by the expected future path of the Fed funds rate. And it could cause corporate bond investors to get a case of the willies, though not a serious one, because spreads are still wide and it would take a whole lot of tightening to threaten the economy. It would be very positive for the dollar, whose weakness reflects a debilitating loss of confidence on the part of investors worldwide, because a Fed tightening even in the face of a modestly growing economy would show that once again the Fed has its priorities correct. Without a strong dollar, economic growth potential can quickly be frittered away on speculation, inflation, and asset market bubbles.

In short, an early tightening move would on balance be very good news in my opinion, and a welcome event indeed.

Slow progress on the new jobs front


The ADP payroll estimate once again suggests we will see a modest 200K gain in private payrolls this Friday. We need much more than that to get the economy back on a healthy growth track. The economy has done most of its adjusting, but a pickup in the pace of growth is likely tied to progress in Congress on cutting back our bloated Federal behemoth. Congress, the world is waiting for you to come to your senses and make convincing cuts in the size of our government. If we can trim spending and cut corporate taxes to boot (just one example of positive tax reform), then we could see the budget deficit close on two fronts, as spending growth slows and revenue growth picks up.

Corporate layoffs remain very low


Absolutely no sign here of any deterioration in the economy. The shrinkage has stopped, now we are just waiting for the expansion to gain strength. That will probably come after Congress demonstrates the ability to make meaningful cuts in spending, while avoiding tax hikes. The government needs to shrink and get out of the way if the private sector is to advance.

Home prices are not likely in a double-dip


We were out and about in Chaco province almost the whole day visiting extremely poor families that had improved their lives with loans from the Grameen-style bank that we helped get started some years ago. If any American could visit these same homes they would be on their knees giving thanks that they are living in such a rich country, where a 35% decline in the real value of homes (as in the chart above) is considered to be an unimaginable catastrophe. The value of most homes in the poorer parts of Chaco wouldn't even buy a used car in the U.S., and yet the people we visited and spoke to were serene and optimistic. Quite a lesson in humility and perspective.

I wanted to post some photos from today but for some reason was unable to. I've got lots to say, but it will have to wait for later; we'll be back home in the USA this Friday.

As for the U.S., we've obviously taken a big hit, but it's far from being the end of the world, despite the numerous calls today for a double-dip recession in the housing market. In contrast, I'm confident that home values will recover and life will go on. The Fed is doing everything in its power to avoid a deflationary meltdown of the US economy, and I think you underestimate the Fed's ability to get what it wants at your peril. Plus, there are many more signs of an economic recovery than of a looming double-dip. Moreover, consider the chart below, which shows the value of an index of major home builders' stocks. If the market is at all capable for looking into the future, then things are really not that bad at all.

Trip update


This is one of the most photogenic spots in the Torres del Paine park, and it was about 10 minutes from where we were staying. In the center right (top) portion you can see the Torres, and our camp/hotel was right at their base. I took the picture in the morning when no air was yet stirring, so the reflection in the river is quite amazing. Bear in mind that the elevation at this spot was only about 600 ft. It's amazing how much snow there is in the southern latitudes at relatively low elevations. The huge Southern Patagonia ice sheet (third largest in the world after Antarctica and Greenland) is behind these mountains and stretches north for several hundred kilometers. Torres del Paine marks the spot where the Cordillera of the Andes drops down and even disappears for a bit, before resurfacing around Ushuaia, which is some 800 kilometers south of this spot.

Tomorrow we have a long traverse to the provincia of Chaco, where we will be for the next several days before returning home. Blogging will be very light if nonexistent tomorrow, but I hope to keep things going whenever we have time at the hotel. We'll be spending most of our time visiting the Grameen-style micro-lending bank that we helped establish a few years ago. Chaco is the poorest part of Argentina, and we are told that our donation has made a real difference to lots of families there. More on this later.