Is US Gross Domestic Income 'Scary?'

Let’s face it: Bad news sells. Doomsday scenarios often capture widespread popular attention particularly well. We live in an age of insatiable demand for content from the financial press. I’ve noticed that many of their websites have adopted a very breezy style that increasingly features headlines aimed at grabbing attention by arousing fear, so that the reader will be motivated to read the often-much-less-alarming story. Even BloombergBusiness seems to be adopting this approach, which I believe was pioneered by Henry Blodget’s Business Insider website. A case in point is an 8/27 BloombergBusiness article titled "The Scary Number Hiding Behind Today’s GDP Party." Here are the first two paragraphs:

“The federal government today released two very different estimates of the U.S. economy’s growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.

“That’s a big discrepancy for two numbers that should theoretically be the same, since they’re two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you’re happy. If you believe the GDI number, you’re thinking the U.S. is skating close to a recession.” A closer inspection presents a much less worrisome view:

(1) Small tracking error. The quarterly GDP and GDI numbers tend to be volatile and prone to significant revisions. Indeed, Q2’s growth rate for real GDP was revised up from the preliminary 2.3% (saar) to 3.7%. The growth trends in both real GDP and GDI are more stable on a y/y basis. The former was up 2.7% y/y during Q2, while the latter was up 2.2%. That’s not much of a difference and is consistent with the tracking error that the two have had for years. Since 2010, both of these growth rates have been around 2.5%. Since the recovery began in Q3-2009, real GDI is actually up slightly more than real GDP, i.e., 15.3% vs. 13.7%.

(2) Statistical discrepancy. In current dollars, the quarterly difference between the GDP production and the GDI income measures of overall economic activity has been very small, rarely exceeding +/-2.0% of GDP. This statistical discrepancy tended to be mostly positive from the late 1940s through the mid-1990s, and mostly negative since then.

(3) The big driver. Labor compensation has the biggest share of National Income (i.e., GDI plus net income receipts from the rest of the world less depreciation), accounting for 61.9% of it during Q2. It includes wages, salaries, and supplements. On a y/y basis, inflation-adjusted compensation rose 3.8% y/y during Q2, with real wages and salaries up 4.0%. These are solid growth rates in real income earned by workers, which is the main driver of consumer spending and the overall economy.

Today's Morning Briefing: Alphabet Soup. (1) GDP, GDI, EIP, ETFs, HFTs, & UFOs. (2) Pure air and water. (3) Iceland, Ice Age, and the Ice Man. (4) The financial press is going Blodget. (5) BloombergBusiness finds a scary number. (6) A small statistical discrepancy. (7) Consumer incomes and spending growing robustly. (8) The role of ETFs and HFTs in last week’s market mayhem. (More for subscribers.)

Black Holes & the Stock Market (excerpt)

According to an 8/25 Newsmax article titled “Stephen Hawking: Black Holes May Have Exits After All,” the famed physicist now believes that black holes may not be the no-exit-ever spaces they’re thought to be. In his latest mind-bending theory, Hawking postulates that unfortunate space travelers could escape from black holes after all, but they won’t be able to go home to their own universe. That’s a bummer. On the other hand, Hawking reassuringly concluded: “If you feel you are in a black hole, don’t give up. There’s a way out.” He presented his views in a lecture on Monday at Stockholm University.

Stock investors are fretting that they fell into a black hole starting last Thursday, with the S&P 500 plunging 10.2% in an almost vertical line through Tuesday’s close. Looking at the chart on Monday, I concluded that the market should find support at 1862.49, which was the low on October 15, 2014, the day before the “Bullard Bounce” commenced. On Tuesday, the market closed on the day’s low at 1867.80. Yesterday, it rebounded 3.9% to close at 1940.51. This could be the beginning of the “Bullard Bungee Rebound.”

Falling below the October 15, 2014 low would be bad, but not as bad as entering a black hole. So far, the market’s selloff looks more like a wicked correction. Yesterday, I attributed it to algorithms and unfair trading tactics used by high-frequency trading (HFT) firms rather than to panic selling by individual and institution investors. Today, I would add that ETFs contributed to the recent debacle. There were mini flash crashes in many ETFs because liquidity dried up as market makers and broker-dealers had no idea what a fund’s holdings were really worth.

The current correction won’t turn into a potential black hole unless the S&P 500 drops to 1704.66, which would mark a 20% bear-market decline from the record high of 2130.82 on May 21 this year. That would be the lowest level since October 15, 2013. That might feel like a black hole, but the S&P 500 would still be up 151.0% since the start of the bull market on March 9, 2009. It would still exceed its previous cyclical high on October 9, 2007 by 8.5%.

That would be cold comfort for most investors who would feel lost in space, believing that Mission Control at the Fed and at the other major central banks can no longer revive the bull market. The 8/26 BloombergBusiness included an article titled “Investors’ Central Banking Saviors Caught Naked as Stocks Slide.” The key point was: “Where have all the heroes gone? The central bankers who saved the global economy in 2008 and kept its anemic recovery from stalling now increasingly lack the tools to respond if the worldwide slump in equities gets much worse.”

Maybe so. But there’s more to the global economy than meddlesome central bankers. There’s also the underlying resilience provided by aspirational consumers, hard-working employees, and innovative entrepreneurs around the world. They’ve done remarkably well for themselves in recent years, with lots of benefits accruing to our economies, despite the meddling of all the central bankers and central planners. Maybe the market bottomed on Tuesday.

Today's Morning Briefing: Black Hole Theories. (1) Stephen Hawking says there’s a way out of black holes. (2) Bullard Bungee Rebound. (3) We blame HFTs and ETFs for exacerbating the recent unpleasantness in the US stock market. (4) Can stock prices move higher if the central banks have lost their magic powers? (5) Dow Theory and Death Crosses. (6) Our mantra: “USA, USA, USA.” (7) Gasoline windfall literally driving the economy. (8) Dudley and his chums are in a black hole without an exit. (9) Fed’s space-age jargon full of “escape velocity” and “lift off.” (10) Reality is probably distorted in black holes. (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

Can US Economy Weather the Global Storm? (excerpt)

The latest batch of US economic indicators certainly looks upbeat. The Consumer Confidence Index (CCI) rose sharply during August, led by its present situation component to the highest reading since November 2007.

Most impressive is that the percentage of respondents to the CCI survey who agreed that jobs are hard to get plunged from 27.4% during July to 21.9% this month, the lowest percentage since January 2008. This series is highly correlated with the unemployment rate, which was 5.3% during July. The CCI series suggests that the jobless rate could soon fall below 5%.

By the way, this also suggests that the Misery Index, which is the sum of the unemployment rate and the inflation rate, will continue to fall to new lows for this cycle. In the past, bear markets were associated with a rise in the Misery Index. On the other hand, cyclical lows in the Misery Index marked the tail ends of bull markets.

If you need a couple more indicators to restore your confidence in the US economy, take a look at the ATA trucking index. It rebounded smartly during July, and is almost back to its record high during January of this year. Intermodel railcar loadings rose to a record high in mid-August. “Choo-choo” isn’t the sound of China sneezing.

Today's Morning Briefing: The Iceman Cometh. (1) Albert Edwards is the Iceman. (2) Global freezing. (3) Another 2008 crisis is imminent eventually. (4) Cold summer followed by warm winter for stocks? (5) Blame HFT robots, since most humans are at the beach. (6) It’s good to be plugged in, to front-run everyone else. (7) VIX soars, while Treasury yields meander. (8) Must be getting close to a bottom for commodities. (9) People say US labor market improving significantly. (10) Transportation activity indicators rolling along. (More for subscribers.)

Retracing the Bullard Bounce (excerpt)

The S&P 500 closed at 1893.21 yesterday. That puts it down 11.2% from its record high on May 21, down 8.0% ytd, and down 5.2% y/y. There was some chatter about the PBOC lowering the required reserve ratio for banks over the weekend, which didn’t happen. Instead Xinhua, China's official news agency, reported on Sunday that under the new rules, China’s giant pension fund will be allowed to invest up to 30% of its net assets in domestically listed shares. No one was impressed: The Shanghai Composite Index plunged more than 8% yesterday. The Chinese media dubbed the collapse “Black Monday.” It was dark in New York as well.

During the first couple of weeks of October last year, the stock market was having another taper tantrum as the Fed was on course to terminate QE by the end of the month. The market rebounded dramatically on October 16 following a comment from FRB-SL President James Bullard that the FOMC should consider extending its bond-buying program beyond October due to the market selloff, waiting to see how the US economic outlook evolves. Yet in his interview with Bloomberg News, he also said he still believed that the FOMC should start raising the federal funds rate in March of this year.

QE was terminated on schedule, and the S&P 500 continued to rally to an all-time record high of 2130.82 on May 21. Nevertheless, many investors have been nervous, particularly the ones who’ve noted the strong correlation between the Fed’s balance sheet and the S&P 500.

This time, Bullard might have contributed to the recent panic selloff by exacerbating the market’s tightening tantrum. On Friday, as the stock market was tanking following Thursday’s plunge, Bullard, who is one of the most talkative of the Fed’s talking heads, was interviewed on SiriusXM Business Radio. He suggested that despite the turmoil in the financial and commodity markets, the FOMC should proceed with its first rate hike at the committee’s September 16-17 meeting. Bullard said the Fed doesn’t react to financial markets directly unless they influence the economy. While crude oil prices slumped to the lowest level since 2009, he said the bulk of the decline over the past year has been driven by increased supply rather than lower global demand.

Earlier on Friday, the Richmond Fed said its president, Jeffrey Lacker, will give a speech September 4 titled “The Case Against Further Delay.” Yesterday, Lockhart stuck to his guns saying he still expects the FOMC to raise short-term interest rates in the next few months, even as he recognized some of the stresses facing the US economy and financial markets.

So what will the FOMC decide to do at its September meeting? Given the turmoil in financial and commodity markets, Fed officials are likely to postpone a rate hike until their December 15-16 meeting. By then, there might be less commotion. Of course, another possibility is that one-and-done will be none-and-done this year, and maybe even next year.

Today's Morning Briefing: Retracing the Bullard Bounce. (1) Bullard Bounce without Bullard? (2) From taper tantrum to tightening tantrum. (3) From one-and-done to none-and-done? (4) The famous airplane scene in “Almost Famous.” (5) Maybe commodity prices are near their lows after falling so far over the past year. (6) Maybe the worst is over for non-dollar currencies. (7) Is it too late to panic? (8) The alternatives to stocks are mostly near-zero interest rates. (9) Global economy is chronically weak, but recession still seems unlikely. (10) Forward earnings remain near record highs for S&P 500/600/400. (More for subscribers.)

Another Panic Attack or the Start of a Bear Market? (excerpt)

There have been lots of panic attacks since the start of the bull market in early 2009. The first four of them occurred from the second through the fourth years of the current bull market, and they were full-fledged corrections. They were all triggered by worries that a recession was imminent, with anxiety focused on three major and varying concerns: a double-dip in the US, a disintegration of the Eurozone, and a hard landing in China--all having the potential to cause a global recession either individually or in combination. When those fears dissipated, relief rallies ensued.

This year started with lots of concerns about a Grexit that would destabilize the Eurozone. That issue seems to have been resolved benignly for now. Earlier this year, there were concerns about a soft patch in US economic growth that is no longer an issue either. The latest selloff was mostly triggered by the relatively small devaluation of China’s currency two weeks ago. That immediately heightened fears that China’s economy is in much worse shape than had been widely recognized.

That new perception was confirmed Friday morning by the release of China’s Caixin/Markit Flash M-PMI for August showing a drop to 47.1, the lowest since March 2009. I’ve observed many times before that bear markets are caused by recessions when corporate profits decline along with the economy. Are we there now as a result of a hard landing in China? I expect that the global economy will continue to grow albeit at a subdued pace with the US economy growing solidly enough to offset weakness elsewhere around the world.

Today's Morning Briefing: Bad Break. (1) Another panic attack followed by another relief rally? (2) Or, is this the start of a bear market? (3) Technical picture is very ugly. (4) One of the bull market’s three major concerns rises to the fore. (5) China’s syndrome. (6) Is there a credit crunch out there? (7) Have central banks really run out of ammo? (8) Tough transition or hard landing for China? (9) The IMF’s spin on China. (10) Global recession? (11) No sign of earnings recession so far. (12) Home sweet home. (13) Bye-bye buybacks? (14) “The Man From U.N.C.L.E.” (+) (More for subscribers.)

Junk Getting Junkier (excerpt)

One of the best coincident and real-time indicators of bursting bubbles and recessions is the yield spread between US high-yield corporate bonds and the 10-year US Treasury. It isn’t flashing code red just yet, but it has gone from green to orange over the past year. The yield on the Merrill Lynch junk bond composite is up 205bps from last year’s low of 5.16% on June 24 to 7.21% currently. The yield spread has widened from 257bps to 501bps over this same period.

Apparently, stock traders didn’t get the all-points bulletin from the credit department. In the past, the S&P 500 VIX measure of volatility has been highly correlated with the yield spread between corporate junk and Treasuries. However, so far, it remains near this year’s lows despite the widening of the spread. That’s complacency for sure, which may or may not be warranted. It may be that stock investors figure that most of the problems in the junk bond market are in the energy segment, which accounts for about 17% of the market. That’s big, but not big enough to cause a contagion in the credit markets. Complacency can also be found in the Nasdaq 100 VIX, which has been relatively calm since early 2012.

There is less complacency in Investors Intelligence’s Bull/Bear Ratio, which plunged from 3.14 to 2.05 over the past four weeks. However, that was mostly because of a big drop in the percentage of bulls who stampeded into the correction camp rather than turning into outright bears. The percentage in the correction camp jumped to 43.9% this week, the third highest reading on record, with the all-time high set during the week of October 21, 2014 at 46.5%.

Today's Morning Briefing: When Bubbles Burst. (1) Commodity super-cycle latest bubble to burst. (2) Must a recession follow? (3) Junk getting junkier. (4) All-points bulletin from the credit department. (5) Complacent VIX. (6) Near-record high in stock correction camp. (7) Emerging markets have an urge to submerge. (8) That sinking feeling in the commodity pits. (9) What to expect when expected inflation is so low. (10) Gundlach and Kocherlakota voting for “none-and-done.” (11) Housing has solid foundation. (12) Will Millennials be single renters forever? (13) Focus on underweight-rated S&P 500 Materials. (More for subscribers.)

Q2 Revenues & Earnings Review (excerpt)

S&P released Q2 data on revenues, earnings, and margins for the S&P 500 on Friday. I like to compare the operating earnings-per-share data compiled by S&P to the similar earnings composite calculated by Thomson Reuters I/B/E/S (TR). I prefer the TR series because it is aligned with industry analysts’ earnings estimates.

S&P sticks to Generally Accepted Accounting Principles (GAAP). One big difference between S&P and TR operating earnings in recent quarters has been the way the two account for asset impairment within S&P 500 Energy companies. These have impacted the direction of operating margins recently. (TR doesn’t publish a reported earnings-per-share or a revenues-per-share series, but both must be identical to the one published by S&P.) I know: You probably can’t stand the suspense any longer, so let’s have a closer look at the data:

(1) In sum, both the S&P and TR data show that both revenues and earnings fell on a y/y basis during Q2 for the S&P 500. However, most of the decline was attributable to plunging Energy revenues and earnings. Excluding this sector, the growth rates were better, but subdued as the strong dollar also weighed on company results. Writeoffs also weighed heavily on the S&P earnings number for the quarter. While TR’s profit margin for the S&P 500 rose to a new record high during Q2, the S&P figure was lower. An analysis of the S&P 500 sectors shows that Financials, Information Technology, and Utilities have been boosting the overall profit margin. Energy and Materials have weighed it down.

(2) S&P 500 revenues edged up from an annualized $1,092.76 per share during Q1 to $1,126.56 during Q2. They fell 3.7% y/y during Q2 following a 2.4% decline during Q1. These were the first such declines since Q4-2008 through Q3-2009. I calculate that revenues rose 2.3% and 0.7% during Q1 and Q2 excluding the Energy sector.

(3) S&P 500 earnings rose from an annualized $114.40 per share during Q1 to $120.20 during Q2 according to TR. On a year-over-year basis, I estimate S&P 500 earnings rose 2.1% during Q1 and 1.6% during Q2 on a pro-forma/same-company basis. On this same basis, I calculate that S&P 500 earnings rose 11.5% and 10.1% during the two quarters excluding Energy earnings.

Today's Morning Briefing: Piecing Together the Puzzle. (1) Lots of S&P 500 data on Q2 revenues, earnings, and margins. (2) Comparing S&P vs. Thomson Reuters earnings composites. (3) The big news was a new high for the S&P 500 profit margin by one measure. (4) Weak oil price and strong dollar aren’t likely to weigh on revenues and earnings next year. (5) Financials, IT, and Utilities profit margins at new highs. (6) Energy and Materials margins down. (7) LargeCap margins consistently exceed SMidCap margins. Why? (7) Small companies tend to be more labor-intensive than large ones. (8) Many may also be losing money. (More for subscribers.)

China’s Known Unknowns (excerpt)

In a 7/15 release on Q2’s GDP, the Chinese National Bureau of Statistics said that China’s economy is “moving forward while maintaining stability.” Real GDP rose 7% y/y. The release observed that Chinese officials “unswervingly pushed forward the system reform and institutional innovation.” What does that mean? Recent events since then suggest that they are spending more time learning how to manipulate the financial markets.

They have long been charged with manipulating China’s economic data to show more strength. “China has a history of ironing out the ruffles in its growth figures,” according to a 7/15 article in The Economist. “No less an authority than Li Keqiang, now the premier, once said that local GDP data were ‘man-made and therefore unreliable’.”

The 8/14 The Guardian includes an article titled “Five reasons to be worried about the Chinese economy.” It observes: “The Economist has developed an unofficial ‘Keqiang index’, based on Li’s own technique of looking at indicators such as electricity use and rail freight volumes to assess what is really going on in the economy.” Sure enough, rail freight volumes were down 11.7% y/y through June. Electricity production was up just 2.8% y/y during July (using the 12-month average), the slowest since October 2009. Using similar measures the London-based consultancy Fathom estimates China is really growing at 3.1% a year, not 7.0%!

Today's Morning Briefing: GDP Growth Is MIA. (1) The demand and supply sides of secular stagnation. (2) Abenomics lost its mojo during Q2. (3) Need to squint to see Eurozone’s growth. (4) China’s many known unknowns. (5) Keqiang index shows weakening Chinese economy. (6) Brazil’s masses protesting the messes. (7) US economy isn’t stagnating, but it isn’t booming either. (8) The Donald Trump of economies. (9) Gatsby has left the building. (More for subscribers.)

S&P 500 Revenues Up a Bit Excluding Energy (excerpt)

The latest readings on business sales show that the plunge in oil prices and the soaring dollar are weighing on revenues growth:

(1) Business sales with & without petroleum. Business sales are down 2.5% y/y through June. Over this period, manufacturing shipments and distributors’ sales of petroleum products are down 25.8%. Excluding these products, business sales are up, but only by 1.3%. Last June, these non-petroleum sales were up 3.3%. This weakness is probably attributable mostly to the strong dollar’s depressing impact on exports. (Remember, this measure doesn’t include sales of goods and services produced and sold abroad by foreign subsidiaries.)

(2) Exports. Merchandise exports accounts for 26% of manufacturing shipments. The growth rate of the former is highly correlated with the growth rate of non-petroleum manufacturing shipments. Exports fell 6.3% y/y during June. A year ago, exports were up 2.5% y/y.

(3) The dollar. In addition to depressing US exports, the strong greenback directly reduces the dollar value of revenues and earnings from overseas operations. There is a strong inverse correlation between the trade-weighted dollar (TWD) and the growth rate in S&P 500 revenues. That’s because roughly 50% of S&P 500 revenues comes from abroad. The TWD is up 16% y/y. This implies that over the past year, the dollar has reduced S&P 500 revenues by 8.5%.

(4) Oil price. The price of a barrel of Brent crude oil is down about 52% y/y. The S&P 500 Energy sector accounted for about 10% of S&P 500 revenues a year ago. So it has knocked 5% off of revenues over the past year.

(5) Combined effect. The bottom line is that together lower oil prices and the stronger dollar have knocked almost 15% off of revenues compared to a year ago. On Friday, S&P reported that revenues were actually down only 3.7% y/y for the S&P 500. There has continued to be good revenues growth in some of the major sectors of the S&P 500. In fact, excluding Energy, revenues rose 1.7%. The revenues performance derby for the 10 S&P 500 sectors is as follows: Health Care (8.3% y/y), Information Technology (4.1), Financials (4.0), Telecommunication Services (2.4), Consumer Discretionary (1.6), Consumer Staples (1.0), Industrials (-3.8), Utilities (-4.8), Materials (-9.9), and Energy (-31.7).

Today's Morning Briefing: Gilded Ages. (1) Back to the future in Newport, RI. (2) Gatsby didn’t sleep here. (3) The “cottages.” (4) Robber Barons, the 1%, and the rest of us. (5) Might inequality be a byproduct of prosperity? (6) Entrepreneurial vs. crony capitalism. (7) Upward revisions in retail sales bullish for Q2 & Q3 GDP. (8) More records for standard of living. (9) Oil and dollar weighing on revenues, but analysts say worst is over. (10) Revenue winners and losers among the S&P 500 sectors. (11) Revisions show NIPA profit margin peaked during Q1-2012. (12) Business sales & GDP and vice versa. (13) Focus on market-weight-rated S&P 500 Retail industry. (More for subscribers.)

Earnings: Looking Good Again Excluding Energy (excerpt)

Over the past year, S&P 500 earnings have been suffering mostly from the plunge in oil prices and the strength of the dollar since last summer. This syndrome may continue for a while given the renewed weakness in oil prices and strength in the dollar.

Let’s calculate the y/y percent change in the 10 S&P 500 sectors during Q2 based on the blend of the available actual and analysts’ estimated earnings. Here is what we find:

Consumer Discretionary (12.0% vs. 7.1% at the start of the Q2 earnings season on July 1st), Consumer Staples (0.2 vs. -2.9), Energy (-56.2 vs. -62.8), Financials (20.7 vs. 14.8), Health Care (11.5 vs. 4.1), Industrials (-1.3 vs. -1.1), Information Technology (5.5 vs. 2.1), Materials (8.5 vs. 4.9), Telecommunication Services (9.3 vs. 5.5), and Utilities (4.5 vs. 0.5).

Three of the sectors are up with double-digit gains. All but Industrials are turning out to be better than was expected at the start of the earnings season. S&P 500 earnings was expected to be down 3.0% y/y during Q2 at the start of the season. The latest numbers show a gain of 1.6%. Excluding Energy, it is up 10.2%. That’s impressive and follows a similar pattern as during Q1, when S&P 500 earnings rose 1.5%, but 11.5% excluding Energy.

The recent renewed weakness in the price of oil could continue to weigh on Energy earnings through the end of this year. The renewed strength in the dollar in recent weeks could also weigh on the overall S&P 500, where at least 50% of revenues comes from overseas. I did cut my earnings estimates for 2015 and 2016 sharply at the end of 2014 and again early this year to reflect the negative impacts of lower oil prices and a stronger dollar. I may have to trim a little more, but I am not doing so just yet.

Today's Morning Briefing: China’s Critical Mess. (1) Fukushima Syndrome. (2) China’s central bankers and central planners have a credibility problem. (3) Trump dumps on China too. (4) Endgame scenario making a comeback. (5) From critical mess to critical mass. (6) The US is a net winner. (7) Need a magnifying glass to see Eurozone recovery. (8) China has two options. (9) Hold the MSG. (10) Earnings are fine excluding Energy. (11) Upside Q2 earnings surprises aren’t surprising. (12) Another Chinese fire drill at the FOMC? (More for subscribers.)

Global Secular Stagnation or Worse? (excerpt)

In recent months, I’ve observed that most of the global economic indicators suggest a scenario of secular stagnation, with neither a boom nor a bust. The OECD Leading Economic Index is leaning more in the direction of a bust, but I’m not convinced.

During June, the index for the 34 advanced economies that are members of the OECD fell to 100.0, the lowest reading since June 2013. Among the weakest components of the overall index is the US LEI, which fell to 99.4, the weakest since November 2011. Sorry, that doesn’t make any sense to me. Making more sense is the LEIs for the BRICs, which all remained below 100 during June.

Then, again the weakness in the CRB raw industrials spot price index is of concern to me. I also note that Japan’s exports and imports remained lackluster during June.

Today's Morning Briefing: Shock Without Awe. (1) How do you say “Godot” in Chinese? (2) Another desperate measure for desperate times in China? (3) Professor Copper gives Chinese a big thumbs down. (4) El-Erian makes sense of it all. (5) Not enough growth to go round, so steal some with cheaper currency. (6) Chinese are in good company. (7) Clueless in Beijing. (8) Chinese savings glut fueling massive misallocation of capital. (9) OECD leading indicators turning weaker. (10) Fed’s talking heads talking. (11) One-and-done this year followed by none-and-done next year? (More for subscribers.)

China Is a Mess (excerpt)

The rebound in Chinese stocks on Monday is consistent with the bad-news-is-good-news performance of stock markets around the world since the financial crisis of 2008. That’s because bad news is viewed as likely to spur the central bankers to provide another round of easing. There were lots of downbeat indicators coming out of China in recent days.

As we noted yesterday, on a seasonally adjusted basis, imports fell 2.1% m/m and 8.1% y/y. Some of that weakness reflected the drop in oil prices. However, imports excluding petroleum still fell 3.4% y/y during June, suggesting weak domestic demand. Exports declined 4.9% m/m last month and 8.3% y/y, likewise suggesting weak global demand. Exports have been essentially flat now since early 2013.

July’s PPI was down 5.4% y/y. That’s the 41st consecutive monthly decline, and the worst since October 2009. There were lots of devils in the details for the various industrial categories: ferrous metals (-20.1% y/y), coal (-15.1), raw materials (-9.7), nonferrous metals (-7.7), heavy industry (-6.3), manufacturing (-4.5), chemicals (-3.1), and light industry (-1.1).

The underlying mess in China may be best reflected in the country’s rapidly rising capital outflows. Over the 12 months through July, the trade surplus totaled $541 billion, a tad below June’s record high. Over the same period, China’s nongold international reserves fell by a record $318 billion. This implies record capital outflows totaling $859 billion over the past 12 months through July.

The only positive spin is that China is lending lots of money to the ’Stans (Afghanistan, Kazakhstan, and Pakistan) to build the Silk Road project, which will boost China’s exports and absorb much of its domestic excess manufacturing capacity. The only problem with this theory is that most of the project is still on the drawing boards. More likely is that anyone with money in China is doing what they can to get it out of there, and fewer foreigners are interested in investing in China.

Today's Morning Briefing: Behind the Curtain. (1) What’s different this time that technicians aren’t seeing? (2) Warren Buffett’s latest deal offsets bearish technical signals. (3) Corporate funds driving bull market more than the investment public. (4) Individual investors mostly on the sidelines. (5) Institutional equity investors (excluding equity funds) are net sellers. (6) Foreigners selling US equities this year. (7) Corporations massively buying shares through buybacks and M&A deals. (8) The wizards behind the curtains in the US and China. (9) Chinese-style QE is sweet and sour. (10) Is greed back in China already? (11) Bad news is good news in China. (12) OPEC no longer the Fed of oil market. (More for subscribers.)

Is the Global Economy Sinking Into a Recession? (excerpt)

One of the most accurate and reliable global economic indicators is the CRB raw industrials spot price index. It has been falling this year, and is now the lowest since November 9, 2009. However, other global economic indicators show that there is growth, and no reason to conclude that a recession is imminent or looming on the horizon. The latest upbeat indicator is June’s 2.0% increase in Germany’s new factory orders, led by foreign orders, to the best reading since April 2008.

The JP Morgan Global Composite PMI edged up from 53.1 during June to 53.4 during July. Its M-PMI component remained unchanged at 51.0, while the NM-PMI led the rise in the overall index. On the other hand, The HSBC Emerging Markets Composite PMI remained weak during July at 50.2, though that was an increase from 49.6 the month before.

China’s July trade figures remained on the soft side. On a seasonally adjusted basis, imports fell 2.1% m/m and 8.1% y/y. Some of that weakness reflected the drop in oil prices. However, imports excluding petroleum still fell 3.4% y/y during June, suggesting weak domestic demand. Exports declined 4.9% m/m last month and 8.3% y/y, suggesting weak global demand. Exports have been essentially flat now since early 2013.

In the US, the labor market continues to improve as discussed below. The Citigroup Economic Surprise Index has rebounded from the year’s low of -73.3% on March 23 to -7.6% at the end of last week.

Today's Morning Briefing: Summer Swoon? (1) Sinatra was right about the Windy City. (2) Lots of turbulence in the financial markets last week. (3) Technical picture deteriorating. (4) Omens and Death Crosses. (5) Railroads hauling less coal, but with cheaper fuel. (6) Is the bubble bursting in the commodity markets this time? (7) Mixed global picture. (8) German orders are up, led by exports, while Chinese exports remain flat. (9) Known unknown: Will small Fed rate hike have big adverse impact? (10) Yellen will soften the blow. (11) Summer swoon could be buying opportunity. (12) Latest employment reports have same rhythm as previous ones. (More for subscribers.)

US Economy: Not on Fire (excerpt)

The US economy continues to cruise along at a leisurely pace. On a year-over-year basis, real GDP has been growing between 2.3% and 2.9% since Q2-2014. It certainly isn’t showing any signs of overheating despite tightening labor market conditions. Let’s review the latest developments:

(1) Exports. The stronger US dollar and slower global growth continue to weigh on US merchandise exports. A 3/11 WSJ article highlighted Duke University’s CFO Magazine Business Outlook Survey. Not surprisingly, the results for 489 US firms showed that 80% of the firms that derive at least one-fourth of total sales from exports said the dollar has had a negative effect on their revenues. Soft global growth is also keeping a lid on exports of capital goods and industrial supplies as overseas companies cut back on expansion plans.

Inflation-adjusted exports have stalled around $1.45 trillion (saar) over the past 11 months through June. They are down 6.3% y/y in current dollars and 0.2% in real dollars.

In current dollars, exports are highly correlated with S&P 500 revenues, which is no surprise since at least 50% of these revenues are generated outside the US. June’s weak export growth is consistent with the negative surprises in Q2’s S&P 500 revenue growth.

(2) Factory orders. S&P 500 revenues are also highly correlated with factory orders. These orders fell 6.2% y/y during June. Leading the decline was petroleum orders, which are the same as shipments. They were down 27.9% y/y. However, even excluding them, orders were down 2.5%.

(3) Transportation. Railcar loadings of intermodal containers always dip during the winter and rebound during the spring and summer as retailers restock their inventories. The dip was a bit worse than normal this year as a result of the West Coast dock strike. However, the rebound has been solid. On the other hand, the ATA trucking index dipped in June and was 3.5% below its record high during January.

(4) Auto sales. While manufacturing data show lots of soft patches, the auto industry is doing well. The level of sales remains high. It averaged 17.0 million units (saar) during the first seven months of this year, up 4.8% from the same period a year ago. The problem is that domestic automakers are scrambling to produce more of some of their most popular models, but may be capacity constrained.

(5) Services. While the manufacturing sector seems to be cooling, with the notable exception of the auto industry, the services sector is hot. It isn’t affected as much by the dollar and overseas economic growth. The national NM-PMI rose to 60.3 in July, the highest since August 2005. Wednesday’s ADP payroll report for July showed that nearly the entire gain of 185,000 was attributable to services companies.

Today's Morning Briefing: We Didn’t Start the Fire. (1) 16,000 fans. (2) Islanders vs. Rangers. (3) Joel & Simon. (4) Headlines as verses. (5) New service. (6) Pieces of the puzzle. (7) Lots of debt in the big picture, and more coming. (8) More can kicking in China and Greece. (9) Companies borrowing lots to buy other companies. (10) Big banks back in the big mortgage business. (11) US economy isn’t on fire. (More for subscribers.)

More on the Standard of Living (excerpt)

The income-inequality crowd is obsessed with the narrowest measure of median real household income compiled by the Census Bureau to measure poverty. Yet it excludes significant noncash government benefits. Furthermore, as I’ve observed previously, it is pre-tax so it doesn’t reflect income redistributed through the tax system. Even with all their tax shelters, the rich pay lots of taxes. The poor can get the Earned Income Tax Credit to boost their incomes.

In June, personal income per household was at a record high of $130,277 (saar) in current dollars. It was $118,803 in real dollars, and up a whopping 108% since the start of the Census data in 1967. I don’t have a way of calculating median personal income per household, but I note that the trends in the Census measures of mean and median household income have been similar, though they do show the rich getting richer. In any event, mean real household income is up 49% since the start of the data, lagging well behind the comparable measure of total personal income.

The important point is that incomes haven’t been stagnating as charged by the income-inequality crowd. Furthermore, in June, personal consumption per household rose to a record $104,440 in current dollars. It was $95,244 in real dollars (saar), and up 118% since the start of the Census data in 1967.

There simply aren’t enough rich people to explain this record high in the standard of living as measured by mean real consumption per household. To reiterate, mean real household income, which admittedly gives more weight to the rich than does the median measure, has also stagnated, but for a shorter period than the median. It is actually down 5% since 1999 through 2013. Yet since the start of 1999, real personal income per household is up 24% and real consumption per household rose 27%, both to new record highs.

Today's Morning Briefing: American Dream or Myth? (1) Myth, dream, and nightmare. (2) Rich, poor, and balderdash. (3) Widespread prosperity. (4) A misleading indicator of income. (5) Cash and noncash income. (6) The rich are richer, but everyone is better off too on average. (7) Income distribution before vs. after benefits and taxes. (8) Declining percentage of families in households. (9) Fewer people per household. (10) Consumers are doing what they do best. (11) More on the skills gap. (12) Bachelor’s degree not required to work at Starbucks. (13) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Timing the Next Bear Market (excerpt)

Since bear markets are usually caused by recessions, timing the next significant drop of 20% or more in stock prices depends on forecasting the next recession accurately. Previously, I have explained why March 2019 is a plausible estimate for the start of the next recession based on the average length of previous economic expansions.

Perhaps there are some leading indicators that might help us anticipate the next bear market. Consider the following:

(1) Leading indicators. The problem is that the S&P 500 is one of the 10 components of the Index of Leading Economic Indicators (LEI). In other words, the market is already discounting future economic developments including booms and busts. How about the spread between the 10-year Treasury bond yield and the three-month Treasury bill rate? The yield curve spread is a component of the LEI as well. The same goes for initial unemployment claims. They all remain in bull market territory.

(2) Industrial commodity prices & the BBB. I am a big fan of the CRB raw industrials spot price index as a daily real-time indicator of the global economy. It’s looking bearish for stocks currently. However, I also divide it by initial unemployment claims to derive my Boom-Bust Barometer, which remains relatively upbeat, signaling neither a boom nor a bust.

(3) Misery Index. A less timely indicator is the Misery Index, which is the sum of the unemployment rate and the PCED inflation rate. It too tends to rise during bear markets without providing much warning. In June, it fell to 6.6%, the lowest reading since August 2007, with the unemployment rate at 5.3% and inflation at 1.3%. Perhaps this is a useful warning: When misery is as low as it is now, the next big move in the index has tended to be in a more miserable direction. However, keep in mind that there is still room for less misery given the 5.3% lows of both February 1966 and August 1999.

Today's Morning Briefing: Less Misérables. (1) No bargains in US. (2) Plenty of bargains in Greece, but for good reasons. (3) Timing the next bear market and recession. (4) The problem with bear market indicators. (5) The Boom-Bust Barometer sees neither. (6) The Misery Index loves companies. (7) Room for less misery. (8) Will the bear market in commodities trip up secular bull market in stocks? (9) Will China’s next shock-and-awe show be shocking enough to boost commodity prices? (10) Easing on down Silk Road. (11) Italian manufacturing is on the mend. (12) Will one-and-done be followed by a melt-up? (13) Blankfein’s big sniff. (More for subscribers.)

GDP Continues to Cruise (excerpt)

I remain impressed by how well the US economy is doing despite all the meddling from federal, state, and local governments. Consider the following:

(1) GDP cruising at stall speed. Real GDP growth on a year-over-year basis has been hovering around 2% since Q2-2010. It was 2.3% during Q2. Along the way, “endgamers” warned that 2% has been the economy’s stall speed in the past. Whenever it fell below that rate, a recession followed. So far, it has been different this time. That may be because the private sector has been growing around 3% over the same period, measured by real GDP excluding government spending.

(2) Consumers still consuming. Consumer spending in real GDP rose 3.1% y/y during Q2. That’s among the highest growth rates during the current economic expansion! Real consumer spending per household rose to a record $96,240 during May, up 2.2% y/y. Household formation has recently been growing at a faster pace. That certainly augurs well for consumer spending. So does the strength in employment indicators. On the other hand, wage gains remain lackluster, as discussed below, though they are outpacing price inflation.

(3) Capital spending not all bad. Capital spending in real GDP rose just 2.6% y/y during Q2, one of the weakest growth rates during the current expansion. Such spending on business structures fell 1.7% y/y. On the other hand, equipment spending increased by 2.1%, and intellectual property products rose 6.6%.

The good news is that while total real capital spending has stalled over the past three quarters, it has done so at an all-time record high exceeding $2.2 trillion (saar). Industrial equipment spending rose to a record high during Q2, while transportation equipment spending remained near recent record highs, which well exceed the previous cyclical peak. The sum of real capital spending on information processing equipment, software, and R&D rose to a record high of $942 trillion (saar) during Q1, and held around that level during Q2, up 3.9% y/y.

Today's Morning Briefing: A World of Hurt? (1) Bronx and Brooklyn cheers. (2) Jared Bernstein to the rescue. (3) Krugman is a man for all seasons. (4) Keynesians are never wrong. (5) Straying from the path. (6) White House shocked that so many jobs require a license. (7) GDP still growing at stall speed. (8) Households are doing well and forming at a faster clip. (9) Some good news under the hood for capital spending. (10) More renters seeking shelter. (11) Nine factors weighing on wages. (12) Global economy continues to stagnate. (13) China’s big snow job. (14) “Mission Impossible--Rogue Nation” (+). (More for subscribers.)