Quote of the Day

Warsh: False Optimism on U.S. Economy | The Big Picture

Our quote of the day:

“The panic’s hasty retreat should not be confused with robust recovery. The rather indiscriminate bounce off the bottom — across virtually all assets and geographies — may be more indicative of a one-time reset, which may or may not be complete.”

-Federal Reserve Governor Kevin Warsh, remarks to the Institute of International Bankers annual meeting in New York.

Green Shoots

Green or Beige?

This afternoon, the Federal Reserve released their Beige Book.  What’s a Beige Book?  It’s their report based on observations and comments from people inside the business world on the state of the economy.    I’m going to walk through some “highlights” and “lowlights” of what’s happening.   My comments are in bold and italics……

“Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May.”

No surprise there, at least not for me.  So, if conditions remain weak or deteriorated, then where are the gree shoots of recovery that people are talking about?

“However, five of the Districts noted that the downward trend is showing signs of moderating.”

So, let’s think about that.   5 out of 12, that’s 41% show that the pace of downward trend is slowing down.  Is that a good thing?   Well, let’s look at a couple of other numbers.   According to this, 100% of the districts show that they are slowing down.  59% of them are slowing down at the same or faster paces than they were previously.

“Manufacturing declined or remained weak in most Districts.”  

Given the shutdowns in the auto industry and the related industries, this certainly isn’t a surprise.    What’s going to be interesting is what that shows as Chrysler (and hopefully GM) get back to work after their “furloughs.”

“Nonfinancial Services - Districts reporting on nonfinancial services indicated that for the most part activity continued to decline………In contrast, San Francisco reported a substantial pickup in real estate services such as title insurance due to an increase in home refinancing.

Ooohhh, that illustrates the trouble that we’re in.  One of the biggest “improvements” in the non-financial services is the title insurance industry because of mortgage refinancing.   Guess what’s not going to last very long due to rising rates…..

Consumer Spending and Tourism
Consumer spending remained soft as households focused on purchasing less expensive necessities……   Several Districts reported that discounters have seen their sales increase, while purchases of luxury goods continued to weaken. Respondents from Boston, Philadelphia, Cleveland, Atlanta, St. Louis, Kansas City, and Dallas expect soft consumer sales to persist. Purchases of new cars remained depressed across most Districts.

Travel and tourism activity declined, and vacationers are tending to spend less.

The information about consumer spending is all consistent with an ongoing deleveraging.    Consumers are spending what they need to but are not spending extra.   What’s the easiest way to get consumers to spend again?   It’s not to make borrowing easier, because consumers have already shown that they have, in many ways, woken up from the “how much would my payments be?” syndrome.   To get consumers spending more, we need to do one of a couple of things:  1) Create more jobs and better paying jobs or 2) Lower tax rates so that people can keep more of what they earn.    Hmmm, how’s that working so far?

“Real Estate and Construction – Although the residential real estate market remains weak, agents in the New York, Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts reported an uptick in home sales. The reasons cited include seasonal factors, low interest rates, declining house prices, and tax credits for first-time buyers. Much of the sales increase was found in the lower-priced end of the market……

First – residential real estate – it’s no surprise that declining house prices are improving home sales.   But, if you look at what we talked about in “Is Housing at a Bottom – Part 5″  there’s a very real chance that house prices aren’t, for most areas, at the bottom.

Second – tax credits for first time home buyers expire December 1, 2009.   If you are a first time buyer and haven’t at least started thinking about buying a home or at least talking to a lender about getting preapproved and starting  to look for a house.   December 1 will be here before you know it.

Third – interest rates are cited as one of the factors that encouraged home sales during this period.   What will be a very telling is what effect the bump in interest rates will have to purchases.   My take on it – the first time home buyers won’t be affected nearly as much as the very few “move up” buyers who are looking at moving up and might find it harder to handle if the rates are higher.

Commercial real estate markets continued to weaken across all Districts…… Eight Districts cited difficulty in obtaining financing as one of the primary reasons for delaying or stopping construction of new developments and for limiting sales of existing properties.

Do you think that one of the reasons the banks are “supposedly” doing well is because they aren’t doing new commercial financing?  Just asking the question…..

“Banking and Finance – Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories………..

Most Districts said that credit conditions remained stringent or tightened further…… The credit quality of loan applicants and existing clients showed deterioration in Philadelphia, Richmond, Cleveland, and Dallas, although Richmond noted that the rate of deterioration has slowed…..  New York and Cleveland said that delinquencies had increased across numerous loan categories, particularly those tied to real estate.”

Lending activity is stable or weak with mixed results but the banks can all give back their TARP money because they are fine?   Hmmm…..

“Employment and Wages – Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling.”

“Prices – With few exceptions, the District Banks reported that prices at all stages of production were generally flat or falling……. The notable exception to the downward pressure on input prices was oil. Increases in oil prices were widely reported.

So,  you tell me…..   Are we dealing with green shoots of a recovery?   Or is the economy looking a wonderful shade of beige?  

It’s important as you make decisions for yourself and your clients that you know what’s really going on.

Tom Vanderwell

Fed Beige Book, Green Shoots

Dr. Roubini – yellow weeds?

“People talk about a bottom of the recession in June, but I see it more like six to nine months from now,” Roubini said. “The green shoots everyone talks about are more like yellow weeds to me.”

Nouriel Roubini, Green shoots

Withering Green Shoots?

Martin Wolf from the Financial Times has a good write up on the dangers of assuming that this bounce in the economic news and the stock markets is indeed a bottom.   It can, in my mind, be summed up by one word:

Deleveraging

What does that mean?  It means that the entire world was drunk on credit and we’re just starting to get over the hangover.   But there’s still the realization that alcohol was a problem and we need to stop drinking.

It means that individual consumers are changing their spending habits because they have realized that they can’t keep getting further and further in debt.

It means that this isn’t over yet…..

Tom

InfoViewer: Why the ‘green shoots’ of recovery could yet wither

The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. They will not be. It will merely show that collapse does not last for ever once substantial stimulus is applied. The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future.

The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable. It is at the early stages of a long and painful deleveraging and restructuring. Fortunately, policymakers have eliminated the worst possible outcomes. But there is much more yet to be done before fragile shoots become healthy plants.

Green shoots

A Few Thoughts About The Recovery….

I like this article for two reasons:

• I really like Daniel Gross’ description of the cheap capital that has been spread around.
• He acknowledges quite well how all of the positive items have come with “asterisks.”

A worthwhile read…..

Tom Vanderwell

Is the economy really showing signs of recovery? – By Daniel Gross – Slate Magazine

Economic theory tells us we should be able to detect some green shoots, if only because so much fertilizer has been spread around in the form of cheap capital.

But for now, every piece of good news—every green shoot—bears caveats. While Goldman Sachs had a great quarter, that was only because it shifted its reporting calendar to exclude December 2008, in which it rang up a loss, from the results. JPMorgan’s Jamie Dimon said things were going so well it might be able to repay the funds it borrowed from the government sooner rather than later, but he also warned that credit card debt is going bad.

Green Shoots