Category Archive

The household savings rate continues to soar, reaching 6.9% in May.

In our current times this is a mixed blessing. On the one hand it means that the unsustainable rise in US consumer debt is coming to an end. This had to happen for international trade flows to stabilize and the world economy to regain balance. Remember that trade flows and international lending are mirror images of one another.

If we are spending beyond our means then that implies we are buying more than we produce. If we are buying more than we are producing where does the extra stuff come from? It must come from abroad. Thus borrowing from abroad and importing are linked. We send the Chinese US bonds and they send us Chinese goods.

The extreme interdependency between the US and China presented risks for both country. The US was at risk for sudden interest rate moves if the Chinese appetite or ability to purchase US debt declined. China was equally at risk for a massive recession should the US stop serving as its primary consumer. As that interdependency winds down, both economies will be safer.

At the same time, however, rising savings means that smaller fraction of consumer’s incomes are going towards purchasing US goods as well. Without increased demand it’s hard to see where a sustained recovery will come from. For know we have some boost from the stimulus. That is temporary. The change in spending habits is likely to be more permanent. The question remains, now that the US shopper is giving his or her credit a break who will be the consumer of last resort?

New Claims for Unemployment Insurance in today at 627,000, pulling the four week moving average up to 617,250.

We can’t seem to break-out into a clear recovery pattern. Each week I am expecting a little bit better number that rolls in. In a traditional recession what we see is a sharp turnaround in new claims once the recovery has begun. The economy has natural job creating mechanisms and so to sustain a recession those have to be overwhelmed by newly unemployed workers.

What we can say is that there appears to stabilization. This is similar to the last two recessions that we had.

No clear drop off but stabilization. My working theory is that this change represents the dominance of service jobs for which layoffs are a much more permanent affair. In a factory setting workers may simply be sent home for a few weeks while the plant works off inventory and then recalled. As soon as the overall inventory glut in the economy is worked off factories will stop these plant shutdowns and the new claims will collapse.

For a service economy a new claim represents a worker who really was let go. That decision didn’t come ways for management and was a long time in the making. It will take a while before we work through all of the layoffs that were planned back in January and February.

http://www.cnbc.com/id/31522920

New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8 percent in May, Commerce Department data on Wednesday showed, providing further evidence that the battered economy was finding its feet.

Analysts polled by Reuters had forecast durable goods orders would decline 0.6 percent last month. May’s increase, the third gain in 4 months, followed a revised 1.8 percent gain in April, previously reported as a 1.7 percent rise.

Perhaps most importantly, orders for non-defense capital goods were up. We think of this as a proxy for business investment spending. Typically, investment doesn’t pick up until the recovery is well on its way. Charts and details to come.