Monday, April 27, 2009

Sunday Night Economic Assessment

The Consumption Index eased back off in the latest week, as scheduled natural gas flows into paperboard facilities (on which the index is based) pulled back sharply in the first business week following Easter/Spring Break. That brought the 28-day moving average (see chart) down somewhat, though still above year-ago levels.

The Production Index set its fourth recession-low in as many weeks, though it was off only slightly. Much of the Year-over-year weakness in industrial gas-flows (68%) comes from the steel sector group (See "Part 8" post on Investor Village CWEI Board), which is off better than 75% from year-ago levels. Nearly three-fourths (74%) of the YOY industrial weakness comes from the metals group (which includes steel).

The new Inventory Index suggested (if both the Production and Consumption Indexes are right) that industry has been using the recent spurt in consumption to clear out inventory-clogged supply channels, as opposed to increasing production. I am, however, leery that a rising dollar combined with lowered shipping costs might also provide an alternate explanation to the recent weakness in industrial & steel gas-flows. Waves of steel-imports have decimated the US steel industry in past periods of recessions and oil-price weakness. The same could be happening today.

Of greatest concern will be consumption. Gut feeling is the recent uptick in consumption was fueled more from "Free-Market-Based Stimulus" (falling gasoline & home-heating costs, falling commodities pricing, rising stock-market valuations, etc) than government stimulus.

That "Free-Market-Based Stimulus" could reverse (Markets will be brutal when they have to be). The energy markets could re-tighten at any time (Natgas fundamentals are hinting at the beginning of that right now on last weeks dailies... though Mondays weeklies and the EIA will have to confirm) and OPEC is apt to be getting antsy. The stock market could roll-over on emotional whim at any time. A couple of dry months could spike food & agriculture.

Providing vast sums of money to banks (so that they can lend more to already-tapped-out consumers) and vast sums of money for infrastructure (so states can repave with 12 inches of concrete rather than 4 inches of Asphalt) might make for happy bankers and lower road repair-costs ten years from now. But is that really going to re-invigorate the consumer to go out and spend more, so that stores can order more, so that factories can produce more, so that employees can be rehired?

Believe me, as a trader I can make a lot of bucks off of 12 inch concrete, but it will not make my kids a more economically-secure country. As a Christian, I would prefer to take the more economically secure country. It will make for happier kids, neighbors and friends.

I would really like to see something more direct... perhaps a payroll tax "holiday" aimed at the lower to lower-middle class (where the most spending bang-for-the-buck is to be had. At least on a short-term (and immediate basis). We are doing too-much tinkering in here... not enough genuine problem-solving.