Monday, November 30, 2009

Sunday Night Economic Assessment

The US Industrial economy again advanced last week (if pipeline scheduling is correct), and consumer spending remains robust amidst a strong 2009 Christmas-shopping season

The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) tallied its 24nd advance in 26 weeks, and now stands higher than at any time since September 29th, 2008. The measure (at 107.5) is just shy of 2008's September pre-plunge peak (108.1) and 2007's high of 110.2 (It bottomed May 28th at 86.7).

In its dailies (as evidenced by the "Part 7" industrial daily posts on the IV-CWEI site) the week was the again somewhat softer in its actuals, though in line given the normal seasonal declines of a Thanksgiving-week.

On a sector-by-sector basis (as per the "Part 8" posts) the steel delivery natgas scheduling remains very firm (steel has been front-and-center in the recovery) and we are having a good strong month (vs the previous month) in the paper, chemical, fertilizer, refining, auto, mining, building materials and Agriculture & Livestock groups.

Especially noteworthy in the part-8 posts is the Food sector, which has now plunged nearly 35% from its January-2009 peak. Gas-flows into food-manufacturing plants have been remarkably proportionate to the recession, prompting me more-and-more towards thinking it has captured consumer-confidence well throughout the recession by measuring Americas ultimate stress-coping mechanism... the fridge.

The Paperboard-based Consumption Index softened a bit more in its latest week. Within its dailies, the index was soft early in the week and strengthened abruptly Wednesday-on, in line with Thanksgiving seasonals. Over the past several weeks, the Consumption index has fallen short of the ramp implied by seasonal factors, presumably because it attained that ramp prematurely weeks earlier when the Christmas shopping rush looks to have begun early.

The Inventories measure (the cumulative weekly difference between the Production Index and the Consumption Index) continues to drop and remains well-below pre-recessionary levels. Once inventory-rebuilding kicks in (assuming nothing tries to derail the economy), another meaningful surge in the industrial economy (and natgas demand) is unavoidable.

Of greatest concern to the US now has to be unemployment. I had hoped to see unemployment numbers starting to come down by now with numbers like these. They so far have not. Either the unemployment numbers are wrong... or something else is very wrong.

For investors, it probably means barn-burning fourth-quarter earnings reports from increased margins as companies make more from the odd-combination of rising revenues and steady-to-falling employment/wage expenses. But for the country as a whole, it is not good to have 10% unemployment lock in.

Perhaps businesses are afraid to hire, preferring to raise cash to meet perceived tax increases or health-reform-mandated payroll increases. Perhaps businesses are hindered by debt-repayment / liquidity concerns. Or perhaps there is a concern for a return to recession, or other emerging factors hostile to business health.

But whatever the reason, the business side of the economic equation is now the sticking point. Consumer confidence appears to be now flying (judging from the gas flows) while business confidence lags. As a vigorous economy requires vigorous participation by both consumers and industrial producers, trouble lays closely ahead if the confidence-imbalance remains... in the form of inflation... and rapid erosion of standard-of-living and economic potential.

We now find ourselves at a point where government must change gears, away from consumption-only stimulus to a more balanced, more-holistic across-the-board approach.

Can 60% govern on behalf of 100% to grow the economy?

Or will 60% diminish to 35% as the economy hits a wall?

Time will tell.