Retail Sales Post Depressing Drop

The American consumer is in a state of depression. I am not just talking about their mood after opening their quarterly brokerage account. The U.S. Census Bureau released the Retail Sales figures for December 2008 today. Adjusted for inflation, Retail Sales plunged in December by 2.7% compared to November and by 10.2% compared to a year ago. Economists were expecting a 1.2% drop compared to November. This is the largest annual drop since July 1951 (which was an aberration due to a very high increase in July 1950). While the NBER has declared the American economy to be in a state of recession, we are a long way off towards being a depression. Some economists define a depression as real GDP declining by 10% over a year. Retail Sales, however, have now entered into depression levels.

This current decline in Retail Sales is a result of a change in dynamics. For years, America has maintained a trade deficit, importing more goods than exports. This deficit has been funded by increases in personal income. The net result has been a positive increase in lifestyle that was sustainable. After the 2001 recession the dynamics changed. The trade deficit took off while personal income was slow in recovering. Consumer spending was no longer sustainable.

Consumer spending was being supported by changes in household net worth. The Federal Reserve publishes a plethora of information including the Balance Sheet of Households and Nonprofit Organizations in their quarterly Flow of Funds Report. From 1970 to 1994, U.S. Households averaged a gain of $2.0 trillion (in 2008 dollars) in household net worth each year. From 1995 to 1999 that increased to an average of $4.6 trillion in gains a year. During 2000 to 2002, net worth dropped by an average of $609 billion a year. But from 2003 to 2006, stock prices recovered and the housing boom took off. Household net worth went up an average of $5.9 trillion a year. Consumers, propped up with enormous paper gains continued spending even though it wasn't supported by gains in personal income.

In 2007, the financial crisis erupted. From the fourth quarter in 2007 to the third quarter of 2008, the net worth of U.S. households declined by a horrific $7.15 trillion. The S&P 500 declined by 22.5% in the fourth quarter. Housing also started declining faster last quarter. When the Fed reports the latest Flow of Funds report in March, the total loss in net worth through the fourth quarter will likely be over $10 trillion. Obama's $800 billion stimulus and the remaining $350 billion in TARP money pale in comparison to the losses sustained. Fears of rising unemployment are also affecting the consumer. We have entered into a new era; U.S. consumer spending will continue to face pressure to come down to a sustainable level.

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Withheld taxes indicate personal income is taking a turn for the worse

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending October 31, 2008 was 0.65% higher than a year ago after being adjusted for inflation. This is down from September's rate of 1.43%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

Withheld taxes gives us a day to day glimpse of how personal income is faring well in advance of the official numbers.  So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession. Withheld taxes is still currently growing. If the downturn continues, there could be a long ways to go before reaching the bottom. Especially if this turns out to be a stronger recession than the one in 2001.

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Withheld taxes post weak growth; further slide is likely

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending September 30, 2008 was 1.41% higher than a year ago after being adjusted for inflation. This is up from August's rate of 0.76%. This is significantly lower than the rate in 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year.

So far, withheld taxes in this current downturn is resembling the slowdown during the 2001 recession.  Withheld taxes is still currently growing.  If the downturn continues, there could be a long ways to go before reaching the bottom.  Especially if this turns out to be a stronger recession than the one in 2001.

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Growth in withheld taxes is slowing down dramatically

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending August 29, 2008 was 0.73% higher than a year ago after being adjusted for inflation. This is down from July's rate of 1.66%.  This is a dramatic decline from 2006 and 2007 where 12 month's withheld taxes grew on average by 4.5% a year. 

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Trade Deficit declines to $56.77 billion

The Department of Commerce announced that the goods and services deficit in June declined to $56.77 billion down from the revised figure of $59.20 billion in May. This is down from when the trade deficit peaked in 2006 averaging $62.77 a month. Exports of goods increased by $5.7 billion while imports of goods increased by $5.7 billion. The goods deficit increased $2.1 billion from May to $70.0 billion and the services surplus increased by $0.4 billion to $13.3 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $21.4 billion deficit (from $21.0 billion in May), OPEC was $18.1 ($17.9), the European Union $8.2 ($7.9), Canada $7.2 ($5.4), and Japan $6.1 ($5.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in June declined slightly from the deficit for the one year period ending in May. The trade deficit peaked in August of 2006. The annual change in Personal Income adjusted for inflation in June was positive but this year Personal Income has been down sharply compared to last year. Before 2000, Personal Income was growing faster than the Trade Deficit. At that time an argument could be made that we were investing in the future. Since 2000, the trade deficit has ballooned while personal income growth has fallen. We are now borrowing from the future to fund our current lifestyle.

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Growth in Withheld Taxes slows in July

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending July 31, 2008 was 1.71% higher than a year ago after being adjusted for inflation. This is down from June's rate of 2.27%.

Through the last cycle, the year over year growth rate of withheld taxes closely mirrored the stock market. The real growth rate turned negative just as the recession ended. It wasn't until the end of 2002 and the beginning of 2003 that the growth rate bottomed and started to improve. The stock market also started growing at the same time. Currently real withheld taxes is growing year over year, but the trend is downward.

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Personal Income increases by 0.06% in June

The Bureau of Economic Analysis released the Personal income figures for June 2008 today. Personal income increased by 0.06% compared to May 2008. May 2008 had a large increase of 1.82% compared to April 2008 due to the 2008 tax rebates. Disposable income decreased by 1.89% in June compared to May 2008. The charts below show per capita Real Personal Income, which increased by 0.60% in June 2008 compared to June 2007.

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Withheld Taxes show income still growing but at a slow rate.

The amount of withheld taxes received by the Department of the Treasury for a 12 month period ending June 2008 was 2.39% higher than a year ago after being adjusted for inflation. This is up slightly from May's rate of 2.20%. Through the last cycle, the year over year growth rate of withheld taxes closely mirrored the stock market. The real growth rate turned negative just as the recession ended. It wasn't until the end of 2002 and the beginning of 2003 that the growth rate bottomed and started to improve. The stock market also started growing at the same time. Currently real withheld taxes is growing year over year, but the trend is downward.

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Trade deficit increases in April

The Department of Commerce announced that the goods and services deficit rose to $60.9 billion up from the revised figure of $56.5 billion in March. The increase in exports of $5.0 billion was offset by the increase in imports of $9.4 billion. The goods deficit increased $4.5 billion from March to $72.9 billion and the services surplus increased by $0.1 billion to $12 billion.

The deficits with our biggest trade partners all increased last month. China was up to a $20.2 billion deficit (from $16.1 billion in March), OPEC was $15.6 ($14.1), the European Union $8.5 ($7.5), Japan $7.6 ($7.5), Canada $7.6 ($6.4), and Mexico $6.8 ($6.0).

Adjusted for inflation, the trade deficit for the last twelve months ending in April declined slightly from the deficit for the one year period ending in March. The annual change in Personal Income adjusted for inflation in April rebounded a bit from its freefall over the last few months. However, the increases in personal income are negligible compared to our trade deficit (unlike in the past when it more than offset our trade deficit). With the increases in commodity prices and the weaker dollar we are continuing to borrow from the future to fund our current lifestyle.

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Mortgage and Consumer Loan Delinquencies Continue To Spike Up.

The Mortgage Brokers Association released the results of their National Delinquency Survey for the first quarter of 2008 today. The seasonally adjusted delinquency rate for mortgages on one - four unit residential properties was at 6.35%, up from 5.82% in the previous quarter and up from 4.84% a year ago. Foreclosures started were at 0.99% up from 0.83% in the previous quarter and 0.58% a year ago. Both of these percentages are the highest on record since the survey began in 1979.

Subprime delinquencies rose to 18.79% from 17.31% in the previous quarter and 13.77% a year ago. However, delinquencies are not confined to subprime, prime mortgage delinquencies rose to 3.71% up from 3.24% in the fourth quarter of 2007 and 2.58% in the first quarter of 2007. Prime delinquencies averaged 2.37% from 2003 - 2006.

Last month, the Federal Financial Institutions Examination Council (FFIEC) released their statistics on mortgage and consumer loan delinquencies. Their definition of a 30 day late is a loan that is over 30 days late when the bank reports (page 501 on this manual). For example if a loan had a March 1st due date and payment was not received by March 31st, then the MBA survey would count that as 30 days late. The FFIEC report would count not count that as "over" 30 days late. If they payment was not received by April 30, then the FFIEC methodology would count that as over 30 days late but not "over" 60 days late. Therefore, the FFIEC numbers for a 30 day late are in between the MBA's 30 day and 90 day delinquency numbers. Nevertheless, the FFIEC delinquencies are showing similar spikes up to the MBA 30 and 90 day delinquencies.

Consumer loan delinquencies are also spiking up. Consumer delinquencies spiked up during the last two recessions and did not start to fall until after the recession ended. It is alarming that we are having this acceleration in delinquencies without the severe effects of a recession like rising unemployment and big drops in personal income.

The stock market is pricing in that the worst is behind us. However, the delinquencies are continuing to accelerate. Home price depreciation is also accelerating. The charts are the inverse image of a falling knife. I believe it is too early to call the bottom yet especially if we do enter a full blown recession.

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Withheld Taxes Show Income is Declining

The amount of withheld taxes received by the Department of the Treasury for the last 12 months through May 2008 was 2.27% higher than a year ago after being adjusted for inflation. 12 month's withheld taxes ending in May 2008 is now off 0.63% from the peak reached in December 2007.

While withheld taxes are declining slightly, they have not reached the magnitude that occurred during the 2001 recession when withheld taxes declined over 5% year over year. Withheld taxes gives us a real time peak at what is happening to income. It is consistent with the recent spate of economic data suggesting that we are flirting with recession but are not feeling the effects of a full-blown recession.

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Personal Income Growth is Flat

The Bureau of Economic Analysis released the Personal Income figures today. Personal increased $20.1 billion, or 0.17% in April. Adjusted for inflation, personal income was virtually the same decreasing by 0.07% for the month after rising by the same amount in March. Year over year, real personal income is up by 0.67%.

Personal income is continuing the recent trend of flirting with recession but not exhibiting the deep effects of one.

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Trade deficit falls in March but personal income falls faster

The Department of Commerce announced today that the U.S. Trade deficit decreased to $58.2 billion in March down from $61.7 billion in the previous month. Exports were lower in March by $2.6 billion, but this was offset by a decrease in imports by $6.1 billion. The goods deficit decreased $3.5 billion from February to $68.6 billion and the services surplus was unchanged at $10.4 billion.

The largest deficits by country were with China $16.1 billion (vs. $18.4 billion in February), OPEC $14.1 ($13.2), Japan $7.5 ($6.9), the European Union $7.5 ($6.9), Canada $6.5 ($6.5), Mexico $6.0 ($5.5).

The trade deficit is following the trend of declining during periods of economic slowdown or more precisely with the fall of personal income. Before the 2001 recession, increases in the trade deficit were offset by larger increases in personal income. However, in this decade, America has begun living way beyond their means. The disparity is now over $700 billion a year and growing because personal income is dropping faster than the reduction of the trade deficit.

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Consumer loan growth is flat for March

U.S. Consumer debt increased in March 2008 by $15.3 billion on a seasonally adjusted basis. During the first quarter, consumer debt increased by $34 billion, the most since the first three months of 2001 before the 2001 recession. Growth in consumer debt dropped dramatically during the recession. This is typical of recessions. Consumer debt usually peaks before the start of the recession and declines during a recession as consumers tighten their belts and banks tighten their lending standards.

The headlines from the media on consumer debt suggest that the "slowing economy is forcing Americans to accumulate credit-card and other forms of debt." This would be going against the grain of the pattern of declining growth of consumer debt during recessions. On a non-seasonally adjusted basis, consumer debt actually declined by $16.3 billion since December 2007. It is the seasonal adjustments that lead to an increase of $34 billion. Year over Year on a non-seasonally adjusted basis the growth rate has turned flat. The growth rate usually vacillates with steep slopes in the growth rate. The periods where it is flat is typically at the tops and bottoms. Meanwhile, mortgage delinquencies are rising at a faster pace than consumer loan delinquencies. While consumer loan and mortgage delinquencies normally rise and fall together, consumer loan delinquencies have typically been more volatile than mortgage delinquencies. This time around, it looks like the problems are being driven by the housing crisis.

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Withheld taxes show that personal income is still declining

Withheld taxes show that personal income is still declining. One year's withheld taxes through April declined 0.21% from March after being adjusted for inflation. Withheld taxes peaked in December 2007 and have declined 0.91% since then. Before adjustments for inflation, Withheld taxes has grown 2.31% for the first four months of the year compared to a year ago. Core CPI has averaged 2.37%. This is also not accounting for growth on a per capita basis. The U.S. has averaged 1.01% population growth over the last 10 years. Real growth less than 1% would still be negative on a per capita basis.

Withheld taxes gives a real time peak at income. Income is declining consistent with the manner it declined at the beginning of the last recession.

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Real Personal Income turns negative

The Bureau of Economic Analysis released the Personal income figures for March 2008 today. Personal income increased $38.8 billion (0.32%). Disposable income increased $29.6 billion (0.28%).

The charts below show per capita Real Personal Income, which decreased by 0.17% in March 2008 compared to March 2007.

Real Personal Income growth is one of the items that the NBER looks at when declaring recessions. Like the PMI report today, Personal Income show that we are at the brink of a recession.

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Trade Deficit increases in February 2008

The U.S. Department of Commerce announced that the Trade Deficit rose to $62.4 billion in February 2008 up from $59.0 Billion in January. The increase was due to a $6 billion increase in imported goods that was not offset by a $2.6 billion increase in exports and a minor increase in the service surplus of $0.1 billion.

The largest trade deficits (in billions) were with China $18.4 ($20.3 in January), OPEC $13.2 ($15.5), and Japan $6.9 ($6.6). Petroleum imports for February were at $37.745 billion compared to $39.785 billion in January.

The increase in the trade deficit was a surprise as the deficit normally decreases as the economy slows down. The trade deficit normally goes up and down with personal income (as discussed in last month's post).

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