Update on the TED Spread

Here is an update on the TED Spread - the difference between the 3 month treasury and the 3 month Eurodollar rate. This measures the amount of perceived risk to lend to a banking counterparty. From 2002 to 2006 the spread averaged .288. Currently it is at 1.14 (as of 8/15/08).

The spreads reached very high levels in the 70s and early 80s when inflation was running rampant. The spread reached a high of 5.97 in July of 1974, and the Eurodollar rate was 13.52%. This next chart shows the spread as a percentage of the Eurodollar. This allows for comparison of the TED Spread during periods of high inflation and lower inflation. Using this matrix, the current spreads are at historic highs. The chart also shows the year over year change in the S&P 500.

The following chart shows the daily fluctuations of the TED Spread. Looking at the TED Spread, it looks like the current credit crisis has gone through 4 waves where the TED Spread has gone over 1.5.

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Inflation at 17 year high

The U.S. Department of Labor reported the inflation numbers for July today. Before seasonal adjustments, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.53% in July over June and was 5.60% higher than July 2007.  The year over year rate of CPI is the highest since January 1991. Core CPI (CPI less food and energy) before seasonal adjustments was up by 0.23% compared to May and up 2.51% compared to a year ago. Seasonally adjusted, CPI-U rose 0.82% over June, twice as much as expected, and core CPI rose 0.33% instead of 0.2% expected by economists. The surge in CPI-U was driven by energy prices. Energy increased 4.0% in July over June.  Crude Oil futures have come down recently so this should alleviate some of the inflation pressures.

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Retail Sales decline by 0.12% last month

The U.S. Census Bureau announced today that retail and food services sales for July 2008 with seasonal adjustments was down 0.12% from June and up 2.63% compared to a year ago. Retail sales without including autos (excluding autos makes the data less volatile) was up 0.38% compared to the previous month and up 5.84% compared to the previous year.

Retail sales adjusted for inflation declined by 3.27% in July compared to the previous year.  The decline in Retail Sales over the last 6 months has been the worst 6 month span since 1992.  The the decline in retail sales is causing havoc for many retailers as is reflected in the amount of retailers and restaurants going bankrupt recently.

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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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Pending Home Sales Index up 5.3% from previous month; down 12.1% versus last year

The Pending Home Sales Index for contracts signed in June 2008 on a seasonally adjusted basis was at 89.0 up 5.3% from 84.5 in May 2008 but was down 12.2% compared to June 2007's figure of 101.4. Without seasonal adjustments, the index was down 12.1% compared to June 2007.

2001 was previously the slowest year for pending home sales on record. June 2008 was 6.6% below June 2001's sales pace. May 2008 was 17.5% below the 2001 level.

The NAR raised their 2008 median home sales price forecast to $206,700 from $205,300. The NAR is forecasting 2009 median home sales prices to be at $215,800. In June they had dropped their 2008 forecast by 4.1% from $213,700 to $205,000. According to Lawrence Yun, NAR chief economist, sales have been in a pattern of rising and falling within a fairly narrow range. Yun said “The vacillation of data from one month to the next indicates a housing market in transition.” It does appear that home sales has bottomed out. We may be transitioning from declining home prices and sales to rising home sales with declining prices.

I don't expect home prices to bottom until supply and demand are in equilibrium. Currently there is 11.1 months supply of existing homes. 6 months is where supply and demand are considered balanced.

April, May and June are the three biggest months for Pending Home Sales. Afterwards, sales quickly taper off. Pending Home Sales for June indicates that the July and August existing sales may pick up a little bit. Last year existing sales plummeted in the Fall. This Fall will be the big test for existing sales.

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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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Non-Manufacturing Index (NMI) is at 49.525

The Institute for Supply Management released their July 2008 Non-Manufacturing ISM Report on Business today. The Non-Manufacturing Index (NMI) came in at 49.525%.  50% is the breakpoint for growth. NMI had plunged to 44.6% in January 2008 but has been between 48%-52% for the last 6 months.

NMI is made up of four components: business activity, employment, new orders, and supplier deliveries. Business activity was at 49.6% in July down from 49.9% in June; employment was at 47.1% up from 43.8%; new orders were at 47.9% down from 48.6%; and supplier deliveries were at 53.5% up from 50.5%.

Here is what some of the respondents were saying:

• "Our business remains at about the same level as the previous month, with continued focus on cost reduction." (Finance & Insurance)
• "The general state of the home-building industry has not changed since last month; however, with the commodity and code changes going into 2009, we face much higher construction costs and reduced margins across the entire supply chain." (Construction)
• "Continue to see slowdown in local economy." (Health Care & Social Assistance)
• "While still positive, the overall outlook for 2008 for our company is not as high as earlier in the year." (Wholesale Trade)
• "Governmental spending for services is up this period." (Professional, Scientific & Technical Services)

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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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The unemployment rate rises to 5.7%

The U.S. Department of Labor released the Weekly Claims data for Unemployment Insurance yesterday. Initial claims were at 448,000 for the week ending July 26th. This is the highest initial claims have been since April 2003. The four week average of initial claims, which is not as volatile, was at 393,000 up from the previous week's mark of 382,000.

Continued claims for unemployment insurance increased to 3,282,000 for the week ending July 19th up from the previous week's number of 3,097,000. This is the highest it has been since December, 2003. The four week average for continued claims was also up to 3,174,500 from 3,131,750.

Unemployment is on the rise. According to "The Employment Situation" for July 2008 released today by the U.S. Department of Labor, the unemployment rate was 5.7% in July up from 5.5% in June. Since 1948, the unemployment ate has never risen by more than .5% without entering into a recession. The unemployment rate is now up 1.0% in the last twelve months and is up 1.3% from its recent low. Nonfarm payrolls decreased by 51,000 in July and decreased by the same in June. Nonfarm payrolls have declined for 7 straight months shedding 463,000 jobs. Over the last ten years, nonfarm payrolls have increased by an average of 107,000 jobs. Nonfarm payrolls rarely decrease outside of recession periods and it is even more rare for consecutive declines. Excluding periods right before, during and after recessions, nonfarm payrolls have declined consecutively only two times: 3 consecutive times in 1951 and 2 consecutive times in 1952.

It now looks like the unemployment rate is picking up steam. News of companies going bankrupt, closing stores, or trimming sales forces seems to be increasing.

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Real GDP grew by 1.88% in the second quarter; was negative in the fourth quarter 2007

The Bureau of Economic Analysis released the Gross Domestic Product figures for the second quarter today. Real GDP, adjusted for inflation, rose by an annualized rate of 1.88% in the second quarter 2008 compared to the first quarter 2008. The first quarter grew by a revised 0.87%. Fourth quarter 2007 was revised down to -0.17% down from the previously announced figure of +0.60%. December 2007 could be considered the start of the recession.

Adjusted for both inflation and population, Real per capita GDP fell at an annualized rate of 1.19% in the fourth quarter 2007. It barely rose by 0.02% in the first quarter 2008 and rose by 1.00% in the second quarter. While inflation is making the headlines with rising food and gas prices, the price deflators used to calculate GDP went down to 1.1% in the second quarter from 2.6% in the first quarter. The monthly increases in Core CPI for the second quarter averaged an annualized rate of 2.33% and CPI averaged a whopping 7.66%.

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