by Calculated Risk on 8/05/2009 12:16:00 PM

Yesterday I posted some comments from Multi-Color Corp. (makes labels mostly for consumer product companies): "While you would expect inventories to be replenished as the economy stabilizes, we have not seen a trend of increasing orders to date.”

Today, from the WSJ: P&G Sales, Profit Fall as Shoppers Opt for Cheaper Brands

P&G projected ... sales excluding acquisitions and divestitures would be flat to down 3% in the [Q3 2009]. On a conference call, company executives said results would improve sequentially after [Q3 2009].

... Sales of the higher-end, more discretionary line of Braun shavers fell sharply. But some of P&G's everyday brands also continued to see declines as consumers traded down to cheaper brands and private-label goods in grocery stores. ...

In recent years, Procter & Gamble has put more focus on higher-priced products, seeking to drive growth by getting consumers to trade up. That strategy has hurt the company during the recession as consumers cut discretionary spending in areas like beauty and traded down to cheaper pantry staples.

Some of this is classic consumer theory concerning inferior goods; as incomes fall, demand increases for generic products at the expense of more expensive brands.

However it helps to remember that there is a usual temporal order¹ for emerging from a recession.

When Recovery Typically Starts

During Recession	Lags End of Recession	Significantly Lags End of Recession
Residential Investment	Investment, Equipment & Software	Investment, non-residential Structures
PCE	Unemployment2

Housing usually leads the economy both into and out of recessions (this was true for the Great Depression too). And even though new home sales and single family housing starts may have bottomed, it seems unlikely with the the huge overhang of excess inventory and high levels of distressed sales, that residential investment will pick up significantly any time soon. Note: Residential investment is mostly new home construction and home improvements.

And that leaves Personal Consumption Expenditures (PCE), and that is why the ISM non-manufacturing numbers this morning and the P&G numbers matter. Away from auto sales, it is hard to find much evidence of a pick up in consumer demand.

I've seen some argue for a business led recovery. That is the wrong order. Sure, there will probably be some inventory replenishment since some companies probably cut back too far, but most companies already have too much capacity, so after the inventory adjustement what will happen? They will not need to expand until their sales pick up significantly.

So I still think the keys are Residential Investment (RI) and PCE, and therefore I think the recovery will be sluggish. Note that CRE and non-residential investment in structures is a lagging indicator for the economy.

¹ From a post in March, (see Business Cycle: Temporal Order for the order in and out of a recession).

² In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

by Calculated Risk on 8/05/2009 10:00:00 AM

From the Institute for Supply Management: July 2009 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector contracted in July, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The NMI (Non-Manufacturing Index) registered 46.4 percent in July, 0.6 percentage point lower than the 47 percent registered in June, indicating contraction in the non-manufacturing sector for the 10th consecutive month, at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased 3.7 percentage points to 46.1 percent. The New Orders Index decreased 0.5 percentage point to 48.1 percent, and the Employment Index decreased 1.9 percentage points to 41.5 percent. The Prices Index decreased 12.4 percentage points to 41.3 percent in July, indicating a significant decrease in prices paid from June. According to the NMI, seven non-manufacturing industries reported growth in July. The majority of respondents' comments reflect a sense of uncertainty and cautiousness about business conditions."
emphasis added

The service sector was still contracting in July, and contracting at a slightly faster pace than in June.

It can't be emphasized enough - this is for July. No recovery yet.

by Calculated Risk on 8/05/2009 08:27:00 AM

ADP reports:

Nonfarm private employment decreased 371,000 from June to July 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from May to June was revised by 10,000, from a decline of 473,000 to a decline of 463,000.

Note: the BLS reported a 415,000 decrease in nonfarm private employment in June (-467,000 total nonfarm), so once again ADP was only marginally useful in predicting the BLS number.

On the Challenger job-cut report from CNBC: Planned layoffs accelerated in July

Planned layoffs at U.S. firms increased in July for the first time in six months, signaling more uneasy times for workers and a continued drag on consumer spending and the broader economy.

Planned job cuts announced by U.S. employers totaled 97,373 last month, up 31 percent from June when it had hit a 15-month low, according to a report released on Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc.

July's announced job cuts brought the total so far this year to 994,048, 72 percent higher than the same span in 2008.

The BLS reports Friday, and the consensus is for about 300,000 in reported job losses for July.

by Calculated Risk on 8/04/2009 11:59:00 PM

From the WSJ: Farm Real-Estate Values Post Rare Drop

The U.S. Agriculture Department said in its annual report that the value of all land and buildings on U.S. farms averaged $2,100 an acre Jan. 1, down 3.2% from last year. The decline in farm real-estate values was the first since 1987, the agency said.

The Chicago Fed had a similar report a couple of months ago: Farmland Values and Credit Conditions

There was a quarterly decrease of 6 percent in the value of “good” agricultural land—the largest quarterly decline since 1985—according to a survey of 227 bankers in the Seventh Federal Reserve District on April 1, 2009. Also, the year-over-year increase in District farmland values eroded to just 2 percent in the first quarter of 2009.

And here was a graph I posted in May based on the Chicago Fed report:

Click on graph for larger image in new window.

This graphs shows nominal and real farm prices based on data from the Chicago Fed.

In real terms, the current increase in farm prices wasn't as severe as the bubble in the late '70s and early '80s that led to numerous farm foreclosures in the U.S.

And as I noted in the earlier post, it was not surprising that John Mellencamp wrote "Rain On The Scarecrow" in 1985 after the farm bubble burst.

by Calculated Risk on 8/04/2009 09:35:00 PM

ProPublica has a great table of failed banks with sortable columns by state, date and Federal regulator.

The database also includes links to public enforcement documents with the dates the documents were issued (Cease and Desist orders, Prompt Corrective Action directives, etc.).

As an example, Millennium State Bank of Texas was seized on July 2nd, 2009 and the FDIC entered a Cease and Desist order on the 19th of May 2009 FDIC. So the bank was closed less than two months after the Cease and Desist order was issued.

Other banks lasted longer, and a C&D isn't a guarantee of failure since some are cured.

A Federal Reserve Prompt Corrective Action (PCA) directive seems to have a very short leash. As an example BankFirst in South Dakota received a PCA directive on June 15th and was seized on July 17th.

If you go to the Federal Reserve enforcement list, you will see Written Agreements and Prompt Corrective Actions popping up fairly frequently. Here is one from yesterday:

The Federal Reserve Board on Monday announced the issuance of a Prompt Corrective Action Directive against Warren Bank, Warren, Michigan, a state chartered member bank.

A copy of the Directive is attached.

Attachment (51 KB PDF)

That makes Warren a BFF candidate in about a month. Also be on the lookout for Bank of Elmwood, Racine, Wisconsin (PCA on July 23rd).

Note: the ProPublica list may be missing some enforcement documents. I found a Prompt Corrective Action for Community Bank of West Georgia on May 21st that isn't included - and the bank was seized a month later.