Robert Brusca

<html>
<head>
<style>
.odd{
 background-color:#edf5ff;
}
.even{
 background-color:#dde5ef;
}
.grey1{
	background-color:#f0f0f0;
}
.grey2{
	background-color:#e2e2e2;
}
.grey3{
	background-color:#d4d4d4;
}
.grey4{
	background-color:#c6c6c6;
}
.grey5{
	background-color:#b8b8b8;
}
</style>
</head>
<body>
<table border="0" cellspacing="0" width="100%">
<tr>
<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314b.jpg" width="353">The US current account deficit is one of the most intriguing phenomena about the US economy. To understand the account is both very simple and extremely complicated. It is therefore easy to think you know nothing about it or everything at the same time! &nbsp; The 2006Q4 current account deficit shrank sharply to $195.8bln from $229.4bln in Q3. It also shrank compared to its $223.1bln level in 2005-Q4. And a shrinkage in the deficit over four quarters ago is unusual. (see chart on the left).&nbsp; Such improvement generally was induced by recession (1990, 2001, 1981,198) but also can be occasioned by significant slowdowns (1995) and the sharp dollar depreciation from its pre-Plaza Accord peak was behind the persisting improvement in the late 1980s ahead of the onset of recession. The current account is simple to understand because it is the just the difference between the value of the goods services we sell Vs the ones we buy plus a few transfer items. The US has a small positive and essentially stable balance on its services account. The trade account is the problem. Its deficit is large and persistently growing larger (see chart below on the right).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314a.jpg" width="353"> That&#146;s the part of the current account that is easy. Now comes the hard part&#133;understanding WHY&#133;The &#145;why&#146; it is difficult because some of the concepts are esoteric and also because there are different identities that describe the deficit circumstance and they have seemingly different root causes.&nbsp; Let me explain.One identity is that (at least conceptually) the world current account deficits across countries must balance. So if the US has a deficit at least one other country has a surplus. And, conceptually, in a world of no lags and the same accounting principles the US deficit would be the same size as the surplus for the rest of the world in total. Another is that the US current account surplus must be funded by net capital inflows of the same magnitude &#150; this is the double entry accounting that accompanies the US balance of payments. &nbsp;The current account plus the capital flows that fund it are what the term &#145;balance of payments&#146; refers to. The US has a current account deficit and an equal and opposite capital account surplus.&nbsp; &nbsp;That&#146;s a bit more complicated framework, but still not impossible. Here is where the immovable object meets the unstoppable force:&nbsp; Economists argue about where the forces come from that drive the deficit. We ask, do the forces stem mostly from the current account itself or from the capital account? Does one push the other into deficit or the other push the one into surplus?&nbsp; Is it the current account the active mover, as profligate US consumers are overspending, or is it that miserly foreign consumer/savers under-spend and over save?&nbsp; Or do the main forces work though the capital account because the US is too dependent on foreign capital or is it the opposite, that foreign investors are too addicted to US investments?&nbsp;Here are the questions.(1) Is it US credit demand that is so huge that is draws in international capital keeping the dollar strong, hurting US competitiveness and ballooning the current account deficit as a result?(2) Is it US demand for goods that is so strong we simply consume too much and live beyond our means leading to a huge current account deficit?(3) Is it that foreign economies consume too little and do not buy enough in general and from the US in particular helping to balloon the US deficit? The flip side of low consumption is the high savings rate. Do foreigners simply save too much (Bernanke&#146;s saving glut argument)?(4) Is the demand by foreigners for US investments so high that they push capital into the US and keep the dollar from falling so that US competitiveness is undermined and the current account deficit balloons?That&#146;s quite a list.&nbsp; AND you may notice that the various arguments draw the dollar in as well.We will not solve these issues today. In any event we know that the deficit is a combination of the above points. We also know that not having a mechanism to create currency adjustment, as there was under Bretton Woods, means that deficits may not be self correcting in any timely way. Notice that despite the US deficit contraction in Q4 2006 compared to Q4 2005 the average for the year is still worsening; that is the deficit for all of 2006 was for a quarterly average of $214.2bln compared to $197.9bln in 2005. This is a full year deficit of $856.8bln for 2006 &#150; over three quarters of a trillion dollars IN ONE YEAR in case you are counting.And if 2007 worsens as much as 2006 did our deficit will top $1trln per year in 2007. How much is one trillion? Well suppose you were to try to &#145;sing the deficit down to zero&#146; and did so singing the tune &#145;100 bottles of beer on the wall&#146;, using the lyric &#145;1trln dollars of deficit today,1trln dollars today, take one down what have you got? 999,999,999,999 dollars of deficit today&#146;. Now assume you can sing that in 10 seconds &#150;each verse. That&#146;s 10 trillion seconds of singing. It would take you more than 300 years to get the current account into balance. If George Washington had started singing that song, and were he blessed with extraordinary long life, he would still being singing today...and going strong with his work still cut out for him. .&nbsp;Slower US growth especially on the back of reduced inventory demand helped to contain imports in 2006; that was aided by lower oil prices as well by year end. Stronger foreign growth played a role as US exports expanded briskly at a 14.5% pace against the weak nominal import gain of 4.5%. Looking ahead to 2007 the fate of the dollar is still a matter of speculation. US growth should pick up from its weak Q4 pace. Inventories should rebuild, thereby boosting imports. Overseas growth is expected to be &#145;about the same to a bit stronger&#146;. The real question is whether US exports can keep up the good work in 2007, or was 2006 some flash in the pan of good news? Imports will rise faster in 2007 than in 2006. That could make it impossible to make trade deficit reduction a reality in 2007 either.</td>
</tr>
</table>
<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 US Current Account
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol"> Balances:</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> 4Qtr-Avg</td>
<td> Prev4Qtr</td>
</tr>
<tr class="odd">
<td class="firstcol"> Current Account</td>
<td>-195.8</td>
<td>-229.4</td>
<td>-217.7</td>
<td>-214.2</td>
<td>-197.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Trade</td>
<td>-197.9</td>
<td>-218.9</td>
<td>-210.9</td>
<td>-209.0</td>
<td>-195.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>22.4</td>
<td>12.0</td>
<td>15.0</td>
<td>15.9</td>
<td>19.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Transfers</td>
<td>-20.2</td>
<td>-22.5</td>
<td>-21.9</td>
<td>-21.0</td>
<td>-21.5</td>
</tr>
<tr>
<td class="firstcol"> Growth Rates</td>
<td colspan="3"> Quarterly SAAR</td>
<td colspan="2">4-Qtr % for Yr Ended:</td>
</tr>
<tr>
<td class="firstcol">Merchandise</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> Q4-06</td>
<td> Q4-06</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>8.4%</td>
<td>15.5%</td>
<td>14.4%</td>
<td>14.5%</td>
<td>11.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>-12.4%</td>
<td>15.7%</td>
<td>10.1%</td>
<td>4.3%</td>
<td>13.9%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> Q4-06</td>
<td> Q4-06</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>12.9%</td>
<td>3.0%</td>
<td>13.4%</td>
<td>8.7%</td>
<td>8.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>6.3%</td>
<td>2.5%</td>
<td>12.7%</td>
<td>8.6%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> memo: ($-Blns)</td>
<td> Q4-06</td>
<td> Q3-06</td>
<td> Q2-06</td>
<td> 4Qtr-Avg</td>
<td> Prev4Qtr</td>
</tr>
<tr class="odd">
<td class="firstcol">Offical Gov&#39;t Securities Purchased</td>
<td>78.0</td>
<td>78.0</td>
<td>21.6</td>
<td>60.9</td>
<td>39.1</td>
</tr>
</tbody>
</table>
 



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314c.jpg" width="353">
Ex-petroleum import prices fell by 0.1% in February. Good news for core inflation trends. The 1Yr, 6-Mo, 3-mo progression of annualized inflation pressures also show that there is no pressure building. Yr/Yr non-petroleum import prices are up by 2.1%; looking over 3-mos annualized the gain is just 1.1%. Tame. Nonagricultural export prices show a bit more lift than that, partly aided by pressure from industrial supplies and materials, an export category that does contain some oil. 
Looking more directly at prices that feed into consumer prices (look at the import figures), we see a bit of lift for consumer prices excluding vehicles and for foods and beverages. Vehicle import prices are under wraps. For the most part it does not look like there is an inflation impulse leaking in for the international sector. 
The chart on the left shows some key consumer goods price relationships. We plot import prices for vehicles and for consumer goods excluding vehicles Vs the CPI core for goods and the PPI consumer goods core. The PPI tends to show the highest gains; this index measures price for core consumer goods produced in the US. The Core CPI for goods consists of these products taken to the next level of distribution, adding consumer goods imports. That results in a core goods CPI index that has showed lower inflation than most other indexes since about August 2002. Nonvehicle consumer prices were, at one time, the slowest inflators on the block, but that changed in August of 2002. While the two international indexes do not show much in the way of inflation it is also true that vehicle imports and nonvehicle consumer goods imports sport higher inflation rates that the core CPI by itself and have been so for about one year . And the consumer core of the PPI is &#145;ramping up&#146; albeit none of these yr/yr gains exceeds even 2% y/y yet. If it&#146;s inflation in the making, it is still quite mild. The trends maybe less than reassuring but the degree of inflation that is in train remains quite MILD.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Export and Import Price Trends
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp;</td>
<td colspan="3"> Imports</td>
<td></td>
<td colspan="3"> Exports</td>
</tr>
<tr class="odd">
<td class="firstcol"> SAAR</td>
<td> All</td>
<td> Petrol</td>
<td> Excl Petrol</td>
<td> SAAR</td>
<td> All</td>
<td> Agric</td>
<td> NonAgric</td>
</tr>
<tr>
<td class="firstcol"> 3-MO</td>
<td>1.8%</td>
<td>-11.2%</td>
<td>1.1%</td>
<td> 3-MO</td>
<td>7.0%</td>
<td>22.9%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol"> 6-MO</td>
<td>-7.4%</td>
<td>-38.8%</td>
<td>1.5%</td>
<td> 6-MO</td>
<td>2.9%</td>
<td>22.3%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol"> Yr/Yr</td>
<td>1.3%</td>
<td>-5.5%</td>
<td>2.1%</td>
<td> Yr/Yr</td>
<td>4.7%</td>
<td>16.9%</td>
<td>3.7%</td>
</tr>
<tr class="odd">
<td class="firstcol"> 2-Yrs</td>
<td>4.1%</td>
<td>18.0%</td>
<td>1.9%</td>
<td> 2-Yrs</td>
<td>3.7%</td>
<td>10.6%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol"> MO/MO</td>
<td>0.2%</td>
<td>2.0%</td>
<td>-0.1%</td>
<td> MO/MO</td>
<td>0.7%</td>
<td>2.3%</td>
<td>0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">

</table>
US Export and Import Prices Show Their Soft Side 
by <a href="/comment/Brusca.html">Robert A. Brusca</a> March 14, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314d.jpg" width="353">
A notable catalyst for yesterday&#39;s stock market sell-off was the quarterly mortgage delinquency report from the Mortgage Bankers&#39; Association (MBA). It showed that 4.95% (seasonally adjusted) of all loans surveyed by MBA were past due on December 31, an increase from 4.67% in September and the highest since September 2002. The foreclosure process was started on 0.54% of all loans, 0.08% more than during the previous quarter and a record high rate for a single quarter; at the end of December, 1.19% of loans were in foreclosure, up from 1.05% at end-September and 0.99% at the end of 2005. These rates are calculated on a total base of more than 42 million mortgage loans.
The MBA gives data on several types of mortgages: conventional prime, conventional subprime, FHA and VA. Each of these is further broken down by fixed and adjustable rate. Haver maintains these series in its specialized database MBAMTG and individual series are available on HaverSelect. The database includes seasonally adjusted data for the country as a whole and the four Census regions as well as not seasonally adjusted data for those areas plus the nine Census divisions, the 50 States, District of Columbia and Puerto Rico.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314e.jpg" width="353">
Delinquencies worsened for all major loan types. Conventional prime loans, which constitute 76.6% of the total market, had loan payments over due 30 days or more increase from 2.52% to 2.79% of the loans in that segment. Conventional subprime delinquencies rose from 12.95% to 14.27%. &quot;Conventional&quot; loans are those not insured by the federal government, such as FHA or VA. Conventional loans may be insured by private mortgage insurance or not insured at all. &quot;Subprime&quot; loans are those granted to borrowers with risky credit ratings or with excessively generous lending terms, such as loan-to-value ratios (&quot;LTV&quot;) near 100%, whereas &quot;prime&quot; mortgages typically see LTVs below 80% and average or higher credit quality in the borrower.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070314f.jpg" width="353">
Delinquencies on FHA-backed loans affected 14.43% of those loans and foreclosures were initiated on 0.96%. VA-insured loans had a delinquency rate of 7.43% and a foreclosure rate of 0.36%.
There are very large differences in delinquency experiences among the regions of the country. The Northeast had 4.58% of its loans past due in December, near the national average. But the Midwest and the South were both at about 5.7% and the West at 3.18%. So credit quality varies considerably around the nation. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Mortgage Delinquencies (SA, %)</th>
<th scope="col">Q4 2006</th>
<th scope="col">Q3 2006</th>
<th scope="col">Year Ago</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2001</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Loans Past Due</td>
<td>4.95</td>
<td>4.67</td>
<td>4.70</td>
<td>4.61</td>
<td>4.45</td>
<td>4.48</td>
<td>5.11</td>
</tr>
<tr>
<td class="firstcol">Foreclosures Started</td>
<td>0.54</td>
<td>0.46</td>
<td>0.42</td>
<td>1.86</td>
<td>1.63</td>
<td>1.73</td>
<td>1.80</td>
</tr>
<tr class="odd">
<td class="firstcol">Conventional Prime Loan Delinquencies</td>
<td>2.57</td>
<td>2.44</td>
<td>2.47</td>
<td>2.39</td>
<td>2.29</td>
<td>2.30</td>
<td>2.67</td>
</tr>
<tr>
<td class="firstcol">Conventional Subprime Loan Delinquencies</td>
<td>13.33</td>
<td>12.56</td>
<td>11.63</td>
<td>12.27</td>
<td>10.84</td>
<td>10.80</td>
<td>14.04</td>
</tr>
</tbody>
</table>
</body>
</html>

Ex-petroleum import prices fell by 0.1% in February. Good news for core inflation trends. The 1Yr, 6-Mo, 3-mo progression of annualized inflation pressures also show that there is no pressure building. Yr/Yr non-petroleum import [...]

U.S. Current Account Deficit Shrinks

<html>
<head>
<style>
.odd{
 background-color:#edf5ff;
}
.even{
 background-color:#dde5ef;
}
.grey1{
	background-color:#f0f0f0;
}
.grey2{
	background-color:#e2e2e2;
}
.grey3{
	background-color:#d4d4d4;
}
.grey4{
	background-color:#c6c6c6;
}
.grey5{
	background-color:#b8b8b8;
}
</style>
</head>
<body>
 



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313a.jpg" width="353">
With flat January retail sales and a 0.1% overall rise in February, retail sales have little lift in Q1. The February retail sales report, with no revisions to the main headlines over the past two months - an unusual development, leaves us with two months of a very flat consumer. This in turn raises questions about growth in the economy at large since it has been banking on continued consumer strength. 
With the huge drop in durable goods orders the outlook for capital spending is poor. Housing started off the quarter looking good but has since beaten a deep retreat. With GDP= C+I+G+(X-M) the question is: where is growth coming from? Take &#147;C&#148; for example, consumption: the retail sales portion is flat for two months running. Services spending, the half of consumption that always slips in under the radar, is probably still firm. But the &#147;I,&#148; for investment has three weak prongs: Business fixed investment is weak if capital goods orders are to be believed; inventories have been pared back (they are up slightly in January); residential investment is that well known story of the ongoing lethargy in housing or worse. Government is usually a GDP positive but is plodding. The X-M portion of GDP (called net exports, or the GDP version of the current account in real terms) has provided some stabilization to GDP growth since imports (M) have been weak due to weak domestic demand and exports have held up as foreign growth has been firm. That combination produces a push to GDP; since imports are a subtraction and weak imports aid US GDP growth. But it&#146;s clear that the economy will not grow for long on its international portion alone. While CEOs at the Round table last week expressed a desire for more capital spending, what we have in hand are weak trends. And that puts more of the focus back onto the consumer. 
Q1 Consumption Arithmetic. Fortunately Q4 growth was &#145;back-loaded,&#146; exporting momentum to Q1. Here&#146;s how that works. Since GDP is a quarterly variable we look at its components by quarter and play the game, &#145;what have you done for me lately?&#146; also known as &#145;what will GDP be this quarter?&#146; What matters for each component is its average for the quarter. Since consumer spending spiked at the end of Q4, it left a high level of spending in December 2006. Thus even with next to no growth in January and February the level of spending in February is still 4.5% above the Q4 average. So overall nominal retail sales are up at a 4.5% nominal pace in 2007-Q1 as a result of the high pace of growth in December of 2006. But that crutch is becoming overused with the February weakness. 
Cold weather did sucker-punch housing this months so we have a basis for believing there was a noticeable adverse weather effect in play. On top of that, as we know, housing is being battered by an ongoing retrenchment. We see both of these factors at work in the retail sales report in building materials where sales plunged by 1.4% in February alone. Sales also fell sharply for furniture and electronic goods. Motor vehicles sales were, however, strong with a rise of 1.0%. 
Nondurables limped to a gain of 0.1% in February and were actually weaker excluding gas station sales that jumped by 1.2% (-0.1% for retail non-durables sales excluding gas station sales). 
With the contribution in from the December sales spurt still in play, 3-mo sales trends are still reasonably firm (saar growth of 4.9%). But if monthly sales do not perk up soon the December effect will cease to help and retailing will then appear to be faltering. Come March, December&#146;s gain will play against three month growth since we will then be measuring growth from the elevated December base and December&#146;s strength will play against us - so far we have no lift from that point on. 
Still, a sag in the winter months is not decisive. December sales were very strong, leaving fewer goods to clear out in January and February. February is a short month with myriad holidays leaving a lot of the work to be done by seasonal factors. Complicating this is the cold snap in March. Winter this year has been backloaded. March has come in less like lion than like a Polar Bear, let hope by month&#146;s end we do not have bi-polar bear. 
All this complicates getting a good look at how the economy is really doing. To be sure with business investment surprisingly weak, a pick up from the consumer is essential or the economy bears are going make another run for the money. It sure complicates the Fed&#146;s job especially with poor trends in productivity, labor costs and labor compensation. For now we can only watch and wait and hope that the slow growth is a product of bad weather.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"></th>
<th scope="col">M/M</th>
Seasonally Adjusted Annual Rate
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Feb 2007</td>
<td>3-month</td>
<td>6-month</td>
<td>Yr/Yr</td>
<td>Yr Ago: Y/Y</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.1%</td>
<td>4.9%</td>
<td>1.6%</td>
<td>3.2%</td>
<td>7.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Excluding MV &amp; Parts</td>
<td>-0.1%</td>
<td>4.9%</td>
<td>0.7%</td>
<td>3.1%</td>
<td>9.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding MV &amp; Parts &amp; Gas</td>
<td>-0.3%</td>
<td>3.0%</td>
<td>3.0%</td>
<td>3.4%</td>
<td>8.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

With flat January retail sales and a 0.1% overall rise in February, retail sales have little lift in Q1. The February retail sales report, with no revisions to the main headlines over the past two months - an unusual development, [...]

U.S. Retail Sales Pose a Dilemma

<html>
<head>
<style>
.odd{
 background-color:#edf5ff;
}
.even{
 background-color:#dde5ef;
}
.grey1{
	background-color:#f0f0f0;
}
.grey2{
	background-color:#e2e2e2;
}
.grey3{
	background-color:#d4d4d4;
}
.grey4{
	background-color:#c6c6c6;
}
.grey5{
	background-color:#b8b8b8;
}
</style>
</head>
<body>
 



<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313a.jpg" width="353">
With flat January retail sales and a 0.1% overall rise in February, retail sales have little lift in Q1. The February retail sales report, with no revisions to the main headlines over the past two months - an unusual development, leaves us with two months of a very flat consumer. This in turn raises questions about growth in the economy at large since it has been banking on continued consumer strength. 
With the huge drop in durable goods orders the outlook for capital spending is poor. Housing started off the quarter looking good but has since beaten a deep retreat. With GDP= C+I+G+(X-M) the question is: where is growth coming from? Take &#147;C&#148; for example, consumption: the retail sales portion is flat for two months running. Services spending, the half of consumption that always slips in under the radar, is probably still firm. But the &#147;I,&#148; for investment has three weak prongs: Business fixed investment is weak if capital goods orders are to be believed; inventories have been pared back (they are up slightly in January); residential investment is that well known story of the ongoing lethargy in housing or worse. Government is usually a GDP positive but is plodding. The X-M portion of GDP (called net exports, or the GDP version of the current account in real terms) has provided some stabilization to GDP growth since imports (M) have been weak due to weak domestic demand and exports have held up as foreign growth has been firm. That combination produces a push to GDP; since imports are a subtraction and weak imports aid US GDP growth. But it&#146;s clear that the economy will not grow for long on its international portion alone. While CEOs at the Round table last week expressed a desire for more capital spending, what we have in hand are weak trends. And that puts more of the focus back onto the consumer. 
Q1 Consumption Arithmetic. Fortunately Q4 growth was &#145;back-loaded,&#146; exporting momentum to Q1. Here&#146;s how that works. Since GDP is a quarterly variable we look at its components by quarter and play the game, &#145;what have you done for me lately?&#146; also known as &#145;what will GDP be this quarter?&#146; What matters for each component is its average for the quarter. Since consumer spending spiked at the end of Q4, it left a high level of spending in December 2006. Thus even with next to no growth in January and February the level of spending in February is still 4.5% above the Q4 average. So overall nominal retail sales are up at a 4.5% nominal pace in 2007-Q1 as a result of the high pace of growth in December of 2006. But that crutch is becoming overused with the February weakness. 
Cold weather did sucker-punch housing this months so we have a basis for believing there was a noticeable adverse weather effect in play. On top of that, as we know, housing is being battered by an ongoing retrenchment. We see both of these factors at work in the retail sales report in building materials where sales plunged by 1.4% in February alone. Sales also fell sharply for furniture and electronic goods. Motor vehicles sales were, however, strong with a rise of 1.0%. 
Nondurables limped to a gain of 0.1% in February and were actually weaker excluding gas station sales that jumped by 1.2% (-0.1% for retail non-durables sales excluding gas station sales). 
With the contribution in from the December sales spurt still in play, 3-mo sales trends are still reasonably firm (saar growth of 4.9%). But if monthly sales do not perk up soon the December effect will cease to help and retailing will then appear to be faltering. Come March, December&#146;s gain will play against three month growth since we will then be measuring growth from the elevated December base and December&#146;s strength will play against us - so far we have no lift from that point on. 
Still, a sag in the winter months is not decisive. December sales were very strong, leaving fewer goods to clear out in January and February. February is a short month with myriad holidays leaving a lot of the work to be done by seasonal factors. Complicating this is the cold snap in March. Winter this year has been backloaded. March has come in less like lion than like a Polar Bear, let hope by month&#146;s end we do not have bi-polar bear. 
All this complicates getting a good look at how the economy is really doing. To be sure with business investment surprisingly weak, a pick up from the consumer is essential or the economy bears are going make another run for the money. It sure complicates the Fed&#146;s job especially with poor trends in productivity, labor costs and labor compensation. For now we can only watch and wait and hope that the slow growth is a product of bad weather.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"></th>
<th scope="col">M/M</th>
Seasonally Adjusted Annual Rate
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Feb 2007</td>
<td>3-month</td>
<td>6-month</td>
<td>Yr/Yr</td>
<td>Yr Ago: Y/Y</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/usecon/@ED/@ED04/@ED0401/@ED0401.HTM">Retail Sales &amp; Food Services</a></td>
<td>0.1%</td>
<td>4.9%</td>
<td>1.6%</td>
<td>3.2%</td>
<td>7.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Excluding MV &amp; Parts</td>
<td>-0.1%</td>
<td>4.9%</td>
<td>0.7%</td>
<td>3.1%</td>
<td>9.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Excluding MV &amp; Parts &amp; Gas</td>
<td>-0.3%</td>
<td>3.0%</td>
<td>3.0%</td>
<td>3.4%</td>
<td>8.4%</td>
</tr>
</tbody>
</table>
<table border="0" cellspacing="0" width="100%">
<tr>
<td><img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313b.jpg" width="353">Inventories rose by a small amount in January 2007. The monthly rise of 0.2% was mostly accounted for by a sharp increase in wholesale inventories that rose by 0.7%. Retail inventories rose by 0.2% and manufacturing inventories fell by 0.2%. The first thing we see in inventory trends is that inventories have stopped the increase in their rate of growth. Inventories are still growing. But Yr/Yr growth rates have either stabilized or declined. For wholesalers the pace seems to have declined, whereas for manufacturers and retailers the pace of growth has been cut.&nbsp; This is largely because sales have slowed (see next chart).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313g.jpg" width="353"> In this chart we see Yr/Yr growth plots of sales by sector. Sales growth rates are sliding across all sectors but the slide has halted for wholesalers, who also have stopped cutting their growth rate for inventories, as we saw above.Adequacy of inventory growth. To assess inventories I like to look at a growth rates for inventories Vs sales. I will show some of the more conventional I:S ratios for retailing later, but as an overview the growth rates when paired are important way to get a fix on what is going on with the dynamic interplay between inventories and sales.&nbsp; I:S ratios only show a relationship that is static. While we can compare the static ratios of today to past static relationships it does not give any idea how inventories are shifting relative to sales. The chart above does that. It looks at different time horizons comparing by sectors inventory growth rates to sales growth rates. And while (as we saw already) Yr/Yr growth rates show all inventory rates of growth reside above their respective sales rates of growth, over the three month horizon, sales growth exceeds inventory growth &#150; as of January, at least. Over six-months, wholesale sales growth still exceeds wholesale inventory growth. And, while inventories in each sector outgrow sales Yr/Yr just a year before that (see table) the opposite was true. What this chart demonstrates is how the current inventory imbalance is probably minor. The Yr/Yr growth imbalances are worst for manufacturers where Yr/Yr sales are actually lower with inventories growing at 5.7% pace. And over the last three-months it is clear that &#150;whatever the I:S ratio&nbsp; -- the imbalance between inventories and sales is being repaired by relatively faster sales growth across the board.&nbsp;<img height="126" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0703131.gif" v:shapes="_x0000_i1027" width="596"> Retailing.&nbsp; Here we present just the I:S table for retail sectors. To the right we show the position of the I:S ratio in its own range of values over the past 5 years, expressing the current value as a percentile of the range. A value of 100% would be the greatest I:S ratio of the period while 0 % would be the weakest. The low percentile readings suggest that retailers are by and large ready to rebuild inventories.&nbsp; Clothing is an exception and autos are mid-range. <img height="172" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0703132.gif" v:shapes="_x0000_i1028" width="572">Supplement this chart with the dynamic retail growth chart on paired growth rates and we can be more constructive on the outlook&#133;&nbsp;&nbsp; <img height="174" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0703133.gif" v:shapes="_x0000_i1029" width="660">The sector-paired growth rates show that for retailing in January, 3-month growth rates of sales generally exceed those for inventories. Over six months the trend is split. Over 12-months inventories are mostly growing faster, but not by large margins (clothing excepted). And again one year ago in January of 2006 sales outpaced inventories by a substantial margin across the board. That tells us the inventory overload is a recent and short term phenomenon.The question for inventories then is not &#145;Are they lean enough to call for rebuilding?&#148; Clearly they are. The real question is how retailers, wholesalers and manufacturers see sales prospects. The flat retail sales growth rates in January and February are a problem in that regard. If retailers judge the problem to be weather-related they may build stocks anyway. It&#146;s their call. That&#146;s why they get paid the Big Bucks.</td>
</tr>
</table>
U.S. Business Inventories Rise 
by <a href="/comment/Brusca.html">Robert A. Brusca</a> March 13, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313c.jpg" width="353">
The ZEW Indicator of Economic Sentiment for Germany, which assesses the outlook in the next six months, based on the opinions of investors and analysts, rose 2.9 points in March to 5.8%. While the current level is a substantial improvement over the pessimism reached last November when pessimists exceeded optimists by 28.5%, it is well below the long term average of 33.2%. On the other hand, the fact that the participants became more positive during a survey period which included a sharp down turn in world stock markets and only a partial recovery, was in itself a pleasant surprise. Many observers had expected the indicator to decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313d.jpg" width="353">
The assessment of current conditions declined slightly to 69.2% from 70.9%, the first decline since June 2005. The indicators for the outlook and current conditions are shown in the first chart.
The ZEW Financial Markets Survey also asks its participants to report on the outlook and current conditions in the entire Euro Area. The assessment of the outlook for the entire Euro Area declined in March 5.1% from 6.8% in February and the appraisal of current conditions rose marginally from 66.7% in February to 66.9% in March. The indicators of current conditions and the outlook for the Euro Area are shown in the second chart.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313e.jpg" width="353">
The indicators for the Euro Area, of course, include those for Germany, but the differences between the indicators of the Euro Area and those of Germany can shed some light on the performance of Germany relative to the rest of the Euro Area. From the appraisal of current conditions in the total area and in Germany, we can infer that the participants had rated conditions in the Euro Area outside of Germany higher than those in Germany until November, 2006. Since then, the appraisal of current conditions in Germany has been higher than that for the whole region, as can be seen in the third chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070313f.jpg" width="353"> Similar inferences can be derived from the appraisals of the outlook in the two series. The outlook for Germany was less positive than that for the whole area indicator until about mid 2005 when it became more positive than the whole area indicator. It remained more positive from then until June 2006. After that until this March of this year, the German outlook for the German economy appeared to be much less positive than that for the Euro Area as a whole. The divergence may have been due, in part perhaps, to the prospect of the January 1, 2007 increase in Germany&#39;s VAT. Since the effects of the higher VAT appear to have been less onerous than expected, optimism in the German outlook has has become modestly more positive relative to the whole area, as can be seen in the fourth chart. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ZEW INDICATORS&nbsp; (% Balance)</th>
<th scope="col">Mar&nbsp; 06</th>
<th scope="col">Feb 06</th>
<th scope="col">Mar&nbsp; 05</th>
<th scope="col">M/M&nbsp; DIF</th>
<th scope="col">Y/Y&nbsp;&nbsp; DIF</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Current Conditions</td>
<td>69.2</td>
<td>70.9</td>
<td>-8.4</td>
<td>-1.7</td>
<td>77.6</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Expectations 6 Months Ahead</td>
<td>5.8</td>
<td>2.9</td>
<td>63.4</td>
<td>2.9</td>
<td>-47.6</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr>
<td class="firstcol"> Eurostat </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Current Conditions</td>
<td>66.9</td>
<td>66.7</td>
<td>2.0</td>
<td>0.2</td>
<td>64.9</td>
<td>23.8</td>
<td>-28.7</td>
<td>-41.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Expectations 6 Months Ahead</td>
<td>5.1</td>
<td>6.8</td>
<td>61.1</td>
<td>-1.7</td>
<td>-56.0</td>
<td>26.6</td>
<td>32.3</td>
<td>52.1</td>
</tr>
</tbody>
</table>
</body>
</html>

Our global data offering is unparalleled in terms of coverage, quality, and organization. We offer 290+ databases from 2500 government and private sources, a wealth of key survey and forecast data covering the world’s economies, and a robust offering of archive databases that drive machine learning for big data applications.

Optimized for precision analytics, our data is seamlessly integrated with Microsoft Office and all leading statistical packages through our DLX® software and platform independent HaverView™ website. We further offer direct database feeds, client server or cloud-based delivery, and RESTful API.


Robert Brusca

Publications by Robert Brusca

U.S. Current Account Deficit Shrinks

U.S. Retail Sales Pose a Dilemma

U.S. Retail Sales Pose a Dilemma