Post 234

A snapshot of what’s going on in the world’s economy.  Financial Ructions and book reviews can be a bit more technical so feel free to skip them.  See disclaimer at the end of this note.

Summary

News

If Not For Food and Booze…

US monthly Retail and Food Services sales ‘here’ and were down month-over-month (the numbers are adjusted for seasonal variations and holiday trading differences).

  • Dec: +0.4%
  • Jan: -0.8%

Year-over-year sales were up 0.6%.

  • But these numbers don’t account for inflation which was +3.1% in January.
    • So, people bought considerably less stuff than they did last January.

The split between Retail Trade and Food Services:

  • Retail: Down 1.1% from December
    • Down 0.2% from last year.
  • Food Services: Up 0.7% from December
    • Up 6.3% from last year.

Some of the bigger year-over-year movers:

Up:

  • Non-store retailers: 6.4%
  • Food services & drinking places: 6.3%
    • PM: Doing my part.
  • Health & personal care: +5.0%
  • Grocery stores: +2.3%

Down:

  • Furniture & home furnishing stores: -9.8%
    • Existing home sales in December were at the lowest annualised rate since 2010.  See ‘here’ from Trading Economics.
  • Building material & garden: -8.3%
  • Gas stations: -7.5%
  • Department stores: – 6.7%
  • Electronics & appliance stores-5.8%
  • Sporting goods, hobby, musical instruments: -3.2%
  • Auto dealers: -2.3%

Note that sales for November and December were both revised lower than previously estimated.

The WSJ reports that according to Bank of America, credit card spending in January was down 0.2% from last year.

Home Depot Results

Further to retail weakness, Home Depot announced their 4Q/2023 results:

  • Comparable sales by quarter:
    • 1Q/2023: -4.5%
      • US: -4.6%
    • 2Q/2023: -2.0%
      • US: -2.0%
    • 3Q/2023: -3.1%
      • US: -3.5%
    • 4Q/2023: -3.5% (-3.2% for the whole year)
      • US: -4.0% (3.5% for the whole year)

Walmart Results

  • Walmart US
    • Comparable sales excluding fuel:
      • 4Q/2023: +8.3%
      • 4Q/2024: +4.0%
        • Transactions: +4.3%
        • Price: -0.3%
    • Gained market share mainly from higher income households.
    • Sales were up in:
      • Grocery
      • Health & Wellness
    • Sales were down in:
      • General Merchandise.

Recessions

A technical definition of recession is when an economy contracts for two straight quarters or six months.

  • But this is not always considered to be a recession as it also depends on things like the level of employment or as they say in the UK (The Office for National Statistics):
    • “Other factors…such as the depth, diffusion (how widespread), and duration of the change in GDP.”
    • So, an economy could fall for two consecutive quarters and not be considered a recession.
      • Like the US did in the first two quarters of 2022.
    • Or only fall for one quarter but still be considered a recession.
      • Like the US did in 2001.

Germany In Recession?

  • 2021: +3.2%
  • 2022: +1.8%
  • 2023: -0.3%

1.    3Q/2023: 0%

2.    4Q/2023: -0.3%

  • Note that the 3Q was initially in decline but subsequently revised higher to flat.
    • Otherwise, the country would be in technical recession.

Japan In Recession

  • GDP growth by quarter:
    • 3Q/2023: -0.8%
    • 4Q/2023: -0.1%
  • PM: Yet, their stock market is booming.
    • Furthering the disconnect between the economy and stock markets.
    • The “connect” with stock markets over the last fifteen years has been central banks.
      • Extracting value from the real economy via printing money in order to boost asset prices such as stocks and housing.
    • Japan’s central bank stock holdings were around 6% of the total market as of March of last year according to the FT.
    • Whenever the market wobbles the BOJ comes piling in with printed money to drive stocks higher.
    • Over a two day period during the Silicon Valley Bank collapse, the Bank spent over $US1 billion to prop-up the market (NIKKEI Asia)

UK In Recession

GDP growth by quarter (Office For National Statistics):

  • 3Q/2023: -0.1%
  • 4Q/2023: -0.3%

For the whole of 2023, GDP is estimated to have grown by 0.1%.

  • Services have fallen three quarters in a row.

Using the “income approach” to measure GDP, it was down 0.3% for the year.

Note that retail sales volumes in the UK were down 3.2% in December:

  • The largest decline since January 2021 when COVID restrictions were still in place.
  • By category:
    • Non-food: – 3.9%
    • Food: -3.1%
    • Online retailers: -2.1%
    • Automotive fuel sales: -1.9%

On a GDP per capita basis:

  • 1Q/2023: -0.1%
  • 2Q/2023: -0.2%
  • 3Q/2023: -0.4%
  • 4Q/2023: -0.6%

PM: So on a per person basis the UK economy is accelerating downward.

Inflation: Not Dead Yet?

The Producer Price Index or PPI measures the change in price that producers receive for their goods.  You can think of it like a wholesale price that eventually gets passed on to consumers through retail prices. 

US PPI Index:

Month-over-month:

  • Sep: +0.2%
  • Oct: -0.4%
  • Nov: +0.1%
  • Dec: -0.1%
  • Jan: +0.3%
    • Services: +0.6%
      • Highest since July 2023.
    • Goods: -0.2%
      • Energy: -1.7%
      • Food: -0.3%
      • Less food and energy, Goods PPI was up 0.3%
        • It was up 0.1% in each of the previous three months.

Inflation: Kicked The Bucket?

Truflation is a measure of inflation that uses 10 million data points and updates things daily.

  • Feb 2023: 6.1%
  • Feb 2024: 1.6%

Exports Growing

From the WSJ:

Exports from South Korea:

  • Dec: +5.0%
  • Jan: +18.0%
    • Semiconductors: +56%
    • Worldwide semiconductor sales ‘YCharts
      • Feb 2020 (pre-COVID): $34.5 billion
      • May 2022 (peak): $51.7 billion
      • Feb 2023 (recent trough): $39.7 billion
      • Nov 2023: $48.0 billion
  • Shipments by destination:
    • US: +27%
    • China: +16%
    • Imports were down 7.8%.

A report from the Fraser Institute (Jake Fuss and Jason Clemens) on Canada’s government spending:

  • Government spending excluding interest expense:
    • 2014/2015: $256 billion
    • 2022/2023: $448 billion
      • Up 75%
      • Note that none of the spending in the latest fiscal year is COVID related.
  • In 2022, Canada had the 5th highest tax rate of 38 OECD countries.
  • Real GDP per person (adjusted for inflation) is still lower than pre-COVID.
  • The OECD predicts that among 32 developed economies, over the next number of years, Canada will rank dead last in terms of GDP per capita growth.
  • Real business investment in Canada (excluding residential construction PM: which is not productive):
    • Since 2014 has declined an average of 1.8% per year.
    • PM: This is a shocking number.  And thus, our declining productivity growth.
  • According to Hill and Emes 2023:
    • Business investment per worker:
      • Canada
        • 2014: $18,363
        • 2021: $14,687
          • Down: 20%!!
      • US
        • 2014: $23,333
        • 2021: $26,751
          • Up: +15%

Job growth since Feb 2020 i.e. pre-COVID (Eisen, Ryan and Palacios, 2023):

  • Private sector: +3.3%
  • Government sector: +11.8%

Financial Ructions

Liquidity

A lot has been written about the Fed shrinking its balance sheet via QT that started in mid-2022.

  • However, in recent months the drawing down of the Reverse Repo account at the Fed has more than off-set the decline in the Fed’s assets.
  • While there are other things that impact liquidity, if we just look at the Fed’s balance sheet and Reverse Repo we can look at two separate periods of liquidity.
    • Period 1:
      • Mar 2020 to Apr 2021: $3.5 trillion of liquidity was injected into the system.
    • Period 2:
      • May 2021 to May 2023: $1.5 trillion of liquidity drained from the system.
    • Period 3:
      • Jun 2023 to Jan 2024: $905 billion of liquidity injected into the system.
    • Note that the most recent stock market rally started in Oct 2023 and the S&P500 is up over 21% since that time.
  • The largest monthly changes in liquidity:
    • Largest increase was Apr 2020: $1.68 trillion
    • Largest decrease was Jun 2022: $263 billion
  • The largest 12-month change in liquidity:
    • Largest increase was Apr 2020 to Mar 2021: $3.5 trillion
      • Uh, thus the record inflation that started in mid 2021.
    • Largest decrease was May 2022 to Apr 2023: -$963 billion.

GDP vs. GDI

Gross Domestic Product (GDP) is what policymakers use to measure the strength of the economy.

  • However, GDP can be a misleading measure of the strength of the economy and fosters poor policy responses from politicians and central bankers.
  • GDP is measured in a few ways and one of them is the expenditure method which measures all “final” spending in the economy.
    • It only measures final spending and does not include intermediate spending in order to avoid double-counting.
      • So, for instance, if you baked a loaf of bread and sold it for $3, that $3 would be included in GDP.
      • But the money you spent on things to make the bread such as flour and yeast etc. would not be included.
      • If you had spent $2 on ingredients for that loaf and that $2 was added to the $3 loaf then it would look like the economy produced $5 worth of stuff, but it only produced one loaf worth $3 i.e. the $2 of ingredients are in the loaf.
    • However, the problem with this is that investment that results in intermediate spending and new jobs doesn’t get counted in the GDP number.
      • But spending resulting from mailing out billions of dollars of stimulus cheques does get counted.
      • And so do the salaries of tens of thousands of new government workers who have been added to the payroll over the last few years.
    • Therefor government encourages consumption over investment.
    • Because consumption makes up around two thirds of final spending, many policymakers foolishly believe that spending rather than investment is the fount of economic prosperity.
    • However, the spending is only made possible by first saving and investing and producing stuff.
    • Spending that results from the government taking on debt or printing money to mail out stimulus cheques is simply a redistribution of wealth that has already been created.
      • That redistributed wealth is then consumed instead of invested, which weakens the productive capacity of the economy.

GDI stands for Gross Domestic Income and should be the same as GDP or Gross Domestic Product.

  • The reason is that every time someone spends money it becomes someone else’s income.
  • So, if GDP is a measure of all final spending it must equal all income.
  • And indeed, for decades this was true, except until now.

 

  • You can see in the above chart that GDP continues to move higher while GDI is flatlining.
  • The divergence started in September 2022.
  • One possible reason for the divergence according to an article on Zero Hedge, is that the Fed used to remit “profits” to the Treasury, but ever since September 2022 the Fed has been losing money.
    • This was the exact date that the two measures started to diverge i.e. GDI started to fall and GDP continued to rise.
    • My understanding is that the Fed’s losses that result from it paying out more interest than it is receiving results in an income to financial institutions which is not getting captured in GDI.
    • This has since been adjusted and is estimated to eliminate half of the difference between the two measures.
    • The article suggests that those same Fed payments will be subtracted from GDP which will bring the two measures closer together.
      • From the article: The bigger change will be seen in the GDP which will now account for (more properly) the costs related to Fed interest rate expenses.

Disclaimer: Note that Paulitical Economy™ should not be considered as investment advice, and I have not verified all of the sources of information.  It is meant for general interest purposes only.  Please consult an advisor if you plan on putting any of your hard-earned capital to work during these turbulent times.

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