The above chart shows the spread between municipal bond yields and treasury bond yields. As you can see from the chart the spread is very elevated compared to historical levels. This is another sign of a flight to quality in bonds. Municipal bonds are usually seen as a very low risk investment. They usually yield only about 90% of treasuries. However, as of late March 2009, municipal bond yields were over 130% of treasuries. This is another clear sign that the current credit crisis is not over. It also shows that investors see an increased potential for municipal bond defaults.
Data source:
> U.S. Federal Reserve. H.15 Selected Interest Rates. Compares the 20-year treasury bond (constant marturity) with the Bond Buyers 20-year, general obligation, mixed quality municipal bond index.
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An historical view of the rate on a 30-year, fixed-rate conventional mortgage. As you can see it is at a record low level. What happens to the price of housing if mortgage rates head back up? Higher rates would make housing more expensive on a relative basis (putting more downward pressure on housing prices). It is obvious that the government is going to do all it can to keep mortgage rates down to prop up the housing market. Without record low mortgage rates housing prices would likely be much lower. For now low mortgage rates are propping up housing prices and providing homeowners with an excellent opportunity to refinance. However, there will be a large negative effect on home prices if/when mortgage rates begin to increase.
Data source:
> U.S. Federal Reserve. H.15 Selected Interest Rates. Primary Mortgage Market Survey - Feddie Mac.
The first chart shows the spread between the interest rate on lower quality (A2/P2 paper) and higher quality (AA) commercial paper. Commercial paper is an obligation issued by corporations and banks to finance short-term credit needs. The first chart clearly shows the dislocation in the commercial credit market from the ongoing credit crisis. A wider spread between lower quality and high quality commercial paper shows that investors see increased risk in this credit market. This spread has narrowed in recent months from its high, but remains at a very elevated level.
The second chart shows the spread between AA (high quality) non-financial and AA (high quality) financial commercial paper. This chart clearly shows the dislocation in the commercial credit market for financial corporations. Basically, financials with similar credit quality as non-financials have to offer higher interest rates to attract buyers of their paper. Historically this spread has been in the low single digits (almost even). However, it has widen substantially with the current credit crisis. Again, this spread has narrowed recently, but remains at an elevated level.
Both of these charts clearly show that the credit crisis is not over, and that risk and liquidity issues remain in the credit markets.
Data Source:
> U.S. Federal Reserve. H.15 Selected Interest Rates.
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The above chart shows the interest rate spread between the three-month Libor rate and the three-month Treasury bill rate (TED Spread). The Libor rate is the rate at which banks lend unsecured money to each other and reflects the credit risk of interbank lending. The Treasury bill on the other hand is believed to have extremely low risk. Therefore, the spread between the two (TED spread) is often used as an indictor of risk of default on interbank lending. An increase in the TED spread is a sign of more perceived risk in this market.
While off of its peak the TED spread remains elevated at over 100 basis points.
Data Source:
> U.S. Federal Reserve. H.15 Selected Interest Rates
> British Bankers’ Association
> Bloomberg.Com
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The Congressional Budget Office (CBO) last week came out with its budget projections based on the Obama Administration’s budget proposal. In prior posts I have been saying that the Obama Administration’s proposal is optimistic, and the CBO projections back me up. The above charts show the difference between the CBO’s and the Administration’s budget deficit projections under Obama’s plan. As you can see the difference in the projections are substantial.
Data Source:
> Office of Management and Budget, A New Era of Responsibility Renewing America’s Promise. Tables S-1. and S-4.
> Congressional Budget Office, A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook, March 2009. Table 1.4.
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The above chart shows industrial production (factory output) over the past three years for communications equipment and semiconductors. The point of the chart is to show how these two sectors have held up during the current recession.
Communications equipment is interesting because it has held up very well throughout the current economic crisis (at least so far). This supports much of what I have been hearing from close friends in the communications industry. My good friend Dan C. who is the CEO of a large communications services company (and writes the Bear on Business website) has been telling me for months that demand for communications services is good. I’ll keep an eye on this in coming months to see if the trend continues. The chart does show communications equipment production turned slightly negative in February. However, we need to see another month or two of data before we can tell if a pattern is developing.
On a different note, industrial output for semiconductors and related components is in a bad pattern. Why is this important? Because semiconductors are widely considered a leading indicator of economic activity. This indicator is still negative for now.
Data Source:
> U.S. Federal Reserve. G.17 Industrial Production and Capacity Utilization. Various monthly reports.
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The first chart provides a view of U.S. industrial production (the total output of U.S. factories and mines) over the past three decades. This chart puts the current downturn in industrial production into historical perspective. The second chart shows U.S. industrial production has had no growth over the past 10 years (talk about “lost decade”). Essentially, the output of U.S. factories and mines was no larger in February 2009 than it was 10 years ago.
The negative trend in these charts also represents the deflationary pressures that are currently present in the U.S. economy. This trend is what the Federal Reserve (Fed) is trying to fight with its loose monetary policy. The Fed has clearly decided that reversing this trend (in the near term) is more important than the risk of inflation.
Tomorrow’s post will chart industrial production for communications equipment and semiconductors. Semiconductor output is particularly important because it is often used as a leading indicator for economic activity. Check in tomorrow to see what it is telling us.
Data Source:
> U.S. Federal Reserve. G.17 Industrial Production and Capacity Utilization. March 2009 release, and The 2008 Historical and Annual Revision.
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Capacity utilization is considered a leading indicator of inflation and future capital spending. Capacity utilization shows the level at which U.S. industry is running relative to its potential. As the chart in the previous post shows, a reading of 70.9% indicates that U.S. industry is running nowhere near its potential. The chart also shows that U.S. industry is running at a record low level relative to its capacity. Why is this important? It is important because with so much spare industrial capacity it can be argued that there is little inflationary pressure (at least for now - all the money printing may change this in the long term). It also means that industry has little need to spend capital to increase production (which can slow the economy even more).
This is the first chart in a three part series on U.S. industrial production and capacity utilization. This week the Federal Reserve released its data on industrial production and capacity utilization for February 2009. The numbers show that industrial capacity utilization in the U.S. matched its record low set in December 1982 of 70.9% (see above chart). This calculation is based on the percentage of total industrial capacity being utilized. Capacity utilization for U.S. industry is currently running well below its long-term average of 80.5%.
More on industrial production in tomorrow’s post.
Data source:
> Federal Reserve, G.17 Industrial Production and Capacity Utilization. March 2009 release, and The 2008 Historical and Annual Revision.
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The above charts show auto inventories in months of supply based on the inventory to sales ratio. The first chart shows a historical view of the auto inventory to sales ratio. The second chart gives a closer view of the recent spike in the inventory to sales ratio. As you can see from these charts the auto inventory to sales ratio: 1) has increased quickly in recent months, and 2) is at a record level. The average inventory to sales ratio for the U.S. auto market since 1967 has been 2.44 months of supply. In January 2009 the U.S. auto inventory was at 5.4 months of supply.
If you are in the market for a car, then make sure you drive a hard bargain. You have plenty of leverage in your negotiations. I am not advocating spending over saving in this economic environment. However, if you need a car, make sure you remember the above charts when you sit down to bargain.
Below is a chart that shows the market share of the U.S. retail auto industry.
Data Source:
> Bureau of Economic Analysis, Table 7.2.5S.
> Market share data is from Autodata
> Includes cars and light trucks.
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This chart compares the size of government in America to that of Germany, France, and the European Union (EU) since 2001. This chart shows that the size of government in the U.S. in recent years has been steadily catching up to the size of government in these European countries. For example, Germany has reduced the size of its government since 2001 while the size of our government has increased. In 2009, the size of government in the U.S. will be just slightly behind the size of government in Germany. Even when you look at the size of government for the combined EU or France the U.S. is not far behind. This is a dramatic shift.
Under the Obama Administration’s budget plan the size of the U.S. government starts coming down after 2009. However, as I have stated in previous posts, I believe the projections in this budget plan are optimistic (predicting just a small recession in 2009 followed by strong growth over the next decade). For now, what is sure, is that government in the U.S. is getting bigger.
Data Sources:
> Office of Management and Budget, A New Era of Responsibility Renewing America’s Promise, Table S-1.
> European Commission, Directorate General for Economic and Financial Affairs, Economic Forecast Autumn 2008, Table 35.
>Bureau of Economic Analysis, Tables 1.1.5. Gross Domestic Product, and 3.1 Government Current Receipts and Expenditures.
> The estimate for 2009 cuts state and local government expenditures by 2% from 2008 levels.
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This chart shows the historical size of government in America from 1929 through 2009. It includes federal, state and local government expenditures as a percentage of gross domestic product (GDP). This chart clearly shows: 1) that the size of our government will be larger in 2009 than at any other time in recent history, 2) the only other time the size of you government was near current levels was during World War II, and 3) that the size of our government has grown dramatically since 1929.
It can be argued that this chart also shows that we have been on a slow march toward socialism (or at least a more socialistic society) over the past 80 years. More on this topic tomorrow. I will compare the size of our government to the size of government in foreign countries.
Data Sources:
> Office of Management and Budget, A New Era of Responsibility Renewing America’s Promise, Table S-1.
> Bureau of Economic Analysis, Table 1.1.5. Gross Domestic Product, and Table 3.1. Government Current Receipts and Expenditures.
> The estimate for 2009 has state and local expenditures cut by 2% from 2008 levels. And uses the Obama Administration’s budget forecast for 2009 federal expenditures and GDP.
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This is the first chart in a three part series on the size of our government. The above chart provides a measure for the size of government by charting total government expenditures as a percent of gross domestic product (GDP). As the chart shows the size of our government has increased dramatically over the past decade. Check back for tomorrow’s post to see how the size of our government today relates to historical levels.
Data Sources:
> Office of Management and Budget, A New Era of Responsbility Renewing America’s Promise, Table S-1. The 2009 estimate is based on the Obama Administration’s plan and assumes state and local government expenditures actually decline by 2% from 2008.
> Bureau of Economic Analysis, Table 1.1.5. Gross Domestic Product and Table 3.1 Government Current Receipts and Expenditures.
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This chart shows the unemployment rate by state for January 2009. The February data will not be released for a couple of weeks. However, the national unemployment numbers for February are out and show a .5% increase from January 2009. Given this, it is safe to assume that when the state unemployment data for February is released we will see an upward spike for most (if not all) states. For now, this chart gives a good comparison of the employment picture among the states.
Also, as I have indicated in prior charts it is important to remember the offical unemployment numbers do not reflect the true employment situation. They do not count: 1) people who have dropped out of the labor force but want a job, and 2) those who work part-time but want full-time employment. When you include these individuals the national “suffering rate” (as I refer to it) is more than twice the offical unemployment rate on a national basis. Accordingly, on a state level the suffering rates are likely more than double the rates in the above chart.
As you can see from the chart, there are several states that have unemployment rates above 10%. When the February numbers are released I suspect that a couple more states will be added to the 10%+ category. What is worse is that the suffering rates in these states is likely above 20%.
Data Source:
Bureau of Labor Statistics, Table 3. Civilian labor force and unemployment by state and selected area, seasonally adjusted.
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This chart reflects the new February 2009 employment data released last week. In my calculation of the suffering rate I include: 1) the unemployed, 2) part-time workers for economic reasons, and 3) those that want a job but dropped out of the labor force. It is shown as a percentage of the total labor force plus those that want a job but are not included in the labor force. Using the suffering rate there were 26.7 million individuals unemployed and underemployed in February 2009.
Source: Data from Bureau of Labor Statistics
> Report A-1. Employment status of the civilian noninstitutional population 16 years and over, 1970 to date
> Report A-7. Employed persons by class of worker and part-time status, seasonally adjusted.
> Report A-38. Persons not in the labor force by desire and availability for work, age, and sex.
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