Mish's Global Economic Trend Analysis

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• San Bernardino Files Chapter 9 Bankruptcy Petition; Pension and Medical Liabilities Impossible to Meet; Major Wave of Municipal Bankruptcies Has Begun
• Problems in Spain: Revenues Collapse, State Spends Nearly Twice as Much as Revenues Collected in First Half
• Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless
• ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under)
• Japan Manufacturing PMI Shows Output and News Orders Down at Accelerated Rate

San Bernardino Files Chapter 9 Bankruptcy Petition; Pension and Medical Liabilities Impossible to Meet; Major Wave of Municipal Bankruptcies Has Begun Posted: 01 Aug 2012 10:24 PM PDT Fearing action by creditors, San Bernardino, California, Files Chapter 9 Bankruptcy Petition San Bernardino, California, after disclosing a $46 million shortfall in the city's budget, filed for municipal bankruptcy. San Bernardino listed assets and debt of more than $1 billion in a filing yesterday with the U.S. Bankruptcy Court in Riverside, California. It's the third California city to seek court protection from creditors since June 28. City officials sped up the timing of the filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said yesterday in a phone interview. Under Chapter 9, all court cases and other legal actions against the city will be halted until the bankruptcy case is over. One of the main problems is the high cost of the city's union contracts, particularly for police and fire service, City Councilman Fred Shorett said in a phone interview. Under the city charter, which is like a constitution for municipal governments, city officials must use a specific formula for determining wages and other benefits paid to its police and fire employees, Shorett said. That formula requires the city to set compensation by comparing employee pay in San Bernardino, which has one of the highest home foreclosure rates in California, with cities in the state that are about the same size and have much more money to spend, Shorett said. "We are set up for failure," he said. The city has about $55.9 million in bond debt tied to the general fund. The city also has unfunded liabilities of $296 million, including $195 million related to pensions and $61 million related to medical benefits for retired city workers. Major Wave of Municipal Bankruptcies Has Begun A major wave of municipal bankruptcy filings is now underway. Scores of other cities nationwide will eventually do the only thing that makes sense: file for bankruptcy to escape pension promises and union salaries that cannot possibly be met. In California, Oakland and Los Angeles are among the walking dead. Unions would be wise to negotiate with cities in advance of bankruptcy filings to protect the most benefits for the most workers. However, the odds of that happening are close to zero. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Problems in Spain: Revenues Collapse, State Spends Nearly Twice as Much as Revenues Collected in First Half Posted: 01 Aug 2012 06:31 PM PDT It's hard to meet budget targets as promised to the bureaucrats in Brussels when revenues collapse and the State Spends Nearly Twice as Much as Revenues Collected in First Half. Via Google translate (heavily modified by me) from El Confidencial: The Spanish economy continues its adjustment process. But the results in terms of deficit reduction, remain meager. Very meager. To the extent that in the first half of the year-on-national accounts, government spending-which really is committed to spend but have not been paid, have grown by 17.6% over the same period of 2011 . Or what is the same, the central government already has obligations amounting to 87.967 billion. The resources, however, only amounted to 44.879 billion (-4.1%), which means that during the first six months of the year the state has spent (or is obliged to spend) almost double what it has collected in revenues. Debt service has become the second biggest problem in the budget (after unemployment benefits). In fact, interest payments of 12.239 billion euros, is already 23% more than the government pays public employees (9.953 billion euros). This does not mean, however, that the debt service is causing the budget shortfall. In fact, the primary deficit (excluding interest payments) amounted to 30.839 billion in just six months. Rising unemployment has forced the state to make some additional contribution of 4,404 billion euros to the Public Employment Service (SPEE), while Social Security has received an additional 2.575 billion euros. The central administration also had to make advance payments to the autonomous communities totaling 5.476 billion, and another 865 million have gone to local corporations. In total, 13.320 billion of additional costs upward bias the data deficit for the first of the year. In any case, the underlying problem continues to be government revenue, strongly influenced by the deterioration of economic activity. VAT receipts actually are falling at a rate of 8.6% on a comparable basis. Panelists expect the destruction of more than 300,000 jobs next year, 2% of the workforce. That is, ten times more than estimated as more likely the government. The Spanish implosion continues and nothing can stop it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless Posted: 01 Aug 2012 10:00 AM PDT Inquiring minds are looking into the July 2012 Manufacturing ISM Report On Business® "The PMI registered 49.8 percent, an increase of 0.1 percentage point from June's reading of 49.7 percent, indicating contraction in the manufacturing sector for the second consecutive month, following 34 consecutive months of expansion. The New Orders Index registered 48 percent, an increase of 0.2 percentage point from June and indicating contraction in new orders for the second consecutive month, but at a slightly slower rate. Both the Production Index and the Employment Index remained in growth territory, registering 51.3 percent and 52 percent, respectively. The Prices Index for raw materials registered 39.5 percent, an increase of 2.5 percentage points from the June reading of 37 percent, indicating lower prices on average for the third consecutive month. MANUFACTURING AT A GLANCE JULY 2012 Index Series Index Jul Series Index Jun Percentage Point Change Direction Rate of Change Trend* (Months) PMI 49.8 49.7 +0.1 Contracting Slower 2 New Orders 48.0 47.8 +0.2 Contracting Slower 2 Production 51.3 51.0 +0.3 Growing Faster 38 Employment 52.0 56.6 -4.6 Growing Slower 34 Supplier Deliveries 48.7 48.9 -0.2 Faster Faster 6 Inventories 49.0 44.0 +5.0 Contracting Slower 4 Customers' Inventories 49.5 48.5 +1.0 Too Low Slower 8 Prices 39.5 37.0 +2.5 Decreasing Slower 3 Backlog of Orders 43.0 44.5 -1.5 Contracting Faster 4 Exports 46.5 47.5 -1.0 Contracting Faster 2 Imports 50.5 53.5 -3.0 Growing Slower 8 OVERALL ECONOMY Growing Faster 38 Manufacturing Sector Contracting Slower 2 Dismal Manufacturing Numbers Worldwide Reuters reports Global factories struggle as growth fears rise U.S. and euro zone factory activity slumped again in July while Chinese manufacturing hit an eight-month low, surveys showed on Wednesday, as economies worldwide showed signs of slowing. Economic malaise was worst in the 17-country euro zone, where output plummeted and the manufacturing sector contracted for an 11th straight month as a downturn that began in smaller countries continued to spread into core euro area economies. The slump worsened in Italy, Spain and Greece as well as the region's two biggest economies -- Germany and France. Europe's economic woes also depressed export orders in China and India, where manufacturing had appeared to be holding up despite the euro zone debt crisis and slowing U.S. growth. U.S. manufacturing, meanwhile, contracted for a second consecutive month, according to the Institute for Supply Management's index of national factory activity. A separate report from Markit showed activity barely expanding and at its slowest pace in almost three years, partly due to lower European demand for U.S. products. "The manufacturing numbers are pretty dismal. There's really no good way to read them," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "I think they bolster the case for more Federal Reserve action, and globally the argument is pretty much the same." Would Another Round of QE Help? Everyone is looking for the Fed to do something. I have to ask what good could it possibly do? Yield on the 10-year treasury is about 1.5%. Would it make any difference to businesses if it was 1.25% or even 1%? I suggest additional monetary stimulus would not do anything to spur job creation and it would continue to punish those on fixed incomes. An additional round of QE could ignite a further rally in equities (already in bubble land). However, one of these QE moves by the Fed will blow sky high, and with equities priced beyond perfection, the next round of QE may be the one. I had not seen this ISM report when I wrote ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under) This is what I said earlier today "Given the global collapse in new orders including the US, weak ISM numbers in the US, and generally bad regional manufacturing reports, I believe there is potential for a really awful jobs report either this month or next and I will go for this month." I certainly see no reason to change that call. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under) Posted: 01 Aug 2012 08:13 AM PDT ADP job estimates have been on the high side of BLS estimates for months, and I expect that to be the case again this Friday. Please consider some snips from the July 2012 ADP National Employment Report® Employment in the U.S. nonfarm private business sector increased by 163,000 from June to July, on a seasonally adjusted basis. The estimated gain from May to June was revised down slightly,from the initial estimate of 176,000 to 172,000. Employment in the private, service-providing sector expanded 148,000 in July after rising a revised 151,000 in June. The private, goods-producing sector added 15,000 jobs in July. Manufacturing employment rose 6,000 this month, following a revised increase of 9,000 in June. Employment on large payrolls—those with 500 or more workers—increased 23,000 and employment on medium payrolls—those with 50 to 499 workers—rose 67,000 in July. Employment on small payrolls—those with up to 49 workers—rose 73,000 that same period. Of the 67,000 jobs created on medium- sized payrolls, 4,000 jobs were created by the goods-producing sector and 63,000 jobs were created by the service-providing sector. Construction employment rose for the second consecutive month, adding 5,000 jobs. The financial services sector added 9,000 jobs from June to July, marking the twelfth consecutive monthly gain. Here are a couple of recent regional Fed manufacturing surveys to consider. Philly Fed Manufacturing Survey From the Philadelphia Fed Manufacturing Report .... Indicators Suggest Continued Decreases The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of −16.6 in June to −12.9. This marks the third consecutive negative reading for the index (see Chart). Nearly 32 percent of the firms reported declines in activity this month, exceeding the 19 percent that reported increases. Indexes for new orders and shipments remained negative but increased 12 and 8 points, respectively. Labor market conditions at the reporting firms deteriorated this month. The current employment index decreased 10 points, to −8.4, its second negative reading in three months. The percent of firms reporting decreases in employment (18 percent) exceeded the percent reporting increases (10 percent). Firms also indicated fewer hours worked this month: The average workweek index increased 2 points but posted its fourth consecutive negative reading. Dallas Fed Manufacturing Survey Here are a few snips from the Dallas Fed Manufacturing Survey. Texas factory activity continued to increase in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 15.5 to 12, suggesting slightly slower output growth. Other measures of current manufacturing activity also indicated slower growth in July. The new orders index was positive for the second month in a row, although it moved down from 7.9 to 1.4. Similarly, the shipments index posted its second consecutive positive reading but edged down from 9.6 to 7.4. The capacity utilization index came in at 8.7 after rising to 13.3 last month. Perceptions of broader economic conditions were mixed in July. The general business activity plummeted to -13.2 after climbing into positive territory in June. Nearly 30 percent of manufacturers noted a worsening in the level of business activity in July, pushing the index to its lowest reading in 10 months. The company outlook index remained positive for the third month in a row but fell from 5.5 to 1.6. Labor market indicators reflected stronger labor demand. Employment growth continued in July, although the index edged down from 13.7 to 11.8. Twenty-one percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index was 4.1, up slightly from its June reading. Price pressures were largely unchanged in July, although compensation costs rose at a faster pace. The raw materials price index held steady at 3, suggesting only slight increases in input costs this summer after strong upward pressure earlier in the year. Selling prices fell for the fifth consecutive month in July; the finished goods price index was -5.5, virtually unchanged from last month's reading. The wages and benefits index rose nearly 10 points to 22.9, largely due to a marked rise in the share of firms noting increased compensation costs. Looking ahead, 36 percent of respondents anticipate further increases in raw materials prices over the next six months, while 25 percent expect higher finished goods prices. Expectations regarding future business conditions were less optimistic in July. The index of future general business activity slipped from 1.3 to -7.3, registering its first negative reading in 10 months. The index of future company outlook remained positive but fell from its June level, coming in at 5.3. Indexes for future manufacturing activity also decreased, although all remained in strong positive territory. US Services ISM and Factory Orders On July 6th, I noted Services ISM Growth Slows - Jobs, Imports, Export Orders Contract. Also on July 6th I noted Factory Orders Fall More Than Expected; Recovery Withers on the Vine Given the global collapse in new orders including the US, weak ISM numbers in the US, and generally bad regional manufacturing reports, I believe there is potential for a really awful jobs report either this month or next and I will go for this month. Addendum: July Manufacturing ISM numbers came out today. For details, please see Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Japan Manufacturing PMI Shows Output and News Orders Down at Accelerated Rate Posted: 31 Jul 2012 11:58 PM PDT Economic conditions in Japan continue to accelerate to the downside as PMI signals sharpest deterioration in operating conditions since April 2011 Key Points: Output and new orders down at accelerated rates New export business decreases at sharpest rate in 15 months Average costs fall to greatest extent since November 2009 July data from Markit/JMMA showed manufacturing output falling at the sharpest rate in 15 months, as both new orders and new export business decreased at accelerated rates. After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers' Index™ (PMI™) posted 47.9 in July, down from 49.9 in June, a level indicative of a moderate deterioration in operating conditions. Moreover, the latest index reading was the lowest in 15 months. All three market groups registered a worsening of business conditions, with investment goods producers noting the steepest deterioration. Japanese manufacturing production declined for a second successive month in July, and at an accelerated rate. The overall reduction in factory output reflected lower levels of incoming new business, according to survey respondents. The pace of reduction in new work was solid, and the steepest since April 2011. New export orders also decreased in July, for the fourth month running, with the rate of reduction the fastest in 15 months. Companies mentioned demand weakness in China, Europe and the United States. It should be very clear now that the global economy in aggregate is back in recession, yet other than my call on July 11, 2012 Case for US and Global Recession Right Here, Right Now there has been scant attention to this possibility in media reports. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.