Mish's Global Economic Trend Analysis

Denmark "Temporarily" Tightens Border Controls; Trains Cancelled; Cascade of Border Controls Grows; Understanding the Problems
Government "Processing Error" Sinks Housing Reports for Entire Year; Where to From Here?
Flattening of the Yield Curve in Pictures; Is an Inversion Necessary to Signal a Recession?
Manufacturing ISM Sinks to January 2009 Low; Don't Count on Services or Housing to Save the Day

Denmark "Temporarily" Tightens Border Controls; Trains Cancelled; Cascade of Border Controls Grows; Understanding the Problems

Posted: 04 Jan 2016 06:33 PM PST

There are so many "temporary" border controls in the EU I have lost count. Fences, train checks, walls, payoffs to Turkey, pressure on Greece, are among the methods.

Today we can add another "temporary" measure to the list as Denmark Tightens Border Controls with Germany.

Denmark has imposed controls on its southern frontier with Germany in a move that is intended to stem the flow of migrants but will also deepen concerns about Europe's fraying commitment to the free movement of people.

Lars Lokke Rasmussen, Danish prime minister, said the decision was prompted by Sweden's move hours earlier to introduce identity checks for all passengers arriving by train, bus or ferry from Denmark.

"The new Swedish requirement for ID checks poses a serious risk of a large number of asylum seekers accumulating in a short time, for example in and around Copenhagen, threatening public order and safety. We do not want this," he said at a hastily called press conference on Monday.

The Danish controls are temporary and will last for the next 10 days but can be extended. Distinct from the Swedish measures, they will involve random checks and will not automatically require all cars and passengers crossing from Germany to show their passports. Mr Rasmussen said Angela Merkel, German chancellor, and the European Commission had been notified.

Sweden was long regarded as Europe's most generous country to asylum-seekers, offering permanent residence in recent years to Iraqis and then Syrians. But after a surge in the number of asylum seekers last year, Sweden's centre-left government buckled under pressure from local authorities and the public to crack down on immigration.

The controls have stoked tensions between Sweden and Denmark, where the centre-right government and its centre-left predecessor have been critical of Stockholm's generous immigration policies.

Hans Christian Schmidt, Denmark's transport minister, said: "It is sad that Swedes have run a failed immigration policy which now means that they are forced to do this. It is sad and annoying for the whole region."

The anti-immigration Danish People's party that acts as the main support for Mr Rasmussen's government in parliament, has long called for border controls and celebrated their arrival.

"A step in the right direction . . . Schengen has collapsed. The illusion of external borders has burst. Why does it take such a long time to recognise this?" Kristian Thulesen Dahl, the party's leader, wrote on Facebook.

Cascade of Border Controls Grows

The Wall Street Journal reports Sweden and Denmark Step Up Border Controls in Bid to Slow Flow of Migrants

Sweden began enforcing tighter border controls Monday to curb the influx of asylum seekers, prompting Denmark to begin similar checks in a further weakening of Europe's principle of open borders.

Sweden warned weeks ago that it would impose systematic identification checks at its borders, saying that the country of close to 10 million people was already straining to cope with the estimated 160,000 migrants who arrived in the Nordic nation last year.

Fearing that it would become the new destination for migrants unable to reach Sweden, Denmark said Monday that it was stepping up controls along its border with Germany.

To the north, Sweden, Denmark and Norway have chosen to erect administrative barriers, rather than physical ones. In Storskog, the Arctic border post between Norway and Russia—along an Arctic route some refugees and other migrants have chosen as more obstacles emerge on the trail through southeastern Europe—Norwegian authorities have stopped allowing in asylum seekers since Nov. 30.

Germany, one of the main destinations for migrants pouring into Europe, has also sought to stem the human tide also by imposing document checks at some of its borders.

Transport companies have complained that the controls place too much responsibility on their shoulders, that their staff are poorly prepared to check documents and that stations aren't designed to restrict pedestrian access to trains and buses. Swedish train operator SJ has suspended services to Denmark until it can iron out such problems.

Schengen Agreement Not the Problem

Problems are many, but the Schengen agreement that allows free movement between participating countries is not one of them. Here is a synopsis of the key issues.

Six Fundamental Problems

The US and UK destabilized the Mideast. Meddling in Iraq created ISIS. US backing of alleged "moderate" Al Qaeda terrorists expanded the civil war in Syria. The US attempt to oust Syrian president Assad with no stable replacement was an enormous mistake.
There are insufficient border controls between Schengen countries and non-Schengen countries.
A ridiculous EU rule states that refugees must register in the country of first entry. That puts tremendous pressure on the peripheral countries. Greece is not up to the task.
The high level of guaranteed benefits for refugees in German and Sweden acts as a magnet, near and far.
There is no clear distinction between political refugee, economic refugee, and war refugee. Someone who has escaped the war in Syria to Lebanon or Turkey, has by definition already escaped. Further migration to Germany or Sweden makes them economic refugees, not political or war refugees.
Welcoming refugees with open arms as did German chancellor Angela Merkel and Swedish prime minister Stefan Löfven openly invited trouble. And trouble arrived by the millions.

Given there is an unlimited demand for free services, free food, and free shelter, the refugee crisis will not go away until those six fundamental problems are fixed.

No key political leader in Europe understands the problem, especially chancellor Merkel. This refugee crisis will be her downfall.

Mike "Mish" Shedlock

Government "Processing Error" Sinks Housing Reports for Entire Year; Where to From Here?

Posted: 04 Jan 2016 12:47 PM PST

Huge "Processing Error" in Government Housing Data

When I saw some of the upwardly revised GDP estimates in 2015 I thought they were too good to be true, and that downward revisions were coming.

I had almost given up on that idea, but I was correct all along. Last month, construction spending was reported to be up 1%. Today we see it was only 0.3%. Economists, being perpetual optimists, came up with a consensus estimate for this month of +0.7% The actual result is -0.4%, over a full percentage point below the consensus and nearly a pull point lower than the lowest estimate of +0.5%.

Construction spending had been a highlight of the U.S. economy but less so with November's report where the headline fell 0.4 percent, far below the Econoday consensus for plus 0.7 percent. The year-on-year gain for spending, at 10.5 percent, is the lowest since April last year. Today's report also includes sharp downward revisions to prior months, the result of a processing error going back to January last year. October's initial 1.0 percent monthly gain is now cut 7 tenths to 0.3 percent while September is now at plus 0.2 percent vs an initial plus 0.6 percent.

The processing error, unfortunately for the housing outlook, is centered in the residential component where prior strength has been cut back. Still, residential spending rose 0.3 percent for a second month in a row that follows September's very solid 1.2 percent gain. Spending on new single-family homes has been rising strongly with the year-on-year rate at a very solid plus 9.3 percent. Spending on multi-family homes did fall in November but has been in fact booming in prior months, up 24.5 percent year-on-year.

Spending on nonresidential construction has also been solid, down in November but with the year-on-year rate at plus 13.6 percent. Public spending has been led by the educational component, up 15.2 percent year-on-year, with highway spending behind at plus 5.6 percent.

A processing error of this size is rare for government data but even after the downward revisions, construction spending remains a central plus and a reminder that domestic demand is the economy's most important driver.

GDP Revisions Coming Up

As a result of the discovery of a "processing error", huge by even government standards, not only will GDP estimates for the current quarter sink, so will reported GDP from prior quarters.

Downward revisions are coming. The next GDP reports will reveal by how much.

Bloomberg puts a positive spin on things pointing out the year-over-year gains. The more important question is: Where to from here?

Total Construction Spending

Total Construction Spending: Nonresidential

Total Construction Spending: Residential

Breakdowns

Total: $1.122 Trillion
Residential: $431 Billion
Nonresidential: $688 Billion

Nonresidential Breakdown

Commercial: $69 Billion
Highway and Street: $91 Billion
Healthcare: $41 Billion
Education: $91 Billion
Religious: $3 Billion
Manufacturing: $84 Billion
Office: $59 Billion
Amusement and Recreation: $21 Billion
Sewage and Waste: $24 Billion
Transportation: $4 Billion
Power: $86 Billion
Lodging: $22 Billion
Water Supply: $13 Billion
Communication: $22 Billion
Public Safety: $9 Billion
Conservation: $8 Billion
Other: $41 Billion

Where to From Here?

It's difficult to judge many of those categories.

The federal government did add a few more billion to highway funds for 2016, but that is a trivial amount in the grand scheme of things.
Affordability of housing has dropped and millennials are struggling for numerous other reasons including rising healthcare costs and need to take care of aging boomer parents. Thus, I do not expect much out of new single-family construction.
Manufacturing is weak. With a strong US dollar, there is no reason to believe a US manufacturing turn-around is on the horizon.
Will taxpayers be willing to shoulder tax hikes for more schools?
Do we have a growing need for office space? Lodging? Mall space? Will we build more anyway?
Many big box retailers are struggling and minimum wage hikes will make employees more expensive to hire. Thus, I expect a slowdown in new retail stores and restaurants. In turn, that will reduce demand for shipping of merchandise to fill those stores, and it will reduce the need for new employees as well.

Certainly there are a lot of questions, but risks seem way skewed to the downside. It's looking more and more to me like the economy has already peaked.

Mike "Mish" Shedlock

Flattening of the Yield Curve in Pictures; Is an Inversion Necessary to Signal a Recession?

Posted: 04 Jan 2016 10:24 AM PST

Curve watchers Anonymous has an eye on the yield curve. Here is a snapshot of year-end-closing values from 1998-12-31 through 2015-12-31.

Yield Curve Year End Closing Values 1998-2015

Unlike 1999-2000 and again 2007-2007, no portions of the yield curve are inverted today (shorter-term rates higher than longer-term rates).

Inversion is the traditional harbinger of recessions, but with the low end of the curve still very close to zero despite the first Fed hike, inversions are unlikely.

Yield Curve Differentials: 3-Month to Longer Durations

Yield Curve Differentials: 1-year to Longer Durations

Yield Curve Differentials: 2-year to Longer Durations

In general, albeit with some volatility, the yield curve has been flattening and spreads shrinking since 2013.

If the economy was truly strengthening, one would expect the yield curve to steepen, with rates rising faster at the long end of the curve rather than the short end of the curve. But that's certainly not happening.

Is an Inversion Necessary to Signal a Recession?

Many believe no recession is on the horizon because the yield curve is not inverted.

Pater Tenbebrarum at the Acting Man blog dispels that myth in A Dangerous Misconception.

One popular theme gets reprinted in variations over and over again. Here is a recent example from Business Insider, which breathlessly informs us of the infallibility of the yield curve as a forecasting tool: "This Market Measure Has A Perfect Track Record For Predicting US Recessions" the headline informs us – and we dimly remember having seen variants of this article on the same site at least three times by now:

There are very few market indicators that can predict recessions without sending out false positives. The yield curve is one of them. At a breakfast earlier today, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. "That is seven out of seven times — a perfect forecasting track record," he reiterated.

This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve!

When Perfect Indicators Fail

The so-called "perfect track record" Mr. Kleintop emphasizes is pretty much worthless once the central bank enforces ZIRP on the short end and has already begun implementing massive debt monetization programs. Here is a chart showing the relationship between 3-month and 10 year Japanese interest rates since 1989, with all six recessions since then indicated:

Over the past 25 years, the "perfect forecasting record" has worked exactly 1 out of 6 times in Japan – and that was in 1989.

There is no "holy grail" indicator that can be used to make perfect economic and market forecasts. It is true that if there is a yield curve inversion, it definitely indicates trouble is on the horizon. Alas, we don't remember hearing many real time warnings (in fact, we don't remember any) from Wall Street analysts when such inversions actually occurred in the past (such as e.g. in 1999/2000 and 2006/2007), which makes this new preoccupation especially funny. Obviously, the only time to pay attention to this indicator is when it suggests that a bubble can keep growing!

There is only one thing that is certain: things will continually change. There is no indicator that is fool-proof.

I captured the charts at the beginning of this post on December 31. With the 2016 opening equity carnage today, the curve will be flatter at the end of the day.

The yield curve does not believe the economy is strengthening, and neither do I.

Mike "Mish" Shedlock

Manufacturing ISM Sinks to January 2009 Low; Don't Count on Services or Housing to Save the Day

Posted: 04 Jan 2016 09:59 AM PST

The perpetual optimists who month after month believe a manufacturing recovery is at hand are wrong once again.

The Econoday Consensus Estimate called for a bit of stabilization following last month's damaging report.

Instead the reading dipped further into contraction, below the lowest estimate of 48.5.

ISM's manufacturing sample is reporting the weakest conditions since July 2009. At 48.2, December is much lower than Econoday's 49.2 consensus and is only the third sub-50 reading of the recovery. Yet the story, nevertheless, is much the same as it was in November which came in at 48.6 with both months showing slight contraction underway for both new orders and production. Employment in the sample, however, is noticeably weaker than November, at 48.1 for a more than 2 point decline and the second sub-50 reading in the last three months. A sizable 4.5 point rise for new export orders to 51.0 is a positive in the report. Inventories are steady and low but the sample still say inventories are a little bit high which betrays caution in their outlook. Prices for raw materials continue to contract, a reminder that low oil and commodity prices are making it difficult for the Fed to reach its 2 percent inflation target. This report points to ever softer conditions for a sector that, held down by energy and weak foreign demand, showed very little life during 2015.

ISM 2013 to 2015

Don't Count on Services or Housing

I have been pointing to this same chart for months. Something clearly turned late third or fourth quarter of 2014.

The consensus opinion was manufacturing did not matter and the service economy and housing would carry the day. I did not buy that theory then, and I sure don't buy it today.

Housing has been weakening for many months, and the Chicago PMI, a measure of both services and manufacturing points to upcoming carnage in services in my opinion.

December 31, 2015: Chicago PMI Crashes, New Orders and Backlogs Plunge to May 2009 Level; Service Economy Headed for a Slowdown?

September 30, 2015: Chicago PMI Unexpectedly Dives to Negative Territory; Production at Lowest Since July 2009; Emanuel's Tax Hikes Will Make Matters Worse

Mike "Mish" Shedlock

Economy News

4.1.16

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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