some loosely connected thoughts of my own:

cmi versus retail sales: commodities squeeze the consumer

I first became aware of the consumer metrics index [cmi] through the blog http://dshort.com/
The cmi is a coincident measure of purchases of discretionary items. it can be found at http://www.consumerindexes.com/
According to the cmi website, "The Consumer Leading Indicators track consumer interest in major discretionary purchases. These typically include such items as automobiles, housing, vacations, durable household goods and investments. Not included would be expenditures that are more or less automatic, relatively minor and/or non-discretionary, such as groceries, fuel or utilities."

The cmi index has in the past been a leading indicator of both gdp and the s&p. Basically, it quickly shows what is happening in the economy, while gdp measures and the stock market lag somewhat. Lately, however, there has developed a discrepancy between retail sales data and the cmi. The cmi shows continued deterioration, although the rate of deterioration has slowed of late. Meanwhile, retail sales appear to be growing.

Since the cmi measures discretionary purchases and is still deteriorating, non-discretionary spending must account for any growth in retail sales as well as compensating for losses in discretionary spending. I would point out in particular, gas station sales [mostly gasoline] account for about 10% of retail sales. As of Sept '10, gasoline store adjusted sales were up 10% yoy.

"Food and beverage stores" account for about 15% of retail sales; food store sales are up only about 2% yoy. Otoh, there have been recent announcements of food price rises to come, as food processors are no longer willing to absorb the recent significant rises in their input commodity prices. Soon we can expect food store sales to reflect rising food prices.

As the price of necessities grows, those necessities absorb an increasing share of income, and squeeze out possible discretionary spending. If the rising trend of commodity prices continues, we can expect further disparities between cmi and retail sales.

Everything we need is getting more expensive. Prices are only dropping on illiquid assets like real estate, and discretionary consumption goods.


gdp and imports

GDP = private consumption + gross investment + government spending + (exports − imports)


The consumption reflected in gdp can remain constant even if discretionary purchases wither, and even if the quantities of necessities consumed do not increase. If the price of necessities increases, the same quantity of e.g. gasoline and food will generate higher nominal consumption. Consumption can remain unchanged [nominally] but include ONLY necessities if those necessities get expensive enough.


In this scenario, however, the composition of our imports is changed. We will no longer be importing dvd players and flat screens; we will only be importing oil and industrial meterials. we are a food exporter, so net-net, we have no food imports.

Thus, the big economic number, the GDP, can continue to look ok, and retail sales numbers can hold up and even rise, as the standard of living declines.


Now add into your thinking the continuing housing debacle and its effect on the economy, and the emerging "hourglass economy." I had never heard that term before a few weeks ago, when I heard it used on the radio twice, in separate stories, in an hour.

The first google hit on "hourglass economy," from jrank.org
The UK and USA are said to have an ‘hourglass economy’, with a large and expanding group at the top who have high skills and enjoy high incomes and a large and expanding group at the bottom who have low skills and low pay. The middle levels, composed traditionally of skilled or semi-skilled manual workers in good paying jobs, however, are declining, giving the occupational and income profile of the economy its distinctive shape. [See Brazilianization.]


I like that "see Brazilianization" part.


Anyway, in fact the top part of the hourglass is not so very large, the bottom part is huge and growing, as the middle shrinks. Income inequality is as great as it's been for the last 80 years. Those in the bottom section spend the greater proportion of their incomes on necessities. [We must include housing costs here, including energy costs for heating and cooling.] Walmart reports an increasing number of "midnight shoppers." They mill around waiting for midnight at the end of the month, so that their transfer payments, food stamps, etc, get credited to their accounts and they can check out with their carts full of necessities for the new month. Toward the end of the month they buy in small quantities, stretching what's left, until they can't afford to buy at all, and they wait for midnight once again.


chinese exports to "developed" nations


If the american standard of living is declining as the rising cost of necessities displaces the ability to purchase discretionary goods, the american market for chinese exports is shrinking. For certainly those exports include, for the most part, discretionary goods. Some chinese-sourced clothing may be viewed as non-discretionary, but broadly speaking the chinese export market in America is disappearing.


As long as this market still has some life in it, however, the Chinese will do what they can to exploit it. Only after they have drained it dry will they lose their incentive to keep the yuan tied to the dollar. If they have no export income from the U.S., of course, then they will have no new dollar income to recycle into bonds. But they will also lose any incentive to roll over the treasuries they already own, when they mature. [I suspect the fed will step in as buyer of first and last resort, via qe4 or 5.]


It seems plausible to me that the same processes described here for the U.S. will be occurring in similar fashion in other oecd, i.e. "developed", economies, such as the e.u. And similarly, the Chinese will continue to support their export industries by suppressing their currency until they have fully exploited what demand there is.


I was interested to note that in spite of some recent appreciation of the yuan against the dollar, the yuan is down overall in trade weighted terms. But it is hard to sort out trade in intermediate goods versus exports to final consumers. This makes interpreting the "trade weighted" numbers difficult.


The recent flap over rare earths points to another ongoing development: China is moving up the value chain. Recently it restricted exports of rare earth metals, offering instead to export value-added components which incorporated those materials. Thus it is promoting the evolution of its own industrial base.



chinese trade with emerging market partners; stepping away from the dollar


China has been establishing bilateral trade agreements which codify the notion of direct exchange in their native currencies between China and its trade partners. Thus, for example, it may conduct trade with Brazil denominated in Brazilian reals or in Chinese yuan, without the necessity of going through the dollar as an intermediary. In this arrangement, the central banks of these countries may start to accumulate reserves of the other's currency. These may be minimal amounts required for transactional purposes, but over time they may grow beyond that, especially if the bilateral trade is not balanced. Then one of the those countries will start to accumulate the currency of the other, and some means of recycling these balances will be developed.


China, too, has arranged for barter deals with African countries, in which it builds roads, bridges, highways, in return for mineral rights, i.e. mining, or food. It is hard to value these deals in understanding the composition of Chinese trade, but anyway you look at it, this is another step away from the dollar.

And of course it is using its dollar trove to directly purchase commodities in vast quantities, converting paper dollars into industrial supplies.


the political-economic problem for china


How can the Chinese keep their population occupied and relatively content? As the oecd nations impoverish themselves, paying interest on their debts and spending more and more for oil and food, chinese export markets contract. They can export more basic goods to developing and emerging partners, and make changes to encourage domestic consumption, but at the same time they want to move up the technology ladder.

Let's add a demographic factor. A 2009 paper by Wei Xing Zhu et al, concludes:

In 2005 males under the age of 20 exceeded females by more than 32 million in China, and more than 1.1 million excess births of boys occurred. China will see very high and steadily worsening sex ratios in the reproductive age group over the next two decades.


What do they do with all those excess males?


the political-economic problem for the U.S.


Our political system is highly dysfunctional, and more and more captured by big money interests. Both democrats and republicans are ever more dependent of the contributions of organizations and individuals representing industrial- and finance-based wealth. This prevents any policy which might effect significant change in the structure of the economy. But the economy is bogged down by excessive debt and ever more dependent on injections of liquidity to keep staggering forward at all. The political impasse prevents fiscal measures from being agreed upon. This puts pressure on the monetary authorities to keep printing more money. This cannot be stable, and - unless some other process intervenes - will lead to crisis in some form, perhaps the destruction of the dollar, perhaps a sudden stop of the economy. But until the economic problems get as big as the political problems, there will be no action.


the "solution"


The Brazilian president-elect remarked before the recent G-20 meeting in Korea, that “The last time there was a series of competitive devaluations. . . it ended in world war two.” The "solution" for both the U.S. and China is a war, preferably of the cold variety. With respect to China, what better way to push high-tech development and simultaneously occupy millions of unattached male 20 year olds? With respect to the U.S., since monetary policy really can't do the job of reviving the economy, how else will we have fiscal stimulus? When it comes to military spending in the face of a serious threat from a real international competitor, the republicans and democrats will join hands and fund whatever is requested.


Many people don't recall that the interstate highway system was initially justified and funded as a defense initiative. from wikipedia:

The Interstate Highway System had been lobbied for by major U.S. automobile manufacturers and championed by President Dwight D. Eisenhower, who was influenced by his experiences as a young Army officer crossing the country in the 1919 Army Convoy on the Lincoln Highway, the first road across America...

Eisenhower gained an appreciation of the German Autobahn network as a necessary component of a national defense system while he was serving asSupreme Commander of the Allied forces in Europe during World War II.[9] He recognized that the proposed system would also provide key ground transport routes for military supplies and troop deployments in case of an emergency or foreign invasion.....

The Interstate Highway System was authorized by the Federal-Aid Highway Act of 1956[11] – popularly known as the National Interstate and Defense Highways Act of 1956 – on June 29.


Note that it was lobbied for by the auto industry, but justified as a necessity for defense. Recall, too, the technology spin offs of military development over the last half of the 20th century, the huge educational funding generated in response to sputnik, and DARPA's role in fostering the development of the internet.


Finally, the economy is said to be suffering from insufficient demand. A new cold war will involve spending huge sums of money on things we hope never to use. What a terrific source of demand!