Another Good Services ISM; Outlier or Strengthening Economy?

For the second consecutive month the Non-Manufacturing ISM surprised to the upside.

In September, the NMI™ registered 55.1 percent, indicating continued growth in the non-manufacturing sector for the 33rd consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

Index	Sept	Aug	Percentage Point Change	Direction	Rate of Change	Trend in Months
NMI™/PMI™	55.1	53.7	1.4	Growing	Faster	33
Business Activity/Production	59.9	55.6	4.3	Growing	Faster	38
New Orders	57.7	53.7	4	Growing	Faster	38
Employment	51.1	53.8	-2.7	Growing	Slower	2
Supplier Deliveries	51.5	51.5	0	Slowing	Same	2
Inventories	48.5	52.5	-4	Contracting	From Growing	1
Prices	68.1	64.3	3.8	Increasing	Faster	3
Backlog of Orders	48	50.5	-2.5	Contracting	From Growing	1
New Export Orders	50.5	52	-1.5	Growing	Slower	3
Imports	50	49.5	0.5	Unchanged	From Contracting	1
Inventory Sentiment	65	67	-2	Too High	Slower	184

Last month I was asked if the services ISM changed my view of recession. I wanted to see the jobs report first. The household survey had horrendous results for the second month.

Household Survey

• In September the number of people employed fell by 119,000.
• In the last two months, the number of people employed fell by 314,000!
• In the last year, the civilian population rose by 3,695,000. Yet the labor force only rose by 971,000.
• In September Civilian Labor Force fell by 368,000.
• In September those “not” in the labor force increased by 581,000 to a record 88.921 million
• In August, those "not" in the labor force increased by 348,000 to 88,340,000 a record at the time

Thus in the last two months those "not" in the labor force increased by 929,000.  This is not demographics!

Since then data has been generally poor, but mixed. Home prices give further indication of a bottoming process. Yet, Durable Goods Orders Ex-Transportation "Unexpectedly" Drop, Down Third Month, July Revised Lower

Moreover, US CEOs Sharply Reduce Expectations for Economic Outlook, Hiring; Third Largest Plunge in 6-Month Expectations in History.

Curiously, even with this strong services ISM, employment is weakening although still positive.

All in all, it is the ISM numbers that seem out of sync with most of the rest of the data, especially household survey numbers.

Once again, let's see what Friday brings, but this time, one solid month will not convince me in light of other weakening data.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com/

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Concerns Mount that ECB Bond-Buying Program Is Illegal; Concerns? What Concerns?

Even though the German constitutional court gave its blessing to ECB president Mario Draghi's OMT program, Concerns Mount that ECB Bond-Buying Program Is Illegal.

The markets have celebrated Mario Draghi's announcement that the European Central Bank will embark on unlimited purchases of sovereign bonds from crisis stricken countries. But are such purchases really legal? Draghi's own justification for the program leaves plenty of room for doubt.

European Central Bank President Mario Draghi is spending a lot of time on the road these days, not unlike a traveling salesman. The product he has on offer is credibility, but in Germany at least, it is proving difficult to find eager takers.

Last week, for example, Draghi gave a speech to several hundred business leaders at the Berlin Congress Center -- and the mood was reserved. German business owners still have fond memories of the old deutsche mark, and Germany's central bank, the Bundesbank, still has a good reputation. Draghi's recently announced plans to launch unlimited purchases of sovereign bonds from crisis-stricken euro-zone member states, on the other hand, are being met with disconcertment and concern.

"These new steps are not a departure from our mandate," Draghi told German industrial leaders. The ECB, in other words, isn't just focused on price stability, but is also engaged in "ensuring the proper transmission of monetary policy." Beyond that, though, concerns are unfounded. The moves made by the ECB, Draghi insisted, "do not aim to finance governments, and nor would they if they were activated."

Draghi, of course, was not as concerned about those gathered in the room before him as he was about a man sitting 425 kilometers (266 miles) away in Frankfurt: Bundesbank President Jens Weidmann. Weidmann believes that, with its bond purchases, the ECB will help euro-zone governments gain access to funds at attractive rates by pushing down interest rates on those bonds. But that, in Weidmann's view, is fiscal policy rather than monetary policy and is thus outside the ECB mandate.

Concerns? What Concerns?

Concerns are in the eye of the beholder. Moreover, I have no doubt that German chancellor Angela Merkel knows full well that not only is the ECB's program in violation of ECB mandates, it is also against the German constitution.

Even ardent supporters of the Euro at Eurointelligence have admitted as much.

...The legal argument is quite strong in our view. The entire euro rescue effort is legally tenuous, and hard to square with what we already know about the German constitutional court’s interpretation of the Treaties, and its views on the scope and limits of financial crisis management. We know out of experience that it is always wrong to second-guess this fiercely independent court. The only thing we do know, in contrast to many financial market participants, is that the court will not take into account the financial market reaction of its decision.

Had Merkel made objections against the OMT, the court would likely have struck it down. However, Merkel does not want the disintegration of the euro on her watch and that is all that matters.

There was no vote by German citizens. And as expected, the German constitutional court bowed to her majesty Angela Merkel. She was willing to sell her soul for her political beliefs and to preserve her legacy. Merkel sold her soul alright, its her legacy that is in question.

German Central Bank Concerns Irrelevant as Well

Concerns by the German central bank do not matter either. The same thing happened with Fed actions in 2008 and 2009.

I wrote about this well in advance (on April 03, 2008 to be precise), and it is one of my personal favorite posts. I have referred to it often enough but in case you missed it, please consider the Fed Uncertainty Principle, specifically corollary number four.

Uncertainty Principle Corollary Number Four:

The Fed [ECB] simply does not care whether its actions are illegal or not. The Fed [ECB] is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Politicians in high power as well as central banks do not give a damn about concerns, nor do they care about obvious illegalities. They do what they want because they consider themselves to be above the law.

Concerns about legalities are for peons, not the royal court. In the end, it does not matter what the concerns are, or even what the popular vote total is. All that matters is who gets to vote, and more importantly, who gets to count the votes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com/

Foreigners Dump €89.6 Billion Spanish Bonds; Spanish Bank Exposure Increases by €108.8 Billion

European banks are supposed to be deleveraging. By now, most realize they are headed the opposite direction. In Spain, the increased leverage is pro-cyclical, 100% certain to cause a bigger problem down the road.

Here is a Mish-modified translation of an El Economista article on Spanish Bond Purchases.

Financial institutions have become the main investor in Spanish government bonds after foreigners withdrawn €89.6 billion in the first eight months of the year, according to Treasury data.

In these eight months, Spanish exposure has risen €108.8 Billion, a record 106.84% increase.

Meanwhile, foreign investment in Spanish debt has dropped 31.8% during the same period, standing at €191.836 billion euros, compared to €281.439 at the end of 2011.

This is the second consecutive time since 2008 that the debt in foreign hands is below the €200 billion.

Banks are now the main investor, ahead of foreigners, accumulating now 34.07% of the public debt, compared to 33.49% by foreign investors. This situation has not occurred since 2003.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com/

US CEOs Sharply Reduce Expectations for Economic Outlook, Hiring; Third Largest Plunge in 6-Month Expectations in History; Reflections On "Uncertainty"

Plunge in CEO Expectations

The quarterly survey of CEO expectations looking six months out shows that while CEOs are still positive in regards to capital spending and sales, the recent plunge was the third largest plunge in expectations in history.

John Engler, president of the Business Roundtable discusses CEO sentiment in the following video.

Link If Video Below Does Not Play: CEO Rountable Video



Read the transcript of the call for comments from BRT President John Engler and BRT Chairman and Boeing CEO Jim McNerney.

Hiring Contraction

More CEOs than not expect reduced employment in the next six months.



click on chart for sharper image

CEOs Sharply Reduce Expectations for Economic Outlook, Hiring

Business Roundtable notes CEOs Sharply Reduce Expectations for U.S. Economy.

The results of Business Roundtable’s (BRT) third quarter CEO Economic Outlook Survey for 2012 show a further downturn in CEOs’ expectations for sales, capital spending and hiring for the next six months. The Business Roundtable CEO Economic Outlook Survey Index decreased to 66.0 in the third quarter of 2012 from 89.1 in the second quarter of 2012, the lowest reading since the third quarter of 2009 and the third largest single quarter drop in the survey’s history.

“CEOs foresee slower overall economic growth for 2012 and have lower expectations for sales, capital expenditures and hiring compared to last quarter,” said Jim McNerney, Chairman of Business Roundtable and Chairman, President and CEO of The Boeing Company. “The downshift in quarterly sentiment reflects continuing concern about the strength of the recovery, including uncertainty over the approaching fiscal cliff and accompanying debates about the tax code, sequestration and the debt ceiling.”

Third Quarter 2012 CEO Economic Outlook Survey Index

The Business Roundtable CEO Economic Outlook Survey Index – a composite index of CEO expectations for the next six months of sales, capital spending and employment – trended downward to 66.0 in the third quarter of 2012 from 89.1 in the second quarter of 2012. This marks the lowest point for the index since the third quarter of 2009.

Plunge In Economic Outlook



click on chart for sharper image

Reflections On "Uncertainty"

CEOs blame "uncertainty" which is nothing more than a euphemism for poor business conditions.

It's as if there is some unwritten rule that CEOs can only be "certain" of good things, never bad. Yes, there is this "fiscal cliff" thing, but business is slowing already, globally, and not just because of a "fiscal cliff".

Simply put, CEOs can easily see things are already getting worse or at least not improving.

Finally, no one can ever truly be "certain" about anything economically speaking six months down the road. CEOs and politicians just do not want to say "conditions suck" so instead they complain about "uncertainty".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com/

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Bernanke Says Don't Worry, "It's Only Temporary"

Earlier today, in Bernanke Begs Congress to Address "Fiscal Cliff", Pledges to Hold Interest Rates Near Zero Through Mid-2015 Even If Economy Picks Up I commented on the Bernanke's self-serving responses to his own questions.

In this post I want to focus on another disingenuous part of his speech that I did not comment on previously. Specifically ...

With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear--which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you "monetizing the debt"--printing money for the government to use--and will that inevitably lead to higher inflation? No, that's not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don't necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.

Gradual Bullsheet

Bernanke knows damn well that the Fed will never "gradually sell these securities". Rather, the only way the Fed would be willing to sell securities is at break-even or a profit.

Yet, if Bernanke honors his pledge to hold those securities until after a recovery is well underway, interest rates will be higher and the Fed will have losses.

Thus, it is the clear intent of the Fed to hold assets it buys from now until maturity (perhaps a decade from now, which for all practical purposes is "permanent"). At that point in the distant future, the Fed may even roll the securities over.

Who Benefits From This?

As I did note previously    ...

Bernanke's policies have destroyed those on fixed income (a claim he tries but fails to address in his five questions). More importantly, those with first access to money (primarily banks and the wealthy) are the biggest beneficiaries of monetary printing exercises.

Those wondering how the 1% got so wealthy need only look at the Fed for the answer.

That was a question Bernanke did not address, but I addressed in detail a few days ago in Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Finally, when it comes to "printing" let's flashback to December 8, 2010: Caught in a Massive Lie: Daily Show Comments on Bernanke's Lies Regarding "Printing Money"



Mike "Mish" Shedlock

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Bernanke Begs Congress to Address "Fiscal Cliff", Pledges to Hold Interest Rates Near Zero Through Mid-2015 Even If Economy Picks Up

Fed Chairman Ben Bernanke was yapping about jobs today in his speech Five Questions about the Federal Reserve and Monetary Policy in Indianapolis.

Bernanke asked five questions of himself and gave five self-serving responses, all absolving the Fed of its role in the global financial crisis.

Bernanke also patted himself on the back numerous times (indeed in the answers to nearly every question).

In particular, Bernanke bragged about the inflation-fighting prowess of the Fed, not pointing out the Fed and fractional reserve lending are the source of inflation.

Direct Lies

In the direct lie category, Bernanke stated "The Federal Reserve is also very open about its finances and operations."

In reality, it took freedom-of-information lawsuits from Bloomberg and others to get information from the Fed. The Fed still does not want to be audited.

Here are a couple of key snips regarding monetary and fiscal policy.

Pledge To Hold Rates Low

In the category of communications policy, we also extended our estimate of how long we expect to keep the short-term interest rate at exceptionally low levels to at least mid-2015. That doesn't mean that we expect the economy to be weak through 2015. Rather, our message was that, so long as price stability is preserved, we will take care not to raise rates prematurely. Specifically, we expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens. We hope that, by clarifying our expectations about future policy, we can provide individuals, families, businesses, and financial markets greater confidence about the Federal Reserve's commitment to promoting a sustainable recovery and that, as a result, they will become more willing to invest, hire and spend.

Bernnake Begs Congress to Address "Fiscal Cliff"

I certainly don't underestimate the challenges that fiscal policymakers face. They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term. In particular, the Congress and the Administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year. According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession. The Congress and the Administration will also have to raise the debt ceiling to prevent the Treasury from defaulting on its obligations, an outcome that would have extremely negative consequences for the country for years to come. Achieving these fiscal goals would be even more difficult if monetary policy were not helping support the economic recovery.

Bernanke Tosses Monetarist and Keynesian Hats Into the Ring

Although Bernanke does not want Congress meddling in monetary policy at all, he meddles in fiscal policy all the time. Bernanke cannot make decisions or pass laws, however, Bernanke is clearly warning Congress the alleged "Fiscal Cliff" of tax hikes and automatic budget cuts "would likely throw the economy back in recession".

I suggest the US economy is already back in recession. Regardless, Keynesian and Monetarist clowns (Bernanke wears both hats when he attempts to manipulate Congress),  never want to do anything "now" to fix structural problems.

Indeed, Bernanke does not even want to do anything until at least mid-2015 regardless of what the economy is doing.

If you want to know why the boom-bust cycles have ever-increasing amplitudes and troughs, look at the policies of the Fed.

Bear in mind that I side with Bernanke that price inflation is not going to get out of hand. However, His policies have destroyed those on fixed income (a claim he tries but fails to address in his five questions). More importantly, those with first access to money (primarily banks and the wealthy) are the biggest beneficiaries of monetary printing exercises.

Those wondering how the 1% got so wealthy need only look at the Fed for the answer.

That was a question Bernanke did not address, but I addressed in detail a few days ago in Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Please take a look at that post if you have not yet done so.

Mike "Mish" Shedlock

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Manufacturing ISM Rebounds Slightly

Following three months of contraction, the September 2012 Manufacturing ISM PMI is back in the green at 51.5%.

Index	Sep	Aug	Percentage Point Change	Direction	Rate of Change	Trend in Months
PMI™	51.5	49.6	1.9	Growing	From Contracting	1
New Orders	52.3	47.1	5.2	Growing	From Contracting	1
Production	49.5	47.2	2.3	Contracting	Slower	2
Employment	54.7	51.6	3.1	Growing	Faster	36
Supplier Deliveries	50.3	49.3	1	Slowing	From Faster	1
Inventories	50.5	53	-2.5	Growing	Slower	2
Customers' Inventories	49.5	49	0.5	Too Low	Slower	10
Prices	58	54	4	Increasing	Faster	2
Backlog of Orders	44	42.5	1.5	Contracting	Slower	6
Exports	48.5	47	1.5	Contracting	Slower	4
Imports	49.5	49	0.5	Contracting	Slower	2

Production is still in contraction. Deliveries and inventories are nearly flat. The big jump is in employment, still in its 36th month of expansion. I doubt that trend continues given the global slowdown.

Respondent Comments

• "Appears that our so-called 'slowdown' was a summer thing. September brings with it increasing requirements and business." (Paper Products)
• "Business improved through Q3, but is beginning to show signs of slowing down in Q4; this has been a typical trend over the last few years." (Wood Products)
• "Business has picked up going into the last quarter." (Plastics & Rubber Products)
• "We are sticking to our manufacturing plan, but have slowed production down considerably. Haven't added any new units to the 2012 plan, and still have no forecast for 2013 released." (Computer & Electronic Products)
• "Sales have tanked over the last two months, bringing a very concerned and stressed management team. Not very optimistic for the near-term future." (Apparel, Leather & Allied Products)
• "Uncertainty in the healthcare legislation (reform) continues to be the underlying force keeping our sales revenue below its full potential." (Miscellaneous Manufacturing)
• "Steel and aluminum prices still dropping, and auto production orders are up." (Transportation Equipment)
• "Domestic business is up; international is down." (Electrical Equipment, Appliances & Components)
• "Demand seems to have stabilized from August. New orders are appearing this month without advanced notice from our customers." (Chemical Products)

Respondent Comments are all over the map from "summer slowdown" to "sales have tanked last two months".

A one month rebound is not that significant unless it is a trend change which I highly doubt.

Mike "Mish" Shedlock

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