Personal Income Tax Revenues Show Significant Softening in Q4 2013, Decline in Q1 2014

For two consecutive quarters, state income tax revenues have disappointed. And in the first quarter of 2014, state income tax revenue actually declined.

The Nelson A. Rockefeller Institute reports Personal Income Tax Revenues Show Significant Softening in the Fourth Quarter of 2013.

Total state tax collections have grown in each quarter of the last four years. However, growth softened significantly in the third and fourth quarters of 2013. Early figures for the first quarter of 2014 indicate even further softening in state tax collections, and possible declines in personal income tax collections.

Officials in many states have been facing extraordinary challenges in forecasting income taxes due to uncertainties related to capital gains, which can have a large impact on estimated taxes paid in December and January, and on payments with tax returns filed in April. The uncertainty has been heightened this year due to the strong performance of the stock market in 2013 and the un- intended consequences of the fiscal cliff. Calendar year 2013 ended up being a remarkable year for the stock market, gaining 19 percent as measured by the S&P 500 Index, creating a favorable environment for capital gains. On the other hand, for reasons discussed within, many taxpayers appear to have accelerated income from calendar year 2013 to calendar year 2012 to avoid higher federal tax rates, likely creating a “trough” in capital gains in 2013. This creates great uncertainty for states: Was the stock market strong enough to more than offset the “trough” effect related to the fiscal cliff, so that capital gains would be strong in 2013, or would the latter effect dominate, resulting in a large decline in capital gains?

First Quarter Income Tax Declines

In a followup report, the institute reports State Income Taxes Showed Declines in the First Quarter of 2014.

The Rockefeller Institute's compilation of preliminary data from 46 states shows that collections from major tax sources increased by an insignificant 0.7 percent in nominal terms in the first quarter of 2014 compared to the same quarter of 2013. This is the weakest growth since the first quarter of 2010. Among 46 early reporting states, 37 states reported gains while nine states reported declines in total tax revenue collections. Personal income tax collections declined in nominal terms by 0.4 percent. This is the first time since the first quarter of 2010 that states reported declines in income tax collections. The growth in sales tax collections was also weak at 1.0 percent, while corporate income tax growth was at 5.6 percent.

While the declines in income tax collections are not surprising, the softening in sales tax collection s is less expected and more worrisome. Among 41 early reporting states, sales tax collections showed declines in 11 states, with Arizona and California reporting the largest declines at 16.7 and 9.9 percent, respectively. The large declines in Arizona are mostly attributable to the expiration of a temporary one-cent tax increase for fiscal years 2011-2013. For the nation as a whole, the unusually cold winter may have temporarily depressed shopping, contributing to the sales tax slowdown.

State tax revenues have been recovering continuously for four straight years. However, the state revenue recovery has been much slower and more prolonged than in previous recoveries. State tax revenues were particularly strong in the first half of calendar year 2013, and particularly weak in the second half of calendar year 2013 and in the first quarter of 2014. This volatility probably is attributable more to taxpayer responses to planned and adopted federal policy changes and to legislated tax changes in many states than to underlying economic factors.

The declines in income tax revenue in the first quarter of 2014 likely reflect lower payments on the 2013 tax year of estimated taxes due in January. We expect that income tax collections will show further declines in the second quarter of 2014, when 2013 income tax returns due on April 15th are filed. However, it is hard to know how surprising the April surprises will be, as the tax year 2013 was also a very good year in the stock market. Once the figures for the month of April are available, we will have a clearer picture of the interplay between the strong stock market and the fiscal cliff, and their relative impact on the income tax collections.

State Tax Revenues 2008-2014



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

Ukraine Opens Talks with Russia; New President Promises Peace Making Efforts; Bombing of Slavyansk Continues Anyway

The Financial Times reports Poroshenko opens talks with Russia.

Petro Poroshenko, Ukraine’s new president, has opened talks with Russia on restoring peace in two breakaway eastern provinces a day after taking office, vowing to negotiate an end to the three-month-old pro-Russian insurgency.

Mr Poroshenko took part on Sunday in a three-member “working group discussion” on a proposed peace plan with Mikhail Zurabov, Russia’s ambassador to Ukraine, and a representative of the Organisation for Security and Co-operation in Europe, Iryna Friz, a spokeswoman for the Ukrainian president said.

The opening of dialogue came a day after the billionaire oligarch took office with a promise to “ensure lasting peace” in the country’s breakaway eastern Donetsk and Lugansk provinces, and on the same day that Ukraine’s military pummeled rebel positions in a heavy assault on the separatist-controlled city of Slavyansk.

Pro-Russian rebels, who fired back with machine guns and heavy artillery, said that an unspecified number of civilians in the city were injured or killed. Explosions were heard, some buildings caught fire, and columns of thick black smoke rose over the town on Sunday afternoon.

In his first speech as president on Saturday, the billionaire oligarch sounded a more emollient tone on making peace with the rebels than the uncompromising line favoured by his caretaker predecessors, who took power after February’s pro-Europe Maidan revolt.

Mr Poroshenko promised to allow easterners free use of the Russian language and move forward with a plan to decentralise government – core separatist demands – and the holding of new local elections in the east.

Peace Making

Peace making talk is off to a rather disingenuous start to put things mildly. Please consider Battles under way near Ukraine's Slavyansk and Kramatorsk.

Shooting resumed Sunday morning in the area of Slavyansk and Kramatorsk, the headquarters of Slavyansk self-defense forces told RIA Novosti. "Battles are now under way on the outskirts of Kramatorsk, in the area of the Yasnogorovsky state farm, as well as on the outskirts of Slavyansk, near the Mashmet," the militia informed.

The Ukrainian army continues to bombard Slavyansk (the centre and the districts of Artem and Vostochny), and its suburbs - Yampil and Semyenovka. The security forces use mortars and self-propelled launchers Tulip.

Images of Slavyansk

Reader Dmitriy provided a link these Images of Slavyansk.







More images in link.

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

Looking to Drastically Reduce College Costs? Study Abroad!

Why go $40,000 to $100,000 or more in debt for a college education when studying in Europe will cost far less, possibly even be free, and you will pick up a foreign language or two in the process?

Please consider a response from reader Ivo in response to Co-Signing a Loan is Risky Business For You, Your Family, Your Heirs, Even the Borrower: More Student Loan Debt Slave Nightmares.

Ivo writes..

Hello Mish

Your points are generally correct, but at the same time, more and more students choose to study abroad. Why not get your degree from another country?

Also, I have co-signed a couple of student loans in Estonia, and feel pretty good about the loans as well as the people, especially in comparison to what's going on in the US.

My oldest son is studying film-making in one of Europe's newest and most modern film schools, located right here in Tallinn, for 3,400 EUR total per year. By the end of his BA, he'll be some 10,000 EUR in debt (I am paying some of his expenses), but has studied under internationally-known film-makers, has participated in several international film festivals with his own films, and has trained on cutting-edge equipment. Before he enrolled last fall, we did some research about his different options in different countries. In the USA, a similar program would have cost him $200,000 or more, tuition only.

So why should one study in the USA at all?

Apparently one of the reasons are regional licenses. You may not be able to get a job in California if your future profession requires a CA license, which you will automatically get from an expensive CA-based university (and which costs you and your family a life-long debt slavery). For example, California may not want to have anything to do with you if your degree is from Helsinki, Finland, even though you may have had many of the same teachers on a guest-tutor basis as you would have had in CA.

I think for many study areas, the regional licensing systems are one of the most important factors driving people into life-long debt servitude in the USA as people may be unable to get jobs if their degrees are from schools in different states or countries.

This definitely warrants some further research.

All the best,

Ivo

Advanced degrees in medical and dentistry in Europe may not be cheap, but they still are far cheaper than in the US as noted by the New York Times article Medical Students Head to Eastern Europe.

Regardless, if you cannot afford the cost of a US education, or even if you can, please research all your options instead of becoming another US debt slave statistic.

Any educators care to chime in on regional or foreign accreditation?

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

Unvarnished Ukraine Update; Steen Jakobsen on Impact of Ukraine on Germany

I have a several reader emails on Ukraine today, including one from Steen Jakobsen, chief economist of Saxo Bank on the impact of Ukraine on Germany.

Impact of Ukraine on Germany

A couple days ago, Steen pinged me with a few comments on Ukraine worthy of your consideration. Steen writes ...

The Ukraine crisis will go on for much longer than anyone wants, everyone will lose and world growth will disappoint again, but the real issue behind the scenes is Europe’s lack of a coherent energy policy. The present green energy policy is a mess. Green energy is inefficient, tax burdening and nowhere near close to meeting rising energy demand from Europe.

Europe is energy deficient. EU dependency on imports is increasing for all fossil fuels. Oil imports reached 83.5 per cent in 2009 and 64.2 per cent for gas, according to the EU Commission.

The biggest loser will be Germany. There are more than 6,200 German companies engaged in business with Russia. The Economist states that 300,000 German jobs are at risk, German business investment into Russia exceeds €30bn, excluding financing from German banks, but more importantly Germany imports 70 per cent of its energy of which 25 per cent comes from Russia.

Angela Merkel and her government have been caught out by a failed energy policy, which has made electricity a luxury good for many German households. But even worse, she decided that she would rather be dependent on Mr Putin than on nuclear power.

The biggest consequence of the Ukraine conflict could be a revisiting of the 1970s energy crisis, including energy rationing. After close to 30 years of doing this job I am realizing that energy is everything in explaining growth, investment, sentiment and market returns.

Understand energy and its marginal price of production and its delivery and you have the keys to predicting the world. Sadly Europe and the US is stuck in using Sir David Frost’s definition of diplomacy: “Diplomacy is the art of letting somebody else have your way.”

Unvarnished Ukraine Update

Reader David writes ...

Good Morning Mish

I just returned from a two-week tourist trip to Turkey, four days in Istanbul, and nine days along the Mediterranean coast.

The hotel/resort where I stayed on the coast was a favorite for Russian tourists, and the hotel TV had several stations delivering Russian channels, German and French stations too. Russian TV news was loaded with pictures and stories on Ukraine, essentially civil war and revolution. 

Small unorganized groups in eastern Ukraine are committed to doing whatever they can to resist the formal Ukrainian government. Here's a picture: Three guys at a makeshift 'roadblock' on a country road, standing next to a stack of old tires and concrete blocks, saying they would do whatever they could to fight if the Ukrainian army came their way.

When a resistance fighter dies, thousands of people attend memorial services and political demonstrations.

In a French documentary on the coal mining industry in eastern Ukraine, a major industry there, I learned a) People in eastern Ukraine complain that their lives have become worse every year since breakup of USSR over 20 years ago. They viewed their lives as happy and stable before; b) Coal mining has almost no safety standards so hundreds of miners die every year; c) With no work alternatives, mining jobs are viewed as good jobs; d) With no real safety standards or oversight or clear authorities, people desperate for money illegally mine coal in abandoned shafts and sell (at a discount) for cash to larger mine owners. 

Good income in this region is viewed as 300 euros ($420) / month.  Given such economic prospects, why not stand at a makeshift roadblock and fight to die? 

These people also see what has happened in other former Soviet states, where Russian language speakers have been treated as outlaws. A 'western friendly' government in Ukraine only means things will get worse for 'Russian friendly' Ukrainians. French, German, and Russian TV news all had lots of stories and images that you do not see in the US.

Regarding Turkey, I was very impressed by the growth. Suburbs in Istanbul, already a city bigger than New York, have hundreds of new and under construction apartment blocks. I sensed a strong nationalist mood. 

One taxi driver complained about Syrian refugees, saying they were a big problem, especially along the coast. Refugees walk or drive across the border, find their way to some friend or relative, and with no money or income, street crime and car crime are rising.

Thanks again for your great work.
David

Comments from Jacob Dreizin

I forwarded David's email to Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian. Jacob replied: "Thanks for that, Mish.  I'm not surprised that French TV is showing footage from the scene. A French reporter was wounded recently near Slaviasnk. On the same day, an Italian reporter lost his head to a mortar round in the same area. In contrast, U.S. media mostly reports out of their hotels in Kiev, relying on heavy doses of 'Ministry of Truth' press releases. It's pathetic."

House-to-House Searches

Earlier today Jacob reported ...

Eyewitness reports in Krasnyi Liman continue to pour in, and they are not good. The Ukrainian National Guard and militias are going house-to-house, searching, interrogating, rounding people up and taking them away.



Some people are said to have been shot in their homes. For the most part, it's hard to say what is rumor/hysteria, and what is fact.

One thing is certain: Kiev is responsible for the loss of lives in Lugansk, not errant rebel anti-aircraft missiles fired from the ground, as claimed by Kiev. Two hospital workers were killed in that attack, many more on the ground.

The Organization for Security and Cooperation (OSCE) in Europe made that claim in a press release.

Translating from my iPad: "In Luhansk the situation remained volatile. On 2 June, shortly after 15:00 hours, rockets hit the occupied regional administration building. Based on the SMM's limited observation, these strikes were the result of non-guided rockets shot from an aircraft."

"SMM" is the OSCE's Special Monitoring Mission to Ukraine.

I received several nasty emails a few days ago in response to Ukrainian Warplanes Miss Targets, Hit Civilians.

Some people believed Kiev's report that rebels caused the carnage.

Nope: Kiev did.

Surveillance Plane Shot Down



Jacob explains: "An An-30 surveillance plane, used as an artillery spotter, was shot down over Slaviansk today. It appears that at least some of the crew was able to parachute out."

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

Nonfarm Payrolls +217,000, Unemployment Rate Steady at 6.3%; Household Survey Employment +145,000

Initial Reaction

Once again the headline job number exceeded the household survey report, but unlike last month, the difference this month was insignificant.

May BLS Jobs Statistics at a Glance

• Nonfarm Payroll: +217,000 - Establishment Survey
• Employment: +145,000 - Household Survey
• Unemployment: +46,000 - Household Survey
• Involuntary Part-Time Work: -196,000 - Household Survey
• Voluntary Part-Time Work: +154,000 - Household Survey
• Baseline Unemployment Rate: +0.0 at 6.3% - Household Survey
• U-6 unemployment: -0.1 to 12.2% - Household Survey
• Civilian Non-institutional Population: +183,000
• Civilian Labor Force: +192,000 - Household Survey
• Not in Labor Force: -9,000 - Household Survey
• Participation Rate: +0.0 at 62.8 - Household Survey

Additional Notes About the Unemployment Rate

• The unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
• In the past year the population rose by 2,259,000.
• In the last year the labor force rose by 4,000.
• In the last year, those "not" in the labor force rose by 2,215,000
• Over the course of the last year, the number of people employed rose by 1,895,000 (an average of 158,000 a month)

The population rose by over 2 million, but the labor force was essentially flat. People dropping out of the work force accounts for nearly all of the declining unemployment rate.

May 2014 Employment Report

Please consider the Bureau of Labor Statistics (BLS) May 2014 Employment Report.

Total nonfarm payroll employment rose by 217,000 in May, and the unemployment rate held at 6.3 percent. Employment increased in professional and business services, health care and social assistance, food services, and transportation and warehousing.

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment January 2003 - May 2014



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Nonfarm Employment Change from Previous Month by Job Type



Hours and Wages

Average weekly hours of all private employees has been flat for three months at 34.5 hours. Average weekly hours of all private service-providing employees rose 0.1 hours to at 33.4 hours.

Average hourly earnings of private workers rose $0.03 to $20.54. Average hourly earnings of private service-providing employees rose $0.03 to $20.33.

For discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I keep this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment



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Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 6.3%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 12.2%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Labor Force Factors

1. Discouraged workers stop looking for jobs
2. People retire because they cannot find jobs
3. People go back to school hoping it will improve their chances of getting a job
4. People stay in school longer because they cannot find a job
5. Disability and disability fraud

Were it not for people dropping out of the labor force over the past several years, the unemployment rate would be well over 9%.

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

Book Review: The Lost Notebook

I recently received a copy of the new book The Lost Notebook: Herman Schultheis and the Secrets of Walt Disney's Movie Magic. 

The large hardbound book of 292 pages is a facsimile reproduction of a detailed scrapbook kept by Herman Schultheis, a technician at the Disney Studios in the late 1930s, while they were developing Pinocchio, Fantasia, Dumbo, and other classics of the art form.

Effects animation used in Sorcerer's Apprentice

Schultheis thoroughly documented every aspect of the production process, presumably to impress the boss someday, but the notebook was kept secret and was lost and forgotten for many years in a chest of drawers. 

Meanwhile, in another human mystery, Schultheis himself disappeared without a trace into the Guatemalan jungle, so his story hasn't been adequately told.

The scrapbook contains many photos of costumed models who provided reference footage to guide the animators. This aspect of the production process has become fairly well known.

But there are other revelations of pre-digital engineering ingenuity. For example, the movement of the fairy ballerinas in Fantasia based their movement on the workings of a contraption with steel rails and revolving spools. Snowflake cutouts were mounted on the spools and moved along the rails, creating geometry that would be impossible to accomplish otherwise at the time.

An expert camera technician, Schultheis shot many of the photos reference to guide the animators, such as the ballerinas and ostriches for the "Dance of the Hours" segment in Fantasia.

Even the mechanical clocks that appear in Geppetto's workshop (link to video clip) in Fantasia were created in workable form, so no wonder they're so convincing in the film.

The ghosts in the "Night on Bald Mountain" sequence of Fantasia were shot using a distortion mirror, and thankfully, Schultheis photographed the setup and described the process.

This book should spark a lot of ideas for working artists interested in exploring pre-digital film technology, and it will offer a wealth of insights for animation history fans. Given all the painstaking work that went into them, it's no wonder that the Disney features of the late 1930s were so expensive to produce. The marginal notes by animation historian John Canemaker add a lot to understanding each of the pages.

On a broader level for any artist, the book is a testament to the value of putting time and effort into research and development.

At Amazon: The Lost Notebook: Herman Schultheis and the Secrets of Walt Disney's Movie Magic

Wine Country Conference II Videos: Steen Jakobsen , Chris Martenson, Mish

The final second set of Wine Country Conference Speaker Presentation videos is now available.

This set features Steen Jakobsen on the "State of Flux", Chris Martenson on "The Coming Wealth Transfer", and Mish on "Misconceptions, Misperceptions, and Blind Spots".

This Year's Charity

As with last year, Wine Country Conference II was for charity. This year's cause was Autism. Many of the speakers donated all or part of their expense honorarium to the cause. I did as well, losing money, to put this event on.

Once again, John Hussman and the Hussman Foundation was amazingly generous. The foundation will match donations dollar for dollar, up to $50,000!

Steen Jakobsen: "State of Flux"



Chris Martenson: "The Coming Wealth Transfer"



Mish: "Misconceptions, Misperceptions, and Blind Spots



Mish, Steen Jakobsen, and Chris Martenson Panel Discussion



If you enjoy the videos (or even if you don't) please Make a Donation to the Autism Society.

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

Oklahoma Recognizes Gold and Silver Coins as Legal Tender

OpenStates.Org notes Oklahoma SB862 was signed by Governor Mary Fallin yesterday.

SB862 recognizes gold and silver coins as legal tender in the state.

Here is the Text of SB862.

Although the bill recognizes gold and silver as legal tender, it also states "No person may compel another person to tender or accept gold or silver coins that are issued by the United States government, except as agreed upon by contract."

Actually, no one should be compelled to take any currency.

Shirley & Banister Public Affairs emailed this statement today:

Oklahoma joins Utah, Texas, and Louisiana, as states that have removed taxes on gold and silver coins, and nearly a dozen other states are currently considering legislation to recognize gold and silver coins as hard money.

The United States Constitution (Article I: Section 10) enables states to declare gold and silver coins as legal tender and gives them the impetus to remove all taxes on gold and silver. APIA is the leading organization promoting sound money and working to uphold this article of the Constitution.

"I commend the people of Oklahoma, particular Senator Clarke Jolley and Governor Mary Fallin, for asserting their state's constitutional right to declare gold and silver legal tender,” said American Principles in Action Chairman Sean Fieler. “With the Federal Reserve actively suppressing interest rates and eroding the purchasing power of the U.S. dollar, it is welcome news to see one more state give its citizens tax free access to money that holds its value over time."

American Principles in Action was the leading group promoting this state legal tender bill in Oklahoma and they continue to work to promote sound money legislation across the U.S.

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

ECB Pulls Out Pea Shooter, Fires, Misses Target

In a widely expected move this morning, ECB president Mario Draghi announced negative interest rates, the first-ever move for a major central bank.

The deposit rate in Europe is now negative 0.10%. The ECB also lowered the benchmark rate from 0.25% to 0.15%.

In a display of puffery, Draghi announced “we aren’t finished here”.

The Financial Times provided a few more details in its report: ECB unveils extraordinary moves to fight deflation, lift economy

The ECB will offer cheap longer-term loans, known as a targeted longer-term refinancing operations, which will resemble the structure of the Bank of England’s Funding for Lending Scheme.

There will be four TLTROs, all maturing by September 2018, worth up to €400bn. “A number of provisions will aim to ensure that the funds support the real economy. Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required to pay back borrowings in September 2016,” Mr Draghi said.

The ECB will also continue to provide shorter-term cheap loans to banks at fixed rates until at least the end of 2016.

Mr Draghi said the ECB had “decided to intensify preparatory work related to outright purchases” of asset-backed securities, a limited form of quantitative easing.

Pea Shooter, Not a Bazooka

The TLRTO refinancing operations will not apply to mortgages out of fear of overstimulating housing.

Although I believe these actions will have the effect of a pea shooter,  this is not a call for the ECB to do more.

The ECB has an irrational fear of falling prices and should not have done anything at all. Contrary to popular myth, falling prices do not cause consumers to delay purchases. The problem is debt, not low prices. For further analysis, please see Deflation Theory Reality Check.

We are in this mess because central banks have blown serial bubble after bubble, each with a bigger amplitude.

ECB Goals

The ECB hopes to spur lending, especially to small businesses, stop deflation, cheapen the Euro, increase exports, and improve economic growth.

Will the ECB's Actions Work?

In a nut shell no.

Negative interest rates were tried before and they accomplished nothing. Denmark tried a -0.2% rate in 2012 and it did not spur lending, nor did negative rates cause customers to pull money out of banks as some feared.

As I have noted on many occasions, banks lend if and only if two conditions are met.

1. Banks are not capital impaired
2. Banks believe they have credit-worthy borrowers on a risk adjusted basis

What about the housing bubble? Banks knew they did not have credit-worthy customers but they thought they could dump the assets on others. Banks also believed no one would ever walk away from houses. Those were bad assumption and banks seriously misjudged the risks. Banks do see such risks now.

In this case, Draghi's moves will not spur lending because the ECB did nothing to make customers more credit-worthy. To top it off, the ECB is tightening capital requirements.

Instead of lending more, banks will raise fees to make up for the loss they take on parking money with the ECB. And if the ECB make the deposit rate negative enough, there will be a run on the bank by depositors.

All in all, slightly negative interest rates will have a slightly negative impact on lending.

The ECB hinted at QE, but in practice will be unable or unwilling to match the scale of Fed QE actions. And Germany will scream every step of the way on any move.

Thus, there is no reason to believe future ECB actions will substantially cheapen the euro or increase exports.

In short, the ECB's actions cannot possibly accomplish anything except perhaps fuel even bigger asset bubbles in stocks and bonds.

Euro 5 Minute Chart



It is risky to make assumptions based on price movements in a single day, nonetheless, today's action in the euro was interesting.

After opening lower, the euro is now in positive territory. This is arguably an early indication of the Forex market's opinion on the ECB's pea shooter approach.

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

CLEMENTOONS: Behind the Scenes

 

I'd like to introduce a behind-the-scenes tour of CLEMENTOONS, the animation technique I've been developing to tell the story of Clement. (Direct link to YouTube video)

Clement is a bold little guy, but he's always getting himself into trouble. He's on a journey through our ordinary world to a magical place called Melville, where cartoon people have congregated to form a surreal society.

He'll meet plenty of other characters along the way. I'll release the next episode, "Clement on the Can" later this month.

China Composite PMI Shows First Expansion in Four Months But Employment Declines at Fastest Rate Since February 2009

The HSBC China Services PMI™ reveals first expansion of output in four months, yet composite employment declines at the fastest rate since February 2009.

Key points

• Services activity growth eases to marginal pace, while manufacturing output falls slightly
• New business increases modestly at service providers
• Composite employment declines at the fastest rate since February 2009

HSBC China Composite PMI™ data (which covers both manufacturing and services) signalled an expansion of Chinese business activity in May, following a three-month sequence of contraction. That said, the rate of growth was only fractional, as signalled by the HSBC Composite Output Index posting at 50.2 in May, up from 49.5 in April. According to latest data, a slower decline in manufacturing output and a further rise in services activity supported the first expansion of combined output since January. That said, the rate of services activity growth was the weakest in four months and one of the slowest in the survey history.

Reports from panellists suggested that muted client demand led firms to be more cautious towards hiring additional workers. As a result, employment at the composite level fell at the fastest rate since February 2009. Outstanding business declined across both the manufacturing and service sectors during May. However, the rates of reduction were similar to that recorded in the previous month and only marginal. Average input costs fell for the fifth month running at manufacturers, albeit at a modest pace that was the slowest in the current sequence. Meanwhile cost burdens at service providers rose modestly in May.

With a pronounced slowdown in housing demand and housing prices, this may be as good as it gets for a while.

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

Divorce Made in Heaven; Cameron Makes Fool Out of Himself Over Juncker

To the delight of eurosceptics, UK prime minister David Cameron backed himself into a corner with no way out.

His campaign to deny Jean-Claude Juncker the European Commission presidency even though Juncker receives the most votes was doomed from the start.

On May 28, in a surprising move, German chancellor Angela Merkel made a statement that opened the door for other candidates. No doubt Cameron was pleased. That pleasure didn't last long.

Following a firestorm of German protests including charges that Merkel gave in to UK blackmail, she changed her colors as quickly as the best chameleon on the planet.

Cameron's Empty Threat Backfires

The Spiegel Online reports Cameron's Empty Threat: Britain Risks Losing an Ally in EU Feud.

In his 18 years as a participant at European Union summits, Jean-Claude Juncker has witnessed a battle or two. But never in his dreams would he become the focal point of a showdown between Germany and Britain.

British Prime Minister David Cameron is actively seeking supporters among the 28 leaders of the EU member states to block Juncker's appointment in the European Council. Last week, Cameron declared to fellow leaders that if Juncker, a federalist, is appointed Commission president, the chances would increase that the British people would vote to leave in a planned 2017 referendum on EU membership.

'Blackmail'

That is a common opinion in the United Kingdom, but it appears that Cameron has underestimated the effect his words would have. The threat could in fact ultimately cost him a decisive ally: Angela Merkel. For days now, furious politicians and the editorial pages of newspapers have called on Merkel to not put up with this "blackmail." Merkel feels forced to repeatedly ensure her support for Juncker, as she did again in parliament on Wednesday in an address in which she also reaffirmed her committment to Britain staying in the EU.

The German public's suddenly passionate enthusiasm for Juncker caught Cameron off guard. How, his strategists are asking, could the country Britain views as its most important partner when it comes to EU reforms, have fallen for this representative of the status quo?

The fact that even the tabloid Bild has thrown its impassioned support behind Juncker was a "real shock," said Mats Persson, the director of the Open Europe think tank. He says the debate in Germany has developed in ways that are very unfavorable to Cameron.

Merkel Wouldn't Risk Personal Defeat for Cameron

Merkel could tip the balance against Juncker, and in the immediate wake of the election, she seemed willing. But after the intense debate of recent days, ditching Juncker would now be seen as kowtowing to the Brits. As much as she would like to protect Cameron from a loss of face, she would probably not do so if it meant a personal defeat for her.

As such, it very much looks like Cameron has backed himself into a corner, left with no leverage to convince Merkel to change course. Tory members of the European Parliament have, to be sure, threatened to invite Germany's euro-skeptic AFD party to join their group in European Parliament should Merkel stick with Juncker. Cameron famously withdrew his party from the center-right European People's Party, of which Merkels Christian Democrats are members, five years ago to appease his Tories' EU-skeptic wing in a move that deeply angered the German chancellor.

"Those who are in favor of leaving the EU are praying that Juncker will be named," Charles Grant of the Centre for European Reform told the German daily Frankfurter Allgemeine Zeitung. Gideon Rachman, columnist for the Financial Times, wrote that the idea that the native of Luxembourg could become Commission president "evokes a strange, irrational rage in the British."

Political Arrogance

Amusingly, the second top vote getter in the European Parliamentary elections was Martin Schulz, a member of the left wing Progressive Alliance of Socialists.

Is that who Cameron really wanted to negotiate with?

Cameron's idea that he could get the EU to change direction regardless who hold the EC presidency is the height of arrogance in and of itself.

Divorce Made in Heaven

• Cameron wants less Brussels, but Brussels wants more Brussels
• Cameron is against financial transaction taxes, the majority of EU countries want them
• Cameron wants special rules that will favor London exchanges, the rest of the EU opposes London favoritism
• Cameron wants to reduce or end EU agricultural tariffs; France vehemently opposes such actions
• Cameron insists on a rebate in UK subsidies to the EU. That caused a firestorm of a spat in an EU summit in 2013 (See Cameron Hijacks Summit with Rebate Spat)

In short, the UK saying goodbye to the EU would be a divorce made in heaven. The UK does not need the EU nor does the EU need the UK.

Yet, Cameron arrogantly believes he can persuade the EU to change its stripes. He can't and only a fool could not recognize that simple fact.

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

High School Drawing

Pen and ink on scratchboard was my favorite medium when I was 13 years old, and here's a drawing that I had a lot of fun with, a young ape raising a toast in a Renaissance court. 

For those who aren't familiar with scratchboard, it has a clay-coated surface that lets you scratch off white lines from any inked area. 

I can see now, looking back on it, that I was trying all different kinds of styles and textures of ink work, and having a hard time integrating them into one vision. And it's pretty obvious where my photo reference stops. But I guess it was a step in the direction of what I've always loved: imaginative realism and fantastical juxtapositions.

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Tomorrow at 8:00 a.m. Eastern time I'll launch the first video intro to Clementoons here on the blog and on my YouTube channel.

Investor Bets in Risky vs. Safe Assets Hits Record High

The June 3rd issue of SentimenTrader contains an interesting writeup on risk taking.

Investor Bets in Risky vs. Safe Assets



click on chart for sharper image

Excerpt (below) and chart (above) by permission...

Periodically, we check in on a ratio that first started to become concerning last year.
At the time, the ratio of assets invested in equity mutual funds and ETFs had eclipsed the assets stashed in safe money market funds by a factor of 3. That was on a par with the levels only seen in 2000 and 2006/2007.

At the time, and subsequent to that, we've discussed the fact that the ratio is not necessarily bounded by any limits, and it could "grow to the sky". The reason it was notable is because it had been bounded during the past 15 years, as stocks traded within a broad range.

Now that it was broken out above its previous peaks, there is no telling how stretched the ratio can go.

As of April, the latest data available, there was $4.05 invested in stocks for every $1 stored in money markets. That is 31% above what was seen in 2000 and 19% above the peak in 2007.

That's not too far above and beyond what the S&P 500 has done, so like the growth in margin debt, it seems reasonable given how well stocks have done.

That the ratio is so far above the 2000 and 2007 peaks seems like it should be market-negative, but we haven't considered it to be for quite a while, due to its in-line rise with stock prices, and the fact that the ratio has broken out above its previous peaks and we don't know where the next logical place would be to consider it extreme.

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

Hosed at the Pump: Where are the Highest Gas Taxes in The Nation?

The Tax Foundation posted the following map of gasoline taxes.



The Tax Foundation says "Gas taxes are generally used to fund transportation infrastructure maintenance and new projects. While gas taxes are not a perfect user fee like tolls, they are generally more favorable than other taxes because they at least loosely connect the users of roads with the costs of enjoying them. However, some of our recent analysis shows that many states do not rely on gas taxes and tolls as much as they could, and instead fund substantial amounts of transportation from other sources like income and sales taxes."

Not That Simple

States with high gas taxes do not necessarily have lower taxes elsewhere. Illinois and California are certainly cases in point. Property taxes in Illinois are over $14,000 on something like a $500K home.

The Tax Foundation notes "rates shown do not include Federal excise taxes of 18.4 cents per gallon."

Nor do they include applicable sales taxes or local gas taxes or Cook County gasoline taxes.

Illinois also has "home rule" sales taxes for various locations within a county. For example, and in addition to special gasoline taxes in Cook County, the Illinois Department of Revenue Tax Bulletin shows that Cicero (in Cook County), has a sales tax of 9.75%, while Dolton (also in Cook County) has a sales tax of 8.75%.

Why Are Chicago Gas Prices So High?

Indiana radio station WBEZ 91.5 asks the question: Why Are Chicago Gas Prices So High?

Customers may also have a desire to blame gas station owners for the high price of gasoline. But Beth Mosher, spokeswoman for AAA Chicago Motor Club, says it’s not their fault.

“Everybody wants to take it out on their local gas station owner why these prices are so high,” Mosher said. “But the reality is when the prices are this high the profit margins for these gas stations are so thin, they are going to make more from a bag of doritos that they are selling you than they are the gas.”

Mosher says the final factor for high gasoline prices can be pinned on the tax man.

“First and foremost, we have to talk about the high taxes in Chicago,” she said. “About 70 cents on the gallon is what people pay in Chicago for gas taxes, really, really a high number, especially given the statewide average is 49 cents on the gallon.”

Our NW Indiana reporter bravely goes where no Hoosier (willingly) has gone before: a Chicago gas station.



Hosed at the Pump

An Illinois Policy Institute report "Hosed at the Pump" will put things in proper perspective.


That graphic is from August of 2012. Rest assured taxes are higher today.

And Illinois is one of only seven states that charge a sales tax at the gas pump!

Illinois is #8 according to the Tax Foundation, but in reality, Illinois is near the top of the list, especially Cook County.

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

Smoke and Mirrors Hide the Collapse in Corporate Profits

Did you notice the collapse in corporate profits?

John Hussman, Steen Jakobsen, and Albert Edwards at Society General did. Hussman tweeted the following chart this morning.



Steen Jakobsen, chief economist at Saxo bank passed on the above tweet this morning along with an attachment from Albert Edwards and this comment: "John – who I met at the Wine Country Conference – is not only great economist and fund manager, but also a remarkable Gentleman who lives to support Autism. This is his link Hussman Funds."

From Society General - No Link Available

Smoke and Mirrors Stop Us Seeing a Slump in US Profits

During the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualised slump in the US Bureau of Economic Analysis’s (BEA) favoured measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). We show below the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy). In this note we try to explain what is happening and why the 10% annual slump in economic profits really does matter.

Having spent the best part of 25 years following US whole economy profits I feel I have a good understanding on what exactly is going on. I was however most surprised at the divergence in the two key series shown on the front page chart. After a very long chat with a very helpful person from the BEA, she emailed me to “note this quarter, there is a substantial difference between profits from current production (that include IVA and CCAdj) and profits before tax (that exclude IVA and CCAdj) due to the expiration of investment incentives that allowed companies to accelerate depreciation over the past several years. As provisions of the tax acts from 2002, 2003, 2008, 2009, 2010, and 2012 expire, and as no new provisions are introduced, businesses are now expensing less depreciation for tax purposes. As a result, tax based depreciation expense, measured as CCA, is falling, while economic depreciation expense, measured as CFC, continues on a steady growth trend (see charts below). The difference between these two measures is the CCAdj. With economic depreciation expense higher than tax based depreciation expense, BEA’s measure of corporate profits with CCAdj shows a decline, while profits excluding CCAdj show an increase.”



So headline reported profits are currently artificially inflated upwards to show a roughly 5% yoy increase, which is incidentally the same pace that the MSCI trailing reported stockmarket profits are rising by – both are misleading investors as to the underlying strength of profits.

Net cashflow with IVA ($bn)



The BEA press release itself describes net cashflow with IVA as “the internal funds available to corporations for investment (calculated as after tax profits with IVA and CCAdj, net of dividend payments but plus depreciation on an economic basis (CFC))”. We can see from the chart above that this decreased by $132bn in Q1 following a decrease of $43bn in Q4. This key measure of internal funds available for investment has stalled badly over the last two years (see chart above). No wonder US business investment has been struggling recently. The bottom line is that the US profits margin cycle has begun to turn down at long last (see chart below). It is doing so from elevated but not unprecedented levels – especially the nonfinancial part of the economy (my former colleague Leo Doyle always told me I had to add depreciation into the profits numerator as the denominator GDP was also measured gross of depreciation – i.e. the G in GDP!)

Thanks to Albert Edwards via Steen Jakobsen for the above charts.

There is more in the report, including a discussion of why a renminbi (yuan) devaluation will crush US and European corporate profits.

If I can get an online link I will post it.

Wine Country Conference Videos

Here is a link to the 2014 Wine Country Conference Videos. Steen Jakobsen's, Chris Martenson's, and my presentation will be out later this week.

Inquiring minds should also take a look at Hussman's post today, Market Peaks are a Process. John speaks of the Wine Country Conference Presentations and the cause.

Here is John's blurb on the cause.

Last month, the second annual Wine Country Conference was held in Sonoma California, this year to benefit the Autism Society of America. As many of you know, my 20-year old son JP has autism, so the cause is close to my heart. The conference website has both PowerPoint slides and videos of the presentations and Q&A sessions (and more will be added over the coming weeks). The title of my presentation was “Very Mean Reversion”

My hope is that if you appreciate the conference materials, you’ll consider making a donation – in any amount at all – to the Autism Society of America. The proceeds of the conference will go to support programs and chapters at the local level throughout the United States (we’ve also put up a $50,000 matching grant to encourage donations). I appreciate your generosity.

Thanks – John

Please Consider Making a Donation

More presentations are yet to come! And if you enjoyed the presentations (or even if you didn't), please Make a Donation to the Autism Society.

On behalf of John and the Autism Society, thanks to all who make donations. Any amount helps.

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

Animation Title Cards

When I was developing a title card design for the CLEMENTOONS series, I looked at a lot of the opening graphics that inspired me as a kid. Most of my favorites were from the Golden Age of American Animation in the 1930s and '40s.

When a cartoon started with the Looney Tunes titles it made my heart race with anticipation--still does. I love the cockeyed block letters, and the concentric circles airbrushed to look like a tunnel. It was a special treat to see Bugs or Daffy or Porky featured in the title. 

And I was crazy about the manic energy of the Warner Bros. theme music, based on the tune called "The Merry Go Round Broke Down." 

I also adored the title cards from the Walt Disney cartoon shorts of the 1930s. They conveyed the promise of beautiful animation. Note the "burlap" background, the gradated light, the dimensional lettering, and date written in Roman numerals.

All the cartoons from that period had beautiful titles. They were all colorful, beautifully lit, with an interesting texture behind the letters. I couldn't figure out how they made them, but they seemed to be made by hand from real materials.

For the Clementoons titles, I wanted to see Clement actually animated in front of the titles, and then somehow jumping back into them. If I made the stepped windows rectangular, in the same proportion as a 9x16 video screen, then I figured the camera could dolly back into that space, following Clement as he jumped into his new adventure.

I did all sorts of R&D for the letters, and finally discovered that craft foam worked best. I cut the letters out with a sharp X-Acto knife and spray-glued them onto a spacer above the background. For the background texture, I experimented with real burlap, but it didn't look right, so I hand sculpted the texture out of Magic Sculpt.

Here's what the set-up looks like with my Canon T3i camera mounted on an improvised Lego dolly and set up for the stop motion sequence. Note the white "C" shape in the upper left. That's called a "gobo" and it's made of an aluminum pie plate. It's used to shape the light on the titles.


Here's the final sequence, which takes about 8 seconds. (Direct link to YouTube video) Note the focus pull and the dolly move at the end, zooming into the stepped rectangle.

I recorded the blink sound effects on a mandolin, plucking the strings between the bridge and the tailpiece. The theme music is courtesy of a young band called The Yanks, in which my son Dan happens to be the accordionist.

The Clementoons theme tune is called "If There Weren't Any Women in the World," an old barn dance they learned from fiddle player Seamus Quinn. If you listen closely, you'll hear a saxophone on the track, played by three-time All-Ireland champion Isaac Alderson.
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More about animation title cards at Animation Treasures
Respective titles © and ® Disney Enterprises, Inc / Warner Bros. / MGM / Paramount / Universal
Clementoons is © and TM little old me.

Sweden Central Bank Governor Proposes the Obvious: Mortgages Should be Paid Back in One's Lifetime

The average mortgage obligation in Sweden will not be paid back until the borrower hits age 140. The Governor of the Bank of Sweden, Stefan Ingves, has a problem with that.

Via translation from La Tribune, please consider Will Swedes Continue to Borrow for so Long?

In Sweden, it is very common for mortgage repayment to occur at such a slow pace that the life expectancy of the borrower must be 140 years on average repay their mortgage. And household debt is expected to reach 177% of disposable income by 2015.

Stefan Ingves, the Governor of the Bank of Sweden proposes to reduce the duration of mortgage debt of Swedish households from beyond their life expectancy. Such a requirement is "considered obvious in many places in the world," Ingves stressed.

"In Sweden, approximately 40% of borrowers do not pay down mortgages at all. Among those who do, more than 40% do so in such a way that it will take 50 years or more to avoid being indebted," he said. "We know it is not uncommon for households to have debt ratios of 600% (annual disposable income)," Ingves added.

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

Ukrainian Warplanes Miss Targets, Hit Civilians

In response to Mish Reader Who Speaks Russian and Reads Ukrainian Updates the Situation in Ukraine, Reader Larry writes "Thank you for this vital news. Please encourage your friend Jacob to keep it coming."

Unfortunately, the news is not good. Jacob emailed today ...

At least one, possibly two Ukrainian warplanes attacked central Lugansk city this morning. The main target seemed to be the rebel-held regional government building (keep in mind, there are plenty of civilians working there, doing their regular jobs.) However, the rockets went flying all over the place. At least one hit a park near the government building (see below). At least one hit a road near the government building and a number of civilians were killed on a sidewalk just outside the building (photos of fatalities, further below.)

Jacob Dreizin











Questions of the Day

1. Is this really the solution?
2. If the separatists killed innocent civilians, would it be all over the news?

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

ISM Correction Heartburn

ISM twice revised its manufacturing numbers today, then issued this Correction Notice.

ISM ® has discovered an error in its software programming for calculating the May 2014 Manufacturing PMI ® that was released at 10 a.m. ET this morning. “We apologize for this error. We have recalculated and confirmed that the actual index indicates that the economy is accelerating ,” said Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management ® (ISM ® ) Manufacturing Business Survey Committee. “Our research team is analyzing our internal processes to ensure that this doesn’t happen again,” he added. “The May PMI ® registered 55.4 percent, an increase of 0.5 percentage point from April’s reading of 54.9 percent, indicating expansion in manufacturing for the 12th consecutive month. The New Orders Index registered 56.9 percent, a n increase of 1.8 percentage points from the 55.1 percent reading in April, indicating growth in new orders for the 12th consecutive month. The Production Index registered 61.0 percent, 5.3 percentage point s above the April reading of 55.7 percent. Employment grew for the 11th consecutive month, registering 52.8 percent, a decrease of 1.9 percentage points below April’s reading of 5 4.7 percent. The Supplier Deliveries Index registered 53.2 percent, 2.7 percentage points below the April reading of 55.9 percent. Comments from the panel reflect generally steady growth, but note some areas of concern regarding raw materials pricing and supply tightness and shortages.”

Correction Heartburn

CNN Money reported Oops! Heartburn in Stock Market After Data Mix-Up

Oops! Manufacturing index corrected: The Institute for Supply Management's initial manufacturing showed an unexpected dip to 53.2 in May from 54.9 in April. That meant the pace of manufacturing expansion slowed a bit. Investors had expected a spring pickup.

But then, according to multiple reports, ISM corrected itself by saying manufacturing activity actually improved to 56. That helped ease concerns about the economy, and the Dow Jones industrial average quickly climbed back into positive territory on the reports.

But then ISM corrected itself a second time, saying the correct reading is 55.4. ISM has not responded to several requests for comment from CNNMoney.

In spite of the upgrade, ISM still came in below consensus, but this was a better showing than originally posted.

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

Over 40% of Nearly 2 Million Modified Loans Facing Resets are Underwater

Black Knight's April Mortgage Monitor shows almost 2 million modifications face interest rate resets, and 40 percent of those resets are underwater.

Email News Release

"We have seen a continual reduction in the number of underwater borrowers at the national level for some time now, but modified loans show a different picture," said Kostya Gradushy, Black Knight's manager of Loan Data and Customer Analytics. "While the national negative equity rate as of April stands at 9.4 percent of active mortgages, the share of underwater modified loans facing interest rate resets is much higher -- over 40 percent. In addition, another 18 percent of modified borrowers have 9 percent equity or less in their homes. Given that the data has shown quite clearly that equity -- or the lack thereof -- is one of the primary drivers of mortgage defaults, these resets may indeed pose an increased risk in the years ahead.

"From a broader perspective, it's also important to note that more than one of every 10 borrowers is in a 'near negative equity' position, meaning the borrower has less than 10 percent equity in his or her home. This is particularly pronounced in New Mexico and Southern states. At a local level -- and we look at both mortgage performance and Home Price Index (HPI) data down to ZIP code granularity -- such slim margins in equity can have a significant effect on overall negative equity levels with even slight variations in HPI. So, while the overall situation for underwater borrowers has improved significantly, there are still areas in the country where borrowers are hovering at the edges."

Mortgage Monitor Charts

April 2014 Summary Data



Total Delinquencies



click on any chart for sharper image

New Originations



Loans Facing Reset



Percentage Underwater



Underwater loans facing reset is one major problem. A second problem is the declining volume of new originations and home sales.  A chart of new single-family homes sold will highlight the second problem.

New Single-Family Home Sales



Housing is weakening in a number of ways.

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

Manufacturing ISM Expands 12th Month, But Less Than Forecast

US Manufacturing as measured by the June 2013 Manufacturing ISM Report On Business® rose for the 12th month.

ISM at a Glance

Series Data	May Index	Apr Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	53.2	54.9	-1.7	Growing	Slower	12
New Orders	53.3	55.1	-1.8	Growing	Slower	12
Production	55.2	55.7	-0.5	Growing	Slower	3
Employment	51.9	54.7	-2.8	Growing	Slower	11
Supplier Deliveries	52.5	55.9	-3.4	Slowing	Slower	12
Inventories	53.0	53.0	+0.0	Growing	Same	4
Customers' Inventories	46.5	42.0	+4.5	Too Low	Slower	30
Prices	60.0	56.5	+3.5	Increasing	Faster	10
Backlog of Orders	52.5	55.5	-3.0	Growing	Slower	4
Exports	56.5	57.0	-0.5	Growing	Slower	18
Imports	54.5	58.0	-3.5	Growing	Slower	16

ISM vs. Consensus

Bloomberg reports ...

Highlights

Growth rates, in contrast to Markit's report released earlier this morning, slowed in ISM's manufacturing sample, to a composite 53.2 vs April's 54.9. Employment growth slowed noticeably, to 51.9 from April's 54.7. Growth in new orders also slowed noticeably, to 53.3 from 55.1, as did growth in backlog orders, to 52.5 vs 55.5.

Supplier deliveries improved which is another sign of deceleration in activity. Production also slowed, but only slightly to 55.2. Inventory readings on net look a little heavy compared to April. Prices paid, in contrast to other signs of slowing, show a little pressure, at 60.0 vs 56.5.

Today's results from the manufacturing sector are mixed, with Markit showing definite acceleration and ISM showing definite deceleration. Together they probably point to little change for the manufacturing sector relative to April. The Dow is moving to opening lows in immediate reaction to the ISM report.

Market Consensus Before Announcement

The composite index from the ISM manufacturing survey for April rose 1.2 points to a better-than-expected level of 54.9. Employment, which has been very soft in this report, bounced 3.6 points higher to a respectable 54.7. New orders were at a solid 55.1, unchanged from March, with new export orders up 1.5 points to a very strong 57.0. Backlog orders were solid at 55.5. Production was little changed from March at 55.7-a still notably positive reading.

This lukewarm report suggests the weather related bounce is over and slower manufacturing growth resumes.

Addendum:

ISM issued this Correction Notice on Manufacturing

ISM ® has discovered an error in its software programming for calculating the May 2014 Manufacturing PMI ® that was released at 10 a.m. ET this morning. “We apologize for this error. We have recalculated and confirmed that the actual index indicates that the economy is accelerating ,” said Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management ® (ISM ® ) Manufacturing Business Survey Committee. “Our research team is analyzing our internal processes to ensure that this doesn’t happen again,” he added. “The May PMI ® registered 55.4 percent, an increase of 0.5 percentage point from April’s reading of 54.9 percent, indicating expansion in manufacturing for the 12th consecutive month. The New Orders Index registered 56.9 percent, a n increase of 1.8 percentage points from the 55.1 percent reading in April, indicating growth in new orders for the 12th consecutive month. The Production Index registered 61.0 percent, 5.3 percentage point s above the April reading of 55.7 percent. Employment grew for the 11th consecutive month, registering 52.8 percent, a decrease of 1.9 percentage points below April’s reading of 5 4.7 percent. The Supplier Deliveries Index registered 53.2 percent, 2.7 percentage points below the April reading of 55.9 percent. Comments from the panel reflect generally steady growth, but note some areas of concern regarding raw materials pricing and supply tightness and shortages.”

In spite of the upgrade, ISM still came in below consensus, but this was a marginally better showing than originally posted.

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