vineri, 29 mai 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Five Chicago Suburbs Headed for Bankruptcy (More Illinois Cities Will Follow)

Posted: 29 May 2015 12:57 PM PDT

Illinois House Bill 298 would allow Illinois municipalities to file for Chapter 9 bankruptcy. That bill is endorsed by Governor Bruce Rauner, and currently rests in the house rules committee.

As soon as Illinois passes Bill 298, a number of Illinois cities are highly likely to file bankruptcy as noted by Bond Buyer in Illinois' Candidates for Municipal Bankruptcy.
If HB298 was enacted, which local governments might use the new bankruptcy option? To help answer this question, our team reviewed audited financial statements that all but the smallest municipalities must file. Most of these financial audits can be found on the state comptroller's local government Finance Warehouse.

Among the indicators we considered were government-wide unrestricted net position and general fund balance. The first indicator shows the degree to which assets held by the government entity as a whole exceed its liabilities and are not locked up in buildings and other illiquid forms. The second indicator, general fund balance, focuses more narrowly on the government's main fund – which is roughly analogous to an individual's checking account. Low or negative general fund balances were cited in the bankruptcies of Vallejo and Stockton, California. It is worth noting that the five municipalities we identified are all located in Cook County, which also faces fiscal challenges. Our list does not include Chicago. Although that city's financial struggles have made frequent headlines, several of its smaller suburbs appear to be in much greater fiscal distress. The five communities we identified are: Maywood, Sauk Village, Blue Island, Country Club Hills and Dalton.
Distress Summary

Maywood: Village of Maywood reported an unrestricted net position of -$47.4 million, and a general fund balance of -$8.2 million. While we found a number of jurisdictions with negative balances, these levels are quite pronounced for a relatively small municipality. With general fund revenues of only $23.3 million and government-wide revenues of $44.1 million, it will take the village a long time to eliminate these shortfalls.

Sauk Village: Sauk Village reported an unrestricted net position of negative $36.7 million – a very large negative position considering that the village had only $29.6 million in assets and government-wide revenues of $13.4 million. Sauk Village also showed a negative general fund balance and unusually high interest costs. The village's $2.1 million of interest expense accounted for over 15% of total revenue. The Village received an adverse audit opinion for its reporting of "Aggregate Remaining Fund Information" and a qualified opinion for its reporting of "Governmental Activities." The Police Pension Fund information was not included and has not been subject to an actuarial evaluation since May 1, 2011.

Blue Island: The City of Blue Island reported an unrestricted net position of negative $15.2 million and a general fund balance of negative $10.5 million in its 2013 financial statements – the latest available. The negative general fund balance is especially pronounced because the city only recorded $16.3 million in general fund revenue during fiscal year 2013. The city's negative net unrestricted position appears to be understated because Blue Island did not report an Other Post-Employment Benefit (OPEB) liability.

Country Club Hills: The City of Country Club Hills has yet to file audited financial statements for the 2013 fiscal year – making it the most delinquent filer among the municipalities we reviewed. The city's 2012 financial statements show a slightly negative unrestricted net position and a large negative general fund balance. Further, the city's auditor was unable to render an opinion on the accuracy of these statements, saying:

Dolton: The Village of Dolton reported a small negative net unrestricted position in its 2013 financial statements – the latest available. Although its general fund balance was positive, the amount was well below Government Finance Officers Association guidelines. Dolton's $1.3 million general fund balance would cover less than a month of general fund expenditures, which were $22.1 million for the 2013 fiscal year. Further, the village reported a $5.2 million general fund deficit. If this deficit persisted into 2014, Dolton may now be facing a negative general fund balance.

Modification to Bill 298 Needed

The Bond Buyer concludes "As Detroit and other cities filing Chapter 9 have found, municipal bankruptcy is an expensive process that transfers community resources to lawyers and financial advisors. While it may be unavoidable, bankruptcy should always be treated as the least best option."

I agree with that statement and that is why I advocate a rules change to Bill 298 that will give bondholders, not pensioners, a secured first lien.

Such a provision would lower borrowing costs to the benefit of taxpayers and it would get public unions to bargain upfront rather than drag processes out for years as happened in Detroit.

For further discussion on Bill 298 and why bondholders should have first lien rights, please see Calpers Wins Pension Lawsuit, Not Good News for Chicago (or Bondholders in General).

In the case of the five cities listed above, bankruptcy appears inevitable although the village administrator of Dolton strongly rebutted the report's findings as noted in a separate Bond Buyer article on Illinois Bankruptcy Candidates.

Bankrupt Candidate Populations

  1. Maywood: 24,160 (2013)
  2. Dolton: 23,333 (2013)
  3. Country Club Hills: 16,866 (2013)
  4. Blue Island: 23,793 (2013)
  5. Sauk Village: 10,549 (2013)

I am aware of at least one other Illinois city potentially ready to file if allowed, and I suspect there are far more waiting in the wings.

Meanwhile, the outlook for the Illinois economy is not a good one. For details, please see Chicago PMI Unexpectedly Crashes: New Orders, Production and Employment Down by More Than 10%

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Chicago PMI Unexpectedly Crashes: New Orders, Production and Employment Down by More Than 10%

Posted: 29 May 2015 11:46 AM PDT

Unexpected Chicago PMI Crash

Looking for signs of strength? You will not find them in today's Chicago PMI report.

The Bloomberg Consensus estimate was for a 53.1 expansion reading. Instead, the PMI came in at 46.2, well below the bottom of the consensus range of 51.0 to 54.0.

Readings below 50.0 indicate contraction.

New Orders, Production and Employment Down by More Than 10%

For details, let's turn to the Chicago ISM Report that shows Business Barometer Back into Contraction in May.
The Chicago Business Barometer fell sharply back into contraction in May, reversing all of April's gain and casting doubt on the strength of the widely expected bounceback in the US economy in the second quarter. The Barometer fell 6.1 points to 46.2 in May from 52.3 in April. All five components of the Barometer weakened with three dropping by more than 10% and all of them now below the 50 breakeven mark.

April's positive move had suggested that the first quarter slowdown was transitory and had been impacted by the cold snap and port strikes. May's weakness points to a more fundamental slowdown with the Barometer running only slightly above February's 5½-year low of 45.8. The three month average, although little changed on the month at 48.3, is significantly down from 61.3 in Q4 2014 and barring a sharp rebound in June points to continued sluggish growth in the second quarter.

The decline was led by a 13.8% fall in New Orders to 47.5 from 55.1 in April, pushing it into contraction for the third time this year. In line with the lower order intake, both Production and Employment Indicators suffered double-digit losses in percentage terms between April and May, with the latter falling to the lowest since April 2013. Order Backlogs declined more moderately, remaining in contraction for the fourth consecutive month.

There was further evidence that the period of oil driven softer prices has run its course. Prices Paid jumped sharply back into expansion in May to the highest since December.
Chicago PMI



Telling Stats

Unlike strict manufacturing PMI reports, the Chicago PMI is a survey of manufacturing and non-manufacturing (services), tracking all aspects of the Chicago economy.

Here is one more telling stat from the report: "42% of companies said their current inventory level was too high compared with 12% in a comparable question asked in November 2014. 53.2% said stock levels were about right, with less than 5% reporting them as too low."

So don't go looking for an inventory rebuild to lead the way out of this slump.

Recession Call

I don't believe this is a "Chicago Only" problem. But it could be an indication that Illinois will be harder hit by the next recession than other areas.

Nationally, economists are looking for close to 3% annualized growth for second quarter. I am sticking with my recession call made back on January 31.


For comments on current recession odds, first quarter GDP revisions, and second quarter GDP estimates, please see First Quarter GDP -0.7%; GDPNow Second Quarter Forecast +0.8%; Economists Get Zero Accolades; Smoothed Recession Odds from earlier today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

First Quarter GDP -0.7%; GDPNow Second Quarter Forecast +0.8%; Economists Get Zero Accolades; Smoothed Recession Odds

Posted: 29 May 2015 10:29 AM PDT

First quarter GDP came in at -0.7% pretty much in line with the Bloomberg Consensus estimate of -0.8%.
First-quarter GDP was revised down about as expected, to minus 0.7 percent vs expectations for minus 0.8 and compared with an initial reading of plus 0.2 percent. Updated source data made for a bigger negative contribution from net exports as imports spiked 5.6 percent from an initial gain of 1.8 percent. The change here is tied to the port strike and the sudden unloading of imports in March. A lower estimate for inventory growth was also a negative. Turning to demand, final sales were revised downward to minus 1.1 percent from minus 0.5 percent.

On the positive side, the contribution from residential fixed investment rose to 5.0 percent from 1.3 percent while the negative contribution from business spending improved 6 tenths to minus 2.8 percent.

The first quarter was definitely weak, showing the first contraction since first-quarter 2014 when GDP fell 2.1 percent in another winter quarter affected by unusually severe weather. The Fed itself has been noting the risk that the pattern of first quarter weakness could reflect how the numbers are crunched by government statisticians to account for seasonal variations. This process may have exaggerated the underlying weakness in the quarter.

Where is GDP currently tracking? Early estimates were in the 3.0 percent range but, due to weak consumer spending, have been slipping to the 2.0 percent range.
Economists Get Zero Accolades

Economists get zero credit for guessing this one correct. Their negative estimate was in arrears after consumer spending unexpectedly collapsed.

This is what the "Blue Chip" economists thought about first quarter GDP on April 2.

GDPNow Estimate for 1st Quarter, April 2



Note the "Blue Chip" consensus at the end of the first quarter was for 1.7% annualized growth. They were off by 2.4 percentage points.

Pathetic.

Bloomberg notes the "port strike and the sudden unloading of imports in March." Question of the day: Had they not unloaded merchandise in March, would they have done so in April?

Of course they would. So instead of whining about the sudden unloading in March, mentally shift -0.4% or so from first quarter to the second quarter.

That brings us to the today's GDPNow Forecast.

Second Quarter GDPNow Estimate



The "Blue Chip" forecasters who were off by a massive 2.4 percentage points at the end of the first quarter are now back at it.

They are looking for 2.9% GDP growth vs. the Atlanta Fed GDPNow model of 0.8%.

Had that port strike settled in April, first quarter would still have been negative due to the revision in final sales to minus 1.1 percent from minus 0.5 percent. And second quarter GDP would now be barely positive according to the GDPNow model.

Smoothed Recession Odds



As of May first, the smoothed recession odds of recession stand at 1.2%.

On Verge of Recession

I think second quarter GDP will come in even lower than GDPNow. Consumers show no inclination to spend, despite economists persistent belief they will.

We are on the verge of recession, if indeed not already in one. First quarter GDP was negative and if for any reason second quarter GDP is negative the US will be in recession.

Regardless of whether or not one believes second quarter GDP will be negative, the odds are far better than 1.2%.

Besides, it does not even take two quarters of negative GDP for there to be a recession. Rather, two quarters of negative GDP is a sufficient but not necessary condition.

The smoothed recession odds model is clearly a joke.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Introducing the Zero Labor Factory (90% Free Actually); Robots at Chili's, Applebees, Panera

Posted: 28 May 2015 11:25 PM PDT

In the strive for zero labor factories we are nearly there. Is 90% good enough?

China Daily reports Manufacturing Hub Starts Work on First Zero-Labor Factory.
A manufacturing hub in South China's Guangdong province has begun constructing the city's first zero-labor factory, a signal that the local authorities are bringing into effect its "robot assembling line" strategy.

Dongguan-based private company Everwin Precision Technology Ltd is pushing toward putting 1,000 robots in use in its first phase of the zero-labor project, China National Radio reported. It said the company has already put first 100 robots on the assembly line.

"The 'zero-labor factory' does not mean we will not employ any humans, but what it means is that we will scale down the size of workers by up to 90 percent," said Chen Qixing, the company's board chairman.

After the work on smart factory started, Chen predicted that instead of 2,000 workers, the current strength of the workforce, the company will require only 200 to operate software system and backstage management.

"It is necessary to replace human workers with robots, given the severe labor shortage and mounting labor costs," said Di Suoling, head of Dongguan-based Taiwan Business Association.

Manufacturers in the PRD have been hit by a shortage of an estimated 600,000 to 800,000 workers, according to data released after the Spring Festival in February.

Tens of thousands of migrant workers had earlier gone back home to inlands for a family get-together and some of them decided to settle down in their hometown where the living costs are much less than the coastal cities.
Shortage of Labor?

There is no shortage of labor. There is no shortage of skills either. Rather, there is a shortage of people willing to work for what factory owners are willing to pay.

And with cheap money everywhere you look, there is plenty of money at low rates to buy robots.

Meanwhile, back in the US, McDonald's employees think they are worth $15 an hour for taking orders and handing people a sack of crap.

Robots at Chili's, Applebees, Panera

High wages means fewer jobs. CNN accurately reports Robots will Replace Fast-Food Workers.
Panera Bread (PNRA) is the latest chain to introduce automated service, announcing in April that it plans to bring self-service ordering kiosks as well as a mobile ordering option to all its locations within the next three years. The news follows moves from Chili's and Applebee's to place tablets on their tables, allowing diners to order and pay without interacting with human wait staff at all.

In a widely cited paper released last year, University of Oxford researchers estimated that there is a 92% chance that fast-food preparation and serving will be automated in the coming decades.

Delivery drivers could be replaced en masse by self-driving cars, which are likely to hit the market within a decade or two, or even drones. In food preparation, there are start-ups offering robots for bartending and gourmet hamburger preparation. A food processing company in Spain now uses robots to inspect heads of lettuce on a conveyor belt, throwing out those that don't meet company standards, the Oxford researchers report.

Darren Tristano, a food industry expert with the research firm Technomic, said digital technology will "slowly, over time, create efficiency and labor savings" for restaurants. He guessed that work forces would only drop as a result by 5% or 10% at a maximum in the decades to come, however, given the expectations that customers have for the dining experience.

"If you look at the thousands of years that consumers have been served alcohol and food by people, it's hard to imagine that things will change that quickly," he said.
I think Darren Tristano is in fantasyland. The higher the wage, the bigger the incentive to get rid of people.

Central banks have mush for brains in their attempts force wages and prices up in this type of environment.

Question of the Day

How much do you tip a human server, when the server did not even take your order? The question will eventually be moot when robots bring food to the table.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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