Housing, business confidence, industrial production, inventory build, volatile bank CDS’s and public finances all point to a recovery with the pace of an elderly man running through molasses.

9/9/2010 – The world economic recovery may be slowing faster than previously anticipated, according the OECD’s latest Interim Economic Assessment. Growth in the Group of Seven countries is expected to be around 1½ per cent on an annualized basis in the second half of 2010 compared with the previous estimate of around 1¾ per cent in the OECD’s May Economic Outlook.

The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased.

“The uncertainty is caused by a combination of both positive and negative factors,” said OECD Chief Economist Pier Carlo Padoan. “But it is unlikely that we are heading into another downturn.”

Additional materials:

PPT
Summary Report

The concept of depletion and exhaustion of recoverable resources is a fundamental question for the future extraction of coal and oil. Historical experience shows that peaking is a well established phenomenon in production of various natural resources. Coal and oil are no exceptions, and historical data shows that easily exploitable resources are exhausted while more challenging deposits are left for the future.

For oil, depletion can also be tied directly to the physical laws governing fluid flows in reservoirs. Understanding and predicting behaviour of individual fields, in particularly giant fields, are essential for understanding future production. Based on comprehensive databases with reserve and production data for hundreds of oilfields, typical patterns were found. Alternatively, depletion can manifest itself indirectly through various mechanisms. This has been studied for coal.

Over 60% of the global crude oil production is derived from only around 330 giant oilfields, where many of them are becoming increasingly mature. The annual decline in existing oil production has been determined to be around 6% and it is unrealistic that this will be offset by new field developments, additional discoveries or unconventional oil. This implies that the peak of the oil age is here.

For coal a similar picture emerges, where 90% of the global coal production originates from only 6 countries. Some of them, such as the USA show signs of increasing maturity and exhaustion of the recoverable amounts. However, there is a greater uncertainty about the recoverable reserves and coal production may yield a global maximum somewhere between 2030 and 2060.

This analysis shows that the global production peaks of both oil and coal can be expected comparatively soon. This has significant consequences for the global energy supply and society, economy and environment. The results of this thesis indicate that these challenges should not be taken lightly.

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The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

Source: Global Strategy Weekly

For those outside of the USA: LINK

Consumer spending appeared to increase on balance despite continued consumer caution that limited nonessential purchases, while activity in the travel and tourism sector picked up relative to seasonal norms. Activity was largely stable or up slightly for professional and other nonfinancial services. Reports on manufacturing activity pointed to further expansion, although the pace of growth eased according to several Districts. Agricultural producers and extractors of natural resources reported continued gains in demand and sales. Home sales slowed further following an initial drop after the expiration of the homebuyer tax credit at the end of June, prompting a slowdown in construction activity as well. Demand for commercial real estate remained quite weak but showed signs of stabilization in some areas. Reports from financial institutions pointed to generally stable or slightly lower loan demand and noted some modest improvements in credit quality.

Upward price pressures remained quite limited for most categories of final goods and services, despite higher prices for selected commodities such as grains and some industrial materials. Wage pressures also were limited, although a few Districts noted increased upward pressures in a narrow set of sectors experiencing a mismatch between job requirements and applicant skills.

Consumer Spending and Tourism
Reports on consumer spending were mixed but suggested a slight increase on balance. Most Districts reported that non-automotive retail sales rose compared with the previous reporting period or were above their levels from 12 months earlier. By contrast, Atlanta reported a decline in the level of sales, and Richmond noted that sales “sputtered” in August, while New York and Dallas reported that growth in retail sales slowed. Several Districts noted an emphasis on necessities and lower-priced goods. Boston reported that back-to-school purchases were focused on immediate needs; in Cleveland, consumers focused on “value-priced seasonal items;” and in St. Louis, Kansas City, and San Francisco, sales were relatively stronger for lower-priced items. Spending on big-ticket items such as expensive consumer electronics was weak according to Philadelphia, Richmond, and Dallas. Most Districts also reported that sales of new automobiles and light trucks were largely stable or up slightly during the reporting period, and contacts were optimistic for stable sales or slight growth over the balance of the year. A few reports indicated that inventories for various goods remained near desired levels despite slower sales in some cases, as retailers have been practicing very tight inventory management.

Reports from most Districts pointed to consistent gains in travel and tourist activity, with pickups evident in the business and leisure segments alike. New York reported strong tourist activity that kept hotel occupancy rates high in Manhattan despite an increase in hotel capacity this year, while Boston noted that travel and tourism activity was “stronger than expected.” Several other Districts also reported rising visitor counts and hotel occupancies, notably for popular tourist destinations in the Richmond, Minneapolis, and San Francisco Districts, although several pointed to continued softness in per-visitor spending. Atlanta noted reduced tourist activity in areas of the Gulf Coast affected by the oil spill but improvements over last year in unaffected areas. Airline traffic was stable to up, with Boston pointing to an expanded number of low-fare carriers.

Nonfinancial Services
Activity was largely stable or up slightly for professional and other nonfinancial services. Providers of information technology (IT) services such as computer software saw substantial revenue and sales gains in the Boston and Kansas City Districts, with increased demand for IT labor reported in Chicago as well. Demand for professional services such as accounting held largely steady, with Minneapolis and Dallas noting increases for selected types of consulting and legal services. Conditions were mixed for providers of real estate services, as heightened appraisal activity for refinancing purposes was offset by depressed home sales and consequent limited needs for agents and brokers. Demand for temporary staffing services remained on an upward trend, with increases noted by Boston, Philadelphia, Richmond, and Minneapolis, although Chicago pointed to a slight softening during the reporting period. Reports from the health-care sector were mixed: Boston, Cleveland, and Chicago reported ongoing increases in demand for health-care workers, while Philadelphia indicated a flattening in demand for health-care services and San Francisco noted a decline in the frequency of elective procedures and routine tests. Demand for shipping and transportation services generally expanded, although according to Cleveland the pace of growth slowed and contacts there expect little change from existing volumes in the near term.

Manufacturing
Manufacturing activity expanded further on balance, although the pace of growth appeared to be slower than earlier in the year. Most Districts reported further gains in production activity and sales across a broad spectrum of manufacturing industries. However, New York, Richmond, Atlanta, and Chicago noted that the overall pace of growth slowed, while Philadelphia, Cleveland, and Kansas City reported that demand softened compared with the previous reporting period. Recent weakness was most notable for construction-related products, according to reports from Cleveland, Richmond, Chicago, Dallas, and San Francisco. By contrast, orders and activity edged up for makers of steel and other metals in Cleveland, Chicago, and St. Louis, propelled largely by demand from the transportation equipment industry. Activity among automobile makers and parts suppliers rose further in Richmond and held steady in Chicago, although it dropped temporarily in Cleveland as a result of factory retooling. Manufacturing activity for commercial aircraft was steady in the Dallas and San Francisco Districts, although a contact in Boston reported that the industry’s recovery has been slow. In the Boston and San Francisco Districts, makers of semiconductors and other high-tech products saw further sales gains, while Dallas noted that demand held largely steady at existing high levels. Among nondurable products, food processing stepped up in Philadelphia and San Francisco. Demand conditions for paper products were mixed, with increased sales and expansion plans noted in Minneapolis and St. Louis but flat to declining sales identified in Dallas. Export demand was an important contributor to healthy conditions in the manufacturing sector according to Boston and Chicago, notably for heavy machinery and autos.

Reports on capacity utilization were mixed. Manufacturers of high-tech products have been operating near maximum capacity of late, although this partly reflects a substantial decline in industry-wide capacity over the past three years, as noted by Dallas. More generally, the majority of Cleveland’s manufacturing contacts reported that capacity utilization remained below pre-recession levels. Capital spending plans for manufacturers and firms in other industries generally indicate little change or modest increases in coming months, based on reports from the Boston, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts.

Real Estate and Construction
Activity in residential real estate markets declined further. Most District reports highlighted evidence of very low or declining home sales, which many attributed to a sustained lull following the expiration of the homebuyer tax credit at the end of June. Some Districts, such as New York and Dallas, noted that the expiration of the tax credit created especially weak conditions for lower-priced homes, while others, including Philadelphia and Kansas City, identified the high end of the market as the primary weak spot. Residential construction activity declined in most areas in response to weak demand. Cleveland, St. Louis, and Minneapolis were the exceptions to this pattern of declining activity, with reports from their contacts indicating that residential construction activity improved of late. Inventories of available homes rose in general, although the availability of new homes in Atlanta was held down by the slow pace of new home construction. Price movements were mixed, with most Districts reporting stability or declines of late; a few, notably Boston, Minneapolis, and San Francisco, noted that prices rose in some areas compared with the previous reporting period or last year. Richmond reported that recent home sales were “dominated by foreclosure and short sales,” and Chicago reported an increase in the supply of foreclosed homes for sale.

Demand for commercial, industrial, and retail space generally remained depressed. Vacancy rates stayed at elevated levels in general and rose further in a few Districts, placing substantial downward pressure on rents. Asking rents continued to decline in parts of the New York and Kansas City Districts. High vacancies and negative absorption held nonresidential construction activity to the bare minimum in most Districts. A few Districts reported exceptions to weak conditions. Cleveland noted improved construction activity for industrial use and educational infrastructure; this raised overall activity above year-earlier levels and prompted modest hiring by builders. Chicago reported an increase in inquiries for commercial redevelopment and rising construction activity for public projects, but Richmond reported that state and local governments cut back on construction projects.

Banking and Finance
Lending activity was stable to down slightly on net. Most Districts reported little or no change from existing low levels of commercial and industrial lending, as businesses remained quite cautious about expansion plans. Dallas and San Francisco reported that overall lending trailed off, with declines driven by weak business lending stemming in large part from uncertainty about future economic conditions. Consumer lending remained sluggish in general, with contacts in Philadelphia and Richmond emphasizing the role of households’ ongoing efforts to reduce their debt burdens. A recent flurry of refinancing activity spurred increased demand for residential mortgages in the New York, Cleveland, Chicago, and Kansas City Districts, but new-purchase mortgage originations remained quite sluggish in general. A few Districts pointed to increases in nonbank financing activity, including rising availability of trade credit in Atlanta and further increases in venture capital funding in San Francisco.

Lending standards were largely unchanged. However, New York reported tighter standards in all lending categories, particularly for commercial mortgages, and Kansas City reported that a few banks tightened standards for commercial real estate loans. By contrast, reports from Chicago indicated that credit availability and terms loosened for business and consumer loans. Credit quality also changed little on balance. Philadelphia, Chicago, and San Francisco noted modest improvements in overall credit quality, while New York reported rising delinquencies for all categories except consumer loans and Atlanta reported an increase in business and household bankruptcies.

Agriculture and Natural Resources
Demand for agricultural products continued to expand, and producers benefited from relatively tranquil supply conditions. Crops and livestock generally sold well in Districts with extensive agricultural sectors, including Chicago, Minneapolis, Kansas City, Dallas, and San Francisco. Domestic growers have seen increased demand for grains and other commodities as a result of shortages overseas. Growing conditions were supportive of relatively high yields in most areas, although volatile weather conditions held corn and soybean yields below the record levels expected earlier in the season in the Chicago District. Low moisture during parts of the growing season also undermined yields for selected crops in the Richmond and St. Louis Districts, most notably for corn.

Demand and extraction activity increased for producers of natural resource products, including oil and other items used for energy output. Rising global demand spurred expanded extraction activity for oil, natural gas, and assorted minerals, as reported by Cleveland, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco. In the Atlanta District, oil production was barely affected by the Gulf oil spill, although contacts noted lingering concerns about the longer-term business impacts of the deepwater drilling moratorium and higher liability insurance costs for oil extraction companies.

Prices and Wages
Upward price pressures were very limited during the reporting period, with the exception of selected food commodities and industrial materials. Philadelphia reported increases in the prices of primary metals and wood products, Minneapolis pointed to higher prices for copper and lead, and Dallas and San Francisco reported higher prices for grain and selected other agricultural commodities. Atlanta reported that commodity and transportation-related prices rose, but their contacts indicated plans to absorb the increases into their margins rather than passing them on to consumers. Chicago, Kansas City, and San Francisco also noted limited pass-through of cost pressures to downstream prices.

Wage pressures remained modest overall. Of Districts commenting on wages, most identified little or no upward pressures or increases. Dallas reported that wage pressures were “generally nonexistent,” with the exceptions of some airline and temporary workers. Hiring of permanent employees was held down in part by employers’ reliance on temporary and contract workers, as reported by Philadelphia and Atlanta, although Boston noted that conversions from temporary to permanent staff picked up. Contacts in the Boston, Chicago, and Kansas City Districts noted skill mismatches between available jobs and the workers applying for them, which caused a slight uptick in wage pressures for selected jobs in a narrow set of industries. More generally, however, the reports suggested ample supply of qualified applicants for open positions.

Beige Book

A majority of 18- to 29-year-olds (55%) say they are watching their spending “very closely” these days, up from 43% of 18- to 29-year-olds who shared that view in 2006. That increase almost matches the 11-point rise in the overall proportion of adults who are keeping a closer eye on their finances these days (46% in 2006 vs. 57% now).

Adults under age 30 continue to worry that they aren’t saving or investing enough (72% in 2006, 77% today). That is about equal to the percentage of those ages 30 to 45 (78%) who say they are concerned about growing their nest eggs.

One reason Millennials are particularly vulnerable to hard times is that they are by far the least likely of any generation to be covered by health insurance; about six-in-ten (61%) of all Millennials say they are covered by some form of health plan, compared with 73% of Gen Xers, 83% of Baby Boomers and 95% of the Silent generation (most of the oldest group are eligible for Medicare or receive health benefits as part of their retirement plans).

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