Newest Macro Data Is W-E-A-K!

Last week two of my favorite data points came out: Payrolls & Trade.

Payrolls were a huge miss. Expectations were for 180,000+, but came in almost 50% lower (at 98,000). Automatic Data Processing (ADP) – a global leader in payroll processing – predicted 263,000.

(This is a huge egg on their face. And it should tell you to be wary of mainstream “experts.”)

Trade data was also bad.

The background to trade data has been that U.S. fracking reduced oil imports and boosted exports.

That also trickled into oil derivative products like plastics and chemicals. But when oil prices plunged, the value of all these plunged with it. When oil rose back up, so did the value.

To escape the distortion, it’s good to focus on the non-petroleum aspects of trade.

First of all, U.S. exports are dominated by two things: agriculture and autos.

But autos aren’t really exports: they are auto sub-assemblies that we ship to Mexico and Canada, where they become finished cars and get re-imported.

Drill-down into imports and you’ll see they were flat with two exceptions: a massive (~$2B) drop in smartphone imports and a massive drop in autos.

The smartphone import drop is one I’ve been predicting for a while. That’s just the tail-end of the wave that follows a new iPhone release.

The auto drop is extremely important though. Autos represent a lot of what’s wrong with the U.S. economy.

End of the cycle: we hit peak auto demand last year. In fact, the auto makers over-built and are carrying massive excess inventory. So much that GM and Ford (F) recently shuttered some factories as they bleed down the excess. That’s why auto imports dropped: sub-assembly production dropped.

End of student loan turbo-charged debt: student loans have grown $1 trillion since the recession ended, from a base of ~$200 billion. That money had nothing to do with school and was just a way to get credit into the market. Most of that money went to vacations and cars. Only a fraction went to schools. This is why forgiving student debt is B.S. and should not be allowed. But the real point is that the $1 trillion isn’t growing. So the extra fuel for the economy – and particularly car buying – has stopped.

“Unnatural acts” have returned (a la 2007): when sales start to flag, salesmen resort to their bag of tricks. One is to extend easy financing. Instead of 4 year loans, almost 50% of new car loans are 6~7 years in duration. (Very easy to do when interest rates were 0%. Less easy at 1%.) Another trick of easy financing is to lend to unqualified borrowers. And that’s happening and the payback is obvious: delinquency rates are higher than they were in 2007.