Author: Vincent Fernando, CFA and Kamelia Angelova

Economic rebounds sure aren’t what they used to be. If the current rebound had been like those during 1954 – 1982, the U.S. would have already experienced a substantial rebound in employment, as shown by the shaded gray area in the chart from Goldman Sachs below. The U.S. seems to be stuck in a ‘New Normal’, one which for employment has existed since 1991.

In the last two decades, employment gains have remained weak well after the end of recessions. Worse yet 2009 takes the cake as the worst of the worst as shown by the blue line below. We clearly have a long time to wait for the significant employment gains like we used to see in 1954 – 1982.

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It’s getting pretty hard to argue that America is at risk of high inflation, especially after today’s April consumer price data.

Despite some of the loosest monetary and fiscal policy America has ever seen, and even the current economic rebound, U.S. inflation appears more than merely under control… it’s dying.

The chart below shows the year over year percentage change for both the overall U.S. Consumer Price Index (CPI) and the ‘core’ index stripped of food and energy costs.

One can see that core inflation, in red, is at the lowest level it has been since at least 2000. Total inflation, in blue is also trending downwards. Thus at its current level, the CPI data isn’t quite showing deflation yet, but it is reporting clear disinflation (falling inflation). A few more months like April and we’ll see literal deflation.

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Total U.S. oil gas extraction employment was just starting to come back over the last few years, after collapsing from its peak in the early 1980’s, as shown below. Most recently, there had particularly been a boom in oil and drilling employment within the U.S. gulf region, though this boom was partially reversed by the recent financial crisis. (not shown)

Given the recent rig explosion in the Gulf of Mexico, and the vast environmental damage it has incurred due to uncontrolled oil pouring out of the rig’s damaged well, it is now far more feasible that America could get cold feet in its effort to expand offshore oil and gas exploration. For example, when asked about her reaction to offshore drilling after the new Transocean spill, Homeland Security Secretary Janet Napolitano responded that “Everything is on the table,” according to CBSNews reporter Mark Knoller.”

Let’s just say that if offshore oil and gas exploration efforts are curtailed, then A) it will be a lot more difficult for U.S oil and gas drilling employment to continue rising as it had over the last few years and B) we could even be in for a new down-leg in this graph should onshore employment opportunities prove insufficient to compensate.

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49 out of 50 U.S. states are still showing less economic activity than a year ago, based on February 2010 coincident economic indicators from the Federal Reserve of Philadelphia. The chart below is organized from top to bottom, from the most growth in economic activity to the largest declines in economic activity.

States like West Virginia (WV), Maryland (MD), Idaho (ID), and Wyoming (WY) are the worst off year over year. Their February 2010 economic activity remained 13.5%, 6.3%, 6.3%, and 6.2% lower year over year. Thus their economies, along with those of another 45 states, all the red ones, are all underwater on an annual basis.

North Dakota (ND) is the only state to currently have a higher level of economic activity year over year. Its February 2010 economic activity was 1.1% higher than February 2009, as shown by the green dot in the chart below.

Moreover, 28 out of 50 states even exhibited less economic activity in February 2010 than just three months earlier (not directly shown below). This means they have been deteriorating most recently as well.

In fact, the chart below is organized from left to right by the change in economic activity in the last three months (February 2010 vs. November 2009).

Thus West Virginia (WV), Maryland (MD), Montana (MT), and Delaware (DE), have seen their economic activity fall since November 2009 the most, given that they are the left-most dots. For example, West Virginia’s economic activity fell 3.1% vs. November 2009 (percentage not shown). In contrast, Michigan has done the best most recently, given that it is the right-most dot, rising 1.5% vs. November 2009 (percentage not shown).

Net-net what this tells us is that 49 out of 50 state economies are still underwater on a one year basis, and 28 out of 50 are even still falling vs. November.

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Thanks to the upcoming April 30 expiration of the government’s new-home-buyer tax credits, in March the U.S. just experienced the sharpest spikes in new home sales back to 1963.

According to the U.S. Census Bureau, new homes sales leaped at an annualized 27% rate in March. You’ll see this below, on the right. It’s clearly an abnormally high jump — welcome to the distorting force of government in markets. People were rushing to buy ahead of the April 30th deadline to qualify for the tax incentives.

Thing is, this isn’t healthy buying behavior. Given we just came off a housing mania, creating new mini-buying manias seems a bit dangerous. It’s kind of like taking shots to cure a hangover.

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Yes, you’ve been hearing about Greek bond yields rising for some time now, but now it is far different — they’re rising, and they’ve gone vertical.

Below we show the spread between Greek bonds and German bonds. We show the spread, rather than just the plain Greek bond yields in order to remove any broader eurozone concerns. Thus this chart shows the additional yield the market is demanding to hold Greek rather than German bonds.

You can see how the spread has just exploded, rising faster than at any time. This shows a collapse of Greece’s perceived creditworthiness.

Note how the 2-year spread is now higher than the 10-year. That’s mainly because 2-year Greek bonds are yielding over 10% due to their market rout, and the ten year Greek bond is at about 8.8%. Extend this trend for even a short period of time and it’s all over for Greece’s finances.

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Analyst expectations have been rising higher and higher for tons of U.S. companies. Here are the major names where analyst sentiment has swung the most, ie. earnings revisions have been ramped higher the most number of times, based on data from Fact Set and Waverly Advisors.

As seen below, Cisco (CSCO) takes the cake with 30 upward revisions to its Q1 earnings so far. Other notables include Texas Instruments (TXN) with 24 upward revisions, Apple (AAPL) with 20, Amazon (AMZN) with 18, Whole Foods (WFMI) with 16, Starbucks (SBUX) with 16, and Home Depot (HD) with 16. We set the cut-off for our screen at 16 revisions.

While analysts may raise their estimates for good reason, at the same time they set the expectations bar ever higher each time. Should these analyst favorites miss their ramped numbers, look out below.

Now see why analysts expect companies to wildly blow away their numbers this quarter >

The chart shows the number of upward revisions that have been made to each stocks Q1 earnings estimates to date. Disclosure: The author owns shares in Chesapeake Energy (CHK).

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David Leonhardt has a rather lengthy article in the New York Times right now, trying to discredit the significance of the fact that 47% of Americans might not pay any federal income taxes this year.

Leonhardt writes it off as a sign of generous U.S. stimulus, and then bemoans the fact that tax rates for wealthy Americans aren’t as high as they used to be in the past. He also critcizes the 47% figure for only looking at federal income taxes, not all taxes.

But there’s one tiny detail not in there… based on the latest available data from the Congressional Budget Office, wealthy Americans are paying a larger share of Total Federal Tax Liabilities (Yes, total, not income tax only) than ever in at least the last 30 years. The 47% figure the New York Times attacks just scratches surface of what is an enormous disconnect between who and who doesn’t pay for all the Federal programs everybody feels entitled to argue about. And come on, this is simply what you’d want to know — at the end of the day, who is paying the bills? Ie. what percentage they are paying, ie. what is their tax burden.

Hence… In 2006 (the latest data available), the 40% highest earning American Households paid 86% of Total Federal Tax Liabilities. The 60% lowest earning households paid just 14%. The 40% highest earners have never paid such a large share of total federal tax liabilities as far back as we found tax burden data (back to 1979). You can see that there has been a steady erosion in the bottom 60%’s contribution to total federal taxes. We don’t show it in the chart below, but in case you’re wondering, the picture is even worse for the top 10% of Americans. The top 10% of Americans paid 55.4% of total federal taxes, which was a higher share than at any time in the data period going back to 1979. In 1979 they paid 40.7% of total federal taxes, so the top 10% highest earners have taken on a substantially larger share of total taxes, ie. funding of the federal government, over time.

Given the massive stimulus benefits given out during the crisis we wouldn’t be surprised if the trend shown in the chart below has expanded even further recently. Make whatever moral judgment you will about whether or not this is fair or unfair. But it’s a fact, according to the Congressional Budget Office. We encourage you to check our numbers, you can find them here.

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Here’s why government spending is really out of control.

First of all, half of Americans don’t even pay income taxes, but it gets worse. If we look at total federal taxes, 20% of Americans pay 70% of taxes, as shown below. 40% of Americans pay 95% 85% of federal taxes.

Yet when it comes to deciding how these tax dollars are distributed, those that pay 85% of the taxes are outnumbered by the 60% who pay just 5% 15%.  Thus, when it comes to the politics of government spending, most Americans are arguing about how to use other people’s money. No wonder nobody wants to see real spending cuts.

(According to the 2006 data from the Congressional Budget Office’s latest tax burden release.)

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Today’s ISM Manufacturing index result blew away expectations, hitting 59.6 vs. an expected 57. March ISM data shows the fastest U.S. manufacturing expansion since July 2004.

Yet hidden underneath the powerful headline ISM number is an even more powerful break-out by the ISM Prices sub-index, which is a component of the total ISM.

As shown by the black line below, the ISM Manufacturing Prices index jumped 8 points in March, to 75 from 67. This signals a sharp rise in inflationary pressure. According to the ISM, 17 industries reported paying higher prices on average in March and no industry reported paying lower prices.

Furthermore, as shown below by the Producer Price Index (PPI) for crude materials in orange below, a rise in the ISM Prices Index makes a rise in the PPI highly likely, as highlighted by Waverly Advisors.  This means we should expect more confirmation of inflationary forces in the near future.

Which means you can pretty much put the final nail in deflation’s coffin. The real threat is inflation, especially given the recent liquidity-bias of the U.S. fed, and today’s ISM result has moved Ben Bernanke one step closer to pulling the trigger on interest rates.

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See Also:

• CHART OF THE DAY: Manufacturing Capacity Was Demolished In 2009
• CHART OF THE DAY: Welcome To The Jobless Manufacturing Recovery
• PIMCO: Forget Bernanke’s Ultra-Low Interest Rate, Next Month The Fed Will Tighten Hard With Other Tools

There’s an enormous yet simple reason why America will remain an extremely powerful nation out to 2050. It’s demographics.

Thanks to a relatively high fertility rate, plus a rich culture of immigration, America is set to grow its population by another 100 million people through 2050. This is based on U.S. census projections and is supported by other projections as well via New Geography.

Over the next four decades, America will grow its labor force, ie. its productive population, by a whopping 42%, as shown below.

Meanwhile, China’s labor force will shrink by 10%, Europe’s will shrink 25%, and that of Korea and Japan’s will shrink by horrendous amounts.

See, China’s labor force has been growing very fast lately, which has helped it stun the world, but this growth is set to peak and then start falling by the middle of this decade. So be prepared for the hype to die down by about 2020, even though China will of course keep developing.

In contrast, from about 2015 onwards, the U.S. will start showing how its national model isn’t so bad after all.

China will have to increase worker productivity faster than the fall in its labor force each year just to tread water when it comes to GDP. Meanwhile the U.S. could have zero productivity gains over 40 years and yet achieve a 42% larger economy by 2050. Thanks to healthy demographics.

China might be able to overtake U.S. GDP since it’s easy to increase productivity quickly when coming from a low base, but at worst, the U.S. will still be a close #2 with few other contenders in the world. All the while having a far higher GDP per person than China. So net-net, the China Challenge won’t be so bad, and in fact the U.S. will likely come out looking very strong.

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Initial claims for unemployment insurance rose to death-defying heights during the U.S. economic downturn, especially after the September 2008 collapse of Lehman Brothers.

Yet as shown below, they’ve now come full circle. The 4-week moving average of initial claims is now back to September 2008 levels. Many other economic data points have already retaken their Pre-Lehman levels. Now initial unemployment claims have as well.

If Dick Fuld manages to come back, you’ll know the recovery is complete.

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In February 2010, total U.S. industrial production rose +1.7% year over year according to the Federal Reserve.

While there was continued expansion, production growth fell from Q4 2009’s +6.6% rate and Q3 2009’s +6.4% growth. Still, overall industrial production kept growing in February.

But… diving into a breakdown of different products by market shows that some U.S. industries have already experienced sharp reversals of fortune.

As shown below, U.S. industrial production contracted sharply in February (orange bars) for Home Electronics, Appliances & Furniture, Paper Products, and Industrial Business Equipment. This came after strong growth in Q4 (blue bars). Thus for some the recovery already feels like it’s over.

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See Also:

• CHART OF THE DAY: The 40-Year Hollowing Of American Industry
• Morgan Stanley: Here Comes A Wave Of Developed Nation Credit Downgrades
• Entire Hangzhou Apartment Tower Sells Out In A Single Night

This relationship makes complete sense yet is frequently forgotten — There has been a simple long-term correlation between U.S. power production and job growth, going back decades, as shown below.

U.S. power production fell with the recent economic downturn, most likely because there was less economic activity (plus some belt tightening when it came to energy usage).

Yet now it is rebounding. Which unless this relationship has suddenly changed, means that new jobs are highly likely to be created in the coming quarters.

The chart below is also interesting as a validation of the U.S. recovery because, right now, many who doubt the validity of Chinese government statistics look to Chinese power usage numbers as a tangible check on the economic growth that the government claims.

Well the same works for the U.S.  It has passed the ‘China’ test!

(Via Value Plays)

Anyone who thinks gold isn’t driven by momentum right now should take a hard look at this chart.

While the chart isn’t complete proof, it is at least a strong indication that a substantial part of gold’s price rise since 2002 has been due to the birth of exchange traded funds and the new gold demand they created by letting anybody trade gold as easily as a stock. It makes a strong case for the argument that gold’s price has largely been driven by ETF fund flows. Note traditional forms of demand, such as jewelry, fell both in 2008 and 2009 according to the World Gold Council (not shown).

This is why today’s gold market is nothing like that of the past.

ETFs have allowed speculative buyers to rapidly move in and out of the asset, which has changed the nature of the investor base driving the metal’s marginal price. Trust us, the hate mail we receive just for debating gold makes this pretty clear.

See, the gold buyers of the past didn’t have the hair-trigger trading capability of the present ETF group, and there was a time when gold was considered simply a store of value rather than a vehicle for making huge upside. Which is why some research firms have voiced concern about gold’s suspected dependency on fund flows for price support. Note how 2009 ETF-driven gold demand soared. It might be hard for 2010 to repeat this performance, especially if recent investors who are in it for quick returns start to think gold might be boring.

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See Also:

• Dow Closes In The Green After Spending A Day In The Red
• Deadly Toxin Invades Barrick’s Dominican Gold Mine, Thousands Hospitalized
• Credit Suisse: The Upcoming ETF Unwind Will Pummel Gold