Economics 5/8/10: Service PMIs

Time to update my earlier post on PMIs - this time with new data on services PMIs. The original post is here. Once again, the data is from NCB Stockbrokers PMI release and you can read their very good objective analysis on their site.
New business activity in the chat above is the one to worry about going forward. Giving a snapshot of more recent periods:
Here, both, the flattening out of the expansion rate in total business activity and the decline in the growth of new business activity are pretty clearly evident. Nonetheless, both series are above 50, signaling continued expansion.
Underlying macro parameters are a mixed bag. Business expectations are still improving and are pretty robust, though the rate of improvement is slipping. More dramatic is the slippage in the rate of new export business orders expansion. In the mean time, contraction continues across services employment and profitability, though the rate of contraction is slowing and is almost reaching zero.

Unlike in the case of manufacturing PMIs, services-related prices are trending in the right direction:deflation is setting in once again in input prices and deflation is ongoing, but at a slowing rate, in terms of output prices.

Putting services and manufacturing sectors side by side, first consider the employment picture:
Both employment pools are contracting. Manufacturing employment has crossed into negative growth territory, while employment in services sectors is falling at a slower rate than before.

Lastly, putting side by side actual PMIs:
Expansion in manufacturing has been under pressure in Ireland over the last three months. Meanwhile, services sector has been on expansionary path since the beginning of the year.

Of course, PMIs are not a perfect signal for near term future of the overall economic activity. Nonetheless, the series have been signaling weak expansion for almost 7 months now. This is the good news. The bad news is that there is low degree of confidence in the gains made so far, especially in manufacturing. In all likelihood September-November will be the key months when it comes to either stabilizing economy in a growth mode, or triggering a double dip. In my view, the risk of the latter before the end of Q1 20111 is around 40-45% and rising.

Economics 5/8/10: Live Register - up & up, again

Live register is out today with some poor news: the seasonally adjusted LR rose from 444,000 in June to 452,500 in July (+8,500 mom).This year to July 2010 LR rose by the cumulative total of 34,403 (+8%).

The latest increase in LR is marked by women signees leading males signees by 4,600 to 3,900. This suggests that (a) services sectors are more likely to show accelerating contraction in employment, and (b) the trend for jobs destruction in higher value added activities is still running strong.

This is confirmed by LR new data on occupation breakdown of lost jobs. Per CSO: "All occupational groups showed monthly Live Register increases in July. The largest percentage increase was in the Professional group (+12.3%), while the smallest percentage increase was in the Craft and related group (+0.1%). In the six months to July 2010 all occupational groups showed Live Register increases with the largest percentage increase in Professional (+22.8%), while the next largest increases were in Clerical and secretarial (+15.6%) and Sales (+13.0%). The smallest percentage increase was in the Craft and related group (+0.1%)."

So for the headline impact of the news - take an average weekly earnings (Q4 2009) at €716.09 (€37,237pa), take the average professional grade weekly earnings at €793.35 (€41,254pa), apply tax rates consistent with these earnings at €3,963-5,610 net tax liability, plus €1,225-1,386 PRSI, plus €1,489-1,650 Health Levy and €745-825 Income levy. Net loss to the Exchequer of tax revenue alone is €7,422-9,471. Employer-side taxes lost are ca €1,250-1,400. Now, add to this the cost of unemployment benefits, loss of Vat on private health insurance, provision of public benefits, such as health etc - you have total cost to the Exchequer of €28,040-30,240 per each new signee.

So July figures are signaling a hit on the Exchequer balance of ca €257mln over the year - just like that, one month worth of newly unemployed.


The average net weekly increase in the seasonally adjusted LR was 1,700 in July or virtually identical to June figure of 1,725.
Monthly rate of change accelerated in July to 8,500 up from 4,900 in June and marking the fastest rate of monthly increase in a year to date, and the highest rate of increase since July 2009:
The standardised unemployment rate in July is now at 13.7% up from 13.4% in June. This compares with 12.9% in the first quarter of 2010, the latest seasonally adjusted unemployment rate from QNHS.
Some final comparatives:

• Weekly net increases average from January 2008 through July 2010 were 2,102 - above the July average weekly net rate of increase of 1,700. However, over the last 12 months, average net weekly increases were 386 - well below the figure for July;
• Monthly average rate of increase in LR was: January 2008-July 2010 = 9,100, 12 months to July 2010=2,783. July 2010 monthly increase was 8,500.
  

Economics 5/8/10: Good news - we might be 'one-off' broke?

Good morning, folks. As a day starter, please take a note: We are bust! Yesterday’s Exchequer returns are a worthy reading on the theme of the day and hence I am writing a third post on the subject. Let me recap where we are at:

Tax receipts are now under €17.2bn cumulative for the first seven months of the year. As far as our ‘ever optimistic’ official analysts go, things are going on swimmingly. But in reality, we are on track to meet my December 2009 forecast for a shortfall of €500-700mln on the year. And that despite the fact that Ireland has ‘turned the corner’ on growth – highlighting the fact that the read through from GDP to tax revenue is not a straight forward thing. Of course, most of the shortfall is due to our real economic activity – as measured by GNP – is still tanking.

So relative to profile, here’s the picture:Good news on expenditure – overall voted expenditure was 2.6% below anticipated for the period to July. But this ‘achievement’ was driven solely by the cuts to capital spending. Thus, net voted capital expenditure for the first seven months of the year now stands at €2.2bn – full €660mln (-23%) below target. Net voted current expenditure is so far on target, while national debt is costing us slightly less (-€213mln) than DofF anticipated.

So overall, we are on track to deliver the Exchequer deficit of ca €19bn in 2010, close to the target €18.78bn, as capital spending accelerates in H2 2010. But we won’t reach the overall target to GDP. Most likely, we are going to see a 12% deficit to GDP ratio.

And this does not include the full extent of funding for Anglo and INBS. Brian Lenihan has already committed the state to supply €22bn to Anglo alone, of which €14.2bn was already allocated, but only ca €4bn went on the Exchequer accounts. Of the still outstanding €7.8bn, the question is how much of this amount is going to be directly shouldered by official deficit figures. The second question is – will €22bn cover Anglo demand for capital post Nama Tranches II and III transfers – recall that Anglo is yet to move loans for Tranche II. The third question now relates to AIB – given its interim result announced yesterday, one has to wonder if the bank will need more capital. What is beyond question now is that the State will be standing buy with a cheque book ready, should AIB ask for cash.

All in, Ireland Inc’s sovereign accounts this year are likely to come out with a 20% plus deficit relative to GDP. That’s a massive number implying that over a quarter of domestic economy will be accounted for by the shortfall in public finances. Our debt can easily reach over 87% of GDP and close to 110% of GNP (and that’s just including the full Anglo amount of €22bn and excluding Nama and the rest of recapitalizations liabilities).

Scary thought. But don’t worry – the Government will come out to say that it was all due to one-off measures. One-off in 2008, 2009, 2010, and one can rationally expect 2011 and even possibly 2012. By which time Nama liabilities will begin to unwind… serializing the one-offs into the future.

Economics 4/8/10:Exchequer July receipts

Note: Corrected version - hat tip to Seamus Coffey!

As promised in the previous post (which focused on the Exchequer balance, here), the present post will be focusing on actual tax receipts.

I have resisted for some time the idea that Budget 2010 targets are somehow analytically important. Hence, you will not find targets-linked analysis here. But the main tax heads - their comparative dynamics over 2008-2010 to date are below.

First, take a look at the actual cumulative to date levels.Overall tax receipts are now running below 2009 numbers, and are still way off 2008 numbers (off €1,536mln on 2009 and €5,520mln on 2008). This means we are now 8.22% below 2009 and 24.35% on 2008.

Two largest contributors to the receipts are Vat and Income Tax:Vat is now €483mln below 2009, and still €2,453mln behind 2008, which means we are now 6.9% down on 2009 and 27.5% behind 2008. One wonders how much of this Vat intake in 2010 is due to automotive sales increases driven (as I explained in earlier posts) predominantly by the 'vanity plates' with '10' on them. Income tax shows a similar pattern: down €537mln on 2009 (-8.45%) and €1,060 on 2009 (-15.4%).

Corporate tax and Excise are the next largest categories.Cumulative year to date, corporate tax receipts are performing weaker than in 2009 (-€260mln and -13.8%) and ahead of 2008 (+€192mln and 13.4%), but this is due to timing issues and financial markets recoveries in H1 2010. Excise taxes are still under-performing: down €87mln on 2009 (-3.37%) and €773mln (-23.7%) on 2008.

Stamps
Transactions taxes are not faring well. Stamps are down €75mln on 2009 (-18.3%) and down €808mln on 2008 (-70.7%).

Surprise surprise, Capital Gains Tax is singing similar song:
So CGT is down €89mln (-44.3%) on 2009 - despite being beefed up by bull markets in financial assets, and is down €544mln (-83%) on 2008.

Year on year changes show stabilisation around 2009 levels.
Usually, the Exchequer returns publications now days provoke a roaring applause from our banks and other 'independent' analysts and the remarks about 'turning a corner'. This time - no difference. Nope, folks - let me stress - there is not even a stabilization around horrific results for 2009. Exchequer revenues are heading south. We haven't gotten anywhere close to resolving the crisis.

But let me show you what this bottom will look like, once we are there.
It is a horrific place in which personal income and consumption-related taxes bear roughly 75.2% of all tax burden (up from 62.5% in 2008 and 68.6% in 2009). Meanwhile, physical capital taxes contribution to the budget have shrunk from 14.7% in 2008 to 9% in 2009 and 4.2% in 2010. Corporate tax, despite the robust performance now contributes only 9.5% of total tax receipts down from 2009 level of 12.4% and 2008 level of 13.5%.

In other words, those who benefit less of all demographic and economic groups, from public services - the upper middle classes - are now paying more than 50% of the total tax receipts bill. This, in the words of some of our illustrious guardians of social justice is called 'protecting the poor'. In other times, in other lands, it was also called 'taxation without representation'.

I would rather call it a tax on human capital - the very core input into 'knowledge economy' that we need to get us out of the long term economic depression.

Economics 4/8/10: Exchequer July results

Exchequer figures for July 2010 are out. Here are trends and some details. Analysis of revenue (by line) will follow later tonight.

Month on month changes first:
Notice seasonality. Seasonally adjusted surplus/deficit is not replicating the V-patterned change over three months. Instead, we are showing persistent worsening of the deficit. This is not due to a surprise expenditure deterioration, as current expenditure side held quite well relative to 2008 (down from €27,565mln to €27,039mln).

One interesting feature, however, on expenditure side is that May-July 2010 saw a net rise in overall expenditure, while same period in 2009 saw a contraction.

Convergence of tax and total receipts was in line with previous years:
This was achieved primarily by relative under-performance of tax revenues, down from €18,689mln in same period of 2009 to €17,153mln this year, plus slowdown in capital receipts mom (although still up yoy cumulatively). Automatic stabilizers are now in action.

Putting receipts against deficit:
Total receipts are persistently down in the last 3 months, and with them, exchequer deficit is rising. This again runs counter to the seasonal trends. Notice also that mean reversion on receipts side is now completed, while deficits are trending still above the long term trend line, primarily due to the fact that 2009 figure includes banks recapitalization costs, but 2010 figures so far do not account for these in full (more on this below).

The broken seasonality pattern on receipts side is evident in the chart above.

On to cumulative results for the year:
Tax revenue is significantly under-performing 2009, let alone 2008. Remember, with all tax increases on 2009 we should have been somewhere between the red and blue lines. Is this suggesting that higher taxes (certainly on the books for Budget 2011) might be counterproductive to revenue objectives?
Total receipts are still coming out slightly above 2009 - thanks to stronger performance in June.

Total cumulative expenditure is running below 2008 levels. That's thanks to cuts in capital spending and under-provisioning for banks in year to date 2010 (more on this below).

Now, deficits:
For a moment there, it looked like we were heading toward abysmal 2008 levels (but not as abysmal as 2009). That's because the Government booked all its capital spending savings into April-June. With these savings now exhausted, our deficit has taken a nose dive.

Shall we compare with banks in across the board?
Hmmm... were capital expenditures (inc banks supports) through 2010 so far running at 2009 levels, we would be worse off in terms of spending than last year.

Now, remember, we (well, actually IMF) were promised by the DofF that the bank recapitalization funds since January 2010 "are now reflected in deficit projections for the year". Actually - they are not. Not 6 in the Exchequer Statement details what is covered in banks recapitalization to date:So in brief - no actual capital injection of any variety is covered in Exchequer data. No purchases of equity in AIB and BofI are covered either. It looks like the Government might be waiting to push these numbers through at the last minute, say forcing recognition into December 2010. Such a move would allow it to pre-borrow funding from the markets without anyone raising too much fuss about contagion from banks balance sheets to the sovereign. Once 2011 arrives, the Government can turn to the markets and say 'Well, that was one-off stuff. Business as normal now."

One way or the other - look at the 2009 figure in the table above: that's the benchmark for our real performance.

Economics 3/8/10: Ireland's PMIs

NCB Stockbrokers today released their latest data for Irish PMIs for Manufacturing.

Core conclusions: "the rebound in the Irish manufacturing sector lost momentum again in July.
Both output and new business increased at slower rates, while employment fell for the second month running. Reduced capacity at suppliers led to the fastest lengthening of lead times in the history of the series. The seasonally adjusted NCB Purchasing Managers’ Index™ ...fell for the second month running, posting 51.4 in July, down from 51.8 in the previous month.

The reading indicated that although operating conditions in the sector improved, the rate of strengthening was the weakest in the current five month sequence. Output growth eased for the third successive month..."

Overall - a very balanced analytical note from NCB, as usual. Worth a close read.

As usual, let me update my charts based on the NCB dataset.

First manufacturing:
The downward pressure is clearly visible in all three PMI-underlying core series. A close up snapshot reveals it in more details:
Output and new export orders series are perhaps the most significant signals of the weaknesses ahead.

Much of the improvements in PMIs globally (and in Ireland) were driven earlier this year by the need to restore supply capacities: This momentum now appears to be close to exhaustion despite the fact that slack capacity remains unfilled.
Prices are showing continued deterioration in margins. Overall input prices deviation from the output prices and the recent crossing of output prices into contraction zone for the index suggest that margins are being significantly undermined. The uptick in employment index, though significant since the crisis lows, is yet to translate into new hires and is now back in contraction territory (since June).

Next, updating Service PMIs (note - the latest data is for June 2010).

Services are posting much more sustainable recovery trend (albeit with less impressive peak of growth so far) than manufacturing. New business trending alongside overall PMIs suggests that unlike the case of inventories-driven manufacturing PMIs expansion, new business is driving most of the service activity rebound. The snapshot of data below highlights this:
However, it is worth watching some of the macro sub-components of the services PMIs:
In particular, both business expectations and profitability are appearing to be on cusp of a shift downward. More importantly, both profitability and employment appear to be stuck in contraction territory.
In terms of prices, inputs deflation is almost exhausted, but outputs are stubbornly refusing to move into higher prices territory - margins are thus down, which should be bad news for employment in months ahead.

Employment picture overall is not too encouraging:
Original support at modest expansion levels in manufacturing, registered earlier this year has now slipped back into contraction. Services employment remains below expansion line, though the rate of contraction is slowing pretty aggressively. It remains to be seen, however, what July data will tell us about services component.