Wichita's Unemployment Rate Rises Seasonally to 8.4 Percent; GDP Grows at 2.4 Percent; and Europe's Mercedes Reves Up

The Stock Market Falls Again

Here it is Friday afternoon and the U.S. Stock Market is down some more after a 144 point plunge yesterday. The Fed of Philadelphia's activity index took a dive and new claims for unemployment jumped over a half million. That latter is one statistic economists do not want to see rise and it is one of the Conference-Board's leading indicators. Yesterday's plunge turned a nicely developing  global rally into a global route.

Markets have been particularly spooked since the Commerce Department issued its GDP report a week a go.  The economy grew at a 2.4 percent rate in the second quarter.  This was seen as lack luster growth.  However the deceleration was not due to a lack of demand but to an over appetite for imports.  Real, domestic final demand grew at a 4 percent annual rate.  More economic stimulus would further aggravate our current account balance.

Its Bureau of Economic Analysis revised the last two and a half years of national income accounts estimates showing, as I expected, that the recession was deeper and the recovery stronger than previously reported.

Good News From Germany

The global rally had been fueled by news that the Bundesbank had increased its forcast of German economic growth. Germany is the Eurozone's engine. Moreover the strength in the world economy is reflected in the new resource M&A boom according to Javier Blas and William MacNamara in the Financial Times. They report, "The rise of China and India has sparked a renewed surge in aggressive dealmaking in the resources sector, with more than $50bn in proposed take­overs this week alone wagering on continued strong commodities demand."

The American stock market is focused on the possibillity of a "double-dip recession."  As I said yesterday, "I don't see a double-dip recession, either here or nationally...It's too late for one to start. They need to happen within 12 months."  We had a  double dip recession in 1973-75.  The economy fell in response to the oil shock of the arab oil embargo.  The economy recovered in the first half of 1974, but as inflation artificially inflated manufacturing order books, firms soon found their perceived demand to be ephemeral.  Industrial activity plunged after June in the "second dip."  The recession of 1982 followed closely (fourteen months) on the heels of the 1980 reession leading some economists to argue it was really one double dip recession not two separate recessions.

There real recession threat for the U.S. is more medium term.  When tax hikes and the supply side effects of the new health care legislation hit in 2011 and 2012, we could see something like the "Roosevelt Recession" of 1937-38.

Wichita's Good Bad News.

Dan Voorhis of the Wichita Eagle reported, "The July unemployment rate in the Wichita area hit 8.4 percent — worse than June, but much better than the 10.3 percent in July 2009."   That compares with 8 percent in June.

The rise is seasonal.  As Voorhis points out, "The unemployment rate typically rises in July as thousands of students and school staff enter the work force looking for jobs."   Chris Moon in the Wichita Business Journal notes that "metro [Wichita] had 26,669 people who were out of work, up from 25,184 a month ago."

To look past the seasonal effects, compare July's unemployment rate to the same month in 2009 (10.3%.)  That is a big drop.   This is the third straight month that the unemployment rate improved compared to a year ago and that provides grounds for optimism.   The Eagle quotes this Friends University professor as seeing "encouraging economic trends that will soon translate into better employment.  'I can see the unemployment rate in the fall closer to 7 percent than where it is now.'
[and the] strength in commercial aircraft construction and a general demand for Wichita-made products in other parts of the globe.."

Kansas

Seasonal factors drove the state unemployment rate up for July to 6.9 percent.   Kansas Department of Labor economist Tyler Tenbrink said "Kansas continued to see steady but slow job growth in July. An increase in goods producing jobs, like construction, are very important. We are still seeing a decline in some service providing jobs, like information services and financial activities. A bright spot this month within those declining industries was administrative and support services, which includes job placement services for temporary workers. We are particularly interested in job gains in this area because employers tend to use these services before hiring permanent workers. This industry saw its first over-the-year job gain since June 2008, a positive indicator that we may continue to see growth in other industries in the coming months."

Sheila Bair, Financial Reform, and Fannie and Freddie: Of Sound and Fury

President Obama has signed into law the Dodd Frank financial reform law. 

The most needed provision of the new law is its authority to resolve failing non-banks procedures along the lines of the FDIC's bank failure resolution process when the non-bank poses systemic risk The FT's Tom Braithwaite interviews Sheila Bair, Chairman of the FDIC, in this video (10m 19sec) "about how she is going to implement the new powers that were given to her by the new legislation on financial reform."

In an unrelated(?) story, Congressman Issa has dug up some very interesting facts about two non-banks not covered by Dodd-Frank.  The Financial Times' Suzanne Kapner reports "Countrywide Financial made 153 “VIP” loans to Fannie Mae executives, in an effort to win goodwill from the giant mortgage finance company, according to a letter released on Tuesday by a US congressman.


"An additional 20 VIP loans were made to Freddie Mac employees, the other large government-sponsored buyer of home loans, according to the details released by Darrell Issa, a California Republican."

Senator Dodd was a recipient of two of Angelo's VIP loans.

Which brings us to the most interesting question about the financial reform package.  The President assures us this will end future bailouts.  Unfortunately, the President left the job of constructing a bill to Congress.  Congress gave us a 2,300 page rewrite of financial regulation and it contains is no solution to the Freddie Mac and Fannie Mae problem.  Here is the biggest sinkhole in the federal bailout and not a word!  I guess Congress did not want to mess with the Financial Industrial Complex.  Incidentally (?), Senator Dodd and President Obama were the two biggest recipients of campaign contributions from Fannie and Freddie sources.   Dr. Blair prudently sidestepped a question on this amazing omission.  Neil Murphy, an eminent banking authority, loved to ask "Other than that, Mrs. Lincoln, how was the play?"  I can hear him ask it again.

But do not worry!   Suzanne Kapner  writes, "Barney Frank, a Massachusetts Democrat, has said that he plans to start work on new legislation when Congress returns from its August recess. The White House is expected to submit plans for fixing the system by early next year."

"To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death."

Farnborough, Jobs, and Wichita

Wichita's unemployment rate is 8.0 percent.

The national recovery is starting to come to us. Wichita's unemployment rate was 8.0 percent June, down from 9.0 percent in June, 2009. Dan Voorhis reported in this morning's Eagle.   "'Given that it's for June, that's a positive sign for Wichita,'" quoting Mammon Among Friends' own Malcolm Harris, Professor of Finance at Friends University.

Note the data is not seasonally adjusted. The national unemployment rate, which is, fell to 9.5 percent (from 9.7 percent.) The national rate fell as fewer folks were in the June labor force. That was in part because of the seasonal adjustment and in part because those census workers who took the work for a few extra dollars but were not looking for permanent work left the labor force. He also quoted "Jeremy Hill, director of the center for Economic Development and Business Research at Wichita State University, [who] said the bulk of the new jobs has come in the medical sector and professional and business services."

As I told Dan Voorhis, "We're 12 months into a national recovery and some of that is spilling into the local economy." One big area of improvement is the aircraft industry.  New aircraft orders are up for the five months through May according to Commerce Department data.   Although well below the boom years of 2007 and 2008, there is a distinct recovery showing up.  Both Boeing and Airbus have been conservative in their production planning.  Boeing is now slowly stepping up its 737 production, a sign it is growing confident.  Increased production also protects Boeing from potential cannibalization of the 737 market by its and Airbus's new planes.   Spirit Aerospace largely avoided layoffs by using a shortened workweek during the worst of it.  By thus spreading the work around, it conserved its younger workers who are the manufacturer's future.

Which brings us to Farnborough:

The Farnborough International Airshow is this week: 19-25 July 2010. The biennial show was last held at the peak of the boom in aircraft orders.  The 2008 show (pictured on the right) set a record of US$88.7 billion worth of orders announced during the show.  Note planes are priced in dollars not Euros.

Boeing's Dreamliner made a splash. The 787 flew into Farnborough Monday and returned home yesterday.  Gulliver, the Economist's Business Travel commentator blogged, "The Dreamliner is much more than just another incremental upgrade to Boeing’s fleet: its revolutionary lightweight carbon-composite wings and fuselage mean much-improved fuel efficiency (20% better than comparable planes made from aluminium, according to Boeing). This could well persuade airlines to open some direct routes around the globe that they previously deemed uneconomic."

Today's Eagle carries an AP report by Jane Wardell and Emma VanDore that orders have totaled $25 billion.

There is life among the aircraft lessors. Halleluja!

I knew the aircraft industry was in trouble when I learned AIG was Boeing's and Airbus's biggest customer.   AIG required a federal bailout, CIT entered bankruptcy and GE Financial was in trouble (the piggy bank that Jack Walsh built was broken.)  Lessors' share of aircraft orders dropped from 40 percent to 2 percent.

The Financial Times' Pilita Clark reported that "Steven Udvar-Hazy made a notable re-entry into the field.  He is one of the biggest names in aircraft financing who founded and ran ILFC, AIG’s aircraft leasing arm, until his departure earlier this year. He announced a $4bn order for 51 Airbus A320 family aircraft for his new leasing company, Air Lease Corporation."

"That news was swiftly followed by Boeing’s announcement that GE Capital Aviation Services, the aircraft leasing arm of General Electric, was ordering 40 of its best-selling 737 jets valued at around $3bn, according to the manufacturer’s published prices."

The A320s and the 737s are the workhorses of much of commercial aviation and seem to be commodity most easily leased.  Udvar-Hazy largely created the air leasing business with International Lease Finance Corporation (ILFC), now owned by AIG.  When AIG lost its AAA bond rating, ILFC got shut out of the commercial paper market and was hard pressed to buy new planes.  Udvar-Hazy's solution?  He left ILFC and started a new company and now he has ordered 40 Boeing 737-800s.  That should be good news for Spirit Aerospace here in Wichita which makes fuselages for 737s.

Is the market developing according to Boeing's view of the world or Airbus's?

The first step to understanding an industry and a company's business model is asking who the customers are. On the commercial side, Airbus and Boeing (and Bombardier and Embraer) sell to commercial airlines and air freight companies. The customers' business models will drive the demand for their planes. As the busiest airports get more and more congested, the airlines will either have to fly bigger planes with more seats into those hubs or fly longer point-to-point routes to relieve pressure on the hubs. Airbus in the A380 bet on the former, while Boeing in the 787 bet on the latter.

Pilita Clark reported from Farnborough Monday that "Emirates, the Dubai-based airline, on Monday announced a $9bn order for 30 Boeing 777 passenger jets, making it the biggest deal so far at the show."

This follows the the Berlin airshow where she reported on June 8th that "the Dubai-based airline, placed one of the largest civil aircraft orders in history on Tuesday when it said it would buy 32 A380 superjumbo passenger jets from Airbus in a deal worth $11.5bn."  That Airbus claimed was the biggest commercial aircraft order by dollar value ever.

At the time the FT's Clark further reported, "Emirates already had 58 A380s on order, with Tuesday’s announcement taking that number to 90, firmly cementing its position as the largest operator of the superjumbo.


"The deal is a big boost for Airbus, which now has 234 orders from 17 buyers. The programme is far from making a profit, however, after it was affected by numerous delays and cost overruns.
In addition to its A380 orders, Emirates has 70 Airbus 350s, 18 Boeing 777-300s and seven Boeing air freighters on order, totalling 143 wide-body aircraft worth more than $48bn.

"The world’s largest passenger jet, which typically has 525 seats, costs $346.5m at list prices, although large customers receive sizeable discounts."

While the luxury airlines can offer has been much commented on in the press, Airbus is stressing that the A380 is a money maker for airlines:  "The big news for operators is that the A380 is earning hard dollars at the same time. Introducing this next-generation jetliner is saving customers millions in operating costs annually while creating thousands of extra seats on long-haul routes. With the lowest cost per seat and the lowest emissions per passenger of any large aircraft, the A380 provides a competitive edge."


Molly McMillan reports in Air Capitol Insider, Hawker Beechcraft has found some business and Bombardier brags "it has captured 50 percent of net orders in the 100- to 149-seat marekt segment over the past two years. The program is on schedule for entry into service in 2013."

In a video report, Richard Milne reports from the Farnborough Airshow on the rise of emerging market manufacturers and the challenge posed to Airbus and Boeing from the Bombardier C-Series.  (3m 5sec) 

Separately,Molly McMillan reported in the Eagle, that "Hawker Beechcraft is looking at states that might be suitable for developing facilities to build parts for the company and has narrowed the field to two — Mississippi and Louisiana" according to its CEO, Bill Boistur. Molly McMillin reports that he said, "'The market for our products has decreased dramatically over the last 18 months...Our view is that this is not a momentary decrease, and we believe strongly it's necessary to adjust the cost structure of the company to be able to be profitable in a small market.'"

Can a company be more credit-worthy than its government?

In this June 10 2010 video, the Financial Times investment editor, James Mackintosh explains that in 2008, McDonald's became more credit-worthy, according to its bonds and credit default swaps, than the US government. Back then, it was seen as an oddity but now investors are starting to sit up and pay attention.  Mackintosh explainss why the spreads don't really make sense. (3m 3sec)

The Balance-Sheet Recession

The CFA Institute is holding it conference in Boston. The Wall Street Journal reporter, Donna Kardos Yesalavich, speaks with Nomura Research Institute's chief economist, Richard C. Koo, who describes the current recession as a "Balance-Sheet Recession." 6/4/2010 2:39:28 PM

Banks and Risk

The Economist walks through how financial institutions misread the risks they were taking, and were more vulnerable than they imagined in this video.

Stephen Roach: Unconscionable Policy Blunders

Stephen Roach, the chairman of Morgan Stanley Asia on the bittersweet taste of vindication and China's role in the economic crisis:

Myron Scholes on Financial Innovation and Regulation

Myron Scholes is a Nobel Laureate for his work in financial innovation, the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business, and the chairman of Platinum Grove Asset Managemen. The seemingly esoteric mathematical model he and Fisher Black developed for pricing options is now checked on every trading floor and is used even by stogy accountants. The Economist interviews him on why innovation must lead, how markets should be regulated, and why taking huge risks became so comfortable going into the financial crisis.

The Economist on the The German Economy