Business Failure (Where We Are - Part 2)

In our last posting we covered the difficulties facing the personal consumer in the market today and the realities of the current economic crisis. We established that spending is down through wages, capitol and credit and that at present, there is very little positive news. In this post, we shall examine the business side of things and from the onset, there is even worse tidings -

According to John Williams of ShadowStats -

In terms of the GDP, we are about halfway to depression level. If you look at retail sales, industrial production, we are already well into depressionary. If you look at things such as the housing industry, the new orders for durable goods we are in Great Depression territory. If we have hyperinflation, which I see coming not too far down the road, that would be so disruptive to our system that it would result in the cessation of many levels of normal economic commerce, and that would throw us into a great depression, and one worse than was seen in the 1930s.

Small-business bankruptcies rise 81% in California, 44% nation wide.

...the latest data show small-business bankruptcies up 81% in the state for the 12 months ended Sept. 30, compared with the previous year. Filings nationwide were up 44%, according to the credit analysis firm Equifax Inc.

Dennis McGoldrick, a bankruptcy lawyer in Torrance, said his clients are all stuck in similar situations -- capital is hard to come by, customers are tough to attract and debt is piling up.

"We can't keep up," McGoldrick said. "There's more people that want to come in every day than I can see."

Perhaps the graph of office vacancies will help illustrate the point.Wow, we've barely touched the subject and the prognosis already seems grim. But let's try to start this next section with some hope.

Industrial Production
Industrial production is up for now or is it a dead cat bounce? For the moment, we'll assume that things might be improving as orders to U.S. Factories Increased 0.6% in October -

Orders placed with U.S. factories rose in October for the sixth time in the past seven months, propelled by gains in non-durable goods that overshadowed declines in spending on new equipment.

Sounds great, but upon further examination, one comes to the question of 'Is this real increased demand or inflation?'

Demand for non-durables such as petroleum and food, which often reflects changes in prices, rose 1.6 percent, while bookings for durable goods fell 0.6 percent. (Emphasis mine)

Seems like inflation, let's look even closer -

The gain in non-durable demand may reflect prices. Crude oil on the New York Mercantile Exchange averaged $75.82 a barrel in October, up from $69.47 a month earlier. Prices have continued to rise.

It would definitely appear that we have our culprit. But wait, there's more -

Bookings for capital goods excluding aircraft and military equipment, a measure of future business investment, decreased 3.4 percent, a bigger decline than the government estimated last week. Shipments of those goods, used to calculate gross domestic product, fell 0.3 percent, also a bigger drop that initially reported.

Talk about cherry picking your talking points. So if we factor in for inflation and look at durable goods, industrial production is down significantly.

How about some more from the Institute for Supply Management -

"The NMI (Non-Manufacturing Index) registered 48.7 percent in November, 1.9 percentage points lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two consecutive months of expansion. The Non-Manufacturing Business Activity Index decreased 5.6 percentage points to 49.6 percent, reflecting contraction after three consecutive months of growth. The New Orders Index decreased 0.5 percentage point to 55.1 percent, and the Employment Index increased 0.5 percentage point to 41.6 percent. The Prices Index increased 4.8 percentage points to 57.8 percent in November, indicating an increase in prices paid from October."

Employment activity in the non-manufacturing sector contracted in November for the 22nd time in the last 23 months. ... Three industries reported increased employment, 11 industries reported decreased employment...

Ow.

Investment Banking/Credit
Let's take a closer look at the banks shall we?

Bank charge-offs -- loans written off as uncollectable -- have reached $116 billion year to date, or 2.9 percent of outstanding loans on an annualized basis, Moody's said in a report. By comparison, bank charge-offs were about 2.25 percent in 1932, the third year of the Great Depression, Moody's said.

Well what about business credit?

The Federal Deposit Insurance Corp. reported Tuesday that U.S. bank loans fell by $210.4 billion or 2.8% during the third quarter – the biggest drop since the FDIC started keeping records in 1984.

Loans to businesses fell 6.5%, and real estate loans plummeted 8.1%.

To make matters even more disconcerting, over one hundred banks are on the official trouble list and the unofficial list has grown to a massive 545 banks.

Capitol - Stock Market
Inflated dollars have been buying up the market for this recent bull rally. If you price in inflation, the market has actually been going down.
Now how can the Dow be going up and going down? Well, if the relative value of what you price your index in goes up, so will your index. For instance, if I created the Real Effect banana index to gauge prosperity and then the price of bananas doubles due to a hurricane, my index is not going up, my pricing unit is.

Like a bad zombie film, it just keeps coming back to life. An adrenalin pump of fiat liquidity has been installed in his back and it’s in a bubble that is going to pop.

Housing
From the Federal Reserve in November -

A majority of Districts reported that the lower-priced segment of the housing market has outperformed the high end.
.... Multifamily housing markets deteriorated further in the New York and Chicago Districts. More broadly, a number of eastern Districts reported continued declines in home prices--specifically, Boston, New York, Philadelphia, and Richmond.

But in what could be viewed as good news, existing home sales are up massively.

What's the deal? Is the housing market going down or up?

Down. From Calculated Risk -

The recent increase in the ratio was partially due to the timing of the first time homebuyer tax credit (before the extension) - and partially because the tax credit spurred existing home sales more than new home sales.

In other words, the bottom feeders are out snapping up what is perceived to be a great deal. In what could be argued a "savvy" business move, many investors are snapping up deals from desperate sellers and flipping them to reap profits. Now where have we seen this pattern before? Here is a chart to clear up any confusion.

So to recap - banks aren't loaning, housing is still crashing, industrial production is flatlining. Not good. Let's review our formula:

GDP = private consumption (Personal: down + Business: Down) + gross investment (down) + government spending + (exports - imports).

So just how can our GDP be reported at an increase of 3.5%? Stay tuned for part 2.