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What the tea leaves say

Feb. 9, 2012

If you want the rainbow, you have to put up with the rain.” –Comedian Steven Wright

Despite a truly knockout employment report last month, many clouds still darken the U.S. economy’s horizon – and that of the world’s as well.

This uncertainty is in no small measure being largely driven by the European sovereign debt crisis (a situation I am sure everyone is VERY tired of hearing and talking about) but other concerns are also in play – a big one being a sharp uptick in U.S. state and local taxes, combined with what’s become a long slow decline in real incomes, reducing consumer spending.

Those issues, in turns, are making corporate CEOs less sanguine about future prospects – and if they (and thus their companies) begin hunkering down, freight volumes might start dropping as well.

Consulting firm Deloitte LLC recently noted that its Consumer Spending Index continued to decline in January even though non-farm payroll employment jumped up by a whopping 243,000 jobs in January, helping reduce the unemployment rate to 8.3% percent, according to the U.S. Bureau of Labor Statistics.

Deloitte’s index, comprised four components — tax burden, initial unemployment claims, real wages and real home prices — fell to 1.73 from a revised reading of 1.90 in December last year.

“A sharp fall in real home prices primarily contributed to the decline in the Index,” explained Carl Steidtmann, Deloitte's chief economist and author of the monthly Index. “While initial unemployment claims ticked lower, real wages and the tax burden showed no improvement leaving little to offset the housing market's negative effect on the Index.”

He added that Deloitte's analysis of U.S. Commerce Department data indicates that the weakness across economic fundamentals over the past several months may continue and further crimp consumer spending in 2012. To wit:

Real incomes declined on a year-over-year basis for the fifth month in a row. While a social security tax cut boosted incomes in January 2011, incomes are set to continue falling without an additional cut this year.

New and existing home sales remain weak, and prices continue to decelerate. Current government proposals to improve the situation, even if approved, will take time to develop, implement and affect the housing market.

Taxes are going up at the state and local level. They are raising the overall level of taxation and reducing consumer purchasing power.

That last one is a big one, as Deloitte said taxes rose sharply to 11.5% last month as state and local governments increase taxes to cover budgetary shortfalls. While rising taxes are typically a sign of an improving economy, it is likely more of a drag on spending than a sign of an improving economy in this scenario, said Steidtmann.

On top of that, real wages are down 1.6% from the same point in 2011, even though energy prices remain stable. Finally, real home prices fell more than 15% from a year ago, more than offsetting the small improvements from unemployment claims and taxes – and Steidtmann cautioned that the last time the housing market experienced a significant drop like that was back in October 2008.

All of that is beginning to affect demand for vehicles, noted Germany’s Daimler AG in its latest earnings report, though North America still remains a bright spot where truck sales are concerned.

On the positive side, the global car and truck maker said that, according to current estimates, worldwide markets for motor vehicles should continue to grow this year, with the exception of the Western European markets, which are of course increasingly affected by increasing sovereign debt level.

Global registrations of new cars are likely to increase by approximately 4%, whereby the growth will primarily be driven by the Asian emerging markets, the U.S. market and the Japanese market, which will benefit from catch-up effects, the company projected.

Worldwide demand for medium and heavy trucks in 2012 is expected to be at least at the level of last year, Daimler noted, and despite a perceptible growth slowdown, the North American market should prove to be the world's most important driver of demand, expanding by 15% to 20%.

Yet demand for trucks in Europe will be impacted by the ongoing sovereign-debt crisis and the resulting economic weakness, so – at best – demand in that market can only be expected to be about as strong as last year, Daimler noted.

Overall demand for trucks in the emerging markets should grow only moderately this year, it concluded.

Yet a poll by consulting firm PricewaterhouseCoopers (PwC) of CEOs finds they are suddenly largely down about the global economy, with 40% expecting it to decline in the next 12 months.

The poll of 1,258 CEOs based in 60 different countries for PwC’s 15th annual global CEO survey entitled Delivering results: Growth and value in a volatile world also discerned that their confidence levels are down this year as well and lag slightly behind the levels seen across the total sample.

Still, nearly four-fifths of industrial manufacturing CEOs are somewhat, or very, confident of revenue growth over the next 12 months, although just 18% believe the global economy will improve and 71% expect to make strategic change in 2012 due those worries about economic growth, along with concerns about customer demand and competitive threats.

PwC also found that Industrial manufacturing CEOs are paying especially close attention to changing tax conditions because of high debts and deficits in developed economies, with 37% saying they anticipate they’ll change growth strategies as a result, compared with 29% of the total sample. Indeed, 17% of industrial manufacturing CEOs are “extremely concerned” about the increasing tax burden in countries where they operate – for while paying taxes is generally getting easier, the rules in areas important to manufacturing, like research and development tax credits, are often far from clear-cut.

That’s a lot to chew on for sure, but it all means we haven’t quite turned the corner safely yet where the global economy is concerned.

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