by Ron McWilliams
U.S. GDP did show a decline last week,
which in fact declined more than expected among analysts. Still, GDP
demonstrated growth. While vehicles pushed growth for the last few
quarters, evidenced by auto company earnings, we have also witnessed
growth in other areas. First and foremost is the fickle gas station.
A whole issue itself given ultimate infrastructure and potentially
closing North East refineries. For retail gas right now, prices seem
to be coming down in a fast manner. With all retail, it seems that
increasing prices to fuel profits arrives at reduced traffic, and
finally declining sales.
Otherwise stated, increasing prices
foil at a point of inevitable decline in demand.
From gas stations, building materials
and apparel showed up on reports recently and demonstrated advances.
Tracking earnings, building materials and apparel have yet to report
on a meaningful basis. Still, the numbers are encouraging.
Concerning, however, is the extent to which such companies created
profit out of increased pricing, as opposed to balancing price and
demand. Should pricing show an exceeding of demand, future positive
expectations will have to be adjusted south.
Essentially earnings expectations have
been declining in a manner that almost parallels economic numbers.
The last surprise was GDP and employment in Q4 2011, which were much
higher than anticipated. All due to auto production, building
materials and their extended reach into down-stream economic support.
Looking at recent reports from durable
goods orders and industrial production, both showing a slowing, we
might be witnessing an organic decline in the drivers that created
the Q4 surge in production. That being cars and home improvement (or
building materials, given no real advance on home numbers).
Along with Q1 industrial and durable
goods reports, we have seen an employment situation report that
revealed heavy and noted declines. These declines came from general
merchandise and department stores. Against car and gas station causes
of employment, conventional retail seems very cautious. To the point
of shredding jobs, based on appearances.
On top of these economic results, one
must consider the transition in U.S. gas and oil production. Noted
previously on this space is gas production in this country is trying
to shift into oil plays. Oil plays were already exceeding internal
infrastructure capacity in its effort to move product to market.
Should the gas rigs once operating on gas plays turn into added oil
production......where are the rail cars? The pipelines and their
direction of flow have proven incapable of moving existing, let alone
further increasing, volumes to market. Perpetual gluts at the Cushing
Hub is first evidence.
Second evidence is the insecurity of
East Coast refinery capacity with its inability to leverage U.S. oil
production over Brent petroleum pricing. If East Coast refineries can
tap U.S. production, obviously their margins will improve, their
profitability will improve, and they will become good business
propositions. Currently, due to refining at Brent prices, they are
closing their doors.
From potentially waning car and
building material sales, and reasonably expected declines in overall
natural resource and refining jobs, one might be seeing the future of
U.S. economic indicators.
Should declines be realized in car and
building material sales, along with a net loss of natural resource
production, not only will we witness a loss of jobs. We will also
witness declines of utilization, capacity, capital expenditure and
company earnings.
Encouraging is the growth in consumer
credit, especially its non-revolving component. Banks are lending,
but not in a meaningful way for real estate, appears to be too much
“shadow” inventory. Symbiosis has revealed itself between banker
and consumer with cars and perhaps home improvement.
Right now, further transition might be
telling among the BRIC nations, their currencies and extent of their
continued demand. We can only see where it all goes from here.
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