US Economy & Liquidity

The $ value of industrial output edged lower in April, declining to
4.1% measured yr / yr. Growth below 5% normally signals
development of pressure on profit margins and often lower
domestic profits. Since the value of production is increasing faster
than retail sales yr / yr, further weakness in production may
result as inventories may be pared down more. Retail inventories
are in decent shape, but 6% plus 12 month rates of increase for
wholesalers' and manufacturers' stocks stand out. The large
number of unsold homes remains dauntingly high, particularly
single family units.

Broad, credit driven liquidity increased by only 4.1% over the past
year, reflecting the blowout in the asset backed commercial paper
market. I like to compare this liquidity number to the change in
the $ value of production to get a measure of whether there is a
pool of excess liquidity in the economy. There isn't currently, and
that implies that the capital markets have no liquidity tailwind and
must rely on sideline cash. At this point, savings and reserves in
money market funds total over $3 tril., a tidy sum. But, remember
that the real economy competes for these funds as well as the
markets.

The growth rate of monetary liquidity remains constrained. This
ongoing modest expansion coupled with the slow growth of credit
driven liquidity continues to signal that the economy has mediocre
potential looking longer term.