ISM Services CONTRACTION!!!

Oops..... 48.7 - that's contraction in the services sector folks, and very not-expected.

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.

Contraction in services is a problem - a big problem, considering that services are more important (in terms of contribution to GDP) than goods these days, and have been for quite some time.  This strongly implies that the so-called "recovery" was fueled not by private activity but rather by "pump priming" that is now wearing off.

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.

We should also be concerned about the prices index.  Specifically, increasing prices in front of employment gains will stunt if not detonate employment recovery.  The simple reality is that hammering unemployed people with higher prices is not conducive to economic recovery.

Who's expanding?

Other Services; Health Care & Social Assistance; Construction; Finance & Insurance; Retail Trade; and Information.

Health care, no surprise.  Construction is a bit of a surprise.  F&I?  Yeah, nice bubble you got there.  Retail trade?  It's Christmas.  Information?  Ok.

But the rest are bad news:

Real Estate, Rental & Leasing; Management of Companies & Support Services; Mining; Arts, Entertainment & Recreation; Public Administration; Accommodation & Food Services; Educational Services; Wholesale Trade; Transportation & Warehousing; Professional, Scientific & Technical Services; and Utilities.

Uh, wait a second.  Construction up, Real Estate down?  Hmmmm... someone's wrong on that one.  I'll bet the construction folks are going to get an ugly (and painful) surprise.

The anecdotes are interesting too.  The most important:

"Capital markets remain very tight; lenders are not releasing funds for development projects, limiting expansion." (Accommodation & Food Services)

Right.  The reason for this is that The Fed's policy, ratified by the government playing handmaiden with them (and they to The Government) has been to guarantee credit expansion and support only for large financial institutions.

But we're in a debt trap, as I have repeatedly shown, and which this chart clearly shows:

Debt levels have to come down!

But - if we simply contract all liquidity the economy will utterly collapse.  Contracting back to a level that can be sustained by earnings is prudent.  Throwing it all in the fire and burning it to the ground is not.

The issue is evident when you look at the break-out chart on the debt:

The proper policy response is to force the contraction of "Financial Instruments" and "Household" credit - that is, the so-called "speculative and trading credit" side of the debt balance sheet, along with the "pulled forward demand" game.  Then you use some of that (but not all, and definitely not more than all you took back!) to help Main Street.

If you pulled in outstanding credit to $40 trillion - cutting back financial instruments by half (total of $8 trillion) and Consumer Credit by 20% (about $3 trillion) we would go a long way toward re-establishing credibility.  More importantly we would get somewhat reasonably-close to the level of debt leverage that existed around the year 2000, which while still too high, would probably be enough to keep the Debt Monster from eating us.

If we then prevented credit aggregate growth (through liquidity control, which is The Fed's job) until GDP caught up and got debt-to-GDP levels down to around 150% in the system (this would take a couple of decades if done responsibly), we would have re-established global credibility, the dollar would be strong and our financial system safe and secure.

Wall Street would scream but Main Street would roar with prosperity.

There's your solution folks.  It takes only will - not ability.

More on this later once I can clip up the Bernanke BS from today's hearing.