Within the European Union, Germany is currently the strongest performer.  They are voicing a growing concern that Greece and their other southern neighbors (Italy, Portugal, and Spain) are beginning to drive the Euro, their common currency, down in value by borrowing in excess to support spending on social issues.  With no elected government running Greece and bond markets signaling growing problems in these other countries, we wonder just how long Germany can remain in the Euro.  Getting out would be quite difficult, very sour in a geo-political sense, and probably disastrous to global banking.  In the end though, Germany may see no better solution than exiting from the Euro.

Such disruption will ultimately be a lesson to any country which runs a continuous deficit in an attempt to redistribute wealth to the less fortunate.  This includes our own programs like Social Security, Medicare, and Disability.  As we watch Southern Mediterranean nations such as Spain and Italy collapse under the weight of similar promises to their own populace, we should guard against following a parallel path.  Continuing to spend huge sums generated by a printing press rather than actual labor and productivity has never ended well historically.  Pretending to be so wealthy that we can persist in doing so is surely a form of hubris.  The Greeks had a Goddess who punished folks with that quality; her name was Nemesis.  We must beware of her revenge upon our own nation should we stray too far down a similar unsustainable path.  Remember that the name America stems from Italy.

Demand is the antidote for the country’s economic troubles.  The purchases do not need to be from within our boarders either, but the rest of the world seems to be facing a similarly slow period and some of our major trading partners are already in outright recession.  So if the additional spending is to be done by domestic buyers, at least two large hurdles will need to be cleared.  First, Americans are still in the process of deleveraging.  According to a paper put out by the Federal Reserve Bank of Richmond in January 2012, debt as a percentage of disposable personal income was 113 percent in the third quarter of 2011; this is down from the peak of 129 percent in 2007 but is still higher than average and suggests Americans have more deleveraging ahead.  To put this in perspective, it was not until the turn of the 21st century that this number was over 100 percent, and before the mid-80s, it was below 70 percent.  The second issue adding to the consumption headwinds is the demographics of our country.  The baby boomers are at a stage in life when consumption is pared back as they enter retirement or save more in preparation for their post-work years.  Due to a lack of savings, many of them have extended their working years.  This is minimizing the job openings for younger workers with a higher propensity to spend.  Together, debt levels and demographics are constricting the conspicuous consumption that propelled the economy over the previous few decades.

As the summer temperatures and campaigns heat up, America is destined to hear about all of the remedies needed for the slow growth we are experiencing.  At Atlas, we will ignore most of the pundits and politicians since there is no quick fix to our problems.  This is a point in America’s history that will require patience, hard work, and savings; demagogues and ideologues will not cut it this time.  Our indicators help us track the former.  Fortunately we don’t need to monitor the levels of hot air as well.  (by C. Cox)

As we have seen recently, the pick-up in employment was generated by the private sector where payrolls rose by 130,000.  Average hourly earnings were unchanged as was the length of the work week.  The public sectors continue to shed jobs, peeling off another 15,000 in April.  While we appreciate a reduction in public sector payrolls can possibly help bring the country’s climbing deficit down a touch, we are concerned that the increase in private sector job creation is losing steam at a rapid pace.  The 130,000 gain seen this month is well less than half of the recent 277,000 January total, and that number has declined every month so far this year.

In spite of all this the unemployment rate fell to 8.1%, off another tenth.  This decline is attributable primarily to yet another drop (off 0.2%) in the labor participation rate to 63.6%, a level not seen since the recession in September of 1981.  That equates to a lot of folks who have stopped looking for work for various reasons and discovering what they are doing with all the extra time on their hands is no easy matter.  Some are opting to take Social Security, even if they must receive a haircut to the monthly payout by retiring early.  Others are going on disability, but there remains a large number still unaccounted for.  They all need to put food on the table.  Discovering how they do so remains a challenge.

This data can be fairly volatile so we also like to look at the annual pace of change.  From this viewpoint, productivity rose 0.5%, a gain of one-tenth from Q4’s 0.4% hike.  Labor costs climbed 2.1% for the year this time, a bit slower than the prior 3.1% annualized gain seen at 2011’s year end.  We are always concerned when the price of production begins to outpace the quantity of good made as this can be a harbinger of inflation, but on an annualized basis there seems to be little cause for worry about drastic price hikes at this time.

There are contrasting ways to view this quarter’s data.  Some will see it as a positive for labor since more hiring will be needed if output is to be increased.  However, one mantra of economics says demand leads labor, not the other way around, so any jump in hiring will need to see increasing demand before it can manifest.  To a degree, this increase will show up as higher retail sales and exports, and recent data in both categories has been favorable.  Unfortunately, adjusted for recent inflation, the 1.5% gain in compensation mentioned above deteriorates into a 0.9% real decline, despite the softer annualized data.  It will be hard to keep increasing domestic demand if spending power continues to fall this fast in the next few quarters.

More attention tends to be paid to the manufacturing component.  This happens for two reasons.  First, it is a much older series, so tradition helps it remain relevant.  Second, it measures an area of the economy that is more sensitive to the vagaries of the market cycle.  It is for the latter reason that April’s reading was so encouraging.  The increase put the headline figure at 54.8 from 53.4 in March, and it was higher than the slight slowdown the consensus was looking for.  The leading component of the indicator, new orders, was surprisingly healthy; it put in its 36th consecutive month of growth and picked up the pace as well.  New orders are important because they lead to actual output.  It is worth noting that throughout the month numerous Federal Reserve regional banks put out manufacturing surveys for their geographic coverage.  For the most part, these reports did not corroborate the national ISM data.  The ISM does not use the various regional reserve banks’ findings, so one of the polls may have asked the wrong set of companies.  There is not a conclusion being drawn here, but Atlas is aware of the differences.

ISM’s report on the larger nonmanufacturing side of the economy is not as old as the industrial version (it was first published in 1998 versus the 1931 roots of the manufacturing survey), so the service survey does not get quite the attention its counterpart receives.  Nonetheless, the report did manage to kick up some dust this go around as there was weakness in some key areas.  Service companies reported weaker activity, new orders, and employment.  The headline number was 53.3 versus 56 in March.  With most companies and jobs in America falling under the service umbrella, a slowdown in this indicator may be pointing to coming weakness in the economy, especially when one considers that service industries are not impacted as badly in a slowdown as goods producers.  Even in economic downturns things like haircuts or portfolio management is needed.

Between the two areas of the economy, the ISM is giving a mixed message.  Manufacturing appears to be growing faster than services which are trending upward at a slower pace.  The mixed messages of the two components of the economy during April may help explain the market’s slight pull back in the month.  These divergent paces add to an already uncertain environment, and hopefully, a clearer picture will begin to emerge over the next few reporting periods.     (by C. Cox)

Why this apparent disconnect between what is and how it seems, or what is wished for?  Maybe it’s the way our financial press spins daily performance.  Or maybe it’s the volatility today’s market are showing.  After all, daily moves of one hundred points or more are becoming commonplace.  But extremes don’t necessarily translate to profit.  In April the markets had a swing of one hundred points or more, sometimes substantially so, every single trading day! Despite these huge swings, the S&P 500 posted a negative return for the period.  To lift a line from Macbeth, our stock market has come to resemble, for various reasons, a tale “full of sound and fury, signifying nothing.”  And to complete the metaphor, the headline writers provide us with the “tale told by an idiot.”

Just because someone puts lipstick on a pig, that shouldn’t require you to kiss it.  Our job here at Atlas is first to do our best to protect your capital.  Given the readings so many of our indicators are producing, we currently find prudence to be the best course of action.  If compelling evidence begins to emerge arguing for a more robust approach, we will surely take it.  While fortune may favor the brave, it can prove both foolhardy and detrimental to your wealth.  Remember, the fellow Virgil had utter that sentiment died shortly thereafter.  Thus, at least for the moment we will opt for a more cautious strategy, thereby ensuring our ability to live to fight another day.

The most recent reading took a sharp turn down in March.  The Chicago Fed admits that this indicator can be volatile and suggests looking at the 3-month moving average in order to avoid being confused by the manic depressive behavior month-to-month.  The recent fall pulled the 3-month average down near the level that suggests the economy is moving at about its long run average.  The issue worth noting is the change in pace.  It went from a 3-month average reading of 0.37 to 0.05 in one month.  The recessionary benchmark provided by the Chicago Federal Reserve is -0.7.  We are still comfortably above the mark that the Federal Reserve Bank at the end of Route 66 considers recessionary, but the recent movement is in the wrong direction.

Consumption is the largest component of American GDP, and the recovery has been hampered by a weak housing recovery, so it is particularly interesting to pay attention to the subcomponent of this national activity index that includes each of these components.  As you may have guessed, it is not close to the levels considered normal.  In fact, while it has grown from the readings captured in the middle of the Great Recession, it is still weaker than the worst numbers of 2001’s recession.  The three month average of this section of the index has been stagnant for the five months starting in November, so any deterioration here will likely push the overall indicator closer to recessionary readings.  (by C. Cox)

While more accurate numbers are collected, it is worth looking at the ones we have.  Net exports, the difference between imports and exports, improved.  We exported 5.4 percent more during the period while only adding 4.3 percent to our imported purchases.  This means the trade deficit decreased, thereby subtracting less from the overall figure.  Also reducing the overall total, state and local governments as well as the federal government spent a combined $19 billion less in the quarter.  On the other side of the ledger, private domestic investment was up. This is a bit of a mixed story.  Non-residential investment fell as less money went toward the categories of “other equipment” and structures, but companies did put money to work in information equipment, industrial machines, transportation, and residential construction.  Inventories, the primary contributor to 4th quarter GDP, increased again in the first three months of 2012.  Additional items on the shelf do help the headline of the indicator but are not constructive if companies unintentionally add to their stock by misinterpreting consumer’s intentions to part with cash.

Consumers parting with cash are the primary driver of this complex system.  This spending falls under the category of real consumption expenditures and is the largest part of America’s economy.  The 2.04 percent jump in spending was helped greatly by a surge in purchases of new vehicles.  The increased spending is welcome, but it comes with concerns here at Atlas.  We like that consumers continue to spend, but the pace of spending cannot be supported by the current disposable income gains (0.1 percent in Q1), so Americans are saving less.  In 2010, the savings rate in the nation was 5.3 percent.  It fell steadily each quarter last year and is now at 3.9 percent.  This leaves little room for additional spending unless the pace of inflation adjusted income picks up.  Income can be supported by a faster rate of hiring, but with an economy growing at the current pace, there is cause for skepticism.    (by C. Cox)

Unfortunately, the details within the income portion of this report are not very robust as a disproportionate amount of the increase came in the form of transfer payments.  Private payrolls increased by $17.3 billion compared to $24.1 billion the prior month.  Government employees took home an additional $1.4 billion, and the self-employed managed to increase their income by $7.1 billion over the same period.  Finally, transfer payments made a substantial leap of $11.6 billion; within transfer payments, the increase to social security surged $6.8 billion. Contributions for social insurance only managed to increase by $2.5 billion, so for the month, the safety net ran a deficit.  Since August, social security payments have gone up just under 6 percent; that is not an annualized number.  Here come the baby boomers!

So sorry, for all of the income “improvements” mentioned above, the after-tax inflation adjusted figures do not seem hearty enough for Atlas’ liking.  Even with the large surge in transfer payments and the increase in government payrolls, real disposable incomes only increased by 0.2 percent. While it is an improvement over the 0.1 percent decrease seen last month, it is only the second positive reading in the last five months, and the first positive posting in 2012.  Ultimately, this figure will need to see a sustained up trend in order for Americans to consume a larger quantity of goods and services instead of just paying more for an equal number of items.  (by C. Cox)

Durable goods are those things expected to last three years or more.  Transportation equipment, especially airplanes, can skew this data radically from one month to the next.  For instance, in February Boeing said they booked orders for 237 airliners but in March they recorded just 53 orders.  This decline in such a big ticket item gets much of the blame for the big swings in both months.  If we subtract out transportation and defense spending (another volatile component) to get the core reading we see a much smaller 0.8% decline in March versus a 2.8% February increase which itself was revised upward substantially from the original 1.7% estimated hike.

This report also follows shipments of completed orders, an important data point in its own right since this is used to help calculate our nation’s quarterly GDP figures.  Here we saw a 2.6% increase following upon February’s 1.4% gain.  I suspect many forecasters will soon be raising their estimate for the first quarter’s rate of growth.  They had better hurry; the preliminary release of that figure will likely hit the street before the ink on their revisions is dry.