Archive for September, 2009

August Producer Prices

Monday, September 21st, 2009

The Department of Labor reported the cost of goods at the wholesale level jumped 1.7% in August as measured by their headline Producer Price Index. The strength of the increase was a surprise, more than double the consensus forecast, and came primarily from the energy component which saw prices pop up 8%, led by a huge 23% spike in gasoline. We stated in last month’s update to this indicator that this would be a probable outcome if the upward pressure on energy prices persisted. Prices at the pump still seem to be rising, so we may see more of the same next month as well. Still, year-over-year, the headline number is down 4.3%, leading us to keep the needle on our indicator page pointing down. Subtracting out food and energy prices to get the core number paints a different story. Here the monthly gain was .2%, much closer to expectations. As we suggested it might last month, the government’s Cash for Clunkers program gets most of the attribution for this increase. The Y/Y change at the core level is a positive 2.3%, reversing the headline trend, and likely reflecting more of what you and I experience day to day. As increasing food and energy costs filter through the pipeline, this number may accelerate a bit as well. If so, we will be watching interest rates for signs of inflation. Should they appear we intend to adjust the portfolios we are managing accordingly.

July Global Trading

Friday, September 18th, 2009

Our trade deficit grew much worse than expected in July, increasing to $32 billion as imports of goods not directly related to oil jumped. A 2.2% gain in our exports was swamped by a 4.7% increase in purchases made by American firms from other countries. While auto imports rose, likely a result of the government’s Cash for Clunkers program, there was a substantial increase in both capital equipment and consumer goods as well, according to the Commerce Department. Oil played a minor part as both the price and quantity brought into the country increased somewhat, but the overall effect was relatively small. The big take-away from this report is the suggestion that businesses may be looking for the recovery from the current recession to begin in earnest soon as they seem to be preparing to increase capacity. If so, it could lead to a huge rebound, given the record low rates of capacity utilization we are currently witnessing. Possibly, however, they are instead just seeking to modernize production as competitive pressures grow stronger globally. Still, money is being spent, which is a vote of confidence of sorts. Viewed over a longer-term time horizon, and underlining the severity of this global recession, imports have declined year-over-year by 30.4% while exports are down 22.4%.

Dandelion Bouquet

Thursday, September 17th, 2009

Data, somewhat cadaverous by nature, must be brought to life by those who massage it.  Thus we have recently been regaled by a variety of economists, all explaining how down is really up.  They will point to an indicator, unemployment for example, and opine since it fell to 9.4% of the population in July versus 9.5% the month before, we are actually witnessing a form of growth since the negatives aren’t compounding at as rapid a clip as they once were, often just weeks or months ago.  They then proclaim these results are yet more confirmation of the green shoots theory: that somehow a diminution in the rate of decline must lead inevitably to the conclusion recovery will soon be visible to the rest of us.  Why don’t they apply this same logic to positive numbers?  Could a decreasing rate of growth be seen as contraction?  Consider the Conference Board’s Leading Economic Indicators report which rose 1.2% in May over April, .8% in June versus May, and only .6% in July from June.  Are these signs of contraction, harbingers of a resumption of the current recession’s ferocity?  Despite the well-know unreliability of the LEI as a consistent reference to future economic performance, I really don’t think that conclusion would be an accurate one.  At the same time, I doubt some of the signs of incipient growth about which pundits hold forth will hold much water either.  We saw unemployment again reverse direction, rising to 9.7% in August, and must all be wary lest these green shoots turn into a handful of weeds.

How to Run a Bank

Wednesday, September 16th, 2009

In China, a real estate market similar to ours is still rather new.  Reforms in the mid-to-late 1990s began to open what was a state-run system to private developers and home owners.  Investor’s Business Daily recently published several interviews with Chinese real estate tycoons.  One of them, Sam Crispin, the managing director of a Shanghai-based property investment management firm said, the “demand to sustain building and development activity for the next 15 to 20 years” will come from an estimated migration of about 300 million people from rural to urban centers.  Harry Lu, the president of Century 21 China pointed out how rapidly his firm, which entered the country in 2000, has expanded; after just nine years, they now have 1,300 offices.  Richard Gao, manager of Matthews China Fund said, “Before 1995 we never heard of mortgages.”  About half of today’s buyers still pay cash and the rest, according to Gao, “tend to pay as much as they can for the down payment.”  The Chinese seem to shun borrowing and debt accumulation.  No one can expect to run a bank like that and still make tons of Peking bucks.  Not if they want to earn a fat bonus every year!  Maybe American bankers can teach them a trick or two.  Or should we be taking notes instead?

Nightmares Are Dreams Too

Tuesday, September 15th, 2009

The government rarely dreams up a program which demonstrates such apparent success as the recently concluded “Cash for Clunkers” program.  T.V. news showed a constant progression of excited buyers turning in old cars to finance new ones, using the government’s cash, your cash to be exact, as an incentive.  Bloomberg reports 690,114 cars will have been bought under the program, costing the taxpayer about $2.870 billion.  Let’s look at some of the ways the government has helped stimulate us.  Selling so many cars in such a short while obviously makes one wonder where all the buyers came from.  An economist might tell you they came from the future.  Tomorrow’s buyers lined up to take advantage of today’s incentive.  So who will be buying tomorrow?  Possibly not as many folks as we would see under normal circumstances.  Also, at a time when trends like job insecurity and stagnating wages work against debt accumulation, the program spurred folks to take on more debt by financing an asset virtually guaranteed to lose value almost every day they own it, despite having to pay constantly for its use and maintenance.  Before the program was initiated, car companies were trying to redesign their factories and work force so that they could compete effectively in an environment of higher energy costs and emission standards.  They will now have to redirect those efforts temporarily to replenish inventories of specific models.  What models were sold?  Apparently the best seller was a Toyota, with Honda coming in second.  In fact, four of the top five favorites were foreign.  So the plan provided an excellent subsidy, especially for Japanese and Korean car makers.  Good call.  American made vehicles did have a strong showing in one category however; apparently the top ten surrendered models were all manufactured domestically.  Be careful when our government dreams these things up; they often can turn into nightmares.  Over the next couple of months we’ll get to see if this program actually has legs, or is just a here today, gone tomorrow phenomenon.  It will be an important observation providing us clues as to what we may expect when another incentive plan, the “Cash for Shelter” stimulus which offers tax credits when buying a home, expires at the end of this coming November.

August Underemployment

Monday, September 14th, 2009

Payrolls in August per the Labor Department declined again, the twentieth consecutive drop, falling by 216,000 in the month, with downward revisions to prior data adding another 49,000 to the list of unemployed.  This caused the unemployment rate to jump .3% to its current 9.7% level, a 26-year high.  Losses were found in every category except education and health services.  Average hourly earnings, with a boost from the recent hike in the minimum wage, rose .3%, providing households with a bit more in earnings.  Unfortunately, the average workweek, another component of the report we consider quite useful for forecasting future retail sales here at Atlas Indicators, remained unchanged at 33.1 hours.  Of equal interest to us, but generally given short shrift by the media, is what the Bureau of Labor Statistics calls U-6, but is known on the street as the underemployed.  It includes the total of unemployed folks plus all “marginally attached” workers and those employed just part time “for economic reasons.”  Marginally attached workers are defined either as people who are neither working nor looking for work, but indicate that they do want a job and had been looking for work sometime recently. Included in this category are those called “discouraged workers” who give a job-market related reason for why they’re not actively looking for a job.  Persons employed part time for economic reasons are those who actually want to work full-time but have had to settle for a part-time schedule.  The underemployed now make up 16.8% of the workforce, a dire statistic indeed.  It may be quite a while before satisfactory jobs for all of them can be found.  Until then, their reduced earnings will continue to be a drag on consumption and ultimately on the GDP of America.

Second Quarter GDP

Friday, September 11th, 2009

The preliminary report issued in July by the Commerce Department for America’s second quarter Gross Domestic Product remained unchanged when they published the first revision in late August.  These revisions, showing that the bottom line stayed at down 1.0%, actually proved to be a welcome surprise since most forecasts were for additional weakness.  Last month’s revision to the first quarter’s data of an additional .9% drop, leading to a 6.4% total decline, provided plenty of evidence of that weakness, but is rapidly becoming old news as signs of strengthening continue to pop up in various other releases.  The string of negative quarterly reports we have suffered through left little doubt about the severity of the recession we have been experiencing.  Newer data which will have an effect on the current quarter are showing traces of a turn, one echoed by many of our indicators here at Atlas, and we are adjusting portfolios accordingly.  While remaining vigilant, we hope to see an end to this recession come soon; possibly it has already begun.  How strong a recovery we will enjoy remains an open question.