Archive for February, 2010

The Wizard of Cause

Friday, February 26th, 2010

The cyclical nature of a variety of phenomena is so pervasive one might conclude the only constant is change.  Here at Atlas Indicators we track a multitude of such cycles, primarily economic in nature, to assist us in devising a portfolio we hope will deliver relatively consistent, hopefully positive, results.  Some cycles, however, operate on a grand stage not suitable for such daily monitoring.  An example is the periodic shift from an environment favoring business and capital to one where labor is predominant and back again.  Each side of this equation may enjoy a dominant period lasting twenty years or more.  Currently we feel the baton has been handed off to the populist side as evidenced by voter unrest, restrictions on banker’s pay, and a general dissatisfaction with government policy.  The Federal Reserve is becoming a lightning rod for this malaise.  While arguments can be made both pro and con concerning the efficacy, even legality, of a private central bank, reason may not matter should events take too dark a turn.  While I don’t anticipate (yet) unruly mobs storming through downtown Manhattan reprising their role in the French Revolution, it should be noted that Bloomberg recently discussed the phenomenon of some Wall Street executives applying for concealed weapon permits.  Should events here and abroad conspire to rekindle the flames just recently doused that seemed set to cause the global banking system to melt away, an army of pundits will surely rise up to assign blame in all directions provided their own constituency remains immune.  It may not matter how accurate the argument is; a glib speaker can carry the day when conditions allow an opinion to flourish.  There are many who feel the creation of our Federal Reserve system was engineered by a secret society of sorts bent on creating a new world order which they alone would control by retaining a tight grip on the purse strings of global lending.  Popular books like “The Creature From Jekyll Island” help promote this view.  The emergence of Tea Parties and the resurgence of Ron Paul’s Libertarian views lend it credibility.  An ongoing series of financial crises foment these feelings that something has gone horribly wrong with a model that seems to require ever more lending to solve problems created by too much financial leverage.  Is it too soon to ask, “Can Central Banking survive Populism?”

January’s Federal Deficit

Thursday, February 25th, 2010

The U.S. Treasury Department felt they had some good news regarding our federal deficit for January.  It slowed its rise to a mere 8.8% clip, a huge drop from the 16.8% rate of acceleration we saw in December.  If you find yourself blinking in amazement right now, allow me to explain that they arrived at this conclusion by calculating we overspent by a mere $42.6 billion in the month.  Miracle of miracles!  This was accomplished by shelling out substantially less in TARP funds to needy bankers and changes in some of the mortgage-backed securities the government has been scooping up.  These mortgages subtracted from the deficit as a result of prepayments and bankruptcies, the latter influence not proving as uplifting as the former.  Now some of you might point out, correctly I will add, that what this report really tells us is that we are in a deep hole, continuing to dig, but in January we switched to a smaller shovel.  Not to worry.  Some nuances in the calendar also contributed to the diminution of debt, and here at Atlas Indicators we fully expect to see this reverse with next month’s figures.

January’s Leading Economic Indicators

Wednesday, February 24th, 2010

The Conference Board’s January Leading Economic Indicators report rose just 0.3%, a marked slowdown from the 1% jumps they recorded in November and December.  This slowing could be echoing the same conclusion which another of our indicators, the Economic Cycle Research Institute’s report, has also recently reached.  Two components of the LEI report which subtracted from the total were declining building permits and increasing unemployment.  A drop in money supply also gave the totals a downward bias, raising concerns that any action taken by the Federal Reserve to reverse their quantitative easing stimulus programs now will exert too negative of an effect, nipping the nascent recovery in the bud.  Hand in hand with that measure is the yield spread which, by itself, was the largest contributor to growth in this report.  It reflects the flat short-term interest rate policy the Fed has been pursuing and may soon begin to reverse should our central bank start to tighten in an attempt to avert a serious bout of inflation.  Another positive in January’s report was slower delivery times, which suggest orders for stuff are increasing faster than expected, causing production to fall behind.  This is considered a good thing since it implies factories will have to play catch up, increasing run rates (i.e. capacity utilization), purchases of raw goods, and hiring.  This is given additional credence by an increase in the factory workweek, another component of the report.  As the ECRI was quick to point out, a slowdown is not the same as an end to expansion.  It is a normal part of most recoveries.  While the initial surge out of the depths of this Great Recession may be coming to an end, there is still plenty of space ahead of us into which the economy can continue to grow.

Industrial Production in January

Tuesday, February 23rd, 2010

The Federal Reserve’s industrial production figures for January were encouraging.  Growing at the headline level by 0.9%, the real story is about composition.  In December we saw a strong total but it was all about the horrible winter weather as increased production from utilities accounted for virtually all the gain.  This month all three of the major components recorded robust gains with utilities continuing their rise by tacking on another 0.7%, mining climbing 0.7%, and the closely watched manufacturing sector jumping a full 1.0%, a welcome comparison to its slightly negative performance at the end of the year.  On a year-over-year basis industrial production has now turned positive, showing an annualized 0.9% growth rate, slight, but miles ahead of the 13% decline we were recording at the mid-point of last year.  This momentum alone is enough to validate our raising this particular indicator another notch to the nine o’clock position.  Further, there is still plenty of room for growth without necessarily igniting inflation.  While it gained 0.7%, capacity utilization is just 72.6%, still suggesting the recovery from this recession proceeds at a slow pace.  Here again, though, the expansion is both welcome and encouraging.  Next month’s data will likely be confusing given the disastrous weather that swept across the nation in February, but we expect to see the improving trend manifest itself again in the reports for March and April barring some outside and unforeseeable event.

Retail Sales in January

Monday, February 22nd, 2010

Last month, even in the face of disappointing numbers, we said we were optimistic that an improving trend in retail sales seemed to be developing.  January’s totals validate that assessment, rising .5% at the headline level and .6% at the core which excludes auto and gasoline sales.  Further, December’s numbers were revised up a bit although, at minus 0.1%, they still contracted.  On an annualized basis sales are still negative, off 4.7%, extending a losing streak which has helped craft the label of Great Recession this global economic slowdown has earned.  The core figures have fared no better, down 4.6% year-over-year.  However, recent changes in some of the employment statistics cause us to retain our rosier outlook and we’ll move the needle for this indicator up another notch to the nine o’clock position, but with some measure of trepidation.  What we seem to be seeing is a cautious consumer looking for those bargains expected to appear in the post-holiday season, as well as gift card redemptions.  Those influences have likely run their string and we’ll need to see impetus arise from other quarters if the consumer is to continue being inclined to spend.  This is when true recovery must ignite, allowing outside stimulus programs to end and growth to become self-sustaining.  Will it happen?  We’ll let you know.

Rain Delays

Friday, February 19th, 2010

Weather has been creating a heap of problems all over the place.  The Winter Olympics in Canada are suffering from a lack of snow.  I thought there was some kind of universal constant embedded in the equation Winter + Canada = Snow.  Apparently not, yet during this debacle the United States experienced one day when 49 states recorded a measurable amount of snowfall!  While I do not intend to belittle the pain and suffering so many have experienced by these freakish conditions, for us here at Atlas Indicators, this anomaly will wreak havoc on our data for month’s to come.  The Labor Department’s household survey was taken during the week when blizzards had their greatest impact on the East coast, likely seriously tainting the data.  Municipal budgets were seriously depleted by the extraordinary expenses incurred for roadway maintenance.  Figures we hold dear such as hours worked, the hiring of temporary help, and unemployment filings will all be turned cattywampus as millions could not get to their offices, factories, or claims centers.  Retail sales will probably prove all topsy-turvy as things normally bought won’t be since stores were unable to open, while other items like food sales may soar, reflecting the panicked buying we saw as the populations of entire states filled their pantries in anticipation of the coming storms.  Abnormalities recorded in February may see a strong reversal the next month as things return to normal.  Since we won’t see February’s data compiled and reported until March, and March’s totals delayed until sometime in April, volatility will likely appear in all these figures and more.  We’ll do our best here to work through these obstacles as they come.  One good thing did happen though: the government was actually shut down for four days in February.  Despite the storms, that was possibly the safest we will be until Washington adjourns for the summer.

January Purchasing Managers’ Report

Thursday, February 18th, 2010

The Institute for Supply Management said the manufacturing side of our economy grew at a 58.4 point clip, the sixth consecutive month above the 50-point breakeven level.  New orders have increased in each of the past four month, setting a blistering pace of improvement on the back of a substantial jump in demand for products we export.  This extremely positive report will likely have far-reaching ramifications, including an impetus for both renewed hiring and higher wages, leading to a possible pickup in retail sales.  All of that can start to feed back on its self, resulting in what economists refer to as a “virtuous cycle” where positive growth in one area sparks the same in others which, in turn, boost the original catalyst even higher, and so forth.  Further impetus for such  a cycle may seen in the sharp jump order backlogs posted, rising to 56, and possibly beginning to eat into the productivity gap which still remains to be filled as much machinery sits idle.  This potential for increased capacity utilization should boost corporate profits and hopefully will provide some support for equity prices.  On the other hand, while prices paid at the wholesale level are skyrocketing, there is no definitive sign these costs at the raw and intermediate goods level are being pushed through to you and me at retail stores.  If that can’t happen, then this promise of future profits will get squeezed.  Inventories still came in below the 50 point level so destocking remains the order of the day, one major factor that continues to work against the manifestation of a self-sustaining virtuous cycle.  Employment rose to 53.3, but until we begin to see both an increase in inventories and capacity utilization, it will not likely show robust improvement.  The non-manufacturing ISM index, which was detailed in a subsequent report and has been swinging back and forth between a positive and negative reading for some time now, showed a slight 0.7 point gain, bringing it back above the neutral zone to 50.5.  New orders rose strongly here as well, gaining well over 2 points to hit 54.7, a level higher than any seen in more than two years.  Orders rose, business activity continued to increase, although at a softer pace, but employment, which did gain one point, continued to contract, posting 44.6 for the month.  Inventories fell substantially while prices paid continued moving up aggressively.  This strong increase in costs seen within both halves of the report is worrisome.  If it continues, look for interest rates to move up a bit to counter-balance the inflationary expectations that will no doubt result.