Archive for June, 2010

Dieting

Wednesday, June 30th, 2010

I suppose most Americans have been on a diet or two. I myself have tried several, even made up a couple. I once decided a cinnamon toast diet was a good idea and ate properly prepared loaves of bread for a couple of week, but it didn’t work. What did work was a strict regimen of frozen M&Ms, but for reasons upon which I choose not to elaborate, I quit that one too. Anyway, the whole point is we generally decide to go on a diet when we have consumed way too much for way too long. Currently, America has found itself in a similar predicament. Individually and as a nation we have gorged ourselves with more goodies than we could actually afford, using ever increasing mountains of debt to keep consuming beyond our means. Now we are even borrowing to pay the interest on what we have previously borrowed, and the bills seem to be growing faster than ever. But it isn’t just here that we see this happening. The same song seems to be playing in most developed nations. Along with us, some other central banks are also resorting to something called quantitative easing to prevent this house of cards from collapsing in a tsunami of liquidation and bankruptcy. Quantitative easing is another fancy word for spending money that doesn’t exist of course, so it sure seems like more of the same gluttony to me. They say, “It isn’t over until the fat lady sings.” Governments seem to be attempting to avert a sad ending by having all the extras keep cramming her mouth full. But the climactic aria must still be heard eventually, and with all the additional debt being stuffed down her throat, this diva seems set on a course that for sure is bound to have an ugly ending. We may all partake of her next diet.

April Trade Balance

Tuesday, June 29th, 2010

The Commerce Department released April’s trade balance report, and it continues to be anything but balanced.  For the month we exported $148.8 billion worth of goods and services while importing roughly $189.1 billion, giving us a widening deficit of $40.3 billion.  While the deficit figure is alarming, it is nothing new, but what lies beneath it that can be most disconcerting.  April’s imports fell by $800 million while exports fell $1 billion from the month of March.  In other words, although we bought fewer foreign goods, other countries reduced their consumption of our goods by even more.  The export trend is being hindered by a continued strengthening of the U.S. dollar as global demand for it as a safe haven during these times of financial turmoil makes our goods more expensive in other countries.   As our currency strengthens, goods produced outside of our borders become relatively cheaper, causing some vendors to choose them over domestically made merchandise.   Becoming less competitive is not exactly what our recovering economy needs.  Year-over-year the goods and services deficit has gone up by about $11.8 billion.  That is because our exports have grown by roughly $25 billion while our imported consumption has gone up about $36 billion.  Still, looking further into the report we can find a couple of components that provide a silver lining.  The imported consumer products fell while imported capital goods grew.  This suggests to us here at Atlas that companies are bringing in less expensive goods that will have their value enhanced by American workers.   Imported consumer goods, which have already been processed, only satiate our need to consume and do little to boost the economy’s long-term vitality.  Nonetheless, this indicator remains in the six o’clock position and will continue to do so until the global economy looks dramatically different.

May Retail Sales

Monday, June 28th, 2010

The Commerce Department released May’s retail sales data by first revising April’s surprisingly strong report to up 0.6% from 0.4%.   In May retail sales took a breather, the first month since September that this figure has contracted, with the overall figure down 1.2%.    There were a few bright spots in the report.  Non-store retailers were up 2%.  These are sales that come from places other than brick and mortar stores, the Internet and door-to-door vendors for example.  Home furnishings and furniture sales were also up, rising 1%, possibly reflecting the after-effect of previously reported home purchases now being furnished.  But building materials went from the head of the class last month to the corner with a dunce hat as they registered their biggest loss since tracking began, falling 9.3%.  Could this come as a result of the expiration of our government’s home buyer stimulus program?  While we don’t take any single data point, especially one so heavily influenced by a single component, and consider it a trend, we will remind you of how important retail sales are when looking for signs of Gross Domestic Product (GDP) growth.  We are nearing the end of the second quarter and will be waiting for the advanced release of GDP the end of July.  While we wait, remember that retail sales make up the largest component of Personal Consumption Expenditures (PCE), and PCE happens to make up roughly two-thirds of GDP.  PCE was about flat in April and now retail sales have fallen in May. Where will that leave GDP?  We do not know, but we may be seeing signs of how the economy will behave without the aid of government stimulus.

New Frontier

Friday, June 25th, 2010

Here at Atlas Indicators we often remind folks who receive our morning missive that the consumer is the backbone of Gross Domestic Product and economic well-being in our nation.  What we buy ultimately drives over 70% of the growth our country experiences every quarter, year in and year out.  Thus it pains us when we see that foundation challenged by various conditions which have been developing of late.  Unemployment is a biggie since folks tend to cut back on their purchases when they run out of money.  A diminishing lack of available credit is putting a damper on the spending habits of those who wish to persist despite being broke.  Globally, there are also obstacles we must confront.  Europe’s debt woes mirror our own to some extent, giving lenders additional heebie-jeebies that make them reluctant to lend.  Now China says they’re going to let their currency appreciate against the dollar which will tend to crimp the supply of bargains we have seen flowing across the Pacific into our local Wal-Mart and Target stores.  Finally, the baby boomers are starting to save for their retirement, a factor that removes demand from the system just when it is most needed.  What we must do is find a new market for our goods.  We need to discover a new continent full of amiable natives who will want rafts of stuff they never have heard of before.  Rather than wasting all the stimulus money on temporary prods to housing or small business loans, the Obama administration should channel it toward an all out effort to find such a new market.  Columbus did it with a handful of little boats and a sextant.  No one would argue that today we have advanced technology well beyond that level, what with satellites and GPS thingies.  How hard could it really be to develop a huge new market of consumers?

Core Samples

Thursday, June 24th, 2010

Wholesale prices in May, as measured by the Labor Department’s producer price index, fell 0.3%, the third decline in the last four months.  Declining prices for both food and energy, both quite volatile by themselves, were the primary cause.  Apart from fundamental economic influences, energy prices are often swayed by political events while food can be influenced by weather.  Hence economists also look at the “core” PPI which removes these two components of the “headline” number.  It climbed 0.2% in May, mirroring the jump in April.  On a year-over-year basis the headline PPI has climbed a robust 5.3% while the core is up just 1.3%, a much weaker figure.  We use the PPI, especially the core numbers, as an indicator which helps forecast the potential direction of future inflation at the consumer level, either up or down.  Within the report we also find figures for crude good (also called raw materials) and intermediate goods (or goods-in-process).  Core crude fell a strong 1.6% in May while core intermediates rose 0.3%.  Nothing in these numbers can be construed as inflationary.  Underlining the point is our currently high unemployment and low use of total manufacturing capacity.  All in, these three data points we follow here at Atlas suggest it should be a long time before the Fed sees any need to begin hiking interest rates.

Public Pension Promises

Wednesday, June 23rd, 2010

In the past, retirement planning has been a rather simple affair.  You add up everything a person has, estimate how much and how fast they can add to it, multiply that by some imputed rate of return, subtract a similar factor for inflation, and select a date in the future when they will retire.  What you come up with is how much they will have when they stop working.  You then apply similar calculations to that balance to determine how much they will be able to spend each year or how fast they will run out of money at a predetermined draw-down rate.  Pension plans, even Social Security, determine their liabilities to future retirees in much the same way.  Unfortunately, many of them, including a vast number of state pensions, continue to project their work force will retire in 30 years even though a large cohort of baby boomers expect to leave in about half that time.  This is akin to buying a home with a 30-year fixed mortgage only to discover you have just 15 years in which to pay it off.  Worse, the general assumption these pension plans (including really big ones like CalSTRS) are making calls for a steady 8% return on contributions, but the real world is delivering substantially less.  Thus we find, according to the American Enterprise Institute, that these unfunded pension liabilities in the public sector amount to some $500 billion dollars using the current projections, and it could possibly be as much as $3 trillion if today’s rates of return were used.  For these pension promises to be delivered, states will need to raise an enormous amount of money soon.  Instead, they just keep using the same flawed data.  I suppose everyone has to believe in something, even when they know it isn’t true.

May’s Manufacturing

Tuesday, June 22nd, 2010

May’s manufacturing index from the Institute for Supply Management (ISM) notched its tenth consecutive month of growth although the pace at which it is occurring slowed slightly.  Coming off a robust 60.4 reading in April, the manufacturing index furthered its progress with a reading of 59.7.  New orders, which provide an insight into future production, continued to advance rapidly, the third monthly increase in a row, at 65.8.  Inventories contracted for the sixth of the last seven months as May posted a 45.6 level for this sector of the report, the lowest reading since December, 2009.  April had similar new orders and inventory figures, providing a perfect environment for production in May and it swelled above 60 as well, the third month of robust growth for this component.  Since workers are needed to fill more new orders and to rebuild shrinking inventories, employment growth hit its highest point since May 2006.  There is also a non-manufacturing component included separately in the ISM indicator.  While it is not as sensitive to the business cycle, it represents a larger portion of our economy and is worth considering.  This report also points to growth, matching April’s rate of expansion at a reading of 55.4,  indicating more purchasing managers reported higher activity than those reporting lower.   One point worth noting is that the employment component here moved above the break-even mark of 50 for the first time this cycle.  It did not blow past 50 but came in at 50.4.  This could still prove to be significant though, since about four-fifths of the jobs in this country come from industries outside of manufacturing.