Archive for July, 2010

Kick the Can

Friday, July 30th, 2010

Keynesian economics is currently in fashion, both with the world’s central banks and economist galore.  Many would argue it has never gone out of style since first being proposed to FDR as a solution to our nation’s woes during the Great Depression.  Within this philosophy the idea gaining the most traction holds that when citizens stop spending their money, the government needs to step it and spend it for them.  This stimulus will last only as long as is needed to jump start consumption by the private sector once again.  Thus, depressions are avoided, recessions ameliorated, and life can proceed in a fairly normal fashion year-in and year-out.  When the great liquidity crisis hit in early 2009, individuals and businesses hunkered down; a great freeze began to move across the global landscape.  Washington scrambled to provide liquidity via stimulus programs like TARP, then added to them as seen fit.  Thus we have had incentives to buy cars, homes, durable goods for those homes, and so forth.  Each of these tax-payer funded plans was intended to stimulate demand in a government controlled deus ex machina fashion, expecting the public would miraculously continue their feeding frenzy once the financial chum stopped.   Alas, each time the spigot was turned off, the buying stopped.  So far, rather than generating a solution, the government has succeeded only in kicking the can further down the road.  They had hoped to buy time, but the deficit grows ever larger and no clear recovery is yet in sight.  Perhaps they should remember one of Keynes’ oft-quoted aphorisms, to wit: “”Markets can remain irrational far longer than you or I can remain solvent.”

College Graduate Dropouts

Thursday, July 29th, 2010

The percentage of unemployed fell to 9.5% in June according to the Labor Department.  Behind this encouraging headline lies more sinister data.  Despite private payrolls increasing a less than forecast 83,000, overall payrolls declined by 125,000 as the government laid off 225,000 temporary census workers.  How could unemployment drop when the number of unemployed is rising?  The simple answer attributes this discrepancy to a 652,000 drop in the size of our labor force.  Where did all these folks go?  They’re still around; they just stopped looking for work after too many discouraging rejections.  The underemployment rate is now 16.5%.  The way it’s figured, if you haven’t looked for work in the last four weeks then you’re not unemployed.  What are you? Retire maybe, or something else altogether.  How about the huge influx of college grads just hitting the street, where are they?  Apparently they didn’t even try to find a job which means we don’t count them either.  With their older sibling who graduated last year still looking for employment, many of them seem to have dropped out of the workforce before even getting into it.  Looking forward we see 339,000 temps still working on the census; they will be let go in the months to come as well.  Unemployment does not seem to be positioned for a rapid improvement any time soon.  Further, both average hourly earnings (off 2 cents to $22.53/hr.) and the average workweek (down .1 to 34.1 hrs./wk.) fell in June.  We will find out soon just how much of an impact that will have on both retail sales and personal saving

Falling Up

Wednesday, July 28th, 2010

The Institute for Supply Management (ISM) reported that June was the eleventh consecutive month of growth in its manufacturing index.  However, the sequence of reports suggests that while production is still going up, the rate of change is falling. In other words April, May, and June showed manufacturing readings of 60.4, 59.7, and 56.2 respectively.  All three months were above the breakeven mark of 50, thereby showing growth, but the pace has been decelerating.  Within the report, new orders make up the largest part; they also continue to expand at a slower pace.  This is important because new orders turn into future fabrication.  Production fell up as well in June, going from 66.6 to 61.4.  The employment component also expanded, again at a slower rate.  Inventories bucked this trend and grew down.  This means they still fell in June but contracted at a slower pace than in May.  The ISM’s companion piece for June, their non-manufacturing index, showed a similar pattern, falling up to 53.8 from 55.4 in May, while delivering its lowest reading since February of this year, as did the business activity (at 58.1) component.  Again this still demonstrates growth is occurring, just at a slower pace.  Here new orders fell up to 54.4, the lowest reading year-to-date.  Two sectors in this report did reverse from growth to outright decline: employment hit 49.7 while exports came in at 48, showing weakness in two of the main drivers needed to generate any meaningful economic recovery.  We will continue to monitor the falling up-trend in the ISM reports going forward, especially the manufacturing component, which is very sensitive to the economic cycle.  With some of our other indicators showing signs economic fatigue may develop in the second half of 2010, we would not be shocked if more ISM figures begin to fall down in the months ahead.

July NABE

Tuesday, July 27th, 2010

The National Association for Business Economics (NABE) released its July survey after polling 84 companies between June 11th and June 29th.  Their report had some encouraging components to it.  The number of firms expecting to hire over the next six months rose to 39% and is the highest level of anticipated hiring since January 2008.  With unemployment at 9.5%, the news from NABE on hiring is welcomed.  The survey concluded that the economy continued to expand during the months of April through June, and according to William Strauss of the Federal Reserve Bank of Chicago, “NABE’s July 2010 Industry Survey confirms that the U.S. recovery continued through the second quarter, although at a slower pace than earlier in the year.”  This gives us a hint of what to expect for 2nd quarter GDP figure that will be released on the last day of July.  Looking forward, the expectations for growth continue to remain positive but at a slower rate. Only 20% of those polled feel GDP will continue to grow by 3% or more versus 24% in April. The idea of growth at a slower pace parallels what some of the other indicators we follow have been telling us. Our most recent Economic Cycle Research Institute (ECRI) blog titled “’Shrooming,” is one example and was posted on July 21st.  With the hiring trend improving and the expectation that the economy will continue its expansion, albeit at a slower rate, it is time for the NABE indicator to move to the 12 o’clock position.

June Federal Budget

Monday, July 26th, 2010

The U.S. Treasury announced it federal budget deficit for June.  For the second month in a row, it was less than expected.  The government only spent $65,800,000,000 more than it took in. This compares favorably against last June when the deficit figure was $94.3 billion.  In more good news, the year-to-date number improved as well.  We have only spent $1,004,000,000,000 more than we have collected in taxes so far. That is about $82 billion less than this time last year or a 7.6% improvement.  Fiscal year-to-date, the tax receipt growth was up about 0.54%.  Most of the “savings” has come from the government outlays as we have spent 2.76% less than at this point in 2009, although the government did spend 3.2% more in June 2010 than it did June a year earlier.  While it is not a large enough improvement to move our indicator, it is a step in the right direction and as Lao-Tzu said, “A journey of a thousand miles must begin with a single step.”  Since it is an election year, perhaps the trend will gain traction, but the trek back to solvency seems straight up and over very rough terrain.

Gnip Gnop

Friday, July 23rd, 2010

When I was growing up we usually had a coffee can filled with “bacon drippin’s” in the refrigerator.  A good cook added a dollop to just about everything they stirred up back then, from green beans to flapjacks.  Nowadays the proper term for pig fat is lard and it must be shunned at all costs.  Cooking grease from cows is another story.  Called tallow, it is bought and sold as a commodity and its price movements have an uncanny correlation with the economy itself.  Here at Atlas we follow the price of tallow along with many other commodities via the Journal of Commerce spot index.  Unfortunately, in the last couple of months it has collapsed, falling from a hair over 70 down below 7 as I write this in mid-July.  At zero it would mean prices haven’t changed much since 2006.  We also track the Pulse of Commerce index from UCLA which measures truck traffic by tabulating the consumption of diesel fuel.  It has been growing at a steady clip almost all year.  Finally, we also follow the Baltic Dry index which measures the cost of shipping things like grain or iron ore by boat.  It has collapsed virtually in lock step with tallow.  Lately the stock market has been moving back and forth like a ping pong ball.  We all would like to see a trend in one direction or the other manifest.  If it goes up, the ping pong match will resolve itself in a bullish direction.  If it goes south, we’ll have to call it gnip gnop instead and invest accordingly.  With spot prices for industrial raw materials and ocean freight both dropping, we doubt truckers will be able to keep driving in a counter-trend fashion much longer.

June 2010 Consumer Confidence

Thursday, July 22nd, 2010

After three consecutive monthly increases, the Conference Board’s June Consumer Confidence Index fell.  The decline was not subtle either.  It fell to 52.9 from a revised 62.7 in May.  June’s Present Situation Index fell to 25.5 from 29.8 in May.  The percent of people reporting current conditions are “good” fell to 8% from 9.7%.  At the same time those who see the existing state as “bad” increased to 42.4% from 39.5%.  The bad news does not stop there.  The Expectations Index lost its enthusiasm as well.  Only 17.2% anticipate business conditions to improve, 14.9% feel they will get worse and the rest feel they will stay the same.  Also falling was faith for future job prospects.  A mere 16% feel more jobs will be available in the next six months while 20.8% are anticipating fewer.  Finally there is the future income question of the survey.  Here we again find more pessimism as only 10.6% of the respondents felt their income levels will be higher in half-a-year from now.  June’s survey has broken a trend that we were enjoying.  We will not be too concerned with a single month’s survey, but you can bet we are waiting with bated breath for next month’s report.