Archive for August, 2010

Second Quarter Productivity

Tuesday, August 31st, 2010

The Labor Department’s second quarter report on Productivity and Unit Labor Cost (ULC) showed productivity slowing in the second quarter and the cost to produce each unit went up.  This ends five quarters of positive reports.  Maybe the work force just took a breather, but we’ll continue to monitor future quarters lest unfavorable trends develop.
Productivity fell 0.9% in the second quarter after the first quarter’s figure was revised upward substantially to 3.9% from 2.8%.  The decline came as output was increased, but the number of hours needed to increase production rose faster.  The second quarter’s increase in hours worked was the largest since the first quarter of 2006.  While seeing hours worked rise could have been a positive, any pluses to be garnered were offset somewhat as compensation per hour fell.  Unfortunately for companies, output per hour fell faster than wages so their cost per unit went up.  This is only the first time since the second quarter of last year such a harbinger of inflation has risen, so we will not blow our higher prices warning horn just yet, but we will keep an eyebrow raised.
This indicator, currently at 12 o’clock, has had two quarters in a row of deteriorating output per hour with the second quarter’s hourly output turning negative.  It is time for the dial to move a notch to the 1 o’clock spot.

Who writes this stuff?

Monday, August 30th, 2010

“Well finally,” I thought, “Some good news on unemployment.”  I had just finished reading the Department of Labor’s headline about unemployment applications which said they had declined for the week of August 21st by much more than anticipated.  Since we pay close attention to such data here at Atlas Indicators, I eagerly read further.
Yes, the report affirmed, new applications fell by 31,000.  While such a drop leaves the total at 473,000, still a hefty number, it was the balance of the report that captured my attention.  First, last month’s number was raised by 4,000 to 504,000.  Taken together, the four-week average of initial claims actually rose to 486,750.  But continuing claims were off by 62,000 as of August 14.  Could I find some hope in that?  Well, that still leaves roughly 4.46 million people collecting unemployment benefits.  But the frosting on the cake came when I read that total “does not include those receiving extended benefits under federal programs.”  That particular data point had grown by 302,000 to 5.84 million by August 7.  So for every person who doesn’t exist (the decline in new applications means somebody didn’t apply.  To me they don’t therefore actually exist) we had ten who stopped existing statistically because they were moved to the ranks of the long-term unemployed, people without work for upwards of two years.
This isn’t funny, yet I wonder how the authors can keep a straight face.  Okay, I asked, “Who writes this stuff?”  Well, we know the report is produced weekly by the Labor Department.  I guess the real question is, “Who reads this stuff?”  Do the authors really believe their audience won’t look through the headline and see the underlying trend?

July Supply Managers

Friday, August 27th, 2010

The Institute for Supply Management (ISM) released their July report for both its manufacturing and non-manufacturing measures.  The manufacturing index has been above 50 for 12 months now, completing a full year of growth.
One year of growth may appear to be a milestone, but the last four months deserve special attention.  The trajectory of this indicator has been falling since the recent peak in April.  The manufacturing side of the indicator is sensitive to the business cycle, so this slow down is worth noting.  The pace of backlogged orders has eased, indicating manufacturers are having an easier time keeping up with orders.  Inventories seem to be right where purchasing managers think they should be with a 50.5 reading.  In other words, the next sale may be taken off the shelf instead of needing to be manufactured.  Speaking of orders, new orders fell for a second month in a row and are now at 53.5 from 58.5 in June.  A reading under 50 suggests new orders are contracting, so this sharp deceleration will be monitored closely here at Atlas.
The second half the ISM report measures the environment for the non-manufacturing part of the economy.  It not only stayed above 50 in July, suggesting expansion, it grew from 53.8 to 54.3. The most encouraging part of the non-manufacturing ISM report is the employment component.  Last month this number was contracting ever so slightly at 49.7 and is now growing with a reading of 50.9.
When we consider that the manufacturing side of the ISM also added jobs, we see an official silver lining to the dark cloud known as the U.S. labor market.  It’s a thin sliver to be sure, but positive news is always welcome during these stormy times.

July Consumer Confidence

Thursday, August 26th, 2010

The Conference Board’s Consumer Confidence Index fell for the second month in a row in July.  The fall came as both the present situation and the expectation components of the survey deteriorated.
The Present Situation Index fell to 26.1 from 26.8.  The jobs portion of the Present Situation Index worsened as 45.8% of the respondents feel jobs are “hard to get;” this is up from 43.5% last month.  Those who feel jobs are “plentiful” remained the same at only 4.3%.  These numbers can be watched to help get an understanding of the health of our labor market but only tell us about how the consumer is feeling about the present.  The Conference Board’s Expectation Index, which provides us with a look at how consumers feel conditions will change in the next six months was off as well as it fell to 66.6 from 72.7 in June.   The job section of this component was down also.  Those expecting more jobs to be available in the months ahead fell to 14.2% from 16.2% in June, and respondents feeling their income would be higher in the near future contracted to 10% from 10.6%.  On a more positive note, those looking to buy a car and people that anticipate buying a major appliance in the next six months moved up to 4.5% from 4.1% and 28.5% from 23.7% respectively.
Let’s hope more people follow through on their anticipated purchases of big ticket items, allowing this indicator’s uptrend, which was broken last month, to be reinstated in August.  This would be the kind of boost our economy needs to experience.

Yo-Yo in the Dark

Wednesday, August 25th, 2010

Joseph Stiglitz, an economist at Columbia University, who was awarded a Nobel Prize for describing how unequal access to information affects buyers and sellers of financial products, often to the buyer’s detriment, addressed the crisis spawned by Lehman Brothers’ collapse a couple of years back as follows: “Complexity opened up new venues for information asymmetry which banks exploited.”  Huh?
Imagine you are sitting against one wall of a pitch-black room.  While you can’t see it, across from you is a staircase rising to the next floor.  Someone is slowly climbing it while playing with a yo-yo that glows in the dark.  You can see the toy move up and down, but it may take a while before you actually can tell the general direction is ever upward.  The reason for that is simple: YOU’RE BEING KEPT IN THE DARK!  That’s what Stiglitz meant by “information asymmetry.”  The guy playing with the yo-yo knows what’s happening, but the rest of us don’t.
Investing works in much a similar fashion.  Here at Atlas Indicators we hope to overcome this problem by monitoring many indicators, almost like we were simultaneously looking at the architectural design plans for the room while monitoring the position of the guy with the yo-yo via GPS.  We still won’t know for certain where his hands are or the length of the string he’s using, but those only determine short-term fluctuations.  We hope to take advantage of the long-term trends dictated by the bigger picture.  Until someone invents a better light switch, we trust our approach will remain productive.

Preliminary 2nd Quarter GDP

Tuesday, August 24th, 2010

The Commerce Department’s advanced estimate for second quarter Gross Domestic Product (GDP) showed it grew by 2.4% annualized.
Before diving into details, it is worth noting that the report also included benchmark revisions to prior data spanning the past three years which are made every July.  These revisions allow us to get a more complete look at historical GDP figures.  One notable change to past data shows our economy grew by 3.7% in the first quarter of this year, substantially more than the 2.7% increase last recorded, even topping the 3.2% high provided in the Q1 advanced estimate.  Thus we are continuing to see the economy expand but at a slower pace than before.   Personal Consumption Expenditures, the goods and services consumers buy (which represent almost 70% of GDP), slowed somewhat from the first quarter’s growth rate of 1.9% to up 1.6%. Our recovering economy will need more out of this component in the future if recessionary forces are to be kept at bay.  Private investment was a real stand out in the second quarter.  It grew by 28.8% and was only slightly slower than the first quarter.  Also adding to GDP growth was government spending.  Net exports continued to hold GDP down as our trade deficit grew for the second quarter in a row.
For now the growth is encouraging, but the level is not sufficient to sustain a viable recovery.  The fact that growth appears to be slowing isn’t particularly encouraging either.  Looking ahead, we will wearilessly watch what the other indicators do and look for other symptoms of slowing growth.

June Leading Indicators

Monday, August 23rd, 2010

The Conference Board’s Leading Economic Index (LEI) contracted 0.2% in June after a slight upward revision to a positive 0.5% in May.
As was the case last month, the difference between short-term and long-term interest rates, commonly referred to as the spread, provided the most support for the indicator.  If it was not for the spread, which is being influence by the Federal Reserve keeping short-term interest rates very low, the indicator would have fallen by more, but still have indicated a growing economy.  “The LEI decreased in two of the last three months, but its level is still about 4.5 percent above its previous peak before the recession began,” says Ataman Ozyildirim, economist at The Conference Board.  Making up a little more than 27% of the index and leading the effort to pull down the rate of growth was weekly average hours in manufacturing.  Manufacturing jobs tend to be more sensitive to economic cycles and are worth paying attention to. The Conference Board is expecting growth to slow in the second half of this year.  This has become a bit of a theme in some of the indicators we follow.  The Economic Cycle Research Institute (ECRI) and the National Association for Business Economics (NABE) have each echoed the same sentiment. 
Since expectation for slower growth was explicitly stated in the Conference Board’s press release, the indicator will be moved to the 12 o’clock position.  With any luck it will get to stay there for an extended period of time.