Archive for November, 2010

September Trade Balance

Tuesday, November 30th, 2010

The U.S. trade gap narrowed more than expected in September. Both sides of the trade equation moved in America’s favor. Our exports grew by 0.3% to $154.1 billion while exports fell 1% to $198.1 billion. With exports growing $500 million and imports shrinking by $2 billion, our trade deficit was only $44,000,000,000 for the month.

The exports were led by the “other” category. It grew 8.8% month-over-month and is now up 32.2% year-over-year. Food and beverages provided the next largest increase by growing 5.1% in September and 23.5% year-over-year. On the import side of the calculation, motor vehicles fell 6.7% for the month, and America bought 6% fewer “other” goods from foreign makers.

The deficits with Mexico and the European Union each improved by over $1 billion. The trade shortage with Japan fell $788 million. The largest part of our deficit continued to come from trade with China. It accounted for $27.831 billion of the monthly total and improved month-over-month by $204 million.

With a trade deficit as large and constant as ours, there will need to be a major shift in the world’s trade dynamics in order for it to become more balanced. The president has set a goal to double our country’s exports over the next five years. This is a daunting task in world of slow growth, but the administration may have an unwelcome ally. While this ally has been weak and, many argue, may become even more so, it also happens to be the world’s primary medium of exchange. It is our currency.

October Supply Managers’ Report

Monday, November 29th, 2010

After hitting a peak in the spring, the Institute for Supply Management’s (ISM) manufacturing and non-manufacturing reports had been showing signs of slowing. The October reports are countering that recent trend as they give signs of reacceleration.

While the smaller part of our economy, manufacturing is sensitive to the business cycle. Increasing 6.2 points to 62.7, production grew for the 17th consecutive month and had the highest month-over-month increase since January 2010. Its upward direction was confirmed as 14 of the 18 industries reporting showed growth, a broad and welcome response. Employment continued to expand, now for eleven months in a row, which should help October’s employment figure. With an eye toward the horizon, we at Atlas like to pay special attention to new orders since they will hopefully turn into actual production. They led all of the components in the manufacturing report with an eight point increase. These orders point to future production that may require even more hiring down the road.

Non-manufacturing also showed improvement, and has grown for 10 uninterrupted months. Like manufacturing, new orders grew in our service sector and have done so for the last 14 months. October was a busy month for this area as the overall level of business activity jumped 6 points to 58.4. While jobs growth did not match this increase, don’t become too dismayed. Remember that hiring tends to lag activity. If the activity keeps up its most recent trajectory, jobs will follow, and the service sector is far and away the largest part of our labor economy.

Though the economy continues to recover, it is often hard to remember we are out of recession. We are bombarded with headlines of slow growth and joblessness. While no one indicator can be used to quantify the entire economy’s future, this indicator is starting to show signs of stabilizing after a challenging spring and summer.

Charlie Brown

Friday, November 26th, 2010

How many times has Lucy pulled the ball away just as Charlie Brown went to kick it? More than I can count, that’s for sure. He may have had a good heart, but the boy was not the brightest bulb in Peanut’s chandelier (that was likely Schroeder). We’ll never really know, of course, because the whole thing wasn’t real, just a comic strip there to amuse us.

The stock markets are many things: amusing, frustrating, even enthralling. They are most emphatically real. So when we see them drop substantially for a prolonged period of time, their entertainment value begins to wane. When our retirement accounts and individual net worth declines during severe bear markets like the two we experienced in the first decade of this new century, the luster of easy riches begins to tarnish. The first drop from 2000 into 2003 was forgiven, perhaps, by a rapid recovery. The second, which coincided with a collapse of real estate and near failure by major banks, may not be so easy to forget. Has the average investor become both older and wiser? If wiser just means more cautious then we may not see a stampede back into equities any time soon.

The Federal Reserve hopes that is not the case. They want to provide an ample supply of cheap money which will look for better returns than those currently provided by the banking system. They want you to buy stocks and houses and such other things that come under the heading of “risk assets.” Will the siren call of potential profit work once more on the American populous? Or will we, rather, distrust monetary officials both public and private and, unlike C. Brown falling for Lucy’s charming promises, refuse to take yet another kick at what may prove ephemeral? How dire would the consequences be should America become a nation of savers rather than consumers?

Diverse Dollars

Wednesday, November 24th, 2010

Back in ’98 I published a book called “What Did My Broker Say?”   In it I tried to illustrate how good portfolio construction required proper diversification.  As an example I said buying stock in Ford, General Motors, and Chrysler would not truly diversify an investor since all three were in the same industry and would likely tend to move up or down in price together.

Try doing that today, just a scant 12 years later.  Ford is still okay although a quick check of its price shows you would have lost about half your money over that period, even after adjusting for any dividends and splits.  The same can’t be said of the other two.  Chrysler was subsequently bought by a German car company, then spun off to a private U.S. based group of investors named Cerberus in 2007.  When the American economy began to head south and our government began questioning the company’s viability, Cerberus allowed the company to go into bankruptcy.  General Motors also went bankrupt at that time and has now been reorganized as a new company owned in the majority by the U.S. Treasury.  I would say this brief history certainly underlines the importance of proper diversification.

Lately China, along with some other nations, has expressed their doubts about the ultimate strength of U.S. dollars given our growing deficits.  How does anyone diversify against his own nation’s currency, the only acceptable medium of exchange he can use to pay taxes, cash payroll checks, and buy groceries?  The price of gold does seem to be climbing as investors around the world begin to see it as a form of currency in its own right.  Can precious metals ever prove to be the answer in a world economy as large as complex as ours?

Third Quarter Production

Tuesday, November 23rd, 2010

The Labor Department’s initial report for the third quarter’s Productivity and Unit Labor Cost (ULC) appeared quite positive.  Generally speaking we want to see an increase in the first and stability in the second, and that is just what we got.

Nonfarm business productivity rose 1.9%, higher than consensus expectations, essentially reversing the prior quarter’s 1.8% decline.  The annualized rate is slowing however, now up 2.5% year-over-year versus the 3.0% gain we saw in the prior three month period.  Productivity is considered a measure of labor’s efficiency, giving us an idea how much output of goods and services workers are producing per hour.

Labor costs were off a scant 0.1% after jumping 1.3% in the second quarter.  On a yearly basis ULC fell 1.9%; they had dropped 2.7% in the prior quarter.  The good news for labor is that wages rose 1.8% annualized, reversing the 0.6% decline seen in Q2.  Further, hours worked rose 1.1%, building on the 3.5% rise seen in the prior period.

When we see both wages and hours worked increase, we worry that labor efficiency will decline.  Seeing it rise this quarter is good news indeed since it implies we are using some of our spare capacity to push out more product.  In turn, this implies orders are increasing, along with the real potential for higher final sales, especially when higher wages are added to the equation.  Hopefully all of this can lead to more employment in the near future, even as inflation remains subdued.

Preliminary Third Quarter GDP

Monday, November 22nd, 2010

That’s it? The preliminary estimate for third quarter Gross Domestic Product (GDP) from the Commerce Department was low. Fortunately for the markets, expectations were subdued as well. The seasonally adjusted annualized rate of growth was 2%. As we have written frequently, consumption makes up over two-thirds of our economy and will need to improve faster than it has for this recovery’s pace to get back on track with normal recoveries.

Personal Consumption Expenditures (PCE) is how the American consumer is quantified in GDP. The third quarter statistic shows an increase of 2.6%. Durable goods, items expected to last longer than three years, grew by 6.1%. This is encouraging because these items tend to be more expensive, often entail debt, and take more confidence to purchase, but this increase is marginally slower than the second quarter’s rate. While consumers did some of the heavy lifting, they needed assistance.

Businesses provided help. Nonresidential fixed investment grew by 9.7% as companies purchased the wares needed to carry out their activities. While business inventories increased, it is unclear how this build up will play out. The two possible scenarios are as follows: A) companies are anticipating correctly and the fourth quarter will see higher sales, or B) the sales pace of the 3rd quarter was slower than expected, and industries will have to work through their inventories before ordering more. The latter scenario will put pressure on the employment data. Let’s hope scenario “A” plays out.

In summary, two of the most important components of GDP are growing. The issue at hand is the strength of the growth. It is not currently at a pace which reflects the expectations of an economy receiving the amount of help that has been provided by both the government and our central bank. For now we will note the figures provided and wait for the first revision due at the end of November. As a reminder, the second quarter’s revisions were lower than the preliminary figure. Perhaps some of your big purchases have yet to be tallied, and this time the revision will be higher.

Unemployment Rising

Friday, November 19th, 2010

Yeast are fastidious little critters. They use an enzyme as dinnerware to cut their meal into bite-sized morsels. Since they apparently do little else, this qualifies as their major source of employment. Interestingly, in a yeast colony, not everyone pulls their own weight. Some freeload, letting others prepare the meal. Oddly, this does not prove detrimental to those pulling the wagon. In fact, colonies with freeloaders can actually outgrow those where every other little yeast mother is helping carry the load.

How does this apply to economics here in the U.S.? For all the talk from our government representatives about creating jobs, not much seems to be happening. In fact, we need to go back some eighty years to find a time when things have been this rough. The Department of Labor says 14.8 Americans are currently unemployed. Of these about 30%, substantially more than 4.5 million people, have been out of work for over a year. Many are now faced with seeing their extended benefits expire as they come up to their 99th week without work. It is estimated we will begin seeing millions lose all their benefits if Congress does not soon vote to extend them once again. Adding in the underemployed, we find roughly 17% of the working population is functioning below capacity. Now we can begin to get a feel for the enormity of our current labor crisis. At what point can a society, whether yeast or human, no longer carry the burden of unemployment and still grow? Remember, growth is considered the ultimate cure for what ails us.

Unproductive yeast, while cheating the system, don’t seem to do so to the colony’s detriment. In fact, at the end of the day I’ll bet the girls kick back, pop the top on a warm one and say, “This bud’s for me.” Here in the U.S. our unemployed are neither cheating nor freeloading. They may be discouraged; they may be desperate, but I suspect most do want jobs. At Atlas we are seeing many of our indicators beginning to rise incrementally. Our hope is that they will do so at an accelerating rate so that a full recovery will soon be baked into the loaf.