Archive for May, 2011

April Existing Home Sales

Tuesday, May 31st, 2011

The April report on existing home sales by the National Association of Realtors continues to illustrate how lousy this important portion of our economy is doing.  The numbers moved in the wrong directions as inventories increased and sales decreased.  The median price was lower than a year ago.  All of this as rates remained very accommodating.  Freddie Mac reported the nation’s average commitment interest rate for a 30-year conventional, fixed-rate mortgage was 4.84, unchanged from March and lower than April 2010 when it was 5.1 percent.

The annualized sales figure fell 0.8 percent for the month and is now 12.9 percent lower than a year ago.  The nation would sell 5.05 million homes if April’s pace was maintained for a year compared to last month’s downwardly revised rate of 5.10 million.  At the current tempo, it would take 9.2 months to exhaust our country’s 3.87 million units of existing homes for sale as long as no other homes were put on the market.  At Atlas, we consider 6 months of inventory to be an indication of a more normal housing market.

Finally, the composition of the sales continue to look less than ordinary as 31 percent of the homes sold were done without financing after a record level of 35 percent in March.  Distressed sales made up 37 percent of the homes; although down from 40 percent in March, it is high.  The housing market is not healing as quickly as we would like it to, but it is showing signs of moving along as we think it will, slowly.  This is one area of the economy we do not see helping anytime soon.

The Ruling Class

Friday, May 27th, 2011

I recently enjoyed a luncheon at a retirement home for missionaries.  I asked the lady sitting next to me what had led her into such service.  She was in her mid-nineties and began by saying, “When I married my husband, it was during the depression…”  She paused momentarily to reflect, then clarified her statement.  “I mean the first depression.”  Now I needed clarification and asked her why she added that qualification.  “To distinguish it from the current one,” was her matter of fact reply.

Here was a woman who could see through experienced eyes what most of today’s economists seem to be missing.  At least for her, and I’m certain a large number of other Americans, we are in a second depression right now.  The smart guys will argue.  They will point out many reasons why that’s not possible.  They will explain away the very real fact that this recovery is currently marked, with just one possible exception since World War II, by the weakest measures for most economic barometers ever seen at a point two years after an official bottom.

The difference of opinion stems from methodologies.  Economists will apply statistics; they will employ graphs.  They will extrapolate trends into the future, connecting dots with a ruler.  This lady has no use for a ruler.  She connects the dots using a check book.  She doesn’t rely on such official data to determine how she should feel.  Perhaps she is an exception and most Americans are much better off.  The truth is, no doubt, somewhere in between.  The crux of the matter is determining just where that mid-point lies and how many people are crowded onto the short end.  Not too long ago I watched two ladies at the local drugstore picking up prescriptions.  They cobbled together what money they had, then pushed those medicines they couldn’t afford back to the pharmacist.  Maybe they should have bought a ruler instead.

April Industrial Production and Capacity Utilization

Thursday, May 26th, 2011

The country’s output of things physically produced or mined was flat for the month of April according to the Federal Reserve’s report on Industrial Production and Capacity Utilization.  This level output figure came after March’s growth figure was revised downward to 0.7 percent from 0.8 percent.  Year-over-year, this indicator is still up 5 percent, but the twelve month comparisons have been falling since December 2010.  Slipping to 76.9 percent from a downwardly revised 77.0 percent in the previous month, the proportion of our country’s capacity being used fell as well.

Industrial output is unlike other indicators because it does not measure price.  This indicator follows the actual volume of goods being made. The manufacturing component fell 0.4 percent as the number of cars and parts cascaded 8.9 percent which led durable goods to drop 1.0 percent.  Nondurable goods managed to increase 0.1 percent.  Utilities and Mining grew by 1.7 percent and 0.8 percent respectively.  Capacity utilization measures the amount of slack in the economy. Currently it is running 3.5 percentage points below its 1972-2010 average of 80.4 percent.  This implies the country’s physical output can increase without stoking inflation, but it will need demand before such escalation can be justified.

As mentioned earlier, the pace of the output has been moderating since the end of last year even as our long term capacity trend remains unreached.  This is significant since the production side of our economy is more cyclically sensitive than the service side.  This slowing growth rate is something the Atlas crew will be monitoring in the coming months as it may be hinting at the business cycle’s trajectory.

April Retail Sales

Wednesday, May 25th, 2011

The U.S. Census Bureau’s April report on retail sales shows Americans spent $389.4 billion at places like department stores, auto dealers, gas stations, and restaurants.  That is an increase of 0.5 percent over March (which was revised up to 0.9 from 0.4 percent) and is 7.6 percent higher over the last 12 months.

Since this indicator does not adjust for inflation, it is not surprising that gasoline and food provided leadership in its increase. Other areas of monthly growth were autos, non-store retailers, and miscellaneous retailers.  Of these, car sales are notoriously volatile while non-store and miscellaneous retailers are not the type of categories we find that inspire confidence going forward either.  Areas of retail sales that weakened include electronic & appliance stores, sporting goods, hobby, book, & music retailers, and furniture & home furniture sale. They were all off measurably, falling anywhere from 1.1 to 2.2 percent.

As we have mentioned many times before, consumption accounts for about 70 percent of our country’s Gross Domestic Product according to the Bureau of Economic Analysis.  Close to one-third this of consumption is comprised of retail sales, so it is one of the primary indicators which will need to heal and remain healthy if our economy is going to grow out of the current weak situation.  Since our economy cannot thrive on expensive food and energy mixed in with leadership from non-store and miscellaneous retailers, it must be noted that despite its headline, April’s retail sales report leaves something to be desired.

April Consumer Sentiment

Tuesday, May 24th, 2011

After falling drastically in March, Consumer Sentiment made a slight comeback in April according to the monthly survey done by the University of Michigan.  The indicator’s downturn in March seems to have been associated with the turmoil in the Mid-East and the earthquake in Japan.  Prior to these significant events, this indicator was at 77.5, a post-recession high.  It now reads 69.8, just above March’s level of 67.5, and is lower year-over-year.

Leading the indicator higher was the expectations component.  This is consumer sentiment’s forward looking portion, so any leadership here is encouraging.  It grew 3.3 points to 61.2.  Consumers seemed to feel that most of the run up in gasoline prices was done, but about half of those surveyed consider their financial situation significantly worse because of higher food and fuel costs.  Americans were not expecting to see large gains in their financial future.  Just 7 percent of the households expected their finances to improve. Still, overall, Americans managed to indicate they feel the employment market is stabilizing.  The survey also shows Americans are anticipating near-term inflation will grow by 4.6 percent while just 11 percent expect their income to outpace inflation in the next 12 months.

Consumers lead our economy, so their attitude is paramount.  There has been some correlation between a buyer’s opinion and purchasing habits.  Unfortunately, consumers are not even feeling as good as they were this time of year in 2010, and they are nowhere near the sentiment levels seen before the last recession began.  Consumption will need to grow if this economy is to improve enough for consumers to feel good.  But wait, if consumers are not feeling so hot, they are less likely to consume. This is an awful cycle we seem to be in.  Let us hope this is one of those times when consumers say one thing and spend differently.

April Producer Prices

Monday, May 23rd, 2011

The Department of Labor recently released the April Producer Price Index (PPI).  This measure of inflation continued its fast assent as the costs of goods for manufacturers and wholesalers increased by 0.8 percent month-over-month after March put in an increase of 0.7 percent.  The year-over-year growth rate is 6.6 percent.  After all of the recent headlines it is no surprise that food and energy contributed the most to this inflation gauge.  Energy charged the indicator with a 2.5 percent increase as gasoline grew 3.6 percent itself.  Food added 0.3 percent after subtracting 0.2 percent in March.

Excluding food and energy, the monthly and annual increases are 0.3 and 2.1 percent respectively.  Passenger car prices moved up 0.5 percent while light trucks’ prices advanced 0.6 percent to help keep the core inflation number annualizing over 3 percent. The costs of core intermediate goods were up 1.1 percent and are 5.6 percent year over year.  Core crude materials were able to gain 2.6 in April and 18.2 percent in the last 12 months.

All of this talk of inflation can be unnerving as the country waits for higher prices.  Producers tend to see the cost of raw materials rise when the economy is growing as we have seen since the second quarter of 2009.  As an economy begins to cool down; this is usually one of the first areas to see prices fall.  The growth rate in raw materials peaked in the first half of last year and most recently the costs of many raw materials have been falling.  This may be an indication that the country’s production is slowing faster than before. Next month’s reports may confirm this.

Understanding Inflation

Friday, May 20th, 2011

You may remember the Standards, a small family of four living in Normal, Illinois I introduced to you not long ago.  Recently, their young son Jimmy allowed his pet gerbil to escape from its Habitrail.  They searched for a few days before finally locating the wee, sleekit, but hardly cow’rin beastie up in their attic.  They heard it drumming a challenge with its little kangaroo feet for days (nights, actually) before finally trapping it.  More on that in a moment.

Gil Standard related the events to me, likening them to today’s increases in food and energy.  “When we first had to climb up into the attic to leave food and set a gopher trap,” he said, “it was fairly inconvenient.  But we only had to do it once, so we got used to the little critter living at a level above normal.  Since he didn’t go any higher, through the roof as it were, we adjusted.  The original climb, like inflation, represented a severe change.  Once there, that became normal, the rate of change fell to zero, and we lived with it until we finally brought him back down.”

I thought that was a good analogy for our own current situation.  If prices level out soon, inflation will stop rising since it measures the rate of change, not an absolute level.  Let’s hope that is how things play out.  Maybe they’ll even drop some.

Unfortunately, at the Standards, a darker mood prevailed.  Apparently the gopher trap malfunctioned, killing the gerbil.  As a family they ceremoniously traipsed out to the backyard cemetery where all the other starter pets, the turtle and goldfish, were buried.  Miraculously, just as they were about to entomb the animal, it began to stir.  The trap seems to have only dazed it.  Little Jimmy, taken more by the ceremony than his beloved pet’s resurrection and always somewhat a sinister child, asked, “Can we kill it?”