Archive for June, 2011

May Producer Price Index

Thursday, June 30th, 2011

The wholesale measure of inflation, the Producer Price Index (PPI), lost momentum in May according to the Bureau of Labor Statistics.  The 0.2 percent increase is a welcomed slowdown from the 0.8 percent rate in April.  Year-over-year the increase moved up to 7 percent from 6.6 percent in the prior month.

Energy managed to tack on 1.5 percent after April’s 2.5 percent gain.  Gasoline ticked up 2.7 percent after jumping 3.6 percent. The other erratic inflation component, food, fell 1.4 percent.  Extracting edibles and energy provides a more stable reading called the core, and it matched the headline reading of 0.2 percent.

As we look for indications of future price pressures, we can turn to the crude component of the report. It looks at raw materials as they enter the market place for the first time.  This component of the report lost 4.1 percent.  This includes losses of 5.2 percent and 4.4 percent for energy and food respectively.  It now has a three month average of -0.2 percent.  The core crude number fell 0.9 percent and has now lost 0.7 percent in the last three months after having a gain of 10 percent between November 2010 and February 2011.  Many are concerned about inflation, and this may be the first sign that the recent price increases are reversing as Fed head Ben Bernanke suggested they might.  As prices ease in the essentials (e.g., food and energy), it will free up capital to be spent other places within our economy.

Wet Bait

Wednesday, June 29th, 2011

When Jim and Sue turned ten, Gil Standard (of Normal, IL) took them up to Evergreen Lake.  Virgil Holt had agreed to teach the kids how to fish.  Gil threw some lunches together and drove everyone up to Virgil’s farm.  The oldtimer said, “We’ll take my boat up Mallard Slough and catch us a mess of Bluegill.  Kids like catchin’ bluegill.  They’s easy, plentiful, and the bigger one’s have a little fight in ’em.”

At the lake, the four piled into Virgil’s boat.  After a few pulls on its cord, his old Johnson coughed to a start.  They anchored about twenty feet from shore in a narrow finger of the lake.  Virgil showed the kids how to put a little piece of worm on their hook, attach some weight and a bobber, and toss their lines out.  Sue did fine but Jimmy was impatient.  He kept bringing his line back in to check the bait.  Finally Virgil scolded him, “Son, you cain’t catch fish if you don’t get yer bait wet.  Keep it in the water and the fish’ll find it sooner or later.”

Gil wasn’t trying to fish, enjoying instead just watching his children experiencing a new adventure, but what Virgil said made him think about his investment portfolio. The stock market had been declining for a couple of months.  Gil had cut back on many of his equity investments.  Now he was contemplating getting out completely.  Hearing Virgil’s council he realized there was no way of knowing when the market would bottom out.  “Like it or not,” he thought, “I have to keep some investments in the market or ultimately I will probably miss the strongest part of any recovery.”  It’s not always pleasant, but we generally hold to that same opinion here at Atlas.

May Supply Managers

Tuesday, June 28th, 2011

The Institute for Supply Management (ISM) saw significant deterioration in the growth rate of its manufacturing index and improvement in the progress of the country’s service sector in May.  Since anything above 50 signals growth, the 53.5 reading of the country’s production side tells us manufacturing is still moving forward, but its pace has slowed from April when the reading was 60.6.  Representing a larger part of our economy, the non-manufacturing ISM accelerated to a 54.6 reading after 52.8 in the prior month.

The forward looking component of the manufacturing ISM, new orders, fell 10.7 points to 51.0.  This will be on our watch list in the coming months because it is so close to the breakeven level of 50.  A persistent weakening in new orders will mean shrinking output for the economy in the near future.  Let’s hope this is a one-off occurrence.  Other notable areas of deceleration include production, employment, and backlogs.  These translate into slowing output, fewer new hires, and less waiting time for orders to be filled.  The one bright spot in the data is the inventory level.  Purchasing managers feel their suppliers do not have enough inventories to fulfill future requests even if new orders decline somewhat.

Contrary to its counterpart, the non-manufacturing ISM number grew suggesting the service side of the economy has seen an increase in its rate of growth.  New orders rose along with employment and backlogs. This is an encouraging statistic since so many other indicators we follow have been receding. If America is to normalize, this side of the economy will need to continue to progress.

It is worth noting that the manufacturing side tends to move more in line with the business cycle since Americans must have their taxes done and hair cut but have a tendency to put off buying things like cars and refrigerators during recessions.  While manufacturing continues to escalate, the rate has relaxed.  It has done this before since the bottom of the great recession and reaccelerated.  Atlas’ hopes are that it follows a similar pattern this time.  Our economy has hardly heated up enough for it to spark a new cyclical downturn.

May Retail Sales

Monday, June 27th, 2011

The largest component of personal consumption fell in May, and the stock market responded positively.  The positive acknowledgement came from the fact that the figure fell less than expected.  Retail sales fell 0.2 percent according to the U.S. Census Bureau after April’s figure was revised lower to 0.3 percent from an original report of 0.5 percent.  This is the first decline since June 2010.

Auto sales led the indicator lower by falling 2.9 percent. Other areas of decline include substantial sub-categories like electronics/appliance stores, furniture/home furnishing, and food/beverage. They were down in percentages 1.3, 0.7, and 0.5 respectively.  Leading the gains were miscellaneous store retailers.  While this description is vague, it does not seem like the type of category by which an economy should be led.  Non-store retailers grew 1.2 percent.  Building materials and restaurants rounded out the report’s leadership with gains of 1.2 percent and 0.6 percent respectively.

Having gained 7.7 percent over the past year, the overall trend in retail sales remains positive, but the rate of growth has been moderating in recent months after a strong progression throughout the first quarter of 2011.  In a consumer led economy, this indicator carries a lot of significance.  It will need to maintain its upward movement if the economy is to continue to grow.  The recent weakness will be closely watched.  Should it deteriorate, you will hear about it from Atlas.

Housing 2011

Friday, June 24th, 2011

Here at Atlas we make a big deal out of the nation’s housing situation for many reasons.  Consider the various aspects involved:  production of raw materials like lumber or copper wiring, actual construction, furnishing everything from carpet to appliances, marketing, escrow and other closing functions, bank lending, government participation via such agencies as the FHA, and the securities industry’s bundling up and placing various products tied to mortgages.  It stands to reason that a healthy demand for housing is good for the country as a whole.

The most common way of measuring such demand is by tracking the number of homes purchased every month–both new and existing–and dividing those sales into the relevant inventory available.  Generally speaking, most economists run with the metric that a six month supply at the prevailing sales pace suggests the industry is balanced and healthy.  Unfortunately, things aren’t that simple.  While determining how many new homes are being built seems straightforward enough, the actual monthly statistic produced by the government counts contract signings as a sale, not the completion and actual closing on the property.  If that was the only fly in our soup of data, we could live with it here at Atlas, but the actual inventory of homes available must include existing residences as well, and here is where things really get murky.

We recently discussed the latest report on new home sales for April which showed they were moving at an annualized rate of roughly 323,000.  Existing home sales for April as reported by the National Association of Realtors annualized at 5,050,000.  That works out to about 15 old homes sold for every new one!  Obviously the supply of existing residences is very important; can we trust the data being reported?  What about this mysterious idea of a “shadow” inventory lurking somewhere outside these figures?  The New York Times reports banks have 872,000 foreclosures they need to sell.  Builders report 187,000 units on hand. According to Gluskin-Sheff, active listings of owner-occupied homes and condos total 3.87 million with another 2 million unoccupied also available, plus 3.9 million additional units for sale in a mysterious category labeled “due to unspecified reasons”, a record high.  Add it all up and the available inventory could take several years to work off at the current sales pace.  Zillow reports home prices have fallen 33% from their peak in 2006.  Where will prices be by then?

The Council of Economic Advisors

Thursday, June 23rd, 2011

The Council of Economic Advisors (CEA) was established back in 1946 to provide the president with analysis and advice on economic policy. Within three years two groups of thought were vying for Truman’s attention, leading to the resignation of the original chairman Nourse who felt a guns and butter economy was unsustainable.  Dean Acheson and Clark Clifford helped persuade the president that we could have both.  By 1953, under Chairman Burns, the CEA had adopted a neo-Keynsian approach which tends to hold sway up to the present.  Additionally, the Humphrey-Hawkins Act in 1978 required every administration to deliver an economic report annually outlining a time frame (usually two to five years) for achieving full employment and “reasonable” price stability.  The end result has generally been a fractious, politically loaded, unreliable and inaccurate dialogue between opposing factions within government.

There are traditionally three members in the CEA, all nominated by the President and approved by the Senate.  Presently two of them are not economists.  Austan Goolsbee, who was both chairman and the only economist, just resigned.  Mr. Goolsbee replaced the prior Chair, Christina Romer, back in September of 2010 after her resignation.  Other prominent economic advisors to President Obama who quit last year include Larry Summers, Director of his National Economic Council and Peter Orszag, the Office of Management and Budget’s Director.  Why so many high-level desertions?  Who knows; it would be interesting to find out.

It will also be interesting to see who takes Austan Goolsbee’s place and how that process unfolds.  We expect the congressional circus will have, as usual, many acts performing all at once.  In the center ring will we see one group of clowns after another come boiling out of their various vehicles?  Perhaps high above we can watch academic Macrobats swing from one ideological trapeze to another.  Let’s hope the ring master can keep it all together.  With such a fragile economy, no one can count on the net catching them should there be a fall.

Like Pulling Teeth

Wednesday, June 22nd, 2011

I was about five when I lost my first tooth.  I still remember sitting in first grade wiggling it back and forth with my tongue.  A loose tooth is just one of those things you can’t leave alone.  You fidget and fuss, worry it back and forth seems like forever until finally that last little attachment gives way.  Be careful, don’t lose it, there’s money to be made once the tooth fairy drops by later that night.

On the other hand, my second tooth was a breeze.  Dad had this bright idea.  He tied a string around its stub, let out about three or four feet, then tied the other end to the kitchen doorknob.  Wham!  He slammed that door hard and my tooth shot across the room, ricocheted of a couple of wall, and still made me a quarter richer that night.

We might argue about which method was most efficacious, but choosing which of the two to apply in Europe relative to the Greek debt situation seems to me to be a no-brainer.  The political wrangling, pulling and tugging back and forth, possibly will not provide the needed resolution, leading instead to a parade of similar bailouts for other indebted Euro participants.  On the other hand, default and expulsion from the EU is seen as the first step toward a global economic Armageddon such as we have not seen since Russia chose that path back in the mid-1990s, and we all know how that played out.

Actually, in retrospect, such a sudden jerk on the monetary system worked out okay.  It took the Russians about six months to recover their momentum.  A year later investors globally were back to buying Ruble based debt.  Subsequently their economy grew by a factor of ten over the next decade while enjoying a stock market boom that presented them with a 20-fold increase.  Their recovery scores one point for the quick jerk.  Compare that to our own economic progress after starting a series of bail-outs three years ago.