Archive for February, 2012

Digging It

Wednesday, February 29th, 2012

Darwin Smith is probably not a name with which you are familiar.  He once said, “I can’t imagine anyone not liking to drive a backhoe.”  I couldn’t agree more.  If you’re wondering why he felt so strongly about this avocation, allow me to enlighten you with another bit of wisdom from this gentleman.  “I did some of my best thinking moving dirt or rocks.”  All you Baby Boomers out there should be grateful that this man found inspiration where he did as it led to his taking control of a declining paper company and turning it into a giant and dominant force in the adult diaper market with Depends.

When I read part of his life’s story it got me thinking about a couple of things.  First, I had better add Depends to the grocery list.  Second, construction requires backhoes and backhoes require industrial manufacturing.  That in turn requires orders which are the ultimate sign of confidence in our economy’s future.  Thus here at Atlas we occasionally turn to the American Institute of Architects’ (AIA) Architecture Billings Index as one of our forward- looking indicators.  Construction, especially the nonresidential variety, is a long-leading indicator since such projects can be expected to take years from start to finish and mega-bucks spent in the process.  Any firm planning such a move must have strong convictions about a robust economic environment which has legs and developers must become convinced that demand is improving and sustainable.  We are encouraged that the AIA is now reporting their billings index continues pointing toward expansion.  Its commercial and industrial component is hitting a ten-month high.  Further, inquiries for commercial building projects are rising, now approaching a five-year high.

The ramifications of this are very positive for American manufacturing and the huge variety of jobs it can generate.  Obviously the process of building big things like roads, other elements of our infrastructure or office high-rises demands a large amount of labor and ancillary support services, but the building process itself uses plenty of raw materials as well.  Orders for familiar components like lumber, rebar and concrete should be forthcoming, but quite a bit more is called for as well.  Construction equipment, like the aforementioned backhoe, or tractors, graders and so forth, spring to mind.  These will require tires and sophisticated instrumentation.  In addition, construction projects may need other big stuff such as scaffolding, aerial work platforms, cranes, heating and air conditioning systems.  Don’t forget the small things as well, special fasteners, custom nuts and bolts, wiring, on and on.  Given that the AIA’s billing index tends to front-run actual improvements in building activity by roughly a year or so, we can expect to see a positive effect follow this report which will manifest in further job creation down the road.

January Consumer Price Index

Tuesday, February 28th, 2012

Consumer prices expanded by 0.2 percent in January according to the most recent data from the Bureau of Labor Statistics; this follows a total of 0.1 percent growth in the prior three months.  Year-over-year, CPI has increased 2.9 percent.  After excluding the volatile food and energy components, “core” inflation moved up 0.2 percent and now has a gain of 2.3 percent over the last 12 months.  

The year-over-year growth figures are fairly consistent with the price increases seen over the last three decades or so.  The impact of energy and food is diminishing from the headline number, but the “core” components are gaining momentum, so we are starting to see the two measures getting closer to converging. As I write this, I cannot help but remember the near $4.00 a gallon I’ve been paying recently for gas, so the muted impact of energy may be short lived, especially as we head toward even warmer months associated with travel; there are also geo-political threats to oil prices still looming.

For now the inflation situation reads relatively normal.  Traditionally, the additional money being created by central banks around the globe would create above average price increases, but something is restricting the price movements from occurring.  Atlas believes the weak wage growth due to an anemic labor market coupled with continued deleveraging is overpowering the blossoming money supply, but we have also noticed the “core” trend has been moving steadily higher in the last year and will be on the lookout for additional signs of price pressures.

January Producer Prices

Monday, February 27th, 2012

The costs associated with producing finished goods rose by 0.1 percent in January after falling by the same percentage in December according to the Bureau of Labor Statistics.  This continues a recent pattern of subdued moves in this indicator that started in October.  Prices for goods earlier in the production process (crude and intermediate) were mixed, but this is normal.

Costs in the earlier stages trended lower during most of 2011, and it appears the lower rates are starting to make their way into finished products.  The year-over-year price increase of 4.1 percent for final products was the smallest since January 2011 when it was 3.6 percent.  Food and energy prices fell, but items excluding food and energy increased by 0.4 percent.  To put this into perspective, “core” price changes ranged from -0.1 to 0.5 percent last year, so there is nothing alarming about this figure.
 
This has been an unusually mild winter, so many are concerned about the impact of seasonal adjustment in future reports.  In order to get rid of the calendar influence, Atlas took a look at non-seasonally adjusted year-over-year changes to intermediate and crude prices, and January’s reading for each of them is the lowest in the last twelve months.  We interpret that as evidence which supports our low inflation expectations.

That Ain’t Workin’

Friday, February 24th, 2012

Entropy requires that things around my house must go wrong on occasion just to assert itself as an inviolate principle.  When something does go amiss my Lady Gaga often points if out to me despite the fact that even someone who is blind would probably be aware of the problem.  She might say, for instance, “The sliding screen door has been stuck for days.  Will you please fix it?”  I get the feeling she’s wondering if I’m blind not to have already noticed and fixed the problem but work of such a technical nature generally requires some conceptual time.

The point is that work as a concept can prove elusive.  When our Labor Department (DoL) talks about it, they generally refer to the people who aren’t doing it, the unemployed.  Recently they said the January unemployment rate was 8.3%, and being a government institution they then proceeded to explain why in such a way that no one could understand.  For instance, they said there were 12.8 million souls unemployed in January, of which 42.9% were “long-term unemployed” which means they haven’t had a job for at least six months.  But wait; there’s more.  Some 8.2 million additional folks were excluded from this total since they couldn’t find full-time work or had seen their hours cut, but they still were holding down a job somewhere.  They are said to be “part-time workers for economic reasons.”  Additionally, 1.1 million people had stopped looking for work because they didn’t think they could find a job.  They aren’t unemployed; they’re “discouraged.”  Another 1.7 million hadn’t looked for a job within the last four weeks due to personal reasons although they were willing, just like the discouraged, to take one if it came along.  Both sets had looked for work sometime in the past year, just not in the last four weeks, which means they don’t get included in the 8.3% unemployment total.  Take these last two groups, called the “marginally attached,” add in the part-time workers for economic reasons sub-set, and you arrive at a new category called “under-employed.” Our under-employment rate currently sits at 15.1%. 

This boulibase of data make for an unpalatable soup.  It has become too complex even while missing other people like those who retire early for lack of opportunity or choose to return to a domestic role as opposed to one in the outside work force.  It’s for this reason that some economists are turning to a different measuring stick, the employment-population ratio, currently at 58.8%, or the civilian labor force participation rate, at 63.7% by last count.  This last group apparently consists of anyone 16 years-old or over who’s not in the military, jail or an asylum, but also not among the marginally attached as defined above.

When I finally get around to fixing the screen or changing a light bulb, my wife wonders aloud, “See how easy that was?  Why didn’t you just handle it two weeks ago?”  That shows me she has no appreciation for the nuances of proper planning.  I put a lot of thought into any such project before implementation.  That’s why it looks so easy once I spring into action.  The point I’m trying to make is that ultimately things do usually get fixed.  I question, however, if all the planning emanating from the current Congress will get our economy repaired as easily.

But Baby It’s Cold Outside

Thursday, February 23rd, 2012

The entire argument about global warming seems to be quite a bargain in a couple of ways.  First, some folks made a killing dealing in carbon credits when such strange financial products were all the vogue.  Second, it appears to me that there are at least two issues being bandied about as one and twofers are almost always a good deal.  Perhaps the primary argument is whether the phenomenon exists at all.  Secondarily, if it does, whose fault is it, man or nature?

I’m not about to step out on thin ice here so will attempt to avoid all such controversy and just provide you with a few notable details.  For instance, no doubt you have been seeing some of the reports about severe winter weather ravaging Europe.  Some remote villages have been literally snowed in for weeks and desperately need relief.  It is so cold that in Germany, when a truck accidentally dropped piles of sauerkraut onto the autobahn, it froze to the road so quickly that a massive traffic jam developed.  Simultaneously, since in theory global warming might manifest as abnormal weather patterns globally, it is with interest that we observe in Canada the city of Winnipeg had to bring in some 200 truckloads of snow to facilitate their annual snow-sculpting competition.

These same disruptions can have much more sinister repercussions.  The U.S. Department of Agriculture is changing the map they distribute which shows what types of plants can thrive in different regions of the country.  Any home gardener with a subscription to Sunset Magazine is probably familiar with these.  But when such zonal drift begins to affect the types of crops an area can support, we had best take notice.  For instance, many areas have now endured several years of drought.  The resulting famines in countries as diverse as Mexico and Somalia lead to disruptive migrations of whole populations, even armed violence.

Understanding the effects of this global whatchamacallit weather change may well be more important right now than ascribing cause.  We need to know how best to use and conserve some of our most precious resources such as water.  We need to make sure barriers to moving surplus foods around the world are easily surmounted.  Unfortunately, none of this will be nearly as easy to accomplish as the recommendation put forth by a French minister of health.  It was so cold there that she felt compelled to warn the homeless to stay indoors.

January Retail Sales

Wednesday, February 22nd, 2012

The Census Bureau’s Retail Sales figure improved in January.  The 0.4 percent headline figure is weaker than expected but came as a relief after the zero growth of December.  Keeping the headline from a better reading, automobiles sales fell 1.1 percent after surging in the final month of the year.  The car figures are getting scrutinized as the information does not reconcile with the figures from auto dealers put out earlier in the month.  Gasoline sales managed a 1.4 percent gain after a drop in the month before, but evidence suggests this is due more to price hikes than usage.

Year-over-year retail sales figures declined from the previous reading.  From December 2010 to December 2011, retail sales grew by 6.2 percent, but the twelve months ending in January 2012 slowed to 5.8 percent annual growth.  Non-store retailers influenced this change, seeing sales slow from 10.1 percent growth rate year-over-year in December to 4.9 percent in January.  Clothing and hobby spending were both down during the same period as well.  Gasoline managed to grow at the same pace.

This indicator is notorious for large revisions and based on the automobile sales discrepancy, there is a good chance we see this number improve when it gets recounted.   For now, it must be concluded that the report is rather good for first quarter GDP because the automobile portion of retail sales is excluded in the country’s output calculation and is replaced by the car industry’s sales figures.  (by C. Cox)

Productivity in Q4 of 2011

Tuesday, February 21st, 2012

Productivity in the fourth quarter of 2011 rose 0.7% according to the Bureau of Labor Statistics (BLS) which defines it as “the growth of labor efficiency in producing the economy’s goods and services.”  You start with the actual output of the two, which they say rose by a healthy 3.6% over last year’s third quarter.  From that you subtract how much it cost to make everything which gives us a total.  One significant portion of the latter is called unit labor cost (ULC) which combines elements like hours worked and compensation.  The fourth quarter ULC saw a 1.2% increase, influenced heavily by a 2.9% hike in hours worked while compensation enjoyed a 1.9% climb.

These quarterly numbers are quite volatile and subject to frequent revision.  The third quarter’s total was revised down from 3.1% to 2.3%, still much stronger than the second quarter’s 0.1% dip.  Output was shaved to a 3.2% increase from 3.8% while hours worked were nudged up 0.2% to a 0.8%.  Significantly the ULC was pegged 0.1% lower from an already negative 2.4% pace.

The technical term we apply to the huge fluctuations between quarters is goofiness.  By taking annual figures, a better understanding of the major trends develops.  Year-over-year productivity gained by 0.5%, off a bit from the 0.8% gain recorded in the third quarter.  Unit labor cost rose 1.3% versus 0.5% using the same parameters.  Higher costs are seen as a possible indicator of growing inflationary pressures but there is a silver lining.  An increase in hours worked and compensation combine to put a lot more spending money in the pockets of American labor.  If that increase finds its way into consumption rather than savings we can expect to see it provide positive impetus to many of our other indicators.