Archive for May, 2012

April Leading Indicators

Thursday, May 31st, 2012

The Conference Board reports their Leading Economic Indicators index (LEI) fell 0.1% in April, confounding expectations that had placed a positive sign in front of the same integer.  It may have been with a touch of irreverence when I suggested in our prior blog on this same subject that March’s positive jump in the LEI was met with a bit too much enthusiasm from the community of economic analysts.  This month’s results help underline why.

We have been warning that an unusually warm winter may have skewed upwardly a touch more than the raw data would imply data concerning some of the indicators to which we give the most weight.  Common seasonal adjustment factors were playing foul we felt.  Now, two of the biggest negatives in April came from building permits and employment, just as we had warned in last month’s report to you.  The idea is that a winter which consistently recorded temperatures some eight degrees above average tended to pull behavior forward by a month or so.  In other words, facets of our economy acted in January as if it were February, February looked more like March, and so forth. In essence, substantial and unusual changes in trends pulled from Peter to pay Paul and now Pete’s exacting his comeuppance.  Additionally, consumer expectations fell in April, thereby adding to the weakness.

On the upside, as usual, we see the yield curve which is old news (three years and counting) and somewhat artificial in our eyes.  While engineered by the Federal Reserve to encourage spending, we fear the opposite effect is beginning to grow deep roots.  If this is proved out then America has entered what may be a prolonged period of sub-par growth and more frequent recessions which we have dubbed the Great Repression.  If warmer weather persists over the next few months, when combined with growing turmoil in the European banking system, we may be facing a very hot summer indeed.

Burger Time

Wednesday, May 30th, 2012

One of my earliest jobs as a teenager was working the window of a local McDonalds during the summer.  It was a pretty good gig with free lunch included.  The pay was decent and upward mobility allowed one to move up to cook.  I missed that opportunity, choosing an education instead.  That was back in the mid-sixties when the company had already sold over one billion burgers.  Their annual report now shows they sell well over twice that many every year or roughly 75 hamburgers each second.

You will find McDonalds locations almost everywhere.  The Daily Telegraph reports England’s queen owns one near Buckingham Palace.  They are in at least 119 different countries and still growing fast.  The company plans to open one a day in China alone for the next three years according to Reuters.  Since their strict control of quality and the production process gives rise to remarkable consistency, this global ubiquity allows us to make some interesting comparisons.

Comparing the relative value of currencies can tell you little about the cost of goods when traveling abroad.  Purchasing power parity is a concept which allows us to compare how much a similar item costs in dollar terms throughout the world.  Since the Big Mac is essentially identical wherever one goes, it makes an ideal candidate for this technique and a Big Mac index is provided periodically by The Economist.  Their latest report says such a delicacy runs $4.20 on average here in the states.  At $2.44, it’s a steal in China.  Latvia will set you back three bucks on the nose.  Hold on to your wallet in Brazil where you’ll pay $5.68, and in Switzerland, tack on just over another bill.

Since production is tightly regulated, the time needed to make a Big Mac hardly varies from one venue to the next.  This allows us to look at wages in a different light as well. According to a recent Wall Street Journal report, the average McDonalds employee must work about 25 minutes to buy a Big Mac in the U.S.  In Canada it takes a couple of minutes less.  The Chinese employee will labor almost 80 minutes and in India don’t count on eating until you’ve slaved over their hot stove for more than three hours!

By itself, McDonalds is the 90th largest economy in the world, serving roughly 1% of the global population every day according to Societe Generale.  Given this size and scope, we are able to glean a good bit of useful economic data from the company’s reports, allowing us to better understand how countries and people around the world are really doing relative to one another.  It’s really something you can sink your teeth into don’t you think?

April Existing Home Sales

Tuesday, May 29th, 2012

The National Association of Realtors reported existing home sales in April rose 3.4% for the month and are now annualizing at 4.62 million.  A slight downward revision of 10,000 (annualized) to March may have been inconsequential but is still a minus, and the total for April came in slightly below expectations as well.  Inventories jumped 9.5% to 2.54 million which represents a three-tenths increase in the overall supply to 6.6 months.

Every region in the country saw some sort of improvement.  The median price soared 10.1% to $177,400, the biggest increase in over six years.  This is likely indicative of a decrease in distressed sales with their lower prices resulting in a sales mix tilted for the moment toward the higher priced end of the market.  Adding credence to this assertion, foreclosures comprised 17% of April’s total and short sales made up another 11%, bringing the sum of distressed sales to 28%.  Still, both these numbers are down substantially from what we saw a year ago.  Further, all-cash transactions and self-styled investors, both of which are felt to represent speculative buyers, each saw a decline in their number of purchases while first-time buyers, seen as a more stable cohort, increased their activity for the month.

Year-over-year April sales gained 10%, marking the tenth consecutive month of improvement in this indicator, although it still remains well below pre-recession norms.  The shadow inventory is estimated to be 1.6 million units which would bring the supply to a cumbersome 10.7 months or so, indicating we still have a long way to go before the housing industry in America can be deemed healthy once again.

Real Money

Friday, May 25th, 2012

Surely everyone wants to make some real money.  Unfortunately, there is a term for the amount of money you get paid every month; economists call it nominal income, thereby distinguishing your take-home pay from what they actually consider real.  In their eyes, real income is what happens after adjusting your check’s spending power for inflation.  Equally unfortunate, that amount is almost always less than you expected.

While it may be a struggle to get your hard-earned dollar to stretch as far as it once did, there is a second, even more significant problem confronting the American worker today.  According to the Economic Cycle Research Institute’s (ECRI) May report, “For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions.”  Their point is that the current pace of income growth resembles what is seen early in recessions, not three years after one has officially ended.

ECRI points out that the U.S. has had 47 recessions in its 222 year history.  They suggest these events are a natural part of the business cycle and that no amount of stimulus, money printing, or accommodative Federal Reserve policies can repeal them.  Such efforts may delay the day of reckoning, but in the present era of deleveraging and weak income growth, ECRI feels a new recession seems to be drawing nearer.  As they also state, throughout its history our economy has never avoided a recession when personal income growth has remained this low for three months running.  This has held true over the past sixty years of reliable financial data.  Some may hope it will be different this time.  Here at Atlas we doubt it.

April Industrial Production

Thursday, May 24th, 2012

The Federal Reserve reports our nation’s industrial production jumped 1.1% in April, the best result since December of 2010.  Before you kick up your heels, they also revised March down to -0.6% from unchanged, following on a flat reading in February.  While the overall pace of improvement is therefore less than stellar, we’ll grab this most recent straw of hope to see where the wind blows it.

Amongst the three major components of this report, mining output rose 1.6%, utilities produced 4.5% more, and manufacturing was up 0.6%.  The large increase seen by utilities was driven perhaps yet again by unusual weather factors and a return to more normal production following output weakened by a previously abnormally warm winter.  The small hike in manufacturing came on the heels of a 0.5% March decline, a downward revision from the originally reported 0.2% shrinkage.  This is significant since manufacturing actually makes up about 75% of the total.  We would like to see it show more consistent strength, especially three years into an economic recovery.

This report also includes a section on the rate at which our nation’s factories are producing goods under the heading of capacity utilization.  Up 0.8% in April, it rose to 79.2%, a welcome increase that slightly (by 0.2%) exceeded expectations.  This puts capacity utilization at its highest level since April of 2008, before the financial debacle that led to our last recession occurred.  Barring some significant exogenous disruption (like a Euro meltdown), perhaps we may soon begin hearing whispers of economic green shoots starting to emerge.

April Producer Prices

Wednesday, May 23rd, 2012

The Bureau of labor Statistics reported a surprising 0.2% drop in their headline producer price index (PPI) for April.  Expectations had been for it to remain unchanged from March, when it had remained flat compared to February.  This weakness can be laid off almost completely to a decline in energy prices since the core rate (which excludes energy and food prices) rose 0.2%, as expected.  This increase at the core is just slightly lower than the 0.3% March increase we reported to you last month.

As mentioned above, energy costs have been experiencing a rather severe drop.  Overall energy costs fell 1.4% in April on the back of a 1.0% drop in March.  Gasoline sales evinced an even more pronounced weakness, off 1.7% in April and a full 2% the month prior.  The core rate received a big upward push from pharmaceutical preparations, no surprise to anyone paying for their prescriptions out of pocket.  In the month, civilian aircraft also provided a measurable influence on the increase.

Without seasonal adjustments, the year-over-year rate of increase at the headline level was 1.9%, down substantially from the positive 2.8% March amount.  The core showed a smaller year-over-year decline to 2.7%, off just 0.2% from March’s figure.  When all is said and done, we can see an obvious downward trend to inflation at the producer or wholesale level.  This suggests similar eventual long-term performance at the consumer level as well.  While we would all surely be pleased at paying less for the things we buy, there is a point where such disinflationary trends become more pernicious.  It is against this ultimate deflationary environment that the Federal Reserve is fighting with all the tools they can find.  So long as this downward slope prevails, expect very low interest rates to do likewise.

April Retail Sales

Tuesday, May 22nd, 2012

The Census Bureau reported retail sales rose just 0.1% in April.  While soft, the number came in as expected.  The March figure was revised down 0.1%, but it still shows a strong 0.7% increase.
Sales of motor vehicles remained vigorous while, interestingly enough, gasoline consumption contracted.  Removing these to arrive at a core number for retail sales, we still see a 0.1% increase as a lot of small fluctuations both up and down scattered amongst the various components combined for scant effect.

As they stand now, retail sales on a year-over-year basis have gained 6.4% at the headline level, down 0.2% from last month.  Pulling out the volatile high-ticket motor vehicle sales component leaves year-over-year results off a bit more, up 5.9% versus the 6.4% gain registered in March.  This slight softening may be laid off to the recent abnormal weather and its exaggerated influence on seasonal adjustment factors, something we have been emphasizing lately.  Nevertheless, the overall trend looks good to us.