Archive for May, 2012

April Consumer Prices

Monday, May 21st, 2012

The Bureau of Labor Statistics reported headline inflation measured at the consumer level (the Consumer Price Index or CPI) was unchanged for the month of April.  This follows on the 0.3% increase registered in March.  Subtracting food and energy, the core CPI was up 0.2%, an increase identical to that seen in the previous month.  A 1.7% decline in energy prices during March helps explain the difference with gasoline prices specifically off 2.6% nationally.  Apparel prices climbed, also widening the gap between headline and core price increases.

Year-over-year we see the headline rate of CPI inflation continue to soften.  Now rising at a 2.3%, this is down 0.3% from March’s annualized 2.7% figure (before applying any seasonal adjustments).  The core rate, at 2.3%, has proven a bit stickier, remaining unchanged on an unadjusted year-over-year basis from the level seen in March.

We wrote last month about the gradual decline in this measure of inflation over time.  The Federal Reserve has a target level of roughly 2.0%, so the persistent decline will be seen by them in a positive light.  This is only true at the headline level since core inflation remains higher on an annualized basis than what was recorded at this time last year.  That will worry some on the Fed’s board and they may call for a preemptory strike against incipient inflation.  This would most likely manifest as a hike in short-term interest rates, but would only occur if the inflation hawks carry the day.  We doubt they will any time soon, resulting in a continuation of the Great Repression.

Eurno German

Friday, May 18th, 2012

Certainly there remains only a few people who haven’t heard that something seems amiss within Europe’s political and economic environment.  Allow me to put these events in a broader context.  While Europe itself has been around quite a long time, the name stems from ancient Greek, and is probably just a few thousand years old.  Today’s Greece is more a mess than modern.  Since becoming a nation back in 1830, the Greeks have gone bankrupt five times, apparently heading soon for six.

Within the European Union, Germany is currently the strongest performer.  They are voicing a growing concern that Greece and their other southern neighbors (Italy, Portugal, and Spain) are beginning to drive the Euro, their common currency, down in value by borrowing in excess to support spending on social issues.  With no elected government running Greece and bond markets signaling growing problems in these other countries, we wonder just how long Germany can remain in the Euro.  Getting out would be quite difficult, very sour in a geo-political sense, and probably disastrous to global banking.  In the end though, Germany may see no better solution than exiting from the Euro.

Such disruption will ultimately be a lesson to any country which runs a continuous deficit in an attempt to redistribute wealth to the less fortunate.  This includes our own programs like Social Security, Medicare, and Disability.  As we watch Southern Mediterranean nations such as Spain and Italy collapse under the weight of similar promises to their own populace, we should guard against following a parallel path.  Continuing to spend huge sums generated by a printing press rather than actual labor and productivity has never ended well historically.  Pretending to be so wealthy that we can persist in doing so is surely a form of hubris.  The Greeks had a Goddess who punished folks with that quality; her name was Nemesis.  We must beware of her revenge upon our own nation should we stray too far down a similar unsustainable path.  Remember that the name America stems from Italy.

Legislating Demand

Thursday, May 17th, 2012

The election year is well on its way, and by all indications, we know who the two major party candidates will be in November.   America will be choosing between a business man with a knack for engineering company efficiency and the incumbent sworn into office in the middle of the Great Recession.  Between now and the election, we are bound to hear countless arguments, from the candidates and their respective supporters, about why one agenda is more appropriate than another for the ailing economy.  It is important to remember that while the arguments may be eloquent and persuasive, neither the White House nor congress can legislate the remedy America needs.

Demand is the antidote for the country’s economic troubles.  The purchases do not need to be from within our boarders either, but the rest of the world seems to be facing a similarly slow period and some of our major trading partners are already in outright recession.  So if the additional spending is to be done by domestic buyers, at least two large hurdles will need to be cleared.  First, Americans are still in the process of deleveraging.  According to a paper put out by the Federal Reserve Bank of Richmond in January 2012, debt as a percentage of disposable personal income was 113 percent in the third quarter of 2011; this is down from the peak of 129 percent in 2007 but is still higher than average and suggests Americans have more deleveraging ahead.  To put this in perspective, it was not until the turn of the 21st century that this number was over 100 percent, and before the mid-80s, it was below 70 percent.  The second issue adding to the consumption headwinds is the demographics of our country.  The baby boomers are at a stage in life when consumption is pared back as they enter retirement or save more in preparation for their post-work years.  Due to a lack of savings, many of them have extended their working years.  This is minimizing the job openings for younger workers with a higher propensity to spend.  Together, debt levels and demographics are constricting the conspicuous consumption that propelled the economy over the previous few decades.

As the summer temperatures and campaigns heat up, America is destined to hear about all of the remedies needed for the slow growth we are experiencing.  At Atlas, we will ignore most of the pundits and politicians since there is no quick fix to our problems.  This is a point in America’s history that will require patience, hard work, and savings; demagogues and ideologues will not cut it this time.  Our indicators help us track the former.  Fortunately we don’t need to monitor the levels of hot air as well.  (by C. Cox)

April Unemployment

Wednesday, May 16th, 2012

The Department of Labor (DoL) reported just 115,000 new jobs were created in April, well short of the anticipated 160,000 gain.  While the disappointing total helped cause U.S. equity markets to decline (at least briefly), revisions to prior months seem to have picked up the slack (the DoL found another 34,000 jobs somewhere in March and 14,000 extra in February).  As an offset, these additional 48,000 positions added to back months hardly make up for the 68,000 combined shortfall from expectations which had been initially penciled in last month.

As we have seen recently, the pick-up in employment was generated by the private sector where payrolls rose by 130,000.  Average hourly earnings were unchanged as was the length of the work week.  The public sectors continue to shed jobs, peeling off another 15,000 in April.  While we appreciate a reduction in public sector payrolls can possibly help bring the country’s climbing deficit down a touch, we are concerned that the increase in private sector job creation is losing steam at a rapid pace.  The 130,000 gain seen this month is well less than half of the recent 277,000 January total, and that number has declined every month so far this year.

In spite of all this the unemployment rate fell to 8.1%, off another tenth.  This decline is attributable primarily to yet another drop (off 0.2%) in the labor participation rate to 63.6%, a level not seen since the recession in September of 1981.  That equates to a lot of folks who have stopped looking for work for various reasons and discovering what they are doing with all the extra time on their hands is no easy matter.  Some are opting to take Social Security, even if they must receive a haircut to the monthly payout by retiring early.  Others are going on disability, but there remains a large number still unaccounted for.  They all need to put food on the table.  Discovering how they do so remains a challenge.

2012 Productivity and Labor Cost

Tuesday, May 15th, 2012

The U.S. Bureau of Labor Statistics produced its initial look at our country’s productivity for the first quarter of 2012, showing a 0.5% decline.  This came about as output slowed while hours worked increased.  Last year the final quarter posted a 1.2% (rev. up from +0.9) gain in productivity so this change in direction definitely catches our attention.  The cost to produce a unit of stuff in general rose just 2.0% versus the 2.7% (rev. down from +2.8) increase seen in last year’s Q4.  With the number of hours worked in the first quarter rising, this suggests compensation slowed, and indeed it did big time, falling from a 3.9% gain in the prior quarter to an increase of just 1.5% in this one.

This data can be fairly volatile so we also like to look at the annual pace of change.  From this viewpoint, productivity rose 0.5%, a gain of one-tenth from Q4’s 0.4% hike.  Labor costs climbed 2.1% for the year this time, a bit slower than the prior 3.1% annualized gain seen at 2011’s year end.  We are always concerned when the price of production begins to outpace the quantity of good made as this can be a harbinger of inflation, but on an annualized basis there seems to be little cause for worry about drastic price hikes at this time.

There are contrasting ways to view this quarter’s data.  Some will see it as a positive for labor since more hiring will be needed if output is to be increased.  However, one mantra of economics says demand leads labor, not the other way around, so any jump in hiring will need to see increasing demand before it can manifest.  To a degree, this increase will show up as higher retail sales and exports, and recent data in both categories has been favorable.  Unfortunately, adjusted for recent inflation, the 1.5% gain in compensation mentioned above deteriorates into a 0.9% real decline, despite the softer annualized data.  It will be hard to keep increasing domestic demand if spending power continues to fall this fast in the next few quarters.

April Institute for Supply Management

Monday, May 14th, 2012

The April Institute for Supply Management (ISM) indices pointed to additional growth in both the manufacturing and service sides of our economy.   Manufacturing was stronger than expected while the service data pointed to a slower than anticipated increase.  The ISM is always the first indicator to come out with information from the prior month, so it garners a lot of attention.

More attention tends to be paid to the manufacturing component.  This happens for two reasons.  First, it is a much older series, so tradition helps it remain relevant.  Second, it measures an area of the economy that is more sensitive to the vagaries of the market cycle.  It is for the latter reason that April’s reading was so encouraging.  The increase put the headline figure at 54.8 from 53.4 in March, and it was higher than the slight slowdown the consensus was looking for.  The leading component of the indicator, new orders, was surprisingly healthy; it put in its 36th consecutive month of growth and picked up the pace as well.  New orders are important because they lead to actual output.  It is worth noting that throughout the month numerous Federal Reserve regional banks put out manufacturing surveys for their geographic coverage.  For the most part, these reports did not corroborate the national ISM data.  The ISM does not use the various regional reserve banks’ findings, so one of the polls may have asked the wrong set of companies.  There is not a conclusion being drawn here, but Atlas is aware of the differences.

ISM’s report on the larger nonmanufacturing side of the economy is not as old as the industrial version (it was first published in 1998 versus the 1931 roots of the manufacturing survey), so the service survey does not get quite the attention its counterpart receives.  Nonetheless, the report did manage to kick up some dust this go around as there was weakness in some key areas.  Service companies reported weaker activity, new orders, and employment.  The headline number was 53.3 versus 56 in March.  With most companies and jobs in America falling under the service umbrella, a slowdown in this indicator may be pointing to coming weakness in the economy, especially when one considers that service industries are not impacted as badly in a slowdown as goods producers.  Even in economic downturns things like haircuts or portfolio management is needed.

Between the two areas of the economy, the ISM is giving a mixed message.  Manufacturing appears to be growing faster than services which are trending upward at a slower pace.  The mixed messages of the two components of the economy during April may help explain the market’s slight pull back in the month.  These divergent paces add to an already uncertain environment, and hopefully, a clearer picture will begin to emerge over the next few reporting periods.     (by C. Cox)

Looking Good

Friday, May 11th, 2012

I’m not sure why some things look good to me when concrete evidence to the contrary is plentiful.  The U.S. equity markets seem to be a case in point.  While much has been made of the stellar advance we have seen in the broad market since November of last year, somehow the fact that stocks have been spinning their wheels for a while now seems to be missed.  Consider this.  The S&P 500, an index of most of America’s largest publicly traded companies and a popular benchmark for the market in general (remember you can’t invest directly in an index; it’s a mathematical calculation used for comparison only) hit its high for the current cycle over one month ago.  In fact, if you pull up its long-term chart, you’ll see it hasn’t come close to the highs established back in November of 2007.

Why this apparent disconnect between what is and how it seems, or what is wished for?  Maybe it’s the way our financial press spins daily performance.  Or maybe it’s the volatility today’s market are showing.  After all, daily moves of one hundred points or more are becoming commonplace.  But extremes don’t necessarily translate to profit.  In April the markets had a swing of one hundred points or more, sometimes substantially so, every single trading day! Despite these huge swings, the S&P 500 posted a negative return for the period.  To lift a line from Macbeth, our stock market has come to resemble, for various reasons, a tale “full of sound and fury, signifying nothing.”  And to complete the metaphor, the headline writers provide us with the “tale told by an idiot.”

Just because someone puts lipstick on a pig, that shouldn’t require you to kiss it.  Our job here at Atlas is first to do our best to protect your capital.  Given the readings so many of our indicators are producing, we currently find prudence to be the best course of action.  If compelling evidence begins to emerge arguing for a more robust approach, we will surely take it.  While fortune may favor the brave, it can prove both foolhardy and detrimental to your wealth.  Remember, the fellow Virgil had utter that sentiment died shortly thereafter.  Thus, at least for the moment we will opt for a more cautious strategy, thereby ensuring our ability to live to fight another day.