Archive for June, 2012

The Euro Genie

Friday, June 29th, 2012

In general, Europeans don’t have a spectacular record of getting along with each other.  The two most devastating wars mankind has known started between European neighbors during the century just passed, and they have endured many other horrific conflicts as well.  Obviously this is not news to the people living there and an economic union of sorts for that continent was proposed soon after the end of the Second World War.  It has evolved over the sixty-plus years into a union of independent states all using a common currency, the control of which is separate from any of them.  This currency, the Euro, is now a thirteen year old political project still hoping to tie the nations of Europe together so tightly that a Third World War cannot take place between them.

The current European dilemma revolves around difficulties enforcing prudent fiscal management by these member states when they all share the fiscal cost of borrowing but lack a political union to enforce prudent budgetary standards.  Thus we have come to a point where some nations borrowed way more than others on a per capita basis and really have no way of paying the loans off by themselves.  Understandably, those countries who didn’t borrow to such excess are loath to now accept the burden of repayment for the sins of those who did.

Established to prevent the potential devastation another war could wreak, the European Union may be coming apart.  A recent report from Bank of America estimated the decline in global stock markets caused by the problems Greece is having with their share of the debt burden led to a loss of almost three trillion dollars just in May of this year.  Other member nations are also in serious trouble to varying degrees, including Ireland, Portugal, Cyprus, and now both Spain and Italy.  Saving the union will require something as miraculous as pulling a genie out of the bottle and many economists are now voicing doubt the Euro will be able to exist in its current state.

There has been substantial discussion of late about how a solution is to be structured.  All the parties involved are hoping to find some way to conjure up a solution.  Can any of them uncover an almost magical solution?  Where will the genie’s miraculous bottle be found, how should it be rubbed, where should it be kept, and especially, who gets to do the rubbing.  The problem is, when all of that gets decided, there is just no way to guarantee what kind of genie will come boiling out.  Tradition says Allah created them out of smokeless fire.  That practically guarantees somebody is going to get burnt.

May Existing Home Sales

Thursday, June 28th, 2012

The pace of existing home sales slowed in May according to the National Association of Realtors (NAR).  The pace of the seasonally adjusted annualized rate went from 4.62 million units in April to 4.55 million dwellings in May.  The month-over-month pace of sales has been trending lower most of this year.   On the bright side, sales of existing homes grew by 9.6 percent versus May of last year.  That makes May’s figure the 11th consecutive monthly improvement when comparing year-over-year statistics.  Since the annualized sales numbers are adjusted for seasonality, the warm winter and early spring sales figures may have been skewed higher if sales were pulled forward from later months (like from now until the end of the year).  This may not be fully evident until early next year when the year-over-year comparisons will be against this year’s warmer than normal first quarter.

Inventories have been trending down for the last 11 months, but they did tick up by one-tenth of a month in May.  At the current sales pace, the stock of used homes (approximately 2.49 million) will last 6.6 months.  The total number of existing homes on the market fell by an estimated 10,000.  The waning supply may be helping the median and average prices as they rose 5.1 percent and 4.4 percent respectively.  A downturn in the number of distressed sales may have also assisted the improving prices; such transactions can impede the average value since they may require large discounting by desperate sellers.  After making up 28 percent and 31 percent of the transactions in March and April respectively, foreclosures & short sales sold at deep discounts only accounted for 25 percent of the deals in May.

Despite the recent improvements, the housing market remains rather lifeless.  According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed rate mortgage fell to a new record low of 3.80 percent, but the sales pace remains relatively soft.  This becomes even more obvious when one considers that the “great recession” ended almost three years before the data for this NAR report was compiled.  Atlas sees the housing market as an area of the economy that is likely to continue having issues into the foreseeable future as financial institutions concentrate on shoring up their positions in order to protect their interests from the next economic downturn that may have already started worldwide.  The tone here at Atlas will remain cautious until we see a large portion of the economic data materially improve.  (by C. Cox)

Retail Sales in May

Wednesday, June 27th, 2012

The Census Bureau reported retail sales for May here in the U.S. fell by 0.2%, mostly on the back of lower gasoline prices.  Paying less at the pump can’t be all bad I would think, especially given that last month we relayed to you the Bureau’s estimate showing April’s sales were up 0.1%, which we saw as soft but still positive.  What statisticians give, they can take away, and the April sales number was revised to a negative 0.2% drop.

The Bureau uses an alternative “core” figure which subtracts out volatile gasoline prices and big-ticket automobile sales, both of which can readily skew the monthly data.  Unfortunately, that didn’t help as core retail sales fell 0.1% in May on the heels of a 0.1% April decline.  The latter was also revised downward from the original 0.1% boost reported last month.

What should we make of this sudden shift from a slow but steady course to one where choppy seas suddenly bring on some swells?  Perhaps we are seeing the first signs of a general economic slowdown once more beginning to surface, one which could gain momentum much like what we saw in the past two summers.  On the other hand, this could just be the pay back we warned about in blogs past for the robust numbers seen in the early months of this year as unseasonably warm weather brought shoppers out early.  While it is still too premature to tell, the answer to this question will influence the Federal Reserve’s decisions going forward, and its importance will keep a measure of our attention.

May Industrial Production

Tuesday, June 26th, 2012

The Federal Reserve’s measure of Industrial Production slipped 0.1 percent in May following a rather strong April that boasted a 1.0 percent increase (revised down 0.1%).  Excluding the previous month, this indicator has been rather weak lately as it has been down three out of the last four months.  Also included in the central bank’s release is capacity utilization.  This ratio of output to capacity retreated to the level it was at in February (79 percent) after a large improvement in April.

After having climbed 1.4 percent in April, production for consumer goods fell 0.2 percent in May.  Manufacturers made 1.3 percent fewer durable goods.  A notable slowdown came from the output of automobiles as they fell 1.9 percent for the month.  Consumers purchased more electricity which help nondurable production grow by 0.1 percent.  Non-energy nondurables fell 0.2 percent thus dampening the overall output for consumer items expected to last less than three years.  Producers continued to increase the manufacturing of business equipment.  By edging up 0.3 percent, this component continued its string of monthly improvements in 2012. Nonindustrial supplies were led lower by construction supplies as they fell 1.2 percent.  Finally, materials to be processed further in the industrial sector managed a slight improvement of 0.1 percent.  The durable component of such materials contracted 0.5 percent.

The tone of this release was not as cheery as Atlas would like to see, but after an increase of one percent in April, unless the industrial output falls quickly in June, this segment of the economy will add to GDP for the second quarter of the year. It is worrisome to see consumer durable goods fall since Americans tend to part with larger sums of cash (items expected to last longer than three years are relatively expensive) when they are feeling confident.  The capacity utilization is still running below its long run average, so inflation caused by demand outpacing the industrial sector’s ability to supply the goods is not likely to be an issue in the near future.  This indicator’s month-to-month change will need to be paid attention to closely in the months ahead.  The recent weakness is a potential canary in the coal mine silently warning about an oncoming slowdown in the country’s economy.  (by C. Cox)

Consumer Prices in May

Monday, June 25th, 2012

The Bureau of Labor Statistics (BLS) said consumer prices fell 0.3% in May at the headline level.  This Consumer Price Index (CPI) is designed to track the prices for an imaginary but generally essential “basket” of good made up of those things you and I probably bought some of in May.  The overall decline in prices is especially attributable to the month’s 4.3% fade in energy costs, with gasoline off 6.8% just by itself.  This brings the year-over-year change down one-half percent to a relatively low 1.7% rate of increase.

After subtracting out food and energy prices to derive their core reading, the BLS reported a 0.2% gain which keeps the year-over-year core CPI figure up 2.3%, unchanged from April, and probably a bit too high for the Fed’s liking (they seem to prefer something at or a touch below 2%).

Few would argue that saving money at the gas pump is a bad thing.  It frees up a few bucks every time we fill up, giving us a little extra to spend in a different facet of the economy should we so choose.  Spreading the wealth around is seen as an economic positive.  But we can’t live on gasoline alone and prices elsewhere remaining unchanged or trending upward aren’t seen in a favorable light by either us or our central bank.

The Fed faces a conundrum.  If they inflate the money supply a bit more in an attempt to stimulate an economy woefully short of positive growth signs, the result would be to risk even higher prices.  If they opt instead to keep their hands in their pockets, resisting calls for stimulus and favoring instead a wait and see policy as Europe sorts out its side of the global economic mess in which we currently find ourselves, unemployment may worsen heading into the upcoming election here at home.  They are surely on the horns of a dilemma, but here at Atlas we see just those two options.  Raising rates is probably the only choice not on the table at present.

Oh Henry!

Friday, June 22nd, 2012

This is the age of acronyms.  While the use of labels such as Baby Boomers still survives as a relic of a simpler past, snappy little contrivances have come to dominate in this age of key stroke ecology.  The label “Hippy” was replaced by the acronym “Yippie” as an endless parade of such abbreviations entered our financial/social lexicon.  Dinks (Double Income, No Kids) for instance took hold some time back, only to be replaced by Ninja (No Income, No Job, no Assets) just recently.  Signs of the times.

Today we learn of a new one: HENRY.  This has nothing to do with what may be your favorite confection; rather, it stands for High Earner, Not Rich Yet.  Acronyms generally are created to describe an influential societal phenomenon –except for anything related to space exploration where tortured examples are born to describe something generally unintelligible anyway.  HENRY is no exception.

The group of Americans captured within this cohort is defined as folks earning between $100,000 to $250,000 annually.  Economic demographers assert there are 21 million such households today, accounting for 90% of our nation’s affluent consumers.  This group, in turn, is defined as the top 20% in income which makes up 40% of consumer spending.  It does not include, by the way, the top 2% of earners who comprise that elite group labeled ultra-affluents.  They don’t need an acronym.  They know who they are.

What’s the point?  The Henry’s are quite susceptible to economic conditions.  When they feel things around them are getting tight, they react by restricting their spending, increasing savings, contracting back into their nests as a feeling of unease, that the good times may not last much longer, grows more pervasive.  They intuit a need to defer to caution when considering discretionary spending.  When enough of them begin restricting their spending, the ripples spread throughout our economy to its detriment.  If you are one of this select group, don’t let this happen.  Go ahead.  Splurge.  That candy bar has your name written all over it.

May Producer Prices

Thursday, June 21st, 2012

The Bureau of Economic Analysis reported the second consecutive decline in the Producer Price Index (PPI) in May.  The decline of one percent follows April’s unexpected drop of 0.2 percent.  Once again, energy prices are the primary driver of the reduced costs.  The core PPI (which does not include energy and food) managed to match last month’s increase of 0.2 percent.  This was in line with the consensus’ expectations.

Sequential months of declines in the headline figure do not occur frequently.  The last back-to-back monthly decline happened in May and June of 2010.  Producers have been experiencing a rather abrupt slowing in price pressures.  The year-over-year change was 0.7 percent in May.  To put that into perspective, the change was 7.1 percent in May 2011 and 4.7 percent to finish last year.  A few months ago, Atlas wrote to you about the deceleration seen in the earlier stages of the manufacturing process.   At the time, crude items (think wheat) had their first negative reading in 2012.  The trend has continued, and the prices of raw materials have been dropping for three months in a row.  Intermediate goods, (think flour) have now decreased for 2 consecutive months.  As the materials continue to become less expensive, the finished goods (bread) have a better chance of seeing price easing as well.

Cost contractions continue to favor the Federal Reserve’s accommodative monetary policy.  If the indicators used to monitor prices keep suggesting disinflation, and possibly deflation, while the global economy shows signs of slowing, it seems reasonable to anticipate further assistance from Ben Bernanke and his cohorts.  As Atlas sees it, this assistance will be futile.  The banking system is flush with cash and interest rates are low.  The economy needs demand, and that cannot be artificially boosted when the largest and wealthiest segment of our population—the baby boomers–has moved past its peak spending years and the generation immediately behind it is too small to replace their spending capacity.    (by C. Cox)