Archive for June, 2012

Twisting, the Truth

Wednesday, June 20th, 2012

Late in the summer of last year, toward the end of September, the Federal Reserve announced the inception of a program dubbed Operation Twist.  Now, just like last summer, they appear ready to twist again.  If you are conjuring up fearful visions of The Bernank in a polyester Nehru jacket gyrating in wild abandon, rest easy.  Allow me to explain.

Along with most everyone else, the Fed figures our economy is in a soft patch (at best) and that stimulus measures need to be adopted to give things a kick start.  Nothing new there; that’s been the case ever since the collapse of Lehman Brothers over three years ago.  Our central bank ran through their usual menu of monetary tricks like lowering interest rates or making extra cash available to the banks.  The result was substantially less than what was hoped for so new programs were introduced.  These generally fell under the heading of Quantitative Easing or QE for short.  Typically these would involve the Fed buying up Treasury notes or mortgage-backed securities.  The first such effort seemed to have been successful, so the Fed backed off.  So did the economy.  When they restarted the program again, the iterations began being numbered by the press.  Thus we have QE1, QE2, and some anticipation of a possible QE3 coming soon to a bank near you.

Obviously things still remained rather rotten so the Fed began trying something new.  They sold bonds maturing in three years or less and used the proceeds to buy bonds maturing later, sometimes much later.  The goal was to keep interest rates low no matter how long they had left before maturity.  The ultimate aim was to spur such drivers of the economy as housing by lowering mortgage rates, thereby creating jobs and stimulating consumption.  This program, when announced last year, was set to end in June of this year.  Given the lack of tangible results to date, we expect they may announce its extension as early as today.

The first time this idea was tried was back in 1961 and the financial press dubbed it Operation Twist then.  I really don’t get the connection but Chubby Checker was all the rage then so there you have it.  Expect all the wags to headline their stories with quotes from various 45s of the time if the Fed does elect to keep on keeping on in what may be a vain hope of twisting the fright away.

April’s Trade Balance

Tuesday, June 19th, 2012

America’s trade deficit improved in April according to the latest figures compiled by the Bureau of Economic Analysis and Census Bureau.  The difference between imports and exports shrank by approximately $2.5 billion to $50.1 billion versus March’s gap of $52.6 billion.  The smaller trade chasm will help improve the country’s GDP figure in the second quarter since the smaller figure will subtract less from the remaining components of the nation’s output.  While smaller, unfortunately the deficit shrank as imports contracted faster than exports, suggesting a general economic slowdown worldwide.

April imports were $4.1 billion less than in March, led in part as foreign fabricated wares fell by $2.7 billion.  America exported $1.5 billion fewer goods and services.  Simultaneously, America’s service surplus shrank by $100 million to a total of $14.8 billion.  Slower business spending held sway over the waning import pace as capital expenditures and purchases of industrial supplies & materials fell.  The same two categories dominated the slowdown in exports.  Businesses around the world seem to be simultaneously tightening their purse strings. This slowdown in investment may begin to put pressure on US manufacturing which has been a bright spot during the recovery.

As another round of banking and fiscal concerns loom, there is worry that the world is starting a new synchronized slowdown, and the latest trade balance report is validating the concern.  There is no shortage of global economic crises; it is reasonable to expect their negative influences to begin to manifest in the indicators.  This trade balance report shows weakness in April.  May’s data will not be available until mid-July, but the economic climate was not particularly balmy, so a big surge in trade does not seem likely from our vantage point.   (by C. Cox)

Revised First Quarter Productivity and Labor Costs

Monday, June 18th, 2012

The Bureau of Labor Statistics (BLS) downwardly revised 2012’s first quarter reading of productivity and labor costs.  The revision comes after the BLS interpreted additional information that was not yet available while making the first estimation.  The initial productivity decline was tallied at 0.5 percent, but we now know it fell closer to 0.9 percent.  Simultaneously, hourly compensation costs grew by 0.4 percent, reduced from an original estimate of 1.5 percent increase.  Also, hours worked were adjusted upward one-tenth of a percentage point to a 3.3 percent increase.

On the surface, growing wages may appear to be a positive development.  Unfortunately, employers do not like wage costs growing when productivity is falling.  This increases the employers’ unit labor costs (ULC).  ULC is a measure of the labor expense required to make each unit of goods or services.  First quarter ULC increased by 1.3 percent, and they are up 0.9 percent in the last year.  As an employer sees the ULC going up, one remedy is to push the employees to produce more each hour.  This is a viable option when demand is ample enough to meet the additional output.  However, when demand is not robust enough to consume the extra units, an employer becomes more likely to cut back hours or staffing because profits are impacted by the less efficient use of capital.

The first quarter’s productivity and ULC did not move in the direction our economy needs.  Despite the increase in wages, the revised inflation adjusted figure shows compensation per hour fell at an annualized 2 percent placing additional pressure on consumers. Along with this cyclical enemy of spending power, Atlas continues to be worried about long term issues that will undermine the purchasing needed for a healthy economy.  Without substantial increases in demand, companies will remain hesitant to increase payrolls, and if productivity continues to deteriorate, it becomes easier for employers to justify their next layoff or firing.   (by C. Cox)

Dominoes for Dummies

Friday, June 15th, 2012

The European drama turns on more than the Drachma.  While Greece still garners most of the headlines and often gets singled out as the originator of the current currency debacle, the situation has moved well beyond that nation’s borders.  Of course this is nothing new.  We’ve known for some two years now that other countries have needed to come to the European Central Bank with outstretched hands for a bailout.  Like a line of dominoes it seems that as each one falls the next begins to falter, leading to a cascade of sovereign insolvencies.

Up to now some comfort has been found amongst those who follow this kind of stuff in the fact that the European Union members who are struggling have been small potatoes economically in the overall scheme of things.  The goal was always to manage events in such a way that contagion could be averted, that other, bigger countries would not catch the same disease.  Too late for that; Spain is now deeply embroiled in the same situation: too much debt, a recessionary economy, and rapidly running out of money.

So who is next?  Greece, Portugal, Ireland, now Spain, all are tipping over.  The latest plan to stave off the crisis requires that the other member nations pony up (at least) 100 billion Euros to lend to Spain which will then be employed in part to bail out their failing banks.  The way that works is each member state contributes to the overall pool in accordance to their economic weight within the union.  This means Italy must come up with at least 22 billion which will be loaned to Spain at a 3% rate of interest.  Italy is also broke so they will need to borrow the money and that’s where things really get fascinating.  The current rate Italy must pay to borrow is about 6% so you do the math.  That sounds really dumb to me, and I’m guessing it moves Italy right up to the top of the next-to-fail candidate list.

Europe continues to come apart.  A deep recession seems to be taking root there which can have long-lasting economic and political repercussions.  Cyprus just recently announced they may need help even before the Italians holler “Zio.”  More on that file later.

May Supply Manager Report

Thursday, June 14th, 2012

The Institute for Supply Management (ISM) released their two reports for May and in both cases there was plenty of good news.

On the manufacturing side, despite seeing the headline number fall 1.5 points to 53.5, the end result still points to growth (anything above fifty is regarded as positive).  Exports slowed, no surprise given what’s happening overseas.  Order backlogs also declined a bit, something to watch, but this slight negative was overwhelmed by the huge 1.9 point advance in new orders, now at a very strong 60.1 reading.  This marks the 37th consecutive month of growth for new orders, and the increasing pace is especially noteworthy.  If all the others sectors of our economy were doing as well, there would be very little to complain about.  Unfortunately, manufacturing, while cyclical and an important indicator in that regard, only represents a small fraction of America’s overall output.

On the services side we saw continued progress made in May with the headline hitting 53.7, up 0.2 points from April.  While hiring slowed somewhat, most of the other components of this report grew.  Of note, new orders jumped a full 2 points to hit 55.5, a reacceleration in this important indicator’s momentum after an April dip.  Exports tailed off in this sector of our economy as well.  Upward pressure on prices slackened, led to the downside by the cost of fuel.  Delivery times and inventories both rose suggesting some issues may be developing even as business activity in general picked up.  These two factors can actually manifest as opposing forces within our economy and we will be watching for further details to emerge in the coming months regarding them both.

This ISM report seems to show some level of growth is occurring across a wide spectrum of our economy, yet it still apparently is not happening at a pace fast enough to pull us out of the doldrums.  Other factors seem to be at work here, and some are easily identified.  Atlas has always pointed to our nation’s shifting demographics having the potential to cause a general slowing in overall consumption. The chaos in Europe’s banking system gets some of the blame.  Our upcoming presidential election and the uncertainty it dredges up gets a share as well.  But perhaps it is the apparent inability of Congress to address our fiscal problems that ultimately bears most of the burden, and it is hard to see how any of the most probable forthcoming election results at this level of our government will lead to a timely resolution.

April New Home Sales

Wednesday, June 13th, 2012

New home sales’ progress continued in April according to Census Bureau’s tracking.  The seasonally adjusted annual rate of 343,000 is an increase of 3.3 percent above March’s revised rate of 332,000 units.  This puts the figure close to 10 percent higher than a year ago.  Prices were relatively stable as the average price grew less than 1 percent to $235,700 and the median price fell a tad over 1 percent to $282,600.  Year-over-year, these price measures are up 4.9 percent and 5.1 percent respectively.

The faster sales pace is encouraging because it helps diminish the inventory on the home builders’ balance sheets.  As these continue to dwindle, new home purveyors will need to construct additional units.  The current inventory would be depleted in 5.1 months if the recent sales pace continues and no other homes are built.  As additional homes are built, they add to the country’s gross domestic product (GDP).  Even though the existing homes market is much larger, the impact on GDP per unit of resold homes is much smaller because no additional construction was needed in the transaction.  New home sales offer the purchase price to GDP in addition to bank fees, commissions, and ancillary purchases which come with all home transactions.

Before it begins to feel like we are getting carried away with this single data point, Atlas wants to offer some perspective.  At the peak of the housing boom, our nation had a new homes annualized sales pace of 1.389 million units.   We are almost 7 years away from the July in 2005 when that figure was recorded and are only able to sell about 25 percent of that rate.  Also, over the last several months Atlas has been commenting on the pattern the economy has been following over the last two calendar years and our concern that the same mold would be used to shape 2012.  Well, if this year’s new home sales parallel the last two, we have just seen the best month of the year.  April tallied the largest number of unadjusted sales in 2010 and 2011; March was the second best month for each of those two years and it has been the second best month so far in 2012 as well.   Atlas is not in the business of predicting housing sales but wants to provide a point of view that may differ from the ebullient headlines you have likely seen.  (by C. Cox)

April Personal Income and Outlays

Tuesday, June 12th, 2012

Personal income increased $31.7 billion in April according to the Bureau of Economic Analysis.  This is a 0.2 percent increase over the similar gain in March.  After-tax income grew $22.0 billion which is also an increase of 0.2 percent.  In an economy that is comprised of over two-thirds consumption, income growth is vital to fund additional spending.  The latest figure on outlays shows consumers spent more than their additional income as Personal Consumption Expenditures (PCE) grew by $31.8 billion; this caused the savings rate to fall to 3.4 percent from 3.5 percent.  Prices were relatively stable as the PCE price index moved up 0.1 percent after growing 0.2 percent in March; the slowdown in price growth will help spur consumption as long as income continues to outpace cost movements.

Wages made up the bulk of the income increase as they improved by $12.9 billion.  This is a slower increase than March’s $17.6 billion.  Proprietor’s income also grew at a more tepid pace; owners added $4.0 billion after managing to make $5.1 billion more in the first quarter’s final month.  Other income categories with diminishing growth include rental income, receipts on assets (interest and dividend income), and transfer receipts (social security, unemployment benefits, and food stamps).  It is worth noting that after adjusting for inflation and taxes, income did manage to grow by 0.2 percent for the second consecutive month after two months of zero growth in January and February.  Going from a nearly stalled pace in March to 0.3 percent in April, personal consumption picked up some velocity.  In April, durable goods managed to make up for some of March’s 1.2 percent slide by growing 0.8 percent.  Non-durable goods purchases grew slower than the prior month, but Americans picked up the pace of services consumption.

This is a very important indicator and sheds some light on the second quarter’s GDP growth.  America’s economy is highly dependent on personal outlays, so the pick-up in April is welcome.  Also, the progress seen in real disposable personal income (inflation adjusted after tax income) drives demand; two months of growth in this measure of pay is not yet a trend, but it has started to gain velocity like consumption, so some comfort can be found within all of the noise of the global economy.    (by C. Cox)