Archive for July, 2012

June Industrial Production

Tuesday, July 31st, 2012

Industrial production increased 0.4 percent in June after falling a revised 0.2 percent in May according to the latest data from the Federal Reserve.  Manufacturing managed to make up most of its 0.7 percent loss from last month by gaining 0.7 percent in June.  Mining increased 0.7 percent as well after being flat in May.  Utilities declined 1.9 percent, but that is coming off of the previous month’s surge of 2.8 percent.
The improvement is welcome, but this indicator has been alternating between gains and losses since March after ten consecutive positive months.  Durable goods manufacturing rose 0.8 percent.  This increase in the output of goods expected to last longer than three years was assisted by auto manufacturing’s1.9 percent jump.  It will be interesting to see if carmakers continue to pick up the pace of production in July since retail sales of automobiles were negative in June.  A buildup of inventories may discourage a faster production schedule.  Nondurable goods made up some of May’s lost ground in June by increasing 0.5 percent after falling 0.7 percent.

Capacity utilization was mixed.  More capacity as a percentage of the total was used in June, but this is after May’s statistic was revised lower.  Currently the country is using 78.9 percent of its capacity.  This is a 0.2 percent improvement from May’s 78.7 percent that was originally calculated as 79 percent.  For perspective, the long-run average is 80.3 percent.
Industrial Production is highly cyclical and worth watching as the business cycle runs its course.  The Federal Reserve calibrates this indicator by pegging industrial production in 2007 at 100.  June’s reading was 97.4, so even as manufacturing has led the recovery since the end of the last recession in June of 2009, it has yet to reach the levels seen before the economy soured.  This is just another illustration of how slowly we are recovering from the banking crisis led recession.  Unfortunately, with important things like retail sales easing and many of our major trading partners experiencing difficulties, this indicator may not fully recover before the next downturn begins.      (by C. Cox)

Friday, July 27th, 2012

Our favorite indicator here at Atlas comes from the Economic Cycle Research Institute (ECRI).  These folks have a phenomenal record of accurately tracking changes in the business cycle that can be traced back to the 1920’s.  In December of 2011 they said a recession here in the U.S. should develop by June of 2012.  This past May they stated, “We have not seen a slowdown where year-over-year payroll job growth has dropped this low without a recession.”  And more recently on Bloomberg (July 10), their spokesman said he believed the next U.S. recession had already begun.

The next logical question might be, “How come nobody seems to have noticed?  Not the Fed.  No major investment firms.  Not the official arbiters of such matters.  Nobody.”

Remember that a recession is a difficult condition to diagnose except in retrospect.  Officially the determination is made by the National Bureau of Economic Research which determined our last recession had begun a full year after its actual onset.  They sometimes pronounce a recession’s beginning at a date later than when they subsequently declare it had already ended, essentially missing the entire event as is occurred.  Obviously as a concept recessions are tricky.  Lakshman Achuthan, the ECRI spokesman, infers complacency sometimes prevents the gradual degradation of economic conditions to be seen as recessionary until a catalytic event suddenly bring things into a sharper focus.  In other words, an exogenous event needs to slap folks up alongside their head before they wake up to reality.

What might such an event be?  9-11 was one; the Lehman collapse, another.  Unfortunately, they can’t be known in advance.  This precludes perhaps any obvious candidate such as a collapse of the Euro.  But try this on for size.

Mexico is our nation’s third largest trading partner.  Our common border is considered “one of the busiest, most economically important borders in the world” according to our State Department.  They are our second largest foreign supplier of petroleum.  The result of their recent presidential election is currently being challenged.  While still a long shot, an unsatisfactory resolution to this problem has the potential to ignite a political firestorm accompanied by civil unrest with attendant sudden and damaging consequences to our cross-border trade which is approaching $1 billion dollars worth of legal goods daily.  If that happens, remember you heard it here first.  If it doesn’t, forget I said anything.  After all, the catalytic event is unknowable, just like the recession we’re in.

June Retail Sales

Thursday, July 26th, 2012

Retail sales continued its string of losses in June according to the Census Bureau.  The monthly change fell 0.5 percent and follows declines of 0.2 percent in both April and May.  While this measure of the economy only reveals the purchases of retail goods and does not consider money spent on services, it is still suggesting the economy has become sluggish.  Unless Americans make up the difference by spending more money in the service economy, like getting more frequent haircuts, the likelihood of recession is increasing.

Consumption was down in several categories.  Motor vehicle sales fell as did gasoline revenues. Since the Census Bureau does not adjust for price moves, even if Americans purchased the same volume of gasoline, the petrol sales figure would decline during times that gas prices are declining.  The Bureau includes a column that excludes auto sales and gas, and it shows the rest of retail sales fell 0.2 percent in aggregate.  There were a few categories showing monthly improvements, but miscellaneous retailers, non-store retailers combined with clothing & accessories and food & beverage stores did not improve enough to counter the other areas of June’s retail weakness.

Retail sales are a large portion of our economy so the recent weakness is concerning.  The U.S. was already in a recession the last time this indicator contracted for three consecutive months.  The consumer is the largest driver of the economy, and this report illustrates fatigue is setting in.  This does not mean Americans cannot get a second wind, but if consumers do not get a boost of spending energy, our economy will need more purchases to come from our foreign trade partners on other continents. With any luck, their weakness (Europe and Asia) will not get in the way of their consumption of U.S. goods.  Of course, the Federal Government may try to borrow more to spend as well, but that can only happen after the “fiscal cliff” is addressed.    (by C. Cox)

June Producer Prices

Wednesday, July 25th, 2012

The Producer Price Index for finished goods increased 0.1 percent in June according to Bureau of Labor Statistics.  The monthly improvement does not make up for the 1.0 percent loss seen in May.  The earlier stages of production continued their string of loses in June as intermediate and crude goods were down 0.5 and 3.6 percent respectively.

Production prices have been seeing negative pressure build for some time, and this month’s headline growth is not enough to suggest the downward push is over.  Energy costs have been quite influential as they have contracted in 10 out of the last 13 months.  The cost of food has been down three out of six months as well.  The report also peers into the future a bit when it looks at prices in the earlier stages of production.  Crude prices (think iron ore) have been down substantially in each of the last four months for a total of 13.29 percent.  The growth of intermediate prices (think steel) began going negative a month after the crude stage price’s rate of change fell below zero and have been lower for three consecutive months.

Lower prices do bring relief to the final consumer’s pocketbook, but the US economy is in its third year of recovery, and this softening is likely due to a disconnection between manufacturer’s ability to produce the wares and the customer’s willingness to consume the items.  If manufacturers try to alter their output to align mores closely with current demand, jobs may be lost as a consequence.  This will not help demand in the future and a negative spiral may result. The current downward price pressure is flying in the face of the massive monetary stimuli put together by our central bank and fiscal spending that far out paces the revenues collected by the Federal Government.  All of the efforts by the powers that be have not yet come up with a suitable substitute for good old fashioned growing demand.      (by C. Cox)

Penny Wise and Dollar Foolish

Tuesday, July 24th, 2012

To say the United States has a fiscal problem is unlikely to upset the apple cart.  Every month the Department of Treasury releases the details of the government’s receipts and outlays.  The report is over 30 pages long and details where the inflows came from (primarily taxes) and generally itemizes how money is being spent.  Page two provides a summary of the monthly deficits and surpluses for the previous full fiscal year as well as the current year’s year-to-date numbers.  Of the 21 months listed in June’s report, only April 2012, the IRS’s busiest month, managed a surplus. In what appears to be an effort to save ink, the crafty civil servants of the Treasury Department chose to give April’s surplus a negative sign while leaving the months with deficits as positive numbers.

Needless to say, June’s budget shortfall of $59.741 billion did not get a negative sign so even more ink was conserved.  Fortunately, the Social Security Administration along with the Departments of Agriculture, Commerce, Homeland Security, Justice, State, and Veterans Affairs  have all pitched in to save the ink by spending more year-to-date than in fiscal 2011.  Not doing their part to save ink are individual tax payers and corporations as tax receipts from both increased. Remember, if spending is less than tax receipts, a negative sign will need to be printed.

Well, there you have it.  Barrels of ink are piling up thanks to the Treasury Department.  As the demand for ink falls, the price should follow.  At some point, another user of ink will find the price suitable and begin buying it for their printing needs.  Perhaps that other user will be the Treasury Department.  Aren’t they in possession of the presses used to create the Federal Reserve Notes that represent the money our central bank keeps manifesting out of thin air?   (by C. Cox)

June Small Business Optimism Index

Monday, July 23rd, 2012

Contests require the ability to tell the contestants apart.  If everyone is vying against each other in a big muddle, winners and losers are hard to distinguish.  Pundits may decry the disconnect between Wall Street and Main Street, but who carries the banner for each?  Wall Street seems easily targeted, bankers and brokers, especially the biggest ten or so companies world-wide.  Main Street may seem more amorphous.  Who speaks for this assemblage of working stiffs, retirees, farmers, and so forth?

Around elections, small businesses get substantial press as the engines of job creation and while it’s true that they are responsible for the majority of new jobs which crop up each year, they can also take credit for destroying the most jobs when times are tough.  It is for this reason we pay some attention to the monthly National Federation of Independent Business (NFIB) survey.  Therefore, in the contest between Wall Street and Main Street, we will nominate this group as spokesman for “the little guy.”

The NFIB’s Small Business Optimism Index for June posted what they called a “significant” decline, down three points to 91.4 for the month.  This total was below expectations and reverses the year-to-date improvements they had been recording.  More to the point, their job creation factor contracted for the first time this year.  In their own words, “job growth will be far short of that needed to reduce the unemployment rate unless lots of unemployed leave the labor force–no consolation.”  Additionally, both earnings trends and (not surprisingly) plans for capital investment declined.  The report highlighted a special weakness in consumer spending on services.

Optimism requires some degree of certainty.  The June NFIB report said, “With over 20 new taxes contained in the (new health care) law–a price tag of $800 billion–and most of the regulations yet to be written by HHS, the implications for employee costs remain unclear.  Uncertainty reigns supreme for much of Main Street.”  It is certainly hard to imagine how this main source of job creation will be able to assist with our current high unemployment until most of these regulations get put in place.  Given the government’s track record, we don’t expect that to happen any time soon.

Coming Up Lame

Friday, July 20th, 2012

Some people never learn.  When you have assembled a large group of these folks together, we refer to them as the U.S. Congress.  And what a fun bunch they are.  Always carrying on, bickering, name calling and blaming each other for all the same things neither of them actually did.  Not that any of them really wanted to do something if it endangered their chances for re-election.  Which brings us right up against the dreaded “Fiscal Cliff” I recently discussed in one of these missives.

Over the past few years as the various interests which comprise our Congress have reacted to their constituencies and occasional cattle prods from both the Bush and Obama administration, a series of temporary fixes have been introduced into our nation’s economic landscape, all in hopes that they will somehow rouse a phoenix from the ashes of the Lehman/AIG disaster we endured a few years back.  Since no single bullet proved magic, various programs were layered over one another in hopes that they would act in concert to spur our economy back to robust health.  Didn’t happen.  Interestingly, what will happen if Congress doesn’t get their act together soon, is that 42 of these goodies shall expire simultaneously at year’s end.

One stimulus measure designed to get ordinary folk to spend their hard earned dollars lopped a couple of points off the payroll tax for which individuals get dunned every payday.  The full deduction will get reinstated come January, removing approximately $1,000 from the average family’s take-home pay each year.  Other measures slated to go into effect include raising the capital gains and dividend tax rates, jumping the estate tax up while substantially reducing the amount which is exempt from it, and adding a surtax on folks with high incomes.  In addition, this last group can look forward to an additional (and not inconsequential) tax on investment income to pay for the new healthcare bill.  Even if you have no income you may feel the effect since extended unemployment benefits are slated to be axed as well.

It is now moot whether or not any or all of these stimulus measures should have been introduced to begin with.  What seems to be of primary importance at the moment is for both individuals and businesses to have a clear view of fiscal policy going forward so that they may plan their savings, spending, retirement, and investment strategies for future years.  None of that can happen with any assurance until Congress acts and that august body seems hopelessly deadlocked in pre-election positioning which precludes any immediate substantive action. If this continues to be the order of the day, that takes us into November, leaving little time for such momentous action before terms expire.  Most likely they will choose to enact a short-term blanket extension which stretches into March of so of 2013, after the next Congress has convened.  That is hardly the type of decisive action needed to pull our economy out of its current funk, but how far do you think a lame duck can kick a can?