Archive for August, 2012

Parting the Red Sea

Friday, August 31st, 2012

I expect to see a large part of the upcoming presidential campaign paying lip service to our nation’s worrisome budget deficit and how it should be tackled.  The Congressional Budget Office (CBO) estimates our current shortfall at a staggering $1.1 trillion for 2012.  While enormous, most of the outstanding balance for which America is on the hook doesn’t get captured in this figure if the debate stays at this level.

The budget deficit is just the difference between what our government collects and what it spends.  If you were to do the same thing you would look at what funds get deposited into your checking account throughout the year and subtract out the bills as they get paid.  But let’s assume you have a mortgage with an outstanding balance of $200,000 that will be paid off in 25 years. The full amount is owed, but how should you account today for the balance due in future years?

The U.S. faces a similar circumstance.  We have promises outstanding for future Social Security and Medicare payments.  We have trillions coming due in the future represented by bonds sold to borrow money.  Proceeds from these sales are used to pay off current bills, but the bonds really represent additional bills needing to be paid in the future, along with the interest they accrue.  When all of these future obligations are considered together we arrive at something called the fiscal deficit.

The CBO recently forecast our long-term fiscal deficit, they call it the Alternative Fiscal Scenario, at $222 trillion!  It grew by an astonishing $11 trillion just in the past year and there is no sign either party has a credible way to bring it under control.

Our nation is drowning in a sea of red ink.  How can we stop it?  How would you stop it if you found your family was deep in debt?  Cut spending?  Pay off your credit cards?  Maybe see if you could get a raise?  All those things make sense on an individual level but how do they apply at the federal level?  Austerity.  Benefit cuts.  Higher taxes.  Regardless of current campaign rhetoric, if our children are to have any hope reaching the land promised by our shared American dream, these aren’t just options.  They must all become part of our immediate future.

July Producer Prices

Thursday, August 30th, 2012

Manufacturers and wholesalers paid more for finished goods in July according to the Bureau of Labor Statistics. The 0.3 percent increase was faster than the month-over-month increase of June which was 0.1 percent. The core number (it excludes food and energy) managed to jump 0.4 percent after only gaining 0.2 percent or less in 8 out of the previous 9 months.

While it is only one month, July’s data is pointing to upward price pressure resulting from cost pushes. The headlines have been filled with stories about the drought in America pushing up corn prices, and geo-politics still stress the price of a barrel of oil. The recent refinery fire is also not helping energy costs either. That being said, there are other less volatile components showing rising costs as well. Light trucks made the largest impact on the price creep, but shoes, pharmaceuticals, and cigarettes helped as well. This was a rough month for sick, chain smoking, light-truck dealers moonlighting as shoe saleswomen.

The report also offers insight into the price pressures experienced in the earlier points within the manufacturing process, and although there was some increase in the price of goods within the earliest stage of production, the trend in the crude (think wheat) and intermediate (flour) has been lower, and all of the crude cost increases came from food and energy. The core crude prices still managed to fall. If food and energy costs continue to increase, it will likely hurt other areas of the economy. In order to escape the fallout, prices excluding food and energy will have to fall fast enough to keep up with the volatile components’ increase, or Americans will have to buy less food and energy to make room for spending in other areas of the economy. Hey, there are those of us here at Atlas that could use a diet.

July Retail Sales

Wednesday, August 29th, 2012

After the downwardly revised decline of 0.7 percent in June, retail sales had a nice comeback in July of 0.8 percent in the latest tally from the Census Bureau.  Not only was the headline figure encouraging, but the increase was broad-based.  This seems to be flying in the face of recent surveys about consumer attitudes.  The polls suggest Americans are pessimistic about the future which does not seem to be a perspective conducive of spending.   But their actions in July did not confirm this outlook.  Perhaps retailers not only require shoes and shirts, but they also want attitudes checked at the door.

This indicator is an important one because it represents about one-third of the spending consumers do in a year.  Parts of this report feed directly into our nation’s official gross domestic product figure, so the positive reading in these items will help with the nation’s economic growth rate.  Leading overall retail sales higher were auto purchases.  This is encouraging to some extent because the Consumer Price Index shows that automobile prices fell in July; retail sales do not adjust for price movements, so there must have been an increase in the number of vehicles sold in order to see auto sales increase.  It should be noted that the Producer Price Index reading on automobiles was higher.  This means dealer’s costs went up, so the increased sales at lower prices may have hurt their margins in July.

This has been an indicator under tremendous stress recently. The year-over-year growth has been declining since mid-2011.  This tick-up was enough to increase the year-over-year change to 4.1 percent from 3.5 percent in June. But to put this in perspective, the year-over-year growth was 9.1 percent in July of 2011, so the growth rate has slowed by over half.  It will take increasing domestic consumption of goods to keep this economy motoring forward because the rest of the world seems to have too many issues to be considered reliable buyers of our manufactured products.   (by C. Cox)

July’s Federal Deficit

Tuesday, August 28th, 2012

Our Treasury Department reports the U.S. had a budget shortfall in July of $69.6 billion.  Understand, that is how much we overspent in just those 31 days.  While that may seem like a lot, we need to put it in some sort of context.  Give me a second to do so.  Okay, there; now you see?  $69.9 billion doesn’t just seem like a lot, it seems like a whole heap of a lot.

Sorry, I didn’t mean to get you upset.  Let me take a different angle on this.  Wow, the month’s budget deficit was the lowest we have seen in five years!  It came in over $30 billion less than consensus.  In fact, with the nation having now completed the tenth month of its fiscal year, our Treasury’s deficit is running some 11.5% less than what we saw at this same time last year.  We have only gone in the hole by $973.8 billion so far.  There’s progress for you.

How can we explain this fortuitous turn of events?  First, receipts are climbing, up 6.1% for the fiscal year-to-date.  Corporate taxes have jumped a whopping 29.8% to $182.4 billion, suggesting some things have been going very well for businesses.  Income taxes paid by individuals now total $928.2 billion over the same period, up a shade over 4%, also a bit encouraging.  Topping it all off, spending stayed relatively flat, actually declining some 0.4%.  A 3.2% drop in defense spending helped keep this side of the balance sheet in check.  I certainly hope this answers all those nattering nabobs of negativism who assert you can’t get out of debt by borrowing money.

June Trade Balance

Monday, August 27th, 2012

America’s trade balance with the rest of the world improved in June according to the Bureau of Economic Analysis.   The trade deficit dropped by $5.1 billion dollars and is now sitting at a still hefty $42.9 billion shortfall.  Our country’s exports improved by $1.7 billion (+0.9%) as imports fell by $3.5 billion (1.5%) for the month.  With exports now rising faster than imports, the year-over-year trade deficit has decreased by $7.4 billion.

Many components of the economy added to the month’s improvement.  Consumer goods increased by the largest dollar amount ($0.9 billion).  More auto related wares were sold to other countries; industrial supplies and materials exports were higher, and capital goods (equipment investments by companies) increased as well.  The only decrease came from the foods, feeds, and beverage category which was down by $0.8 billion. On the import side of the equation, June’s lower oil prices provided a large decrease in the value of goods purchased by Americans from foreign sources.

The trade balance is far from equilibrium, but the downward trend in the deficit is encouraging.  The gap has been running much lower than it was in the few years before the great recession.  Since the end of the last economic contraction, exports have been growing, and more recently, imports have been going down.  One possible explanation may be that American companies have become more competitive in the global market.  While this could especially apply to our exports, imports may be a different story.  The decline we are seeing there may still be attributable to the same increasing competitiveness, but it may also be explained by a weakening U.S. consumer.  Consumer trends have been showing signs of difficulty recently so Atlas is paying special attention to this area of our economy.  Are you spending enough?   (by C. Cox)

Rolling Loans

Friday, August 24th, 2012

Does our government own America’s biggest banks?  Certainly not; after all, they are publicly traded, private enterprises aren’t they?  Still, we did see the biggest ones come under intense government scrutiny in the depths of the Lehman/AIG crises a few years back.  And legislators do redefine the bank’s operating parameters from time to time.  Also, the Federal Reserve has much to say about their daily activities (although the Fed operates in parallel but outside of our government).  Further, many of the world’s largest banks or their subsidiaries are qualified as “primary dealers” by the N.Y. Fed, which, according to that august body, means they are “required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”

This points to an interesting world-wide phenomenon.  Governments borrow money by selling their bonds and some of their biggest banks are obligated to act as buyers of last resort, using these bonds in part to bolster legislated reserve requirements.  With the deepening fiscal problems seen here, in Europe, Japan, and elsewhere, governments continue borrowing by selling ever more bonds to banks.  In turn these banks are using them as collateral to borrow from their own central bank equivalents to our Fed.  Are sovereign governments essentially borrowing from banks via bond auctions while banks are borrowing from the same governments to remain solvent?

Deficits continue to grow in most developed nations, suggesting the answer to this last question is yes.  With no money to pay off their bonds at maturity, governments roll the principle and interest over into a new series of the same.  This smacks of a Ponzi scheme in which our banks are complicit following the adage, “a rolling loan gathers no loss.”

J Paul Getty has been quoted as saying, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”  I would suggest that when the figure reaches $100 billion governments have, at the very least, become partners with these institutions deemed too big to fail.  Certainly, as is now the case, any amount north of that confuses the issue as to who owns whom even more.  Resolving this conundrum could lead us to conclude the same banks have also become too big to bail.

Second Quarter Productivity and Costs

Thursday, August 23rd, 2012

Companies were more productive in the second quarter according to the Bureau of Labor Statistics.  This 1.6 percent annualized uptick follows the upwardly revised first quarter contraction of 0.5 percent that was originally thought to be negative 0.9 percent.  To get this level of growth in productivity, output increased by 2.0 percent, and the improvement required 0.4 percent additional hours worked to create the added production.  Unit labor costs moved up 1.7 percent after an upwardly revised increase of 5.6 percent in the first quarter; the original estimate was 1.3 percent.

As illustrated by the revision in labor unit costs, the components of this indicator can swing drastically from quarter to quarter.  This volatility makes it worthwhile to look at the year-over-year changes.  Output is 2.9 percent higher, but it took 1.8 percent more hours, so productivity increased by 1.1 percent.  The unit labor cost has increased by 0.8 percent year-over-year, adding to profitability.  To put it in perspective, unit labor costs were negative during 2009 and 2010 but were up 2.0 percent in 2011.  If the growth rate of unit labor costs is falling again, this may prove to be advantageous to the income statements of American corporations.  It is suggesting that the cost per unit of production is slowing.  If demand for their products continues, profits will increase and that may lead to added hiring.  Maintaining the demand component of such a virtuous cycle is the problem Atlas sees; we anticipate an intermediate period marked by demand constrained by a demographic phenomenon that can only be
remedied with time.  Thus far, the powers that be do not agree with this solution, so they have impatiently resorted to creating more money.  But all this new money has been sitting relatively idle.  It is too bad the Federal Reserve cannot print time.  (by C. Cox)