Archive for August, 2012

July Consumer Sentiment

Wednesday, August 22nd, 2012

The attitudes of Americans soured some over the month of July according to the University of Michigan’s Consumer Sentiment survey.  The indicator edged down from June’s reading of 73.2 to July’s 72.3.  This lack of improvement resonates with the sluggish recovery our country has endured since The Great Recession came to a close over three years ago.

Consumers continue to expect the state of things to deteriorate even after suggesting times are currently better than in the recent past. The current conditions index improved to 82.7 from June’s 81.5.  It is the outlook that continues to suppress the overall indicator.  The expectations component of the poll fell 3.2 percent from 67.8 to 65.6.  This dour attitude may manifest in slowing consumer spending as Americans squirrel money away for the expected rainy day.

Only time will tell if consumers turn their feelings into measurable actions.  Should they spend according to their outlook, we will likely begin to see it show up in the other indicators. Unfortunately, these indicators gauge actual economic activity instead feelings as this one measures. The biggest concern is that the outlook may influence the largest part of the economy (personal consumption), and at this stage of America’s weak recovery, the last thing it needs is a poor attitude from consumers.     (by C. Cox)

July Unemployment

Tuesday, August 21st, 2012

U.S. payrolls continued to grow in July and did so at a faster pace than in June according to the Bureau of Labor Statistics.  The country added 163,000 new jobs after the prior month’s downwardly revised figure of +64,000.  The unemployment rate ticked up to 8.3 percent after spending the prior two months at 8.2 percent.  While it is nice to see the rate of job creation grow for the month, there are still plenty of items below the most popular figures in this report that continue to illustrate weakness in the overall jobs market.

The data underneath the headlines were not exactly rosy.  The average workweek for all employees remained at 34.5.  Average hourly wages did improved by $0.02 to $23.52.  But that is only an increase of 1.7 percent over the last twelve months.  This is less than the most recent year-over-year core (excluding food and energy) Personal Consumption Expenditure Price Index which is used by the Federal Reserve to gauge inflation.  In June, the Bureau of Economic Analysis calculated this inflation measure to have grown by 1.8 percent year-over-year.  In aggregate, it appears that wages are not keeping up with the growth in the broad cost of living.  When combined with the stagnate average workweek, our country is left with a mix that is likely to slow real personal consumption which will in turn begin to exert downward pressure on our country’s gross domestic product.  This can be averted if Americans save less, but the latest reading on savings, also put out by the Bureau of Economic Analysis, shows the personal savings rate has been trending upward since the last few months of 2011.

The employment situation is another indicator that is informing Atlas’ less than optimistic outlook over the next several months.  It comes in addition to the economic problems that America’s trading partners are experiencing.  If the issues in Europe and the slowdown in Asia continue to progress, this indicator may see even more deterioration in the months to come since exports may suffer.  Of course, this is all happening in front of a demographic backdrop that keeps Atlas up at night as well.   (by C. Cox)

July Consumer Confidence

Monday, August 20th, 2012

The Conference Board’s measure of consumer attitudes, the Consumer Confidence Index, managed to improve slightly in July.  The improvement to 65.9 from June’s upwardly revised 62.7 is surely welcome, but the level is still very low considering the economy has been in recovery for over three years.  Nonetheless, the improvement is welcome and may turn out to be the first step in a thousand mile journey.

The voyage toward a healthy economy has many obstacles.  Americans see employment as a big hurdle, with over 40 percent of those surveyed still describing jobs as hard to get.  Income is seen as another roadblock as over half expect to see their future income fall from current levels.  While the housing market seems to be recently carving out a bottom, consumers indicated a slowdown in their plans to buy homes.  Fortunately, there was some shelter from the storm as car buying plans improved a little.

Atlas is not expecting this indicator to approach the normal levels seen during a healthy economy before the next economic downturn.  Many others of our indicators are turning down in a sequence that tends to precede a slower economy.  The time needed to arrive at a normal economy appears to be growing as obstacles continue to reveal themselves. The globe has many headwinds and the blowhard leadership of the world is not doing its part to keep them from turning into gales.  Perhaps minimizing rhetoric by keeping their motor-mouths shut and letting the engine of the economy warm up will keep us from having to walk the entire distance to normal.     (by C. Cox)

Short Stops

Friday, August 17th, 2012

I mentioned recently that Mr. Market has reached an advanced age, well over 230 years old, with certain eccentricities of behavior which can be seen by those who choose to look.  While any discussion of outright senility has yet to surface, some allowances have been made for behavior broaching on such a condition.   Selling a stock before it is bought ranks as a perfect example.  But the powers that be within the New York Stock Exchange have made allowances for such omissions, allowing Mr. Market’s behavior to be excused in this regard.  Rather than being seen as symptomatic of doddering old age, selling what you don’t yet own has now been formalized as “short selling.”

Here’s how it works.  If you think a stock will decline in price, you can sell shares borrowed from a current owner (paying him interest and some other costs).  If you are right and the price declines, you can then buy the shares at the cheaper, lower price and return them to the original owner.  You still accomplished a primary investment goal, namely buying low and selling high, you just did it in reverse order.

Issues can sometimes arise when this process is applied rigorously by large pools of money.  If a large number of shares are being sold, that action tends to put downward pressure on the price of the underlying stock, almost a self-fulfilling prophecy.  If huge pools of money begin making the same bet, the onslaught can force a company’s price much lower on the exchange.  This rarely happens unless a pronounced underlying weakness of some sort is seen in a corporation’s structure by “stock vigilantes”, who then carry out the shorting.

In both Spain and Italy we have seen such an underlying weakness begin to show in the structure of their banking systems.  Shares of the big banks headquartered there have come under attack.  The governments answered by banning short selling.  This is a tacit admission that they see no other way to remedy the situation.  Desperate times may call for desperate measures but this type of solution does not tend to end well.  We have seen it applied by governments before.  It tends to presage a collapse, not prevent it.

July Supply Managers Report

Thursday, August 16th, 2012

The Institute for Supply Management’s (ISM) July release shows that the economy is headed in two directions.  With a reading of 49.9 after June’s 49.7, the manufacturing report pointed to slowing for the second consecutive month.  The service sector of the economy is still expanding and did so at a faster pace than in June coming in at 52.6 versus 52.2.  For each of the ISM indicators, 50 is the dividing line between contraction and expansion.

Since neither area of the economy is very far from the 50 mark, the underlying components can be looked at to provide added perspective for each side of the marketplace.  New orders point to continued weakness in manufacturing; they continue to look positive for the service side.  New orders remained under 50 at 48 in the goods sector.  The same forward looking component grew to 54.3 for companies providing services.  Employment readings headed in opposite directions with manufacturing companies adding to employment while service providers saw payrolls decline.  If the weakness in manufacturing orders continues, the recent employment expansion will not likely be sustained.

The indicators Atlas watches are continuing to show signs of weakness.  The largest component of our economy is the personal consumer expenditures (PCE). And as we mentioned in the most recent posting for PCE, consumers’ manufacturing spending is slowing even as expenditures for services are growing.  This ISM release is suggesting the pattern will continue based on the new orders components.  This has Atlas’ attention because of the cyclical nature of manufacturing.  As weakness falls over the economy, consumers will curb spending on goods since their replacement can be postponed (paperclips are reusable).  But Americans do not always have that luxury when it comes to services because things like haircuts, doctor appointments, and tax filings are more difficult to do without.  Additional weakness in manufacturing will increase the likelihood that a recession is looming.    (by C. Cox)

June Income and Outlays

Wednesday, August 15th, 2012

Personal income increased in June while consumer outlays fell according to the Bureau of Economic Analysis.  Americans made $61.8 billion more in June (+0.5 percent) than in May but were not willing to spend the added income as personal consumption expenditures (PCE) fell $1.3 billion after contracting $13.3 billion the month before.  The change in income and spending habits resulted in a higher savings rate of 4.4 percent.  It is said that our central bank’s favorite inflation gauge is the core PCE price index (it excludes the volatile components of food and energy), and it managed to edge up 0.1 percent in June after a similar increase in May.

This latest report included revisions in the data going back to 2009.  It appears that incomes grew slower in 2009-2011 than previously thought.  Personal consumption was slower in 2009 and 2010 than earlier readings suggested, but consumers did buy more in 2011 than originally calculated.  No surprise here, Americans’ savings rate was downwardly revised in all three years as well.  Consumers find it difficult to put money away in the good times. How can we be expected to save during periods of weakness?

June’s slower consumption came at the expense of the manufacturing portion of our economy.  Durable goods (items expected to last longer than 3 years) and nondurable (lasting less than 3 years) each contracted.  Services managed to increase.  It should be noted that the lack of growth in durable goods purchases may be how America’s low consumer confidence is showing up in our economy.  As consumers become less sure about the outlook, they are not as likely to purchase longer lasting items that tend to be more expensive.  This indicator is important since over two-thirds of America’s gross domestic product is driven by the U.S. consumer.  Atlas does not find the recent behavior from the consumers according to this indicator very comforting.    (by C. Cox)

June Durable Goods Orders

Tuesday, August 14th, 2012

In June, durable goods orders (DGO) took a surprising 1.6% leap according to the Census Bureau, rising a full percent above consensus expectations.  This brings the year-over-year rate of change for new orders up to 8%, a welcome sign.  Kinda.

Here at Atlas we focus on what is called the core DGO which totals spending by corporations for capital goods excluding both aircraft and defense.  What we are then left with is seen by the economic community as a better representation of spending by America’s corporations on equipment and other longer-term assets intended to boost their overall productivity, hopefully leading to stronger economic expansion and hiring.  Unfortunately, this category saw a 1.4% drop, although the May number, already reported as positive, was revised even higher to evidence a 2.7% surge.  And even within June’s negative core number there was a bright spot as orders for machinery climbed 3.1%, a record increase.

Remember that the best use for a battle tank, fighter jet or assault rifle is to let it rust away.  They may be good for keeping the peace but, if successful, are never employed, providing little else to future growth.  This is one reason why the core number deserves attention.  Its weakness may be yet another reflection of our industries’ concerns and confusion about pending and future legislation which will affect their operations going forward, part of the dreaded fiscal cliff we hear so much about of late.  Additionally, recently expired tax incentives introduced in previous years to help provide immediate stimulus then may be exerting a drag now as well.  Perhaps they played a positive part in prior reports but payback now comes into play.  Robbing from Peter to pay Paul only works until that second party comes to collect what’s owed.  In this case, Paul’s piggy bank may be empty.