Archive for September, 2012

Just Two Shopping Days Left

Friday, September 28th, 2012

Our federal government here in the U.S. of A. operates on a fiscal calendar which starts with October of each year.  That means this coming Monday is actually New Year’s Day and should be considered a holiday.  Hopefully the government will stay closed to celebrate.  We the people are always safest when the government isn’t working to help us so that would be a plus right there.  In addition, it might cut down on some of their spending.

In another month or so we will get a peek at our country’s books, giving us a chance to evaluate just how prudent the caretakers of our national treasure have been.  We did just get the tally for August which gives us a good idea as to how things are going.  Unfortunately, America overdrew its account by $190.5 billion over the course of this eleventh month according to the Treasury Department, substantially more than the $69.6 billion shortfall recorded in July.  Interestingly, this marks an improvement of sorts.  Our deficit year-to-date is actually down 5.6% from this same time last year.  Once some accounting adjustments are made, there has been a 6.7% YTD reduction in spending.

How did all this good news get accomplished?  First, corporate taxes have jumped 31%, continuing the rise we saw last month.  Individual taxes, a much bigger source of revenue gained 3.9% as well.  One the expense side, defense spending declined 2.2% and interest expenses required to service our total national debt stayed fairly constant.

Adding August’s shortfall to the total deficit accumulated through July puts us in the hole by roughly $1,164.3 billion.  Next month we’ll see how much further into arrears we fell for the entire year.  If August represents a recent trend, then the news isn’t so hot since the monthly outlays were well above last year’s and way more than double the $79.1 billion average deficit for the last ten years.  Still, seeing it reduced is good news.  Let’s pray it can get into balance before interest rates begin to tick up.

August National Activity

Thursday, September 27th, 2012

The Chicago branch of our Federal Reserve System releases a monthly report called their National Activity Index (CFNAI).  It fell to -0.87, a substantial drop, from the July -0.12 reading (which had been revised slightly from -0.13).  This forces the three-month average to -0.47 from July’s -0.26 post (also revised from -0.21).

Last month, despite the negative headline, we pointed out that the production component had actually moved to a positive reading, suggesting some strength might come from consumption of durable goods by our citizenry.  With a drop in August to -0.58 led by declines in both industrial production and capacity utilization, those hopes are fading fast.  Compounding the problem, last month the consumption & housing category had provided a slight positive to the overall total by declining at a slower rate.  Unfortunately it has resumed its downtrend, declining a bit more to -0.23.  The other two components are employment and a mash-up called sales/orders/inventories; both continued to show slight monthly negative numbers.

The abysmal reading for August placed the CFNAI at a three-year low.  This means America’s growth rate is falling ever further below its long-term trend.  As noted last month, a reading below -0.7 for the three-month average tends to mean we are in a recession.  Given that many of our other indicators are now coming in disappointingly lower (with the notable exception of housing), that level may be breached next month, but we don’t need a number to tell us what many American’s already know.

August Leading Indicators

Wednesday, September 26th, 2012

The Conference Board reported their index of leading economic indicators (LEI) fell a bare 0.1% in August.  We are used to seeing this data point see-saw up and down from positive to negative.  It has been up in two of the last five months, down in three, and this slight drop comes on the heels of a 0.4% July gain.

If we hope to derive a better sense of direction by turning to the individual components of this indicators which, taken together, comprise the monthly total, we come up a bit short.  For instance, the supply manager’s new orders index for August was disappointing, providing much of the drag influencing the total.  However, more recent data from some of the purchasing manager’s reports we follow suggest that figure may be turning positive.  Also contributing to the negative tone was a drop in consumer expectations.  This metric has suddenly turned positive, and in a big way.  Taken together, this leads us to expect a favorable reading for September.

Jobless claims, on the other hand, don’t seem to be getting appreciably better, so their negative influence will likely continue to be felt.  Also possibly adding some drag to any prolonged recovery will be interest rates which are being held low and engineered down further by the latest policy announcement from the Federal Reserve.  This latter category has been providing what we feel is an abnormal positive influence on the LEI total for years but, if long-term rates can be lowered still further, that benefit may go away soon.

All in, the August leading economic indicators index suggests a continuation of current conditions.  Goldilocks may have found a porridge to her liking, but to us this mix is neither hot nor cold, just bland.

July 2012 Trade Balance

Tuesday, September 25th, 2012

The Bureau of Economic Analysis indicates that America’s trade balance was slightly worse in July than the revised June figure.  The deficit rose by about $100 million to $42.0 billion as we imported $225.3 billion while exporting $183.3 billion.  Year-over-year, however, the trade gap narrowed by $3.6 billon as exports have increased faster than imports.

In dollar terms, both imports and exports slowed for the month as the moribund global economy continues to float in the doldrums.  Underneath the headlines, it appears that consumers in the U.S. slightly increased their demand for non-petroleum goods from other countries, but foreign buyers wanted fewer of our goods.  While the petroleum deficit shrank by $1.6 billion, the price of oil fell faster than the uptick in demand so we actually imported 4.4 percent more barrels but the average price was 6.3 percent cheaper than in June.  Recent upward price pressure may increase the petroleum deficit in August according to the price tracking done here at Atlas, assuming, of course, that demand did not wane significantly during the month.

This report illustrates the general difficulty seen in the global economy.  Our trading partners are exhibiting reduced demand, and U.S. consumption of foreign made non-petroleum wares has been trending downward pretty much since March.  Less than optimal statistics like the trade balance inform the actions of central banks around the globe as they continue efforts to stabilize their individual economic systems.  But many of the tools being used by these controllers of the money supply are new and untested.  The efficacy of their actions may not be known until future historians write about the times we are currently living in.  Let us just hope their untried techniques do not add to the plethora of challenges the world is already facing.

Second Quarter Productivity and Costs

Monday, September 24th, 2012

America was more productive in the second quarter than initially thought according to the revised figures put out by the Bureau of Labor Statistics that measure the amount of output relative to hours worked.  Nonfarm business sector labor productivity grew by an annualized 2.2 percent for the quarter (versus the initial reading of 1.6 percent) and is up 1.2 percent year-over-year.  The labor cost per unit of output increased 1.5 percent from April to June as hourly compensation jumped by an annualized 3.7 percent; unit labor costs have climbed 0.9 percent in the last twelve months.

The added efficiency came as output increased faster than the number of hours worked in both the quarterly and annual figures.  But the employees did not go unrewarded for the added production, and since their income grew faster than output per hour, the additional compensation must be paid for by somebody.  The two likely payers are corporate profits or consumers via inflation.  Company owners do not like to see profits fall, so they will likely attempt to pass it on to the final buyers.  If it does leak out as an increase in prices, the 1.5 percent annualized uptick is within the normal range of the last twenty years.

The Federal Reserve must still feel comfortable with some higher amount of inflation since it continues to pile on monetary easing in an attempt to stimulate the economy.  If the acceleration of labor costs continues, the central bank may remain accommodative to encourage even further inflation.  Many argue that the actions by central banks around the globe are without precedent and must eventually result in significantly higher prices.  It is an understandable concern, but with wage increases still relatively normal after years of stimulating, central bankers seem to feel they have room to remain abnormal in their responses to the sluggish pace of growth in the U.S. and the rest of the world.     (by C. Cox)

Don’t Bank On It

Friday, September 21st, 2012

Atlas consists of three guys who manage client portfolios, so you can probably imagine what the place looks like.  Nobody picks up their socks, puts down the lid, and so forth.  That’s where Bobby comes in.  Literally.  Once a month he drops in to vacuum, empty, scrub, do whatever is necessary to keep our office spruced up.  For this we had been paying him a princely sum in the form of a check.

Turns out that Bobby doesn’t have a checking account.  Says he doesn’t trust banks.  So our bank was charging him five bucks each time he tried to get his money as recompense for all the extra time and effort it took to have the teller dip her hand into the cash drawer.  They don’t charge me, so I take his check over and they give me cash which I hand to him.  I only charge him $3 for the inconvenience so everybody wins.

The Federal Deposit Insurance Corporation (FDIC) recently updated a report on folks like Bobby.  They place him in one of two categories.  The “Unbanked” who have no banking relationship whatsoever, or as “Underbanked”, which means he may have a checking account but still uses outside check cashing services, pawn shops, pay-day loans, and so forth.

Here’s the gist of this FDIC report.   The primary demographic of these two groups consists in large part of “poorer Americans” who have a couple of things going for them.  The FDIC thinks they could be good customers and they definitely represent a growing cohort in our land of plenty.  In short, this group represents an untapped market, an opportunity for America’s banks.

Oddly, big banks don’t share the FDIC’s enthusiasm.  During my brief association with Bank of America, planning sessions tended to revolve around strategies for “capturing the client’s entire wallet.”  Bloomberg reported on a Chase Bank finding that 70% of its clients with less than $100,000 in a total relationship (which includes checking, savings, credit cards, mortgages, and so forth) would probably prove unprofitable should caps on lender’s fees go into effect as a consequence of recent legislation.

Obviously this leaves the un- and under-banked also un-touched by such institutions.  After all, such folks might let their accounts run dry every month.  Caps on charges for bounced checks could seriously crimp a source of income for banks in this troubling low-interest environment.  So here’s the big question.  If someone of their ilk were to collapse from hunger while waiting in line to make a deposit, should a banker check their back pocket before trying to find a pulse?

August Supply Manager Reports

Thursday, September 20th, 2012

The Institute for Supply Management’s (ISM) two indicators continued to illustrate the economy’s bifurcation in August.  The reading on the manufacturing side of the economy has contracted for three consecutive months (50 is the dividing line between growth and contraction), and the service or non-manufacturing index improved to its best reading since May.  Manufacturing stagnated to 49.6 from 49.8 in July and non-manufacturing improved to 53.7 from 52.6 during the same period.  The ISM is a perfect example of why it is tough to solve the directional conundrum of the economy.  One sector looks as if it is picking up steam while the other points to slowing output.

New orders get most of the attention in this indicator since orders will need to be turned into actual output in the near future.  Manufacturing new orders read 47 (also the third month in a row below 50), but non-manufacturing new orders remained solidly above 50 with a reading of 53.7 just 0.6 less than July’s count.  As mentioned above, manufacturing new orders have been declining since June, and this slowdown has made its way into actual output as production took a sharp fall of 4.1 points to 47.2 giving manufacturing output its first sub-50 reading since May 2009 a month before the Great Recession ended.

The manufacturing sector is more sensitive to the business cycle, and its recent malaise may be foretelling a turn in the direction of the economy.  On the other hand, the non-manufacturing segment is a much larger part of the economy, so perhaps its strength will overwhelm the recent softness seen from goods producers.  While these contradictory readings do not provide a clear sense of its direction, the economy is not appropriately buttressed for exogenous shocks like fiscal cliffs and uncertainty stemming from non-tested monetary policy from central banks around the world when America’s cyclically sensitive manufacturing segment is showing signs of strain.    (by C. Cox)