Archive for December, 2012

Revised Third Quarter GDP

Wednesday, December 19th, 2012

The Bureau of Economic Analysis’ first revision of the third quarter’s gross domestic product (GDP) was positive suggesting that economic activity between July and the end of September was greater than first tallied.  The annualized figure was 2.7 percent versus the first estimate of 2.0 percent.  This 40 percent improvement is a large revision and means the economy grew at more than double the pace of the second quarter which improved at an annualized 1.3 percent.

On the surface this all looks very encouraging, but the details do not leave Atlas as cheerful as the headline did.  The primary driver of our economy is consumption, so it is important to know how consumption in faring in order to understand the health of the economy.  A subcategory of GDP, final sales, allows us to see the demand component of the economy and ignores the inventories businesses accumulate when their production outpaces their ability to sell their products.  The final sales of American produced goods and services only improved to 1.9 percent from the second quarter’s 1.7 percent.

Businesses are slowing their consumption as well.  Fewer nonresidential structures were purchased and investments in equipment and software fell in the quarter.  The only area of capital investment that improved was residential housing.  It jumped by an annualized 14.2 percent as more homes were built in the third quarter than from April to the end of June.  Automakers produced fewer cars in the quarter as well.  This is the first time since the final quarter of 2010 that vehicle output has slipped.

Atlas continues to remain concerned about the near-term and intermediate-term outlook for the economy.  With output as slow as it is now, the economy remains vulnerable to shocks which may occur inside or outside of our country.  Further down the timeline, we are still concerned about the demographics of the country being a headwind as baby boomers spend less in preparation for (and during) retirement.  We are hoping for the best but worried about the worst.  (by C. Cox)

October Durable Goods Orders

Tuesday, December 18th, 2012

Orders for wares expected to last at least three years were up $1.05 billion or 0.5 percent in October according to the Census Bureau’s Durable Goods Orders report.  This is after September’s 9.2 percent surge.  Year-over-year the indicator has improved by 2.8 percent.  The annual improvement ticked up slightly for the month but has been trending lower since its April 2010 peak of 33.8 percent.  The top year-over-year number was that large because of its comparison to the depths the great recession.

One of the big takeaways from this indicator is a gauge of business confidence which is derived by looking at the nondefense capital goods excluding aircraft portion of the report.  This “core” figure is a measure of companies’ equipment purchases less the volatile aircraft and defense orders.  As companies feel more confident, they are willing to add to their capital stock in anticipation of more business.  For the month it improved by 2.9 percent, but year-to-date, it has only managed to tick up by 0.1 percent versus 2011.

American companies are rather hesitant at this stage in the business cycle.  Their lack of confidence is noted here at Atlas and makes us marginally more concerned about the economy’s position in the cycle.  Perhaps this lack of investment will end as fiscal matters are straightened out.  Of course, we may simply find that the business cycle cannot be legislated, and that a peak has already occurred.            (by C. Cox)

October Leading Economic Indicators

Monday, December 17th, 2012

The Conference Board’s index of leading economic indicators (LEI) grew at a slower pace in October.  The 0.2 percent increase is the second consecutive month of improvement but it follows September’s downwardly revised 0.5 percent increase which came on the heels of August’s 0.4 percent decline.

Four of the ten components improved thus helping the indicator for the month.  First, the relationship between short-term and long-term interest rates continues to behave favorably for the LEI.  This yield curve provided the biggest impact on the index.  Next, it appears that credit is loosening as the Conference Board’s proprietary Leading Credit Index improved.  Also, the average number of weekly initial unemployment claims declined suggesting job losses are slowing.  Finally, business investment improved according to their estimate of the Institute of Supply Management’s (ISM) core capital expenditure reading.

The other components were either lower or unchanged.  Building permits declined as did consumers’ expectations for business conditions.  New orders from the Conference Board’s estimate for the ISM index fell, indicating output may falter.  Average weekly manufacturing hours and the Conference Board’s calculation for manufacturer’s new orders for consumer goods and materials were steady for the month.

This indicator is designed to help determine turning points in the business cycle before the change in direction occurs.  The underlying components have gone through some changes this year in an attempt to make the index more accurate, but the LEI is still not Atlas’ favorite leading indicator.  Nonetheless, it is comprised of many economic data points, some of which we do not write about on a regular basis, so it is interesting to follow.  One point of contention Atlas has with the indicator is the interest rate spread.  In more normal times, it would not cause such consternation, but the Federal Reserve is fiercely influencing this component through its monetary policies.  One cannot help but wonder about the current efficacy of the overall index when the portion of indicator providing the most positive impact is being swayed by strong external forces.       (by C. Cox)

Hot Times

Friday, December 14th, 2012

The concept of Global Warming is inspiring heated debate and hot new industries.  Whether or not it exists is a separate matter, but I think the entire issue can be divided into three piles.  Whose fault is it?  Is it actually happening?  How are we going to react?

I think it might be the height of hubris for mankind to accept the blame, or even most of it.  Maybe a little falls on our shoulders, and that may be the only part with which we ultimately can deal.  It is a big planet full of poorly understood self-regulating mechanisms.  No doubt we are just one of the latter and Nature may someday provide a lesson to us in our own self regulation.

Let’s not quibble too much about whether or not it is happening. It has been happening for some 15,000 years or there abouts, with brief interruptions spanning a century or two.  Look out the window.  Do you see a glacier?  Did a Wooly Mammoth just wander by?  No?  Well then, there you go.

Let the record show that from about AD 950 to 1250, Earth endured a period of global warming called the Little Optimum.  It was accompanied by beneficial conditions leading to the evolution of cities into “bulk and break sites” which helped spur global commerce, but also by seriously distressful events like the Black Plague.  Admittedly, it was followed by a period of some 200 years starting around 1500 called the Little Ice Age which also made itself felt in different ways, some quite serious.

No matter how we choose to react, weather cycles are not something Congress can repeal.  Changing my house paint or hair spray may or may not help.  For whatever reason, there were two major droughts in the U.S. during the last century and we will no doubt face more in the future, although one hopes they won’t last 1,000,000 years or so like what seems to have occurred during the Pleistocene.  But let’s be sure of the science before legislating boondoggles.

Is it already too late?  There is a long list of candidates for the Bogus Award already standing in line.  Will corn ethanol, fracking, carbon credits, recycling plastic, or wind turbines ultimately prove to be too expensive, too ineffective, or both?  No doubt some will.   Others may become quite beneficial.  It is in man’s nature to act or react, but knee jerk emotional responses are no answer.  Bending data to allow some groups to profiteer despite lacking any solid evidence that such efforts will really help should not become the way business gets done.   (by J R Capps)

October CFNAI

Thursday, December 13th, 2012

Economic growth was less than optimal in October according to the Federal Reserve Bank of Chicago’s National Activity Index (CFNAI).  After a reading of zero in September, the index fell to -0.56 in October.  The consensus expectation was for 0.18 according to Bloomberg.

This index is comprised of 85 indicators that are chosen to represent the economy as a whole.  A reading below zero indicates contraction while anything above zero suggests growth for the month.  There were 31 components positively contributing to the reading with the remaining 54 negatively impacting the outcome.  Many of the categories, 51, worsened while 33 showed signs of improvement.  Of the 33 that improved, 13 of them were still negative for the month but less negative than before.

The Chicago Fed uses a three-month moving average to help smooth out the readings on the economy.  This average worsened in October to -0.55 from -0.36 in September.  The bank considers a three-month moving average of -0.7 to be recessionary.  Unless November turned out to be a very disappointing month, this index is not likely to be pushed into the recessionary territory since the three-month moving average will be losing August’s -1.13 outcome and September was unchanged.  This means  November’s reading will need to be -1.54 or worse to produce a three-month moving average that is equal to or less than -0.70.  That would be the lowest monthly reading since at least June 2009, the month the Great Recession ended.  There would need to have been major spillover effects from Hurricane Sandy to further reduce production as it was already the hardest hit area of the economy in October.    (by C. Cox)

Optim ISM

Wednesday, December 12th, 2012

The Institute for Supply Management (ISM) issued its two major reports for November which showed the manufacturing sector in decline at 49.5 versus October’s 51.7 reading, while the non-manufacturing sector showed solid improvement, rising to 54.7 from the 54.2 reading seen last month.

These reports are both called diffusion indexes.  If you ask ten businesses how things are going and five say up, with the remaining five saying down, you would get a .5 reading.  The number gets higher when there are more positive responses; conversely, it drops when negative answers increase.  Obviously, numbers above fifty percent are optimal.  Knowing how the data is actually calculated allows us to take a more granular approach to the reports.

The ISM manufacturing report has been somewhat irregular for months now.  It was down slightly in November after a slight rise in both of the prior two months which in turn had reversed the small declines seen in each of the three months before that.  Here’s where the details can provide a better feeling about the overall trend than that which the headline number might give us.  In November, inventories fell five points to 45; order backlogs declined a bit more to 41.5; employment went negative to 48.4 from October’s 52.1; new orders stayed positive, but barely, at 50.3, off just over two points.  All said, these numbers don’t look all that positive for this manufacturing segment which represents about 10% of our economy.

The positive headline for the non-manufacturing side has some bright spots.  According to the responses, business activity went over 60 for the first time in months and new orders, at 58.1, rose over three points.  Simultaneously, employment stayed barely positive at 50.3, falling by almost five points in November.  This suggests businesses, primarily those service oriented ones which fall into this much larger part of America’s entire economic pie, are figuring out how to wring more production out of fewer workers.  We’ll keep an eye on this facet of the data to see if it becomes more of a trend.     (by JR Capps)

October Existing Home Sales

Tuesday, December 11th, 2012

The number of existing home sales increased in October according to the National Association of Realtors.  The 2.1 percent increase follows September’s downwardly revised decline of 2.9 percent.  Seasonally adjusted, the annualized sales pace for the month was 4.79 million homes which is an increase of about 100,000 units over September’s figure.

Hurricane Sandy slowed the pace of sales in the Northeast, but the other regions of the country were able to more than make up the difference.  Sales in the region hit by the storm fell 1.7 percent but are still 13.7 percent higher than a year ago.  The Midwest grew by 1.8 percent for the month and the South improved by 2.1 percent.  The West jumped 4.4 percent and has improved 3.5 percent year-over-year.

Housing prices continue to provide encouragement.  While the month-over-month change in the median home price was little changed (it is currently at $178,600), it has increased by 11.1 percent from a year ago.  The year-over-year median price has now improved for eight consecutive months.  The last time the median price measure put together a string of monthly improvements this long was during the period of October 2005 to May 2006.

Some of the price improvement is likely being caused by a lack of supply.  The inventory fell 1.4 percent as there are only 2.14 million existing homes currently on the market.  At the current sales pace, these homes represent a 5.4 month supply.  The supply was 5.6 months in September.  This is the lowest inventory measured in months since February 2006.

At the risk of sounding exuberant, there appears to be a noticeable improvement occurring in the housing market.  This will make a positive impact on the economy; to what extent it helps is not knowable.  It should be noted that the stock of homes is much smaller than it was in the last housing market run up.  To put the inventory into perspective, in February 2006, when the supply measured in months was lower than it is today, there were actually 890,000 more homes on the market.   Why the anomaly?  Although the pace of purchases has been increasing, it is not near the rate seen in the past.  Low inventories are helping the statistic.  At least the supply and demand relationship is much closer to normal (generally considered 6 months of supply) than it has been during most of this economic recovery.      (by C. Cox)