MarketKapz

The labor market improved in January according to the Bureau of Labor Statistics (BLS).  The economy added 157,000 jobs.  Not only were jobs added to start the year, but further gains were found in November and December after additional data was collected.  The headline unemployment rate was up 0.1 percent to 7.9 percent.  As we discuss below, that should be expected if the labor market is indeed healing.

Businesses continued to hire at the beginning of the year.  Private payrolls increased by 166,000.  The difference between the headline number and private hiring is the 9,000 jobs lost at the government level.  Local government jobs were hit hardest as 6,000 positions were lost, with 4,700 of these municipality losses coming from education.

Revisions to the two previous months’ data suggest the labor market is even better than initially thought.   November 2012’s initial estimate was an increase of 161,000.  The latest tally from the BLS puts November’s payroll gain at 247,000!  December also saw a large upward revision as the estimate went from 155,000 to 196,000.  So while the headline number in January was not robust, the number of jobs created in the last three months is significantly better than first thought.

The unemployment rate that is reported on the nightly news did increase, but that is not the entire story.  Ironically, one of the primary reasons the figure moved in the wrong direction appears to be confidence.  As some “labor dropouts” begin to feel better about potential job prospects, they begin to reenter the workforce by looking for a job.  This pushes the number of available workers up, but most of these reentrants to the labor market have yet to be hired, so the unemployed total initially grows at a faster rate relative to the total of all Americans who would like a job.  In turn, this makes the unemployment rate increase.  Of course, some of the growing workforce also comes from new entrants to the jobs market, so it is unfair to claim all of the uptick can be attributed to renewed confidence from previous members of the labor market.

Unemployment is a critical component to the health of the overall economy and the central bank watches it closely.  Recently, the Federal Reserve explicitly tied its monetary policy to two indicators.  One of those indicators is the unemployment rate (the other is an inflation measure).  The central bank would like to see this statistic closer to 6.5 percent before it considers tightening monetary policy.  The upward tick certainly suggests that the easy money policy coming from Ben Bernanke has just received an extension.   (by C. Cox)

The first reports from the Institute for Supply Management (ISM) for 2013 were rather positive.   After suggesting nearly no growth in December with a revised reading of 50.2 (originally tallied as 50.7), the manufacturing report moved to a figure that is much less directionally ambiguous, 53.1, in January.  Any number above 50 in these reports points to growth within their respective parts of the economy.    The service sector counterpart, ISM’s non-manufacturing report, also shows continued economic growth to start the year albeit at a slightly slower pace than at the end of 2012.

The composition of the manufacturing headline is more encouraging than even the best reading since May 2012 suggests.  The new orders component of the indicator is very important because it provides a clue as to the pace of manufacturing in the near future.  When new orders improve today, actual output generally follows as the orders are completed.  The orders were up 3.6 points to 53.3, swinging from a slight contraction at the end of 2012 to a position of growth at the start of the year.  With a reading of 54, employment enjoyed a two point boost for the month.

The non-manufacturing index continues to point to growth as well.  Like its manufacturing counterpart, there were job gains as the employment category moved up 2.2 points to 57.5.  The non-manufacturing employment index has not seen a reading this high since February 2006.  The overall service index did slip because of slowing growth in new orders, but a reading of 55.2 (versus 56.1 in December) is still healthy.

The two ISM reports suggest both sides of the economy, manufacturing and service, continued expanding to start the year.  The real test for these indicators will come in the months ahead as the impact of higher taxes begin to make their way through the economy.  Fully reinstating the social security tax at the beginning of the year may negatively impact discretionary spending.  If it does, these indicators may be the first to show signs of the disruption.     (by C. Cox)

Productivity and unit labor costs moved in the wrong direction in the final quarter of 2012 according to the Bureau of Labor Statistics.  The output per hour of labor (productivity) fell 2.0 percent after growing by a revised 3.2 percent in the third quarter (originally tallied as 2.9 percent).  The labor costs for each unit of output jumped 4.5 percent after sliding a downwardly revised -2.3 percent which was initially thought to be -1.9 percent.

Productivity is comprised of two parts, output and labor.  Output managed to grow by 0.1 for the nonfarm business sector.  Unfortunately, the increased production was more than offset by an increase in the number of labor hours required for the output.  Hours worked grew by 2.2 percent, and the additional hours only managed to increase output by the aforementioned 0.1 percent.   Complicating the situation for companies was the 2.4 percent uptick in hourly compensation.  To summarize, companies produced a little more in the quarter, but they needed substantially more hours to increase the output, and workers were paid more for each hour they worked.  When combined, the unit labor cost grew 4.5 percent.

The fourth quarter was not kind to companies from an efficiency perspective.  There was a large price to pay for the small gain in output.  If a negative trend in this indicator begins, the additional costs are likely to have consequences on the economy.  Businesses may choose to raise prices in order to compensate for their added costs.  Alternatively, companies might choose to accept tighter profit margins.  Of course, companies could seek ways to reduce staffing if the output does not improve in the coming quarters.  From Atlas’ perspective, this was not a productive report, and we anxiously wait for the next iteration hoping for a better outcome.  (by C. Cox)

Confidence of America’s consumers according to the Conference Board  continued to fall in January after December’s upwardly revised but still declining reading of 66.7 (originally 65.1).  January’s decline of 8.1 to 58.6 puts this indicator at its worst level since fall 2011 when Congress was arguing over the debt limit. Sound familiar?  The setback also erased all of the indicator’s gain for 2012.

This time around Washington D.C. has given the consumer more to be concerned about than just the ceiling.  January was the month consumers experienced a drop in their disposable income after the temporary reduction in the Social Security withholding expired.  This probably influenced Americans’ feelings about the current situation.  Those describing business conditions as “good” fell to 16.7 percent from 17.2 percent in December.  Those saying the same conditions are “bad” increased to 27.4 percent from 26.3 to end 2012.  The number of people who feel jobs are “plentiful” declined and those saying they are “hard to get” increased.

The Beltway has also not come to terms with a way to avoid automatic cuts now scheduled to begin on March 1st after being postponed at the very end of 2012.  This may have contributed to the deterioration of consumer’s short-term outlook.  Those expecting business conditions to improve in the next six months fell to 15.4 percent from 18.1 percent.  However, those expecting conditions to worsen did manage a slight fall to 20.6 percent from 21.1 percent at year’s end.  Consumer’s outlook on the labor market soured as well.  Those anticipating more jobs in the coming months fell to 14.3 percent from 17.9 in December.  At least those expecting fewer jobs were virtually unchanged at 27 percent.

Consumers are not enthused with their current situation and do not have rosy expectations for our economy’s short-term potential.  The uncertainty coming from the nation’s capital is only serving to complicate this historically weak recovery following the Great Recession.  If there is a positive relationship between consumer attitudes and their spending habits, the recent decline in confidence is not constructive for the economy.    (by C. Cox)

My summer job between grades in high school involved pushing an ice cream cart around the neighborhood where I lived, dispensing Popsicles, Fudgesicles, Creamsicles, and banana pop-ups.  Kids would flock to my magic bell and pay for the goodies with handfuls of change.  Upon returning home I would diligently sort out the Mercury dimes, buffalo nickels, Walking Liberty halves, and occasional Standing Liberty quarters.  A dime went a long way back then.

A recent article in the Wall Street Journal discussed the proliferating popularity of discount stores.  Specifically the author highlighted new openings.  Dollar General said they hope to add 635 new stores this year to the roughly 11,000 currently operating.  Dollar Tree is planning to add 200, bringing their total up to some 4,400 and Family Dollar wants to add 500 to their current 7,000 locations.  There certainly appears to be quite a demand for bargain priced merchandise here on the old sod these days.  Can we say a buck goes a long way?

Here’s the point.  Back in the day, pre-1965 that is, I could take ten dimes and buy a silver dollar.  I could also go shopping at the local Woolworth or Kresge, then called five and dimes.  Today I can sell that same silver dime for a tad over two dollars.  That means the 99 Cents store is actually selling goods for a nickel when adjusted for inflation.  I hope we never see the day when dollars are a dime a dozen.

The Bureau of Economic Analysis’ report on income and outlays improved in the final month of 2012.  The magnitudes of the two improvements were not similar but each figure was better than the month before.  Personal income soared 2.6 percent for the month after growing one percent in November.  Spending only managed a 0.2 percent increase which was half the rate of the prior period.

Overall income surged by $352.4 billion on an annualized basis but had a few special circumstances driving the large improvement.  Social Security paid a lump-sum benefit totaling an annualized $7 billion as the benefits of recent recipients were recalculated.  December was also the last month before anticipated tax increases, so there were accelerated bonus and dividend payments for the month adding to the total.  The BEA estimates private wages and salaries were boosted by an annualized $30 billion in December after a $15 billion annualized increase in November because of the expected higher taxes.

Personal consumption expenditures only increased by an annualized $22.6 billion.  Consumer purchases were higher across the spectrum of categories.  More money was shelled out for nondurable goods, durable goods, and services.  Since the pace of spending was not commensurate with the growth of income, the savings rate went up to 6.5 percent compared to November’s 4.1 percent rate.

Finally, the central bank’s favorite measure of inflation is included in this release.  The “core” price index which subtracts food and energy increased less than 0.1 percent for the month.  Year-over-year the “core” measure has ticked up 1.4 percent, remaining well below the Federal Reserve’s discomfort zone of greater than two percent.

Atlas cannot wait to see the next release of this indicator.  The December anomalies will make an income improvement in January difficult.  Also, the reintroduction of the full social security withholding that started at the beginning of 2013 is likely to negatively impact either the savings rate or consumption.  This is an important indicator because it heavily influences gross domestic product.  It is not being set up for success by the end of the year one-offs or the first of the year changes.  (by  C. Cox)

The initial tally on our economy’s growth rate in the final quarter of 2012 was not very encouraging.  The Bureau of Economic Analysis (BEA) estimated Gross Domestic Product (GDP) shrank at a 0.1 percent annualized rate.  This follows the third quarter’s increase of 3.1 percent.  Since the figure is constructed without complete information, the BEA will revise this number in the next two months. The negative figure was the result of mixed GDP components.

Consumers positively contributed to the tally.  Personal consumption expenditures increased at an annualized 2.2 percent.  Durable goods consumption increased by a whopping 13.5 percent.  Motor vehicles made the largest impact to the surge in goods expected to last longer than three years and were the biggest contributor to GDP in the final quarter of the year.  Services improved by an annualized 0.9 percent, so if it was not for automobile purchases, the consumer would have contributed considerably less.

Investment was negative for the quarter.  Private investment fell by an annualized 0.6 percent.  Inventories contributed most of this contraction.  Companies did not restock their shelves at the same pace as they sold items, so the change in inventories was negative.  Companies also built fewer nonresidential buildings after the category was flat in the third quarter.  However, business equipment and software investment grew by 12.4 percent.  Residential investment surged 15.3 percent after growing by 13.5 percent in the third quarter.

Government spending also subtracted from the growth of the economy.  Overall, government spending slipped an annualized 6.6 percent.  Spending by state and local institutions was down 0.7 percent.  The federal government spending fell 15 percent after growing by 9.5 percent in the third quarter.  Defense spending collapsed 22 percent as nondefense spending grew by 1.4 percent.

Finally, trade with other countries was slower in the final quarter of the year.  Our exports dropped 5.7 percent on an annualized basis.  Trading partners were not as anxious to buy our goods and services, nor were Americans compelled to buy more of their wares as in the prior period with America importing 2.7 percent less than in third quarter.  The falling imports actually help the GDP statistic because imports are subtracted from the other components of the figure, so imports took less away to end 2012.  Still, the coupling of slower imports with waning exports is not very positive because it suggests the global economy is not operating optimally.

This is the initial attempt by the BEA to quantify the output of America in the final quarter of last year.  As more complete information becomes available revisions will be made and released.  Revisions coming or not, the latest figures on GDP are not strong.  The impact of the Great Recession continues to reverberate through our economy.     (by C. Cox)