Archive for March, 2013


Friday, March 29th, 2013

I suppose the list of things folks can become addicted to is surprisingly long.  And I’ll bet addiction was probably the last thing any addict expected would happen when they first started using.  There seems to be a subtle shift where master and slave trade places, with the former finds himself suddenly in shackles which grow ever heavier as the one-time servant usurps the throne.  Addictions are not limited just to the more noxious habits.  Donuts will do.  TV will do.  Debt will too.

Historically, where America’s economy sat in the business cycle influenced the stock market’s movements up or down.  That seems to have changed.  In an interview last February on CNBC, Alan Greenspan, former head of the Federal Reserve, said “the stock market is the key player in the game of economic growth.”  The current head of the Fed, Ben Bernanke, sees an increase in both stocks and housing as capable of generating a “wealth effect” which will induce Americans to spend more, thus revitalizing our economy.

How does the Fed think this can be accomplished?  First by keeping interest rates low.  This might prod savers who earn nothing at a bank to accept more risk, buy stocks, buy rental real estate, spend money.  But apparently in order to release these animal spirits, to induce risk takers to step forward, some ante must first be added to the pot.  So the Fed creates ever larger quantities of debt, calling it quantitative easing.  It seemed to work the first time (QE1) it was tried back in 2008, but the effects began to wear off as this initial program came to an end.  The economy began to slip; the good feelings faded.  In 2010 QE2 was introduced.  Its salutary effects were again first felt, then reversed when it ended.  QE3 was started in September of last year and remains in effect.

All of this is meant to revive the economy.  Oddly, what it apparently has done is drive money into stocks and rental real estate.  They are seeing price increases but the general economy doesn’t seem to be matching that pace.  Is debt creation turning investors into junkies?  And is our Central Bank the pusher?

Revised Fourth Quarter Productivity and Costs

Thursday, March 28th, 2013

There were only minor changes to the initial figures of fourth quarter 2012 productivity and costs according to the Bureau of Labor Statistics.  Productivity fell slightly less than the first count suggested, down an annualized 1.9 percent versus 2.0 percent in the first tally.  However, the unit labor costs (ULC) were more expensive than initially thought, up an annualized 4.6 percent versus 4.5 percent in the earlier estimation.  This is because in addition to the slowdown in productivity, hourly compensation increased 2.6 percent; wages only grew by an annualized 1.7 percent in the third quarter.

The year-over-year comparisons were not favorable for the economy either.  Productivity slowed from the third quarter’s annual pace of 1.6 percent to 0.5 percent in the final three months of last year.  In other words, companies are seeing a slowdown in the growth of output per hour of labor worked.  The fourth quarter’s annual unit labor costs also deteriorated, meaning that ULC grew faster than the prior year-on-year tally which ended in September 2012.  Looking back twelve months, it cost companies 2.1 percent more in wages for each unit of production versus an increase of just 0.1 percent in the third quarter.

This is one quarter of data and not a trend, but it will need to improve in the coming quarters or there may be negative consequences.  Companies will need to find a way to make their labor costs become more effective, and unless there is a technology to solve the issue, jobs may be sacrificed and workloads increased on those that survive the cutback.  Perhaps, companies will try to pass the inefficiency on to consumers in the form of price increases.   Management may have to make an attempt to explain to shareholders why their margins are being squeezed.   A rosier scenario would have workers becoming more efficient without prodding or layoffs as the newly hired become better acquainted with their new roles.     (by C. Cox)

February Institute for Supply Management

Wednesday, March 27th, 2013

The Institute for Supply Management’s (ISM) surveys covering both sides of the economy improved in February.  The manufacturing survey moved to 54.2 from 53.1 in January.  The largest segment of the economy (services) saw the tally improve to 56 from 55.2 a month earlier.  Any reading above 50 for the two surveys implies economic growth for the respective segment of the economy.

The manufacturing survey improved for the third consecutive month.  A substantial improvement was seen in new orders.  This is known to be a leading indicator because unless the orders are cancelled, the future output will add to Gross Domestic Product (GDP).  Actual output grew in the month as well which bodes well for the first quarter GDP figure.  Exports grew faster than in January but imports grew more quickly which may put pressure on the country’s trade balance.  Manufacturing employers continued to hire but did so at a slower pace than the month before.

The larger portion of America’s economy is represented in the non-manufacturing ISM survey.  The service sector completed its 38th consecutive increase.  Businesses reported more activity in February over January and the rate of change was faster too.  Service companies also received more orders, and this grew faster than in January as well.  Non-manufacturing continued to hire, but the pace for payroll additions was slower.

Overall the ISM reports point to continued economic growth.  The dark lining to this silver cloud would be prices. Both sides of the economy reported faster increases in prices.  If companies cannot pass their higher costs on to the buyers of their wares and services, it will impact corporate America’s bottom line.  If they can pass the prices on, it means Americans will be paying more for the goods and services they consume.   (by C. Cox)

January’s Trade Balance

Tuesday, March 26th, 2013

The U.S. Trade Balance widened to start the year according to the Bureau of Economic Analysis.  The trade deficit was $44.4 billion to begin 2013 after ending 2012 with a revised shortfall of $38.1 billion versus the initial count of $38.5 billion.  The chasm is smaller than a year ago when it was $52.3 billion.  The 12 month average deficit improved over December’s reading, falling from $44.96 billion to $44.31 billion.

The gap widened to start the year because exports fell and imports increased.  America’s trading partners purchased $2.2 billion less than in December.  On the other hand, Americans spent $4.1 billion more to begin the new year than was the case to close out 2012.  The slowdown in exports primarily reflects a slip in the demand for American made industrial supplies and materials; meanwhile, almost all of the increase in imports came from the same category of industrial supplies and material.  One notable trading deficit increase came from the surge with OPEC countries; this gap widened by 88 percent for the month growing from $3.4 billion to $6.4 billion.

Annual trade deficits have been the norm in America since 1976, but the average monthly deficit has been lower ($42.509 billion in the last 44 months) after the Great Recession than in the 44 months prior to the down turn which averaged $58.490 billion. The impact of 2008’s global slowdown is continuing to be felt and will continue to reverberate through the economy for an unknown period of time.  Lower trade deficits in America may be one manifestation of the contraction’s influence.    (by C. Cox)

February Consumer Sentiment

Monday, March 25th, 2013

Consumers seem to be feeling better lately.  The University of Michigan’s February Consumer Sentiment survey is confirming the change seen in the other monthly attitude index Atlas follows, Consumer Confidence.  The sentiment measure moved from 76.3 to 77.6.  It also resonates with a third measure of consumer attitudes that has been higher over the last six weeks, the weekly Bloomberg Consumer Comfort Index.

The Michigan survey suggests consumers are feeling marginally better about their current conditions, and their outlook is also improving.  Americans noted that they heard more about jobs than at any time since last May which may be influencing their perception about the future.  While the outlook measure improved from 66.6 to 70.2, less than a third of all households expect their finances to improve over the next twelve months.  Half of those surveyed anticipate an increase in income over the coming year.  A reading above 50 percent has only happened two times in the last 48 months.  Consumers are not anticipating significant inflation on the horizon, but half of the households still expect a decline in their inflation adjusted income.

This survey certainly has many headwinds.  The economy has not grown very quickly over the last 3.5 years since the recovery began, keeping Americans from their normally cheerful disposition.  Washington D.C. has been relatively paralyzed lately, and consumers are concerned; one in four voluntarily mentioned the beltway negatively in this survey.  Then there is the Euro-crisis making headlines again as institutions in Cypress are bailed-in and creating more uncertainty for the global banking system and economy.  The consumer has been resilient lately but one must wonder if the weight of the world is becoming too heavy for this intrepid group.  How does the weight feel on your shoulders?    (by C. Cox)

Escape Velocity

Friday, March 22nd, 2013

Certainly we have all been told the cheetah is the fastest animal around.  To some extent that’s true, so long as you limit it to mammals.  An aptly named swift called the White-throated Needletail can buzz right by a cheetah.  A Peregrine Falcon can go three times faster when it’s in a dive but that doesn’t seem exactly fair.  I’m guessing you could drop a rock climber off the top of El Capitan and accomplish much the same thing, but that’s not the point.  No matter how fast any critter can go, they still can’t make it to the International Space Station.  To get there you need to reach what’s called escape velocity or roughly seven mile per second.

In some of our blogs we have commented on the recent slow pace of America’s Gross Domestic Product (GDP).  While it may be a week or so before we get the final numbers for the last quarter of 2012, things don’t look very robust with growth likely to register either positive or negative by a few tenths of one percent around zero.  The gravitational pull on our economy currently comes primarily from inflation and population growth.  To overcome these influences and achieve lift off, we must do much better.  Many economists set our escape velocity at three percent GDP growth.

Can America blast off again?  Some of our most newest data points have been quite encouraging.  In recent blogs we have pointed to data from various sources showing a strong improvement in employment and a few measures of income.  Retail sales have jumped.  Businesses are adding to inventories in what may be a sign of growing confidence.  Building permits seem to be on the rise.  Manufacturing is showing renewed vigor.  If these trends continue and other factors also can confirm the increase in economic momentum, we will be reaching for the stars once again.

January Personal Income and Outlays

Thursday, March 21st, 2013

Income and outlay data was mixed to start the year according to the Bureau of Economic Analysis.  Personal income fell $505.5 billion or 3.6 percent in January.  The drop in income did not stand between American consumers and their spending habits.  Outlays managed to increase 0.2 percent or $18.2 billion.

Incomes were helped in December by accelerated bonuses.  Employers did employees a favor, anticipating changes to individual tax rates to start the year, so the decline in income for the first month of the year was not a surprise.  January’s survey is the first since the full reinstatement of the Social Security withholding.  This negatively impacted real disposable income (which is a measure of inflation adjusted after-tax pay), since a larger percentage of income was taken from Americans to fund the safety net.

Despite the change in income, spending increased for the month. When adjusted for inflation, the increase in outlays was 0.1 percent.  This is the same pace of growth as in December, but the composition of spending was different.  Consumers were less willing to part with cash for durable goods.  Consumption of goods expected to last at least three years fell 0.8 percent compared to a 1.3 percent jump to end 2012.  Non-durable spending increased 0.3 percent versus 0.1 in the prior period.  Americans also increased the consumption of services after this category was slightly negative in December.

The combination of increased spending with decreasing income puts pressure on the nation’s savings rate.  The rate collapsed from 6.4 percent in December to 2.4 percent in January.   This measure of consumer health is suggesting tremendous strain on the household income statement and will be monitored in the months ahead.

Finally, the Federal Reserve’s favorite measure of inflation is included in the report.  The core (excluding food and energy) measure of the personal consumption expenditure price index remained rather stable at up 0.1 percent for the month.  The year-over-year measure of this inflation gauge has been trending lower since finding a recent peak of 2.0 percent in March of 2012 and is now just 1.3 percent higher than a year ago.

With inflation as low as it is, America’s central bank  has room to be additionally accommodative as it attempts to engineer a faster pace of economic growth.   This space may be necessary if real disposable income does not improve in the months ahead.  With a saving rate of 2.4 percent, the country is already spending most of what it takes home, so an improvement in income is needed or consumption may wane.  If the recent improvement in America’s employment continues, the country may already be experiencing this needed income surge.    (by C. Cox)