MarketKapz

Every month the Federal Reserve’s Chicago branch mashes up an index using 85 separate economic reports; the broad scope and frequency of this report causes it to be one of our favorite indicators here at Atlas.  And it is for that reason that it breaks our heart when behaving in a disappointing fashion like it did in March, falling to a negative -0.23 level.  This drop is all the worse since February was revised from a plus 0.44 up strongly to the 0.76 level.  It’s like having your kid fail his final after bringing home an A on midterms.

What a negative reading suggests is our nation’s economic activity has suddenly fallen below its historic trend.  Obviously there can be quite a bit of volatility in this monthly data.  Because of that we like to follow a three-month moving average instead.  Alas, no relief here either as that figure fell from a positive 0.12 (revised from 0.9) to a negative -0.01 trend.

What happened?  For one thing, while various indicators of production managed to cobble together a meager positive 0.01, this was a substantial decline from the positive 0.47 reading seen in February.  Additionally, declines were registered in unemployment (-0.06) and the sales/orders/inventories component (off -0.02), both of which had been positive the prior month.  Further, consumption and housing provided a hugely negative pull, down -0.14 for the second month running.

These figures point to a growth rate slipping below its historic trend.  They don’t yet point to outright contraction.  Perhaps the best summary is one which uses a hackneyed phrase: welcome to the “new normal.”  (by J R)

The employment situation did not improve much in March according to the latest release from the Bureau of Labor Statistics.  The economy added 88,000 jobs for the month, but this is nearly half of the 168,000 average seen in the last three months.  In each release since December 2012, the jobs report posted a three-month moving averages of over 200,000.  March is a clear disruption from the recent trend.

Even with the slowing jobs growth, one of the most followed indicators managed to improve.  The headline most of us saw in the newspaper was about how the unemployment rate is now at 7.6 percent versus 7.7 in February.  A year ago, this figure was 8.2 percent.  The rate is now at the lowest level since December 2008.  Two factors are helping the rate fall so quickly. First, there are jobs being created each month so more Americans are working.  Secondly, the number of Americans counted as part of the labor force is falling.  Currently, only 63.3 percent of the working age population classify themselves as part of the labor force.  This is the lowest level since May 1979.  In the month of March, the labor force shrank by 496,000.

Wages and hours worked were little improved.  Despite the lack of labor participation, there does not appear to be substantial pressure on those currently working.  The average workweek added six minutes, but hourly earnings did not increase, and last February’s uptick was revised lower to 0.1 percent from 0.2 percent.  Companies do not feel compelled to pay workers more and only needed employees for an additional one-tenth of an hour per week.

The weak labor market appears to be weighing on consumer attitudes.  These measures have been falling, due in part to Americans’ outlook on job availability.  Consumers’ dour forecast may impact spending, and this could ultimately slow hiring plans in the near future.  Such a pernicious cycle, should it develop, would definitely put a damper on America’s economic recovery.    (by C. Cox)

The end of March marks the half way point for our government’s fiscal year which begins with October. According to the Treasury Department, Washington has certainly been trimming the fat. Bottom line, in March they spent just $106.5 billion more than was earned.

You might wonder at my characterization of this as a move toward prudent budgetary management, but consider that the shortfall in February posted $205.5 billion or that the expectation for March was more like $172.4 billion in overspending. Quite an improvement indeed. Shucks, that brings the total deficit for the year to date up to just $600.5 billion. Okay, I’ll admit that this pace annualizes our fiscal year creation of additional debt at a touch over $1 trillion for yet another year. Thank goodness the Federal Reserve had essentially promised to buy it all if need be. It certainly pays to own the printing press with an apparently unending supply of ink (red) courtesy of the U.S. taxpayer.

A combination of healthy tax receipts from both individuals and corporations added to cuts in defense spending, tightening the reins on spending in the month. In fact, the hole being dug this year is actually 23% shallower than last year’s was at this same time. Of course, all of this is off the cuff accounting since there has been no official budget in place here for years. I wonder how things will pencil out if our nation ever actually gets one passed. (by J R)

Overall prices paid by manufacturers and wholesalers declined in March according to the Bureau of Labor Statistics’ headline Producer Price Index (PPI).  The headline number fell 0.6 percent for the month.  This follows increases of 0.7 percent February and 0.2 percent to start 2013.  Much of the headline number’s fall came from slumping energy prices; the gasoline index dropped 6.8 percent in the period.  Year-over-year, the PPI has only managed to grow by 1.1 percent.

The core rate of price increases has been slightly higher over the last year and month.  Excluding food and energy, because they are volatile, the PPI increased by 1.7 percent in the last twelve months, and it was up 0.2 percent in March.   These are still rather tame upticks.

There does not appear to be price pressure building in the earlier stages of production.  Crude goods, (think timber) fell 2.5 percent in the final month of the first quarter.  Intermediate goods, like lumber, ticked down 0.9 percent in the period.  Energy fell in each of the earlier points of production.  At the intermediate level, it fell the most since March 2009, down 4.7 percent.  Prices fell 8.5 percent at energy’s earliest stage of production.

The Producer Price Index continues to confirm our outlook on inflation.  Despite all of the money printing that the Federal Reserve has been doing, Atlas is of the opinion that it will not be inflationary in the near future.  One of the reasons for this perspective is that banks are relatively reluctant to lend and are keeping the new dollars on their balance sheets as reserves.  Until this money begins to make its way into the real economy, the likelihood of substantial upward price pressure seems remote.     (by C. Cox)

The Institute for Supply Management’s (ISM) manufacturing and non-manufacturing indices pointed to a moderating improvement in March.  Each side of the economy, service and manufacturing, continued to expand in the final month of the quarter but did so a slower pace.  The manufacturing index went from 54.2 to 51.3, and the non-manufacturing reading ticked down to 54.4 from 56.0 in February; any reading above 50 suggest expansion for the respective segment of the economy.

The internals for manufacturing were mixed.  New orders led the slowdown as this sub-index fell to 51.3, a 6.4 point slide from February and are now lower than the January reading.  Surprisingly, even as major trading partners to the U.S find themselves in recession or trying to devalue their currency, new export orders rose to 56.0 from 53.5.

Employment for manufacturers was strong.  The current level of 54.2 is the strongest reading in the employment index since June.  If the orders do not pick up in similar fashion, this need for additional workers will subside and employees will need to be removed from payrolls or companies will see their bottom lines squeezed.

Non-manufacturing ISM is now at the lowest level since July.  New orders also slowed for the month.  This may help clear some of the backlog service providers are experiencing.  The pent-up work is at a very strong 54.6 and may keep the need to reduce service employment at bay for the time being.

Both sides of the economy continue to grow according to the ISM measures.  The pace is moderating at a period on the calendar that other slowdowns have occurred during this recovery.  Since recapturing the level associated with expansion, the indicator’s slowdowns in recent years have never pushed non-manufacturing below the critical 50 level, and manufacturing’s lowest dip was 49.9 in November.  This minor setback could be short-lived.     (by C. Cox)

Consumer sentiment, according to the University of Michigan survey, continued to rise in March, hitting 78.6, two full points over a positive February increase.  This marks the fourth highest report since our nation’s recovery began several years ago, and brings the headline total close to the recent high just above 80 seen toward the end of last year.

There are two primary components to this report.  Current conditions posted 90.7, the best level seen since the recovery started.  The expectations component scored 70.8, a level well off last year’s highs near 80 but still up 0.6 points for the month.  Additionally, inflations expectations actually declined in March, pointing to a 3.2% price increase one year out (off 0.1 from February) and just 2.8% for five years, down 0.2 on the month.

The slight decline in inflation expectations may be laid off to a slim drop in prices at the gas pump.  The small jump in expectations could reflect a bleed through from the robust jump in the view of current conditions.  It is the latter strong upward move which goes begging for a good explanation.  We have seen strength in some other recent data points we follow and seeing the stock market at new highs may contribute to the good feelings as well.  Unfortunately, some of the other recent common attitudinal measures such as consumer confidence have taken a turn in the opposite direction.  Such divergences tend to come back together over time so we will await further reports over the next few months before declaring the consumer freed from shackles of financial concern and once more prepared to spend freely.

The Bureau of Economic Analysis reported the U.S. international trade balance fell to $43 billion in February.  This drop from January’s $44.4 billion shortfall was a bit of a surprise; on average the consensus numbers were calling for a slight increase.

There are two obvious components to this report: what we as a nation buy from our foreign trade partners and what they in turn buy from us.  The first category, imports, was essentially unchanged, thereby ascribing the month’s improvement to the second: exports.   These registered a slight 0.8% jump, but still enough to put an apparently positive spin on the total.

Any drop in our trade deficit should help boost our gross domestic product, generally seen as a good thing.  Proving the axiom that you can’t make everyone happy all the time, some economists still groused about a few of the February report’s components.  They complained the essentially unchanged total of our imports was due to a drop in the petroleum component which may point to a lower need by producers here for energy.  Further, there are hints of weakening demand from Europe as a recession seems to be gripping the continent, putting some downward pressure on the amounts of capital and consumer goods moving out of our ports.  Their argument does have some merit and we will continue to monitor this data point as more information is made available.