Archive for May, 2013

First Quarter Productivity

Tuesday, May 21st, 2013

Companies used their physical capital and employees more efficiently in the first quarter of the year according to the Bureau Labor Statistics.  Productivity in the first three months of 2013 improved 0.7 percent after falling a revised 1.7 percent (the first revision was -1.9 percent) to end 2012.  The expectation among economists was for an increase of 1.3 percent.

The output in the nation’s nonfarm business increased but required additional work hours.  These are the two components that go into productivity.  If the output grows faster than the number of hours worked, the nation is more efficient.  This go around, output increased by an annualized 2.5 percent, and the labor hours needed for the increased production ticked up by 1.8 percent.  The difference between the two percentage changes yields the 0.7 percent increase in productivity.

One thing the number of hours worked does not take into consideration is the change in wages over the quarter.  If wages increase faster than productivity, then something called Unit Labor Costs increase.  In the first quarter, this measure ticked up an annualize 0.5 percent. This uptick in the cost to produce each widget is important because companies can only do two things with it if it is consistently rising.  They either pass it on to their customers in the form of higher prices or absorb the added costs via lower profits.  An uptick this low will likely be passed on to customers.

For now the indicator seems rather ho-hum.  Productivity is not growing so quickly that a dramatic upturn in the economy’s pace seems probable.  At the same time, unit labor costs are growing at a reasonable rate, so inflation or substantial pressure to companies’ bottom lines is not likely either.  The pace of the economy’s growth continues to leave it susceptible to outside shocks, but the measure of inflation in this indicator does not suggest the central bank will be concerned about tightening its policy due to rising costs in the months ahead which will be helpful in the event a negative exogenous event occurs.  (by C. Cox)

April U.S. Federal Budget

Monday, May 20th, 2013

April is a big payday in the U.S.A.  But you did not get paid, your government did.  The seventh month of the fiscal year posted a larger monthly surplus than a consensus of economists were expecting according to the data released by the Treasury Department.  The surplus was $112.9 billion dollars as taxpayers mailed in their checks to settle with the government for calendar year 2012.

Taxes are our nation’s largest form of revenue, so it was not a surprise to see the budget in the black during the month income taxes are due.  What did surprise Atlas was the year-to-date deficit improvement, down 32 percent from the same period a year ago.  Unfortunately, the improvement primarily falls on the back of higher revenues (taxes) since the government has only improved its spending by 0.6 percent fiscal year-to-date.   Military spending was down 4.9 percent, but it is being more than offset by an 11.7 percent increase in Medicare outlays.  The demographics of the country will continue to propel the costly Medicare trend.

The 2013 hole is likely to be shallower than the holes from the previous several years.  The problem is that the nation has a collection of holes called debt.  Starting a new hole each year, even if it is not quite as deep, is not the same as pouring a firm foundation.  Of course, before we can expect Washington D.C. to stop digging, they should probably figure out that the tool they are using is a shovel instead of a cement mixer.  This will require a budget, and they have not passed one yet.  Perhaps some comfort can be taken now that both chambers of congress have drawn up their own plans, but Atlas does not think either of them will begin to fill the hole  in which our country finds itself.      (by C. Cox)

April Institute for Supply Management

Friday, May 17th, 2013

The theme for the April Institute for Supply Management (ISM) reading is “slowing growth.”  Both the manufacturing and non-manufacturing segments of our economy appear to have hit some resistance to start the second quarter.  Each index has now slowed for two consecutive months.

The manufacturing index fell to 50.7 from 51.3; this follows the slowdown in March from February’s reading of 54.3.  Employment was nearly flat for the month as the sub-category moved to 50.2 from 54.2 in the previous period; a tally of 50 is the breakeven level in this type index.  Companies let their inventories fall.  This can cut two ways: they may be expecting slower demand, therefore curbing their output, or demand may have outpaced management’s expectations and caused products to move off of the shelf faster than anticipated.  Suggesting it may be the latter and thereby adding a little encouragement, new orders increased to 52.3 from 51.4.  This optimism stems from the chances of the new orders turning into actual business in the months ahead which may reverse the slowdown of the other components.

Services registered growth for the 40th consecutive month in April, albeit at a slower pace than in March.  The indicator’s reading was 53.1 versus 54.4 in the prior period.  All four subcomponents of this indicator slowed for the month; business activity, new orders, employment, and supplier deliveries fell to start the second quarter.

The ISM is one of several recent indicators that have not been as strong as expected.  The economy may have entered into a “soft patch” at the end of the first quarter, and the initial information on the start of the second is not suggesting a reversal into faster growth.  One recent positive surprise was the employment report for April.  The Bureau of Labor Statistics revised previous readings higher and indicated that hiring accelerated in April.  However, the two ISM indicators are not confirming the pick-up.  One segment of the economy, manufacturing, showed nearly zero growth in the number firms that hired while the non-manufacturers are suggesting their hiring pace slowed.  Perhaps revisions to the indicators in the months ahead will reconcile the differences.    (by C. Cox)

March Trade Balance

Thursday, May 16th, 2013

The trade deficit narrowed in March according to the Bureau of Economic Analysis.  The difference between imports and exports improved to -$38.8 billion from a revised -$43.6 billion (the original tally was -$43.0 billion).  This shrinking deficit will help the country’s GDP tally when it is revised later this month, but it was caused by underlying weakness.

The frailty is illustrated by the slowdowns in both imports and exports.  America’s demand for goods and services generated outside of our borders fell 2.8 percent following February’s 0.3 percent increase.  In particular, the deficit with China fell by a non-seasonally adjusted $5.5 billion in the month alone.  America exported 0.9 percent less to foreign buyers in the period as well.  The slowdown in both components of the trade ledger speaks to the general sluggishness of the global economy at the end of the first quarter; many of March’s statistics weakened, and this pattern appears to have continued into a number of April’s figures.

This weakness continues to keep central bankers trying to “do something.”  These keepers of their respective currencies (e.g. Federal Reserve, Bank of Japan, European Central Bank, Bank of England) are all imposing their forces in an attempt to stimulate the economy.  Thus far, it seems like they are only pushing on a string.  (by C. Cox)

April Employment

Wednesday, May 15th, 2013

The April employment data issued by the Bureau of Labor Statistics contained several positive surprises.  The number of net new jobs created in the month, at 165,000, exceeded expectations and helped bring the unemployment rate down another tenth to 7.5%, a low that takes us back to December of 2008.  Further, revisions to previous months show an additional 64,000 jobs were added in February, bringing that month’s total to 332,000, while March gained 50,000 more jobs than initially thought, elevating the monthly sum to 138,000.

Over the recent past we have seen plenty of opinions suggesting the declining unemployment rate has been more a function of discouraged workers dropping out rather than any true growth in actual hiring.  April seems to have reversed that pernicious trend and we see a decline in the unemployment rate happening even as the labor participation rate is now rising.  This is good news since it suggests some of yesterday’s dropouts are now feeling more confident that they will be able to find a job.  Facts seem to bear this out.  Not counting the temporary hiring by our government when conducting the decennial census, the revisions show job creation in February was the highest monthly total recorded since November of 2005.

Here at Atlas we welcome this positive turn of events, but still remain a bit cautious.  Sequestration and higher monthly payroll taxes have not likely made themselves fully felt yet.  Economists see signs that companies are slowing their pace of hiring and many feel our country’s growth rate (GDP) will slip a good bit.  Further, the general consensus feels a monthly pace greater than 250,000 in net new jobs must occur consistently before employment growth does more than just absorb the labor pool’s inflow of first-time entrants.   (by J R)

March Personal Income and Outlays

Tuesday, May 14th, 2013

In March, according to the Bureau of Economic Analysis (BEA), the personal income of Americans increased by 0.2%, half of what was expected by a community of analysts, and well off the 1.1% increase seen in February.  Annualized, personal income is growing by 2.5%, a reduction of 0.1% from last month’s tally.

The BEA also reported personal spending rose 0.2%, double expectations, but well off the 0.7% jump seen in February.  Consumption in the services component rose 0.7%, primarily reflecting higher utility bills, while purchases in both the durable and nondurable categories declined.  The 1.1% drop in nondurables (after seeing a 1.6% hike the month before) reflects a fall in gasoline prices; durables reversed a 0.2% climb in February to fall 0.2% by the end of March.  Consumer spending is now rising at a 3.5% annualized clip, 0.2% stronger than seen in last month’s report.

An influential measure of inflation can be found in this monthly data series, the personal consumer expenditures (PCE) price index.  It fell 0.1% in March, defying expectations for a 0.1% increase, on the heels of a 0.4% February jump. The core PCE price index which removes volatile components such as food and fuel was unchanged, also confounding the consensus looking for a slight 0.1% rise.  Annualized, the headline PCE price index is now up 1.0% compared to the 1.3% annualized gain seen last month.  The core PCE price index, one which is seen as a significant contributor to Federal Reserve policy decisions, is now climbing at a 1.1% annual pace, off 0.2% from March.  We expect such a low inflation rate will help spur the Fed to keep their heel on interest rates, holding them at low levels for some time to come.      (by J R)

April Consumer Sentiment

Monday, May 13th, 2013

According to the University of Michigan’s Consumer Sentiment poll, American’s have lost some of their ebullience over the last month.  April’s reading fell to 76.4 from 78.6 to end March.  Most of the loss came from consumer’s view of the future, but they also seem to be feeling worse about their current conditions.  Housing did provide a silver lining to the otherwise gloomy report.

The strength of the economy, jobs, and income are at the top of their list of concerns.  There is additional worry about an economic downturn in the next five years.  Only one-in-four is expecting a decline in the unemployment rate over the next year.  Half expected no gain in their household income during the twelve months ahead; the same percentage felt there was less than a 25 percent chance of an increase in their inflation adjusted income in the next five years.

The current conditions index was down slightly for the month to 89.9 from 90.7.  If this sub-index tells us anything about the near-term behavior of consumers, it does not bode well for spending.  The April number is lower than the previous month, and March’s retail sales figures were disappointing.  We may see a similar outcome when this important indicator of consumption is released later in May.

Ending on a positive note, there was some good news on the expectations for the housing market.  Rising home values were reported by the largest percentage of homeowners since 2007.  The exact percentage was not given, but a note about it being less than half of the 2005 peak of 76 percent was provided.  Nonetheless, some wealth effect may be making its way into the economy via rising values of homes.  If others begin to perceive additional wealth, they may become more inclined to spend money.  (by C. Cox)