Archive for June, 2013

May Institute for Supply Management

Wednesday, June 19th, 2013

The two major segments of our economy, manufacturing and services, are providing mixed signals in the latest data from the Institute for Supply Management (ISM). The cyclically sensitive manufacturing data fell to its lowest level since June 2009, the last month of the great recession. Services, however, which account for a much larger portion of the economy, picked up some momentum in the month.

The ISM manufacturing index fell hard, off 1.7 to 49.0, well below expectations for a gain. This report tends to follow a pattern similar to the business cycle, which is why it captures Atlas’ attention. The current reading, falling below 50, suggests physical output by the nation’s manufacturers contracted in May. Making matters worse, the new orders component of the release fell significantly to 48.8 from 52.3, so the outlook for June is not too optimistic either.

Fortunately, the non-manufacturing segment of the economy is not experiencing a similar slowdown. Services increased in May, going from 53.1 to 53.7. More importantly, new orders rose 1.5 point to 56.5. Order backlogs also ticked up, suggesting firms are having a tougher time keeping up with their workflow. This, along with increasing new orders, may help future reports overcome some of the weakness seen in the employment component of the May index which tallied its weakest reading since July of last year.

The difference between the two segments of the economy may have to do with the composition of their end users. Services are primarily consumed domestically while a larger ratio of physically made goods can be exported. The weakness in other countries may be putting pressure on demand for manufactured wares, but despite somewhat tepid growth in the U.S., the demand for services is able to keep growing. (by C. Cox)

May Unemployment

Tuesday, June 18th, 2013

The employment situation improved in May according to the Bureau of Labor Statistics. The pace remains lethargic but is headed in the right direction. Nonfarm employers added 175,000 new workers. This follows April’s downwardly revised tally of 149,000 (initially 165,000). The unemployment rate ticked up to 7.6 percent from 7.5 percent in the prior period.

Private employers did all of the hiring for the month. These payrolls increased by 178,000. The difference between the headline number and the private hiring figure is the 3,000 net jobs lost in the various governments (federal, state, and local) within the country.

Wages and weekly hours were basically flat for the month. Average weekly earnings moved up $0.35 for the month to $824.21. This statistic has increased by 1.9 percent in the last year. The slow wage growth is likely due to the types of jobs being created. A large proportion of May’s new hires were in low paying fields with near stagnant wage growth. These include retail (27,000), temporary (25,600) and hospitality (43,000). The typical work week is now 34.5 hours long. It did not change over the last month and is just six minutes longer than a year ago.

The uptick in the unemployment rate is arguably the most positive development in the report. The primary reason for it moving up is the growing labor participation rate. This is the ratio of Americans that make themselves available for work. Should economic news continue becoming more encouraging, previous drop outs from the labor market should start looking for jobs again, causing this ratio to rise. It feels like a stretch, but perhaps the same confidence will possess the working consumers in America and cause them to accelerate their spending. (by C. Cox)

Consumer Sentiment

Monday, June 17th, 2013

The attitudes of consumers continued to improve in May according to the University of Michigan’s Consumer Sentiment poll.  The group attributes much of the uptick to higher market prices for housing and stocks.  This latest release confirms the trends seen in both the Conference Board’s Consumer Confidence report and Bloomberg’s weekly Consumer Comfort Index.

Consumers are feeling better about their finances.  For the first time in five years, more consumers noted that their finances improved than worsened.  They cited recent income gains as the most common reason.  Homeowners’ assessment of the current value of their home is the highest since 2007.  High income households, defined as those with incomes above $80,000, also expect housing appreciation rates over the next year to be the best since 2007.  About one-fourth of the high income consumers mentioned gains in their wealth in addition to reductions in their debt as contributing to their cheer.

Not only are consumers’ income statements and balance sheets healing, consumers are planning on spending money.  Household intentions to buy durable goods (items expected to last longer than three years) are now at the highest level since 2007.  Drilling down a little further, the attitude toward buying a new vehicle is now the best since 2005.

This type of enthusiasm is encouraging.  If consumers are genuinely feeling well enough to increase their purchases of expensive durable goods, the economy may have better days ahead.  Consumption is well beneath the typical levels seen this far into a recovery and with many of our trading partners in dramatic slowdowns or recessions, the American economy could really use a shot of good ol’ fashioned American consumption.      (by C. Cox)

Can of Worms

Friday, June 14th, 2013

If you are a lumbriculidaphile, then you have no doubt attended the annual earthworm pet convention hosted by the NSPCEW.  And what fun it is!  I used to take Clyde, and we would meet up with other lovers and their pets.  Placed together in a can, all the worms would frolic with such abandon it proved hard really to tell where one ended and the next started.

The current real estate market for existing homes has some similarities.  Trying to get a clear picture of supply, demand, and prices is akin to watching Clyde and friends slither.  The National Association of Realtors (NAR) said pending sales in April were disappointing due in part to tight supply.  But the inventory of existing homes, while still below levels seen one year ago, did jump 11.9% in the month.  An NAR spokesman referred to “accidental landlord,” buyers who are still holding onto their original home as they wait for a suitable buyer.  Additionally, some owners remain under water and are reluctant to sell until prices improve a bit more.  So is supply coming or going?

The NAR said home prices should continue climbing but access to lending is holding some buyers back even as all cash sales, at 32% of the month’s total, are also constraining the advance to some degree.  And banks that had been more willing to consider short sales are now holding back, seeing the current increase in value as an opportunity in foreclose instead.  So does the current demand have legs, or is it just another speculative venture?

While the recovery in home prices has been persistent, incomes have not shown a similar rise.  Are we now getting to a point where prices are becoming unaffordable again, especially when mortgage rates seem to be moving up as well?  Will these two dynamics combine to put a lid on any further appreciation?

Such a can of worms is a bittersweet reminder to me of the fun Clyde and I used to have together.  He seemed to love having me refresh his little box with a special blend of Sumatra and Ethiopian coffee grounds.  Unfortunately I left him out of his box too long one sunny day and he fried and dried and died.  But that’s life.   (by J R)

April Income and Outlays

Thursday, June 13th, 2013

Consumers took a hit in April according to the Bureau of Economic Analysis.  Households did not earn any more for the period, and they spent less.  The 0.2 percent decline in consumption is not constructive for the American economy which depends heavily on its consumers for growth.  Also imbedded in the report is the Federal Reserve’s favorite measure of inflation; it fell for the second consecutive month.

The stagnant income measure follows a 0.3 percent uptick in March.  The slowdown was primarily caused by diminutive growth in wages and salaries (up just $1.6 billion) coupled with a big drawdown in farm proprietor’s income (down $11.3 billion).  Year-over-year, the rate of growth slowed from 3.3 percent in the prior period to 2.8 percent in April.  After adjusting for inflation and taxes, real disposable income managed to tick up just 0.1 percent for the period.

Headline personal consumption expenditures fell partly because of monthly deflation.  When the figure is adjusted for the 0.3 percent month-over-month price decline, the nation actually purchased 0.1 percent more than in the prior period.  Only services experienced a decline in consumption (down 0.1 percent); Americans bought more durable and nondurable goods.

The light consumption growth is not indicative of a healthy economy.  The year-over-year rate of consumption has been stuck in a range between 1.7 and 2.2 since November 2011 which is less than previous non-recessionary periods.  Slow growth, coupled with low inflation rates and a stubborn labor economy, provides the central bank with plenty of reasons to keep using its experimental tools.  For all of the recent chatter about the Federal Reserve “easing” its quantitative easing, this important indicator is not supporting the argument.    (by C. Cox)

Recession Continues?

Wednesday, June 12th, 2013

The Economic Cycle Research Institute (ECRI) predicted the U.S. economy would enter into a recession in the second half of 2012 in the earlier months of last year.  They have reaffirmed this claim several times since and continue to present evidence to support their stance.

The last time we wrote about ECRI, they pointed to the slow rate of year-over-year nominal (real + inflation) growth in the economy.  They showed that the economy has not seen year-over-year nominal growth dip below 3.7 percent outside of the context of a recession.  The rate of growth has done just that in each of the last two quarters.

ECRI’s proprietary measurement for consumption is suggesting that consumers have slowed their purchases down by the most since September 2009.  They point out that the lack of consumer enthusiasm is weighing down the growth rate of year-over-year imports.  This statistic (provided by the Bureau of Economic Analysis) is currently negative, and ECRI highlights two interesting observations.  First, in recent decades, negative year-over-year tallies have only occurred during U.S. recessions.  Secondly, unlike other indicators, import data is not substantially revised, as are other figures (e.g. GDP and unemployment) at turning points in the business cycle.  ECRI is waiting for these revision-prone economic releases to be negatively impacted as more data is collected.

ECRI is an organization that attempts to find directional changes in the economy.  Prior to the previous downturn, they predicted its arrival.  Before the recovery began, they emphatically claimed that the turning point was just beyond the horizon.  As noted above, ECRI’s current position is that a new recession has already begun.  ECRI is simply waiting for the rest of the world to acknowledge the contraction.     (by C. Cox)

Revised First Quarter GDP

Tuesday, June 11th, 2013

Gross Domestic Product (GDP) grew slightly slower than initially thought to start 2013 according to the Bureau of Economic Analysis.  The revised annualized figure was 2.4 percent versus the initial tally of 2.5 percent.  The new figures for the various components of GDP were mixed.

Businesses appear to have sold more in the quarter than initially thought.  Final sales of domestic product were revised upward to 1.8 percent from an initial tally of 1.5 percent.  Since exports, a component of final sales, were revised down, American consumers must have increased their spending on goods and services made in the U.S.

Inventory investment was revised down as companies accumulated fewer unsold items than previously thought.  Some of the inventory drawdown is attributed to the additional consumption mentioned above.  This is encouraging because the economy’s growth cannot be dependent on the growing number of unsold wares sitting on companies’ shelves even though this collection adds to the GDP statistic.

It is almost not worth mentioning, but there were small downward revisions to residential investment and government spending.  Atlas will be monitoring the pace of house building going forward to make sure there is not a change in behavior at construction firms.  Government spending is unlikely to support the economy much in the near future as the beltway tightens its belt in one way or another.

Overall, there are no major surprises in the revision.  The added consumption is encouraging, but it should be noted that the growth rate of final sales is still low by historical standards.  The reason for the below average pace has yet to be determined, but the central bank continues to work diligently at fixing the unknown cause of slow consumption by printing scads of money every month.  We wonder if it will work, especially given the results to date.   (C. Cox)