Archive for July, 2013

June Leading Indicators

Wednesday, July 31st, 2013

The Conference Board’s Leading Economic Index was stagnant in June. The index stayed level at 95.3 after increasing 0.2 percent in May and 0.8 percent in April. The stall was the result of five improving components, four deteriorating categories, and one which was unchanged.

This forward looking indicator was negatively influenced by declines in the housing and stock markets, components that had been rather helpful to the LEI in recent history. Building permits fell in June; since it takes permits to build structures in the future, this indicates slower construction output is ahead. Equities were not helpful in the period as markets tried to digest the meaning of some of the central bank’s commentary during the month. Also declining were both measures of new orders from businesses contained in the report, suggesting firms may begin to moderate the growth of their output.

Positive contributions from the lending conditions, improving unemployment claims, a positive yield curve, new orders for consumer goods, and consumer expectations for business conditions helped to keep the index from falling. It appears lending is improving, which should lead to more output as additional firms and households access the credit market. Consumer new orders were only slightly positive, but Americans expect better conditions; this improvement in attitude may cause spending to increase.

This is one month of data, so the lack of growth in the indicator is not causing any alarms to go off at Atlas. On the other hand, this indicator is not signaling economic acceleration is around the corner. That leaves Atlas wondering about the number of consecutive quarters the American economic expansion can grow at less than two percent on an inflation adjusted annualized basis without leading to recession. With the latest data on Gross Domestic Product, the answer is at least three. (by C. Cox)

June’s Treasury Budget

Tuesday, July 30th, 2013

Stop the presses! Well, at least stop the ones using red ink. The nation’s June budget was released by the Treasury Department, and it was back in black. The budget has now been in the positive for two of the last three months and has actually had a surplus in three of the first six months of this calendar year. Before we all pull out our AC/DC t-shirts to celebrate, July tends to run in the red each year.

Total receipts for the month were $287 billion. Fannie Mae and Freddie Mac contributed heavily to the government’s revenue this period as they made a repayment of rescue funds totaling $66.0 billion. The nation’s outlays were $170 billion, leaving a surplus of $117 billion. Fiscal year-to-date, the deficit is $510 billion; during the same period in the 2012 fiscal year, the shortfall was 77 percent higher with a total of $904 billion. Lower spending and higher receipts have helped the change in year-to-date deficits. Government spending has slowed by 4.8 percent and tax receipts from consumers and businesses are up 18.0 percent and 16.9 percent respectively.

The falling deficit may prove helpful in the current environment. The Federal Reserve has been hinting at tapering its unconventional monetary policies. One concern about the central bank starting to exit its strategy is that a large source of government debt buying will begin shrinking. If the beltway is able to continue to reduce the monthly shortfalls, the pace of new government debt issuance may be sluggish enough to offset the slowdown in central bank purchases and keep the deleterious impact on interest rates, which many fear will increase, minimized. It really does sound too good to be true. Better turn up AC/DC. (by C. Cox)

June Jobs

Monday, July 29th, 2013

The labor market continued to improve in June according to the Bureau of Labor Statistics’ report on employment. Companies added 195,000 new names to their payroll in the month. The rate of unemployment remained stagnant at 7.6 percent; it has not moved much since February, but its standstill is likely caused by reentrants into the labor force. This is encouraging because it demonstrates an improving outlook by those previously too dispirited even to consider themselves part of the workforce.

The number of new jobs added in the period was quite encouraging on its own, but when revisions in previous months are included, the report begins to look downright optimistic. First, the 195,000 new jobs figure is higher than the 182,000 average over the last 12 months. Secondly, the revisions to the prior two months were substantial. April’s recount added 50,000 jobs to the total, and May tacked on another 20,000 to the list of employed; these upticks put the three month average at just over 196,000 new jobs a month.

The encouraging figures still mask some problems in the labor market. The composition of new jobs remains biased toward the lower skilled and therefore lower paying jobs. For example, leisure and hospitality led the month’s jobs growth with 75,000 new workers. In addition, the labor participation rate (while it has improved for two months in a row) is still low when compared to the previous couple of decades. This is partially demographically driven; if some of the baby boomers choose to reenter the workforce as the labor market improves, do not be surprised if the unemployment rate remains stubbornly high.

Overall, this unemployment report can be characterized as positive. Companies are continuing to add workers. Labor is the most expensive cost to employers, so firms must see some optimism in the near future as they add to their ability to produce. While it was not mentioned earlier, there was an increase of 0.4 percent in the average hourly earnings. This will add to disposable income which should eventually find its way into consumption unless Americans save it. How likely is that? (by C. Cox)

June Retail Sales

Friday, July 26th, 2013

The Census Bureau’s report on retail sales for June showed a 0.4% rise, just half of the consensus total expected by economists. Significantly, this disappointing result includes a 1.8% boost from motor vehicles sales and a 0.7% increase in gasoline to operate them. Excluding these two components of the headline report leaves us with an actual 0.1% decline in core retail sales for June.

We find these results to be somewhat suspect. The core measure is somewhat of a mixed bag. Some categories such as building material and garden supplies were down while others like furniture and home furnishings rose. A few analysts point (once again) to the abnormal weather in many parts of the country, considering that to be culpable for some of the decline. If so, we can reasonably expect to see a rebound in the months to come. There is also some question about the veracity of the vehicle sales report as it currently stands. All these special factors may be clouding the result and, if they are actually flawed, all should get straightened out by subsequent revisions. Nevertheless, evidence points to a slowing of consumption as our economy end its second quarter. This will not prove helpful for the preliminary second quarter’s Gross Domestic Product. (by J R)

June Producer Price Index (PPI)

Thursday, July 25th, 2013

The Bureau of Labor Statistics reports prices paid by producers jumped 0.8% in June, well above general expectations, following on the 0.5% rise we saw for May. Small comfort may be taken from food prices which actually slowed their climb, gaining 0.2% versus the 0.6% hike the prior month. It was a 2.9% surge in energy costs that gets much of the blame for this July jump, following the 1.5% increase posted in May. Gasoline prices by themselves rose a staggering 7.2%, but prices for diesel and home heating oil also climbed. Subtracting out these two volatile components (food and energy), we see the core PPI climbed 0.2%, led primarily by passenger cars (up 0.8%) and light motor trucks.

Year-over-year the headline PPI rate has jumped 2.5%, a strong increase over the 1.8% pace recorded in May. The core rate remains up 1.6% Y/Y, just as it was the previous month.

While there are as yet no red lights flashing because of these figures, some members of the Federal Reserve may be seeing yellow. It is only one report, but it is one which will bolster the argument for a more cautious approach to monetary stimulus by some board members at the Fed’s next meeting. (by J R)

June Industrial Production

Wednesday, July 24th, 2013

The Federal Reserve reported U.S. industrial production rose 0.3% in June after being unchanged the previous month. Breaking the report down into its three major components we see output by utilities off 0.1%, mining increasing 0.8%, and a 0.3% gain in manufacturing.

The manufacturing segment gets most of our attention here at Atlas since it includes production figures for many big ticket items. June’s largest gains came from a nondescript class called miscellaneous manufacturing, a less amorphous category labeled machinery, and a somewhat specific sector: motor vehicles and parts. Each of the three gained over 1% in the month.

Capacity utilization, a figure we liken to the speed limit on production, gained a meager 0.1%, clocking an overall 77.8% rate for the month. This is an okay number, but hardly robust.

While the manufacturing sub-sector did rise in June, the manufacturing index fell to a 0.2% annualized gain for the second quarter. Compare that to the year’s first quarter 5.1% jump and you get a sense that things may not look all that stellar when the preliminary second quarter Gross Domestic Product figure gets released at the end of July. (by J R)

June Consumer Price Index (CPI)

Tuesday, July 23rd, 2013

The Bureau of Labor Statistics reported headline prices at the consumer level rose 0.5% in June. Compared to the 0.1% rise seen in May, this is quite a hike and much of the rise can be laid off to increasing energy prices. Gasoline, for example, zoomed up 6.3% in the month. Food contributed slightly with a 0.2% gain.

The core CPI data (which eliminates both food and energy) was a bit more subdued, up 0.2% as had been expected. Climbing costs for shelter, medical care, and apparel were the primary drivers for the increase here.

Year-over-year the headline CPI has risen 1.8%, up 0.4% from the May report. The core measure has actually declined on the same Y/Y basis, off 0.1% to show a 1.6% increase.

There is nothing of substance in this report that the markets should find alarming, nor is there anything suggesting the Federal Reserve needs to worry about any inflationary pressures their current easy money policies may be stimulating. (by J R)