Archive for August, 2013

July Federal Budget

Wednesday, August 21st, 2013


America’s budget deficit expanded by $97.6 billion in July according to the Treasury Department.  The red ink follows June’s sizeable surplus of $116.5 billion.  Both budget components, outlays and receipts, worsened in the period.  Government spending increased by almost $177.0 billion, but the uptick followed an unusually small June tally.  Receipts (primarily taxes) dropped nearly $87.0 billion.

It is quite fun to comment on the lack of inertia coming from the beltway, but fiscal year 2013 budgeting has improved substantially versus the last several years.  That is not to say that the over $607 billion year-to-date deficit is good, but it is better than it has been in the last four fiscal years.  The deficit is down by roughly 38 percent from this time last year.  The sequestration and tax hikes, along with a slowly growing economy, appear to be positively influencing the nation’s income statement.

The improvement is notable when compared to the last four fiscal years, but unless August and September have substantial surpluses, fiscal year 2013 will be the fifth worse deficit in American history.  Fiscal authorities have lots of work ahead of them in order to keep the hole from becoming too deep to climb out of.  In the meantime, America will have to settle for the smaller shovel Washington D.C. is currently using.  (by C. Cox)

June International Trade

Tuesday, August 20th, 2013


The Bureau of Economic Analysis reported America’s trade deficit with the rest of the world was $34.2 billion in June.  While such a sum may appear substantial, the community of economic analysts was taken aback by how scant that total really was.  Go figure.

Never mind; I’ll do some figuring for you.  The number was below the lowest forecast out there.   More importantly, it was substantially lower than the Commerce Department’s assumed $42.3 billion shortfall.  Why is this especially important?  Because that was the number used to calculate the preliminary estimate for our nation’s second quarter GDP and this substantially lower figure will now subtract less from the revised total coming out at August’s end, thereby most likely boosting the country’s growth rate.  The May total was also revised down just a bit to $44.1B from $45B as originally shown, providing additional help to move the GDP revision in a positive direction.

Statistics aside, what else can we draw from the news?  It lists this as the narrowest trade gap in over four years with about two-thirds of the improvement coming from factors other than the price of oil.  Good news.  Obviously there are two major components to this report.  Our exports rose, which can be seen as a potentially positive sign of increasing global demand and more sales by domestic corporations.  The import segment declined, leading us to question any ongoing strength coming from American consumers, especially when it was precisely this sub-category (consumer goods) which saw the biggest decline in demand for June.    (by J R)

July Institute for Supply Management

Monday, August 19th, 2013

The July data from the Institute for Supply Management (ISM) was encouragingly strong. Both sides of the economy, service and manufacturing, improved in the period. The ISM uses diffusion indices to illustrate the state of the economy each month. This means that any reading above 50 points to expansion in the relative portion of the economy while a figure below 50 suggests the output contracted for the month. In July, the service and manufacturing tallies were 56.0 and 55.4 respectively.

The service sector sped up from the prior reading of 52.2. The concern in June was the slowdown in new orders. Fortunately, a slowing trend does not appear to be developing as the new orders component jumped nearly 7 points to 57.7, its best reading since December. New orders are important because they lead to new production. It is not as if the economy was waiting for these new orders to become output either; the service sector appears to have gotten off to a good start in the third quarter as business activity surged over 7 points, also putting in its best reading since December.

Manufacturing also accelerated in July as the index jumped 5.5 points over June’s tally. As seen in the service section of the economy, new orders were strong. Also pointing to a strong third quarter start was the production level. The output measure jumped over 11 points to 65.0, which is the strongest reading of the current recovery for this subcomponent. Delivery times were also up; this means it is taking longer for order to be completed. Companies may need to invest in either capital or labor in order to combat the congestion in their supply chains. Both solutions are good for America.

The two segments of the economy appear to have found firmer footing to start the second half of the year. This encouraging news will likely put the central bank marginally closer to reducing its unconventional monetary policy. At some point, the Federal Reserve is going to need to see if the economy can remain upright without the bank’s training wheels, but tapering is not the same as outright removal; the training wheels will just get smaller. (by C. Cox)

Not So Neat

Friday, August 16th, 2013

Acronyms are a ubiquitous part of today’s linguistic landscape. They help tech savvy types save space when tweeting (LOL). They can seem a little too too, like saying POTUS instead of Obama. Some we have come to live with almost naturally (NASA); others, not so much (NOAA). Here’s one that’s new to me: NEET, and it is not neat to be one.

Originating in England, NEET describes a young person (usually between 16 and 24 years old) who is Not in Employment, Education or Training. The Organization for Economic Co-Operation and Development (OECD) estimates the developed world contains 26 million NEETs. The World Bank, looking at developing economies, adds a staggering 260 million to that figure. The Economist places the total at almost one in every four young people worldwide! If you add temporary workers and the unpaid who labor for family businesses, this same magazine guesses nearly half of our planet’s youth are currently caught in such a trap.

Research suggests being either marginally attached or out of the work force altogether leaves a lasting scar, one seen immediately as a wage penalty. The longer-term effects lead to delays in both savings and family formation. These, in turn, can prove pernicious, producing a debilitating hand-me-down passed to subsequent generations. Further, they don’t affect just the unemployed. Governmental attempts to redress the problem tend to be expensive, often taking such forms as unemployment and welfare payments which in turn appear to create economic losses that measure in the billions of dollars and put a perpetual drag on global GDP. The additional expense which may result from social unrest has yet to be tallied.

The solution is easier to name than implement. Policymakers need to stimulate growth, but agreeing to solutions when divisiveness is the order of the day can prove difficult. Political and economic viewpoints both seem at loggerheads worldwide. Fortunately, technology appears to be engineering its own solutions. We spoke about MOOCs in an earlier essay, and the same solution is being adapted rapidly to vocational education. Perhaps equally empowering, on-line advances are now allowing work to be taken to people, replacing the traditional early a.m. rush hour. If necessity is the mother of invention, more advances will emerge from the private sector going forward even as the world’s leaders remain tied to cartels, taxes, and regulations. (by J R)

Retail Sales

Thursday, August 15th, 2013

Retail sales improved in July according to the Census Bureau. The advanced estimate for the first month of the third quarter shows an uptick of 0.2 percent. While this is not a large increase, it comes on the heels of June’s reading that was upwardly revised to 0.6 percent from 0.4 percent in the original count. Looking back one year, retail sales have improved by 5.6 percent. Atlas considers this an important indicator because it is such a large part of personal consumption which happens to be the biggest component of gross domestic product (GDP).

Absent from the report was strength in durable goods. Americans shied away from buying long-lasting wares like furniture, electronics, and cars. Automobile purchases have added significantly to retails sales over the last twelve months but were not helpful in July. Year-over-year they have managed a 13.3 percent gain but were down roughly one percent in the latest month.

Consumers seemed more content buying items that will need to be replaced within the next three years. More money was spent on items like clothing, gasoline, and eating away from home. Additional money was also spent at pharmacies and drug stores; as the demographics in America continue to morph, this will likely be a component of the report that will benefit.

There are signs in the attitude surveys that suggest retail consumption should continue to be constructive. Americans’ feelings about their current situation have been improving in the recent attitude surveys that Atlas follow. Consumers are not as cheerful about the future according to the same surveys, and this retail sales report may reflect their different outlooks over the immediate and longer-term time horizon; at least in July, consumers were less willing to buy longer lasting items that tend to be more expensive and are often purchased by borrowing from one’s future earnings. (by C. Cox)

Second Quarter GDP

Wednesday, August 14th, 2013

The pace of the economy picked up some momentum between April and the end of June according to the Bureau of Economic Analysis (BEA). This is the preliminary estimate, so there will definitely be adjustments to the tally in the coming months. For now, it appears that the economy grew at an inflation-adjusted annualized pace of 1.7 percent.

The growth rate is not very favorable. At this pace, the economy remains susceptible to outside shocks like natural disasters or geopolitical conflicts. The rate of change looks even worse after one considers that the downwardly revised first quarter figure was needed to help the second quarter look better; after more data was collected, the BEA determined that the economy only grew by 1.1 percent in the first quarter instead of the 1.8 percent reported by the group in the “final revision” from a month earlier.

Mathmagic aside, there were positives in the initial second quarter release. Companies invested more in the quarter; nonresidential fixed investment swung from -4.6 percent in the first quarter to +4.6 percent in second. Exports also swapped signs as they were up 5.4 percent in the second quarter after being down 1.3 percent in the first three months of the year. Government spending decreased by less and may suggest the sequestration impacts on GDP are beginning to fade from the statistic. Companies drew down their inventories in the quarter as they sold more than what was produced in the period. This bodes well for output in the future as companies will need to restock their shelves. Consumers appear to have lost some enthusiasm in the period as the rate of growth for personal consumption expenditures slipped.

Overall the economy remains lukewarm. The pace of growth, at just 1.43 percent in the last 12 months, has been diminishing on a year-over-year basis which causes some concern at Atlas. It is just an observation, but this level of output growth is generally seen in the periods leading up to a recession. (by C. Cox)

June Income and Expenditures

Tuesday, August 13th, 2013

The Bureau of Economic Analysis reports personal income grew by 0.3% in June, following the 0.4% May advance (originally +0.5%). The details show a good 0.5% increase in the wages and salaries component, some of which may ultimately find its way into retail sales.

Consumer spending also grew by 0.5% following the revised 0.2% May hike (originally +0.3%). We would like to see these purchases center around durable goods but such was not the case. Nondurables led the way with a strong assist from rising gasoline prices.

Headline-level inflation rose 0.4%, well above the 0.1% May gain, while the core rate was up a more subdued 0.2% (+0.1% in May). Taking a longer-term perspective, the headline rate is up 1.3% year-over-year while the core has risen 1.2%, unchanged from May.

These inflation figures do nothing to argue for a reduction in the Federal Reserve’s current monetary stimulus agenda. This report was issued the same day as the Bureau of Labor Statistics released the July unemployment figures. Since the latter was disappointing, it derailed any positive momentum the markets may have received from June’s income and spending numbers. This too gives the Fed more support to carry on and in this topsy-turvy world where bad news is good news, the equity markets may welcome a softer tone to the economy. (by J R)