Archive for September, 2013

July Chicago Fed’s National Activity Index

Thursday, September 19th, 2013

The economy continued to expand in July according to the Chicago Fed’s National Activity Index (CFNAI). Not surprisingly, the expansion’s pace remains slower than the economy’s historical average growth rate. Any reading below zero indicates the economy is performing below trend. July’s tally of -0.15 is the fifth negative reading in a row, but the tally edged closer to zero after June’s reading of -.23.

There are other signs of improvement in the indicator besides its less negative monthly tally. Of the 85 components in the index, 53 of them improved versus 32 deteriorating. The three month moving average for the indicator also improved. The Chicago Fed uses this measure to help it predict turning points in the economy. A reading of -0.7 or below tends to be associated with recessions, so seeing the average move away from this mark and closer to zero is encouraging; the three-month moving average stands at -.15, and has improved for the last two months after hitting a recent low of -.30 in May.

The Federal Reserve likely took this measure into consideration when it chose to keep its unconventional monetary policy in place at yesterday’s Fed meeting. It would have been difficult to ignore such a comprehensive indicator that continues to illustrate the inherent weakness in our economy. Coming from one of its own regional banks surely made this report even more challenging to disregard. (by C. Cox)

July New Home Sales

Wednesday, September 18th, 2013

New home sales cooled substantially in July according to the Census Bureau. This is a dramatic contrast to the existing home sales number for the same month, but as you will see later, existing homes may be next. The number of new homes sold on a seasonally adjusted annualized basis fell 13.4 percent to 394,000 units versus June’s revised tally of 455,000 units. June was originally thought to have 497,000 units sold on a seasonally adjusted annualized basis, so July’s tally is even more disappointing when the original June figure is considered.

The price statistics were mixed for the month. The average value of the homes sold in the period grew by 6.7 percent to $322,700. The median price paid was down 0.5 percent to $257,200. This directional discrepancy is likely explained by the fact that the $750,000 and over category was the only price category to experience an increase in the number of units sold. All others groups fell with the exception of homes valued under $150,000 which was unchanged.

Atlas’ concern about the future of existing home sales is caused by the difference in how the tallies are counted. New homes are considered sold once a contract is signed, while existing home sales have to be completed in order to count. This means that the market for new homes is likely feeling the effect of the recent mortgage rate increases first. The existing home deals that closed in July were mostly started a month or more before the end of July. If existing home buyers reacted similarly to the higher costs of borrowing, there will be a lagged impact that will be seen in the months ahead as the current pipeline of transactions dries up. As Atlas mentioned in our existing home sales blog, the chief economist of the National Association of Realtors voiced his concern about the negative influence higher rates will have on the existing home market. July’s new home sales report may be the canary in the coal mine for existing home transactions. Can you still hear the miner’s companion? (by C. Cox)

July Existing Home Sales

Tuesday, September 17th, 2013

Existing home sales increased in July after falling in June according to the National Association of Realtors (NAR). July’s increase of 6.5 percent is quite a spike and was helped by June’s downwardly revised statistic. The seasonally adjusted annual rate of 5.39 million units followed June’s tally of 5.06 million which was initially thought to be slightly higher at 5.08 million.

Interest rates may have played a larger than normal role in this month’s figure. The national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 4.37 percent. This is a large jump over June’s rate of 4.07 percent. This bellwether rate is a full one percent higher than the record low of 3.35 percent in December 2012. To put this figure into perspective, monthly loan payments to a bank based on these interest rates have increased 13.2 percent since the end of 2012. The uptick in the cost of money has Lawrence Yun, the NAR chief economist, concerned. He noted, “Mortgage interest rates are at the highest level in two years, pushing some buyers off the sidelines. The initial rise in interest rates provided strong incentive for closing deals. However, further rate increases will diminish the pool of eligible buyers.” As the rates increase, it becomes more difficult to afford the home.

The housing market has been healing for several years. Interest rates have been a tailwind for this segment of the economy. If a trend reversal is taking place in home loan rates, something else, perhaps a healthier economy, will be necessary for housing to continue its recovery. (by C. Cox)

July Durable Goods Orders

Monday, September 16th, 2013

Orders for durable goods, wares expected to last longer than three years, fell in July per the Census Bureau. The 7.3 percent decline came in addition to the downwardly revised June gain of 3.9 percent (originally 4.2 percent). The orders fell after three consecutive months of higher volume.

The largest impact came from the transportation segment of the economy. It was down 19.4 percent. Nondefense aircraft and parts orders, a notoriously volatile component of transportation, led the downtick with a $14.5 billion contraction.

In order to better understand the state of businesses, Atlas looks at the “core” durable goods orders, which excludes spending on national defense and aircrafts. This proxy for business confidence demonstrated some weakness in the month as it fell 1.5 percent in the period. In other words, firms added less capital to their balance sheets.

Durable goods orders are an important indicator for at least a couple of reasons. First they measure orders, so it provides some insight into future output. Secondly, manufacturing output has a tendency to follow the contours of the business cycle more closely than services. This monthly decline is the first since March, so Atlas is not drawing any conclusions about an imminent slowdown but has noted the downtick and will be on the lookout for a change in this indicators pattern. (by C. Cox)

Eight Ways to Diversify

Friday, September 13th, 2013

Have you ever had a foot “go to sleep?” Maybe you were sitting cross-legged for awhile or something and then stood up and wondered where your foot went. It was so numb and floppy you were afraid to take a step for fear of twisting an ankle. You had to wait for the blood to rush back in feeling all tingly or even like a bunch of needle sticks before you were confident enough to continue walking. Certainly, if you can count yourself among the fortunate, it is at times like that when you were glad you had two of them. Biologists would no doubt consider bi-pedal construction a convenient form of diversification.

Diversification is also important when constructing a portfolio. In a general sense here at Atlas we look at various asset classes to achieve this end, primarily equities or stocks, fixed income or bonds, and sometimes commodities like gold. In theory, at least one of these should be appreciating more often than not. The trouble with theory is that we can never be sure which one.

Another trouble with theory is when an outside force causes all the classes to move in the same direction at once. Actually, that is not a problem when the direction is up. It is unwelcome when the trend is negative as was the case recently after the last Federal Reserve Board meeting and subsequent policy discussion.

Coincidence is not causality, so maybe the market was reacting to something other than Mr. Bernanke’s pronouncements. Asset class valuations did drop in unison for a few days following his press conference, but China appeared to be on the verge of a liquidity crises at that same time. We may never know the true cause (or causes), but the decline did cause us to become more cautious.

Too bad we don’t have many asset classes other than cash to turn to when these events occur. Consider an octopus for example; it has eight legs. It can squirt around, crawl around, even (rarely) roll around or stroll along on just a couple of legs (arms?). Now that’s diversification! I wonder if they ever have any feet go to sleep. (by J R)

July Personal Income and Outlays

Thursday, September 12th, 2013

Income and expenditures increased slowly to start the third quarter. According to the Bureau of Economic Analysis, they were both up 0.1 percent for the month. These monthly increases were sharply slower than in the previous period which saw income and spending grow by 0.3 percent and 0.6 percent respectively. Income and outlays are not setting a very quick pace for third quarter gross domestic product (GDP).

Headline figures do not always tell the whole story. After-tax income matched June’s uptick; also known as disposable personal income (DPI), it increased by 0.2 percent. This is an important figure because it is represents the money consumers can put into the economy if they choose not to save it. Wages and salaries, the largest component of income, curiously fell in the period, so the other sources of income (rent, proprietors’ income, and government social benefits) made up the difference. Medicare, Medicaid, and veteran’s benefits caused the transfer payments to increase.

Consumers changed some of their buying habits. Americans spent less on services and durable goods, while adding to their consumption of nondurable wares. Also, more money was spent on personal interest payments in the period. Americans saved roughly 4.4 percent on an annualized basis to start the third quarter, unchanged from June.

Inflation pressure remained tame according to the Personal Consumption Expenditure (PCE) Price Index, up 0.1 percent in July. Widely thought to be the Federal Reserve’s preferred measure of prices, the core PCE also grew by 0.1 percent. Both of these increases were slower than a month earlier. (by C. Cox)

2nd Quarter Productivity and Unit Labor Costs

Wednesday, September 11th, 2013

The Bureau of Labor Statics’ report on Productivity and Unit Labor Costs improved slightly in the second quarter after being negative in the first three months of the year. The nation’s output per labor hour was 0.9 percent higher on an annualized basis. This uptick follows the first quarter’s fall of 1.7 percent which was initially thought to be positive 0.5 percent before the revision. Productivity improved because output increased by 2.6 percent, but it only took 1.7 percent additional hours worked to produce these extra goods and services. Compensation per hour grew after contracting to start 2013, causing unit labor costs to increase after a steep decline in the first quarter.

The nation’s productivity is showing signs of stalling. The quarterly improvement of 0.9 percent was tepid even after the January through March contraction. Also, the year-over-year productivity growth is zero, which is the same rate of growth as the first quarter’s 12 month look back.

Labor costs increased but not in a substantial way. The annualized quarterly uptick of average hourly wages was 2.3 percent. On its own, this figure may seem higher than expected, but when it is looked at from the context of the first quarter’s decline of 5.9 percent, it is not as alarming. Year-over-year, average hourly wages have increased by just 1.6 percent.

This indicator confirms the lukewarm feeling of the economy. America is experiencing growth but not at an exhilarating rate. Wage growth is not accelerating too quickly, so, barring an exogenous event like a natural disaster or geopolitical disruption, normal levels of inflation may continue to remain elusive at this time. (by C. Cox)