Archive for October, 2013

August Trade Balance

Thursday, October 31st, 2013

The trade deficit grew slightly in August after July’s revision according to Bureau of Economic Analysis. The monthly shortfall was $38.8 billion which is slightly better than the July deficit of $39.1 billion (originally $38.6 billion). It appears our trading partners wanted less of the goods and services America provides (exports fell $0.1 billion) while we purchased virtually the same amount of foreign wares and services as in the prior period.

The month was marked by divergent directions in goods and services. Exports of goods fell $0.3 billion while imports ticked down $0.1 billion. On the other hand, service exports and imports increased by $0.1 billion and $0.2 billion respectively.

The trade gap has been trending lower. The three month average deficit has fallen to $37.3 billion from $39.9 billion in July. Also, the shortfall has declined by $5.2 billion year-over-year. During the last twelve months, exports grew by $7.2 billion and imports climbed $1.9 billion.

The global economy’s upward trend remains intact. Americans continue to buy more from our trading partners, and foreign buyers continue to demand our domestic products and services. Because of the amount of time it takes to gather the information, this report comes out with considerable lag. With all the nation has been through since the end of August, Atlas anxiously awaits the September and October iterations of this report to see if there was any trade damage done while Washington D.C. was throwing fits. (by C. Cox)

But Is It Real?

Wednesday, October 30th, 2013

Trying to understand the true health of the labor market is not an exact science. Instead, it is an exercise in inferential statistics. This discipline is a tool that helps the Bureau of Labor Statistics define characteristics about the large labor population without needing to poll the entire cohort. But recently there has been a lot of criticism about one of the most recognized economic data points, the unemployment rate.

The rate’s validity may be questioned due to some unusual behavior in the labor market: a persistent decrease in the labor participation rate, defined as the number of employed plus unemployed Americans divided by the total population. Missing from this count are those who could be working but are no longer trying to get a job for one reason or another. In other words, a increasingly smaller percentage of Americans consider themselves to be part of the work force. This leads some to question the improving unemployment statistic.

There are policy implications at stake. The nation’s employment health is part of the Federal Reserve’s dual mandate. The central bank has even targeted a 6.5 percent unemployment rate as its goal (September’s rate was 7.2 percent). But if there is an artificial decline happening because of the participation rate, what is a central banker to do? Those that endorse the unconventional monetary policies currently being used worry that the tactics will be removed too soon based on possibly tainted information.

The Federal Reserve Bank of San Francisco has tried to address this problem by looking for other measures of labor market improvement. They analyzed 30 indicators and found six that have some predictive qualities. These indicators come from various sources like the Conference Board, Institute of Supply Management, and the Department of Labor. Their research suggests the labor market is improving and has more momentum now that just a year earlier; they go so far as to conclude that the improvement could accelerate in the coming months. Perhaps this rationale would help justify the end of experimental monetary policy in the near future. Of course, Congress may throw a wrench in the plan if they cannot get their act together in the months ahead. (by C. Cox)

September Employment Report

Tuesday, October 29th, 2013

Additions to payrolls were light in September. Per the reopened Bureau of Labor Statistics, employers added 148,000 new jobs to end the third quarter. This follows August’s positively revised tally of 193,000 (originally 169,000). For what it is worth, the unemployment rate fell to 7.2 percent from 7.3 percent in the prior period.

Many of the internals of the release do not make the headline figures any more appealing. Average hourly earnings ticked up just 0.1 percent. This $0.03 increase puts the average hourly earnings for all employees at $24.09; year-over-year, the figure is up $0.49 or 2.1 percent. The average workweek for all employees on nonfarm payrolls did not change from last month’s 34.5 hours which is unchanged from September 2012.

To show Atlas is fair, we can look at a few of the recent developments that are relatively positive. The long-term unemployed (those jobless for 27 weeks or more) fell by 156,000 in September and by 725,000 in the last 12 months, putting their total number at about 4.1 million, representing nearly 37 percent of all the jobless. We might see this as a positive only because it does not appear that many of them became so discouraged in seeking employment that they left the labor force altogether. For the month, the overall labor force participation rate managed to stay even at 63.2.

It took some digging to find gold in the employment data, and it may only be pyrite. The jobs market remains tepid at best. This weakness coupled with the negative impact the government shutdown likely made on the country’s output should delay the Federal Reserve’s taper schedule into at least the first quarter of 2014, which could mean Ben Bernanke will not even get to start unwinding all he has wound. (by C. Cox)

Preview of Coming Distractions

Monday, October 28th, 2013

Whew! Looks like we dodged a bullet when Congress kicked the can down the road a few more months, eh? Of course, these are two handy metaphors for what is ultimately an irresponsible failure of government. So what do we have to look forward to when our nation hits the same wall again early next year?

First, let’s define the situation. The Congressional Budget Office estimates the U.S. made $223 billion in interest payments last year. To avoid an actual default, we will be on the hook for at least that much by the end of this new fiscal year. Additionally, some portion of our debt will mature, requiring additional cash to repay the loaners unless they are willing to roll it over and let it ride. Also, there will be a continuing drain as we meet a wide variety of continuous expenses such as military pay, social security benefits, and Medicare. All of this is in addition to paying the bills for goods and services our government procures on a daily basis.

Offsetting all of this, of course, is the income brought in from taxes, tariffs, and so forth. Obviously there isn’t enough to go around or we wouldn’t see the deficit continue to grow. Some believe the U.S. can continue to go further in debt for some time yet; others feel spending must be brought under control and every day’s delay in doing so will aggravate the problem even more. This issue was a significant part of the debt ceiling debate just ended, and the one set to soon begin anew.

Why did the promised (and decried) ultimate showdown seeking resolution of this issue get delay yet again? Many economists feared an actual default would result in a financial crisis far worse than that sparked by the Lehman failure. True or false, the extension was made. It comes just in time for the holidays. Rather than stick to their purported principles, did everyone in Congress realize the hit their constituency would take if America’s seasonal shopping binge was cut short by wide-spread pay cuts and how this might affect their chances for reelection? (by J R)

Dunking Junkies

Friday, October 25th, 2013

Admittedly, I have a somewhat sinister approach to dunking cookies. Holding each one firmly, I immerse the entire cookie in coldish milk up to my first knuckle. It struggles to breathe, but finally the bubbles cease, and I know it is ready to be transferred into my mouth, all in one bite. This is risky business when dipping chocolate chip cookies; they are prone to break off and fill the bottom half of my glass. I’ve found it’s best to employ this technique with Oreos, as the creamy center helps hold the biscuits in place longer. Confession: I could eat a whole bag of them in one sitting.

There may be a good reason for this. Led by their neuroscience professor, undergraduates at Connecticut’s Conn College have discovered that rats approach Oreos the same way they cozy up to cocaine. The implication is that I do so as well. I’ll not quibble. Addiction takes many forms.

Take global debt for instance. The International Monetary Fund recently suggested rampant debt creation, especially by the U.S. and Japan, runs counter to efforts to cut the global debt burden. Obviously, as the ongoing debt ceiling drama in D.C. continues its long run, there is no easy way to kick the habit. Apparently the entire world has now become hooked on debt.

This leads to another question. Is a diet of Oreos healthy? Is debt, like Cotton Candy, more fluff than substance, promising ultimately to create serious health problems for the consumer? The answer from an historical perspective is overwhelmingly, “Yes!” But can we stop? The U.S. now has a debt to GDP ratio (per Bloomberg) of 106%; Japan is sitting at 243%. That sounds to me like we have moved well beyond dunking Oreos and, let me tell you, dunking Cotton Candy is a very bad idea. (by J R)

September Existing Homes

Thursday, October 24th, 2013

The pace of existing home sales fell in September according to the National Association of Realtors (NAR). The downtick was 1.9 percent to an annualized number of 529,000 units. This contraction followed the July and revised August (originally 549,000) tallies of 539,000 which were the highest since November 2009.

The year-over-year figure is still strong, so the one month slip is hardly enough to cause alarm. To put it into perspective, June 2011 was the last month with a negative year-over-year tally. September’s twelve month look back puts the growth rate at 10.7 percent; the fifth double digit increase in a row.

Interest rates may have put some pressure on the month’s sales. According to Freddie Mac, the national commitment rate for a 30-year, conventional, fixed rate mortgage increased slightly to 4.49 percent from 4.46 percent in August. The last time this benchmark rate was higher was July 2011 when it was 4.55 percent. A year ago, this bellwether rate was 3.47 percent, so there has definitely been upward pressure on borrowing costs recently.

Cost measures suffered in the period but inventories were stable. The median price of an existing home fell $10,500 to $199,200, falling for the third consecutive month. The average home price also fell for the third month in a row; the mean is now $247,400 versus $256,600 in August. Both measures are up on a year-over-year basis with the median and average gaining 11.7 percent and 9.2 percent respectively. At the current pace of sales, there are roughly five months of inventory for sale. This is a modest uptick from 4.9 months in August.

To say the paint is falling off of the existing housing market would be an exercise in hyperbole. However, the last few months of data from the NAR feels like the pace of this portion of the economy is diminishing. Perhaps this market is suffering from the effects of government and central bank uncertainty. With congress back at work for a few more months, these doubts have not been removed. (by C. Cox)

Two decades of aughts in just 18 years

Wednesday, October 23rd, 2013

The beginning of each century is marked by a decade known as the aughts. This is the period of time between the turn of the century and the end of the 10th year. If the economy is not careful, our new millennium may have two decade of aughts before it is twenty years old.

At the end of this year, the Federal Reserve’s zero interest rate policy will be five years old. It was December 2008 when the central bank moved its target of the overnight interest rate to essentially nil. Since that time the U.S. economy completed the worst recession since the great depression and has only managed to advance slowly. This tepid recovery has prompted the central bank to keep rates at virtually zero and implement other unconventional monetary policies like “operation twist” (which has already expired), “quantitative easing” (the ongoing money creation), and the use of “forward guidance” in order to prop up the economy.

Before the overnight interest rate is increased, the unconventional monetary policies will be removed. Quantitative easing will be diminished via “tapering” which simply means money will be created more slowly over a period of time. Finally, the bankers will likely alter the tone of their guidance ahead of changing the targeted overnight interest rate.

In the meantime, some of their recent guidance has stated a few targets should be met before moving the interest rate higher. These include inflation figures above two percent and improvements in the labor market. In December 2012, the Federal Reserve wrote in is official statement that it expects the “…exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½%.” In a presentation to the UC San Diego Economic Roundtable, John Williams, the President of the San Francisco Federal Reserve Bank, noted their use of “at least as long” as an indication that there is no statistic that will automatically cause the central bank to increase interest rates.

John Williams’ own forecast does not show the unemployment rate hitting the 6½ percent level until 2015. By that time the second period of aughts will be roughly 7 years old. What’s another three years? (by C. Cox)