Archive for November, 2013

September Income, Outlays, and Inflation

Tuesday, November 19th, 2013

Personal income and outlays were rather constructive in September. The release from the Bureau of Economic Analysis (BEA) showed incomes grew by 0.5 percent (matching the increase in August), and expenditures improved by 0.2 percent, slightly off from the prior month’s uptick of 0.3 percent. The measure of inflation included in the report confirmed the slow increase seen in other price gauges.

Farm incomes led the monthly increase with a 15.3 percent surge. Other proprietors added 0.5 percent to their category. Wages and salaries, the largest component of the indicator, advanced 0.4 percent, and the growth rate was fairly even between the manufacturing and service sectors. Rental remuneration increased as did income on assets (i.e. interest payments and dividends) which fell in the prior period.

The income portion of this indicator that Atlas pays most attention to is the disposable personal income because this is what Americans have left to spend after sending a portion of their earnings to the beltway. This critical measure also added 0.5 percent for the month. The improvement is after the government collected an additional $2.6 billion in taxes in September.

Americans do two things with their income; it can be spent or saved, and in September they did more of both. Personal consumption expenditures increased by $24.7 billion. The savings rate grew to 4.9 percent from 4.7 percent in August.

Also included in this BEA release is a measure of personal consumption prices. The index grew by 0.1 percent in the period, matching August’s uptick. If food and energy are excluded, you are left with the Federal Reserve’s favorite measure of inflation, the core PCE price index. This also nudged higher by just 0.1 percent and has increased by a mere 1.2 percent in the last year.

The data in this indicator suggest the economy continues to heal. The pace of the repair does not seem to be accelerating, which likely consternates the central bank; slow growth along with a low level of inflation will continue to justify the Federal Reserve keeping the overnight interest rate near zero. The question puzzling economists and markets is whether Ben Bernanke (with Janet Yellen on deck) and his cohorts are inclined to taper their unconventional tactics known as Quantitative Easing while the economy is in this condition. Here at Atlas we don’t see that happening until next year sometime at the earliest. (by C. Cox)

October Institute for Supply Management

Monday, November 18th, 2013

According to the latest data from the Institute for Supply Management, both side of the economy continued to expand in October. The organization provided information from the manufacturing and service portions of the economy that suggested the recovery continued and did so with noticeable strength and at a faster rate. Manufacturing grew faster with a reading of 56.4 versus 56.2 in September. Non-manufacturing ticked up to 55.4 from 54.4.

Manufacturing’s reading was the fifth consecutive reading above 50 (any tally above 50 suggests expansion) and was the best figure since early in the recovery, now over four years old. New orders, seen as a leading indicator, managed to grow to 60.6 from its already strong reading of 60.5; these orders will likely become output in the near future. Output did slip for the month but was still above 60, so production grew but at a slightly slower rate. Manufacturing firms continued to hire albeit at a more tepid pace. Exports grew significantly to 57.0 from 52.0 in September, a sign that other parts of the globe may also be improving.

Services are the largest portion of the economy, so it is encouraging to see them picking up momentum even after having now grown for 46 consecutive months. Non-manufacturing activity expanded at a faster rate than in the prior period. New orders grew but did so more slowly. Employment moved up at a faster rate; nine industries reported increased hiring while eight indicated a decrease.

The overall tone of the reports suggests the fourth quarter is off to a good start. The labor market seemed to continue increasing the number of workers, adding to the healing within the labor economy. The new orders indicate the expansion should continue as long they are not cancelled. For now, it appears the government shutdown in October had minimal impact on the output of the country. (by C. Cox)

Take His Money

Friday, November 15th, 2013

Have you noticed guys all over town, decently dressed in suits and ties, carrying signs saying “Will loan you other people’s money for food?” A declining demand from most sectors of our economy for loans is putting people in the “credit intermediation industry” (apparently Wall Street slang for loan sharking) out on the street. The Labor Department says positions for commercial bankers, credit-card issuers, and mortgage and loan brokers are at a one-year low. Wells Fargo, the biggest U.S. mortgage lender has cut over 5,700 such jobs since midyear while Bank of America expects to cut about 3,000 mortgage-division jobs this quarter. JPMorgan said it may drop 15,000 similar positions.

Economic activity in our capitalistic system needs lots of loan growth in order to flourish. While expanding credit creates a demand for more manpower to service loans directly, growth relies most heavily on the money thus created to boost the overall economy. It may seem weird, but America’s new found conservative spending habits seem to be spoiling the party. The Fed, despite their best efforts to boost consumption, report household borrowing represented just 2.5% of new lending in the second quarter of this year, down from 11% at the end of 2012, while the federal government has pared its borrowing to 24% from 48% in the same period. Further, mortgage refinancing is off 61% from its peak in May of this year according to the Mortgage Bankers Association.

With both slow refinancing and sequestration taking hold, Main Street needs to pick up the slack, but it hardly seems likely that folks are going to feel a sudden urge to go deeper into debt. Bloomberg reports household debt has now fallen to 92.2% of income, a ten-year low, and well off the 113.8% 2009 peak. Stephen Stanley, the Pierpont Securities chief economist says, “Until we see significant improvement in the labor market, income growth isn’t sufficient enough to drive a big increase in consumer credit.” This is underscored by a Commerce Department report showing real disposable personal income growth is averaging 0.8% this year (through August); it was up 1.4% over the same period in 2012. Adds Stanley, “as long as (households) feel hesitant about their job situation, they tend to be more conservative.” Seeing all those bankers selling apples on the corner is not the type of new job creation to which he is referring. (by J R)

September Leading Economic Indicators

Thursday, November 14th, 2013

The Conference Board reported their index of Leading Indicators, what we generally refer to as the Index of Leading Economic Indicators or LEI, rose 0.7% in September. This can be considered a strong continuation of recent momentum that brings the current level up to 97.1, the highest seen since April 2008. Despite an economic environment made difficult to interpret due to many mixed signals, the LEI has fallen just once since September of last year.

What can be gleaned here is that our economy was still gathering steam heading into September, but at Atlas we want to see how that momentum was affected when it ran into a wall as Congress shut down the government.

One of the ten components comprising this index, the yield spread, continued to boost the total given the Fed’s continued efforts to keep rates abnormally low. A helping hand came from the sustained increase in the stock market. Credit activity also rose. Unemployment claims gave the September total a boost, but will surely detract from the October figure given the 16-day layoff fiscal indecision produced while our representatives in Washington wrangled finer points of economic philosophy and began positioning themselves for upcoming elections.

We have liked the upward slant delivered by this indicator for some time now but are reluctant to give it too much weight in the overall picture. The nature and source of this report causes it to be less than timely. Regardless how things looked a couple of months ago, markets, especially the fixed-income markets, are already turning their gaze to what may transpire two months hence. With yet another Congressional showdown on the budget possibly scheduled for January 15, followed by another bump against the debt ceiling three weeks later (February 7), we are having a hard time seeing through all the fog. (by J R)

October Consumer Confidence

Wednesday, November 13th, 2013

Consumer attitudes took a measurable decline in October according to the Conference Board’s Consumer Confidence Index. The reading fell to 71.2 from September’s upwardly revised tally of 80.2 (originally 79.7). This collapse is the worst since January 2013.

On a short-term basis, the impact was only moderate, but the outlook for the longer time horizon fell significantly. Those describing business condition as “good” ticked down to 19.0 percent from 20.7 percent, and those describing jobs as “hard to get” increased to 35.8 percent from 33.6 percent in the prior period. Those expecting business conditions to improve over the next six months fell to just 16 percent from 20.6 in September; those expecting conditions to worsen in the same period of time jumped to 17.5 percent from 10.3 percent the month earlier.

Consumer’s outlook for the labor market was quite dour as well. Those anticipating more jobs in the months ahead fell to 15.1 percent while those expecting fewer jobs increased to 22.7 percent from 19.1 percent month-over-month. Income expectations were split as there was only a slight increase in those predicting higher incomes and larger uptick in the number of people foreseeing lower incomes on the horizon.

The interesting thing about the two largest monthly drops we have seen in 2013 is that both saw headlines dominated largely by very vocal but essentially ineffectual government action during the periods. In January, the sequestration was being implemented. This was the mandatory budget cuts and tax hikes that started off the year. In October, the chambers of Congress were once again unable to compromise on a budget, and until the eleventh hour did not increase the borrowing capacity of the country which, according to the popular press, made the threat of default by the U.S. a real possibility. This legislative infighting may have led to the steep drop in confidence. If there is a positive relationship between consumer attitudes and spending, the fourth quarter is not being set up very favorably. (by C. Cox)

September Consumer Prices

Tuesday, November 12th, 2013

Prices continued higher in September, but not at an alarming rate. The Consumer Price Index (CPI) rose 0.2 percent in the period according to the Bureau of Labor Statistics. This puts the year-over-year increase at 1.2 percent, off from 1.5 percent in August and the lowest annual change since April 2013.

The core tally grew at half of the pace seen in the headline figure. Excluding food and energy, core CPI increased by 0.1 percent, matching the prior period’s uptick. Year-over-year, this version of price tracking is up 1.7 percent; the annual look back has been 2.0 percent or less since August 2012. One notable decline for the month was the cost of apparel. This category saw a decline of 0.5 percent for the month. Now that the back-to-school season is over and the economy is entering the holiday period, a continued decline in this category may be a sign that retailers are discounting clothing in order to work down their inventory. The coming iterations of CPI may provide hints of this in the months ahead.

Atlas continues to be of the opinion that inflation is not an immediate concern. Over the years, the central bank has added kindling to the fire pit via money creation, but the economy has yet to generate a spark hot enough to ignite the fuel. If inflation does become problematic, Atlas will look for areas of relative strength and make adjustment to our portfolios. (by C. Cox)

September Federal Deficit

Monday, November 11th, 2013

That’s a wrap! Time has run out for the U.S. Government to spend more money than it takes in for fiscal year 2013. The beltway managed to end the year with a slight monthly surplus, $75.1 billion. This is primarily due to a calendar anomaly that pushed some expenditures to be paid in August since September 1st fell on a non-business day; this same irregularity boosted August’s deficit to $147.9 billion. The average deficit between the two months, $111.5 billion, was still elevated versus the mean for the other 10 periods in 2013.

September’s receipts were the second highest monthly take for the government. The final month of the fiscal year tends to be one of the strongest months of the year for Washington D.C revenue. For instance, it was the only month besides April in which the beltway had a surplus in both 2012 and 2013.

The annual deficit improved to “just” $680.3 billion, a 37.6 percent improvement over 2012’s shortfall of $1.09 trillion. For the year, the outlays fell 2.4 percent to $3.5 trillion. Receipts (primarily taxes) increased by 13.3 percent to $2.8 trillion.

Despite all of the rigidity in the nation’s capital, there is good reason to think the 2014 budget could be even better. First, the economy is improving, so aggregate income should grow which means larger tax revenues. Secondly, the sequestration was only in place for the last 9 months of the fiscal 2013 year, but tighter outlays should be in effect for all of fiscal 2014. Of course, this is dependent on the Washington D.C. leadership not messing up the fiscal situation further in the months ahead as the two sides try to resolve their budget differences. (by C. Cox)