Archive for January, 2014

What Does the Fox Say?

Friday, January 10th, 2014

Wal-Mart is having trouble in China again. The ever popular “Five Spice” donkey meat they sell in locations has been found to be tainted by adding fox morsels. This makes very little sense to me. Donkeys are rather large and not known for speed or furtive skills. In short, they are like sitting ducks, but with a lot more heft. Foxes are anything but. I would think a vendor who finds himself a bit short of prepared donkey meat and in need of a filler might select something more practical than chasing after fox unless he just happened to have a lot of fox on hand. And who does these days? Especially given that my research suggests it would take about eighty fox carcasses to equal that of one donkey.

A similar scandal rocked Europe last year when horse meat was found in meat balls which were purported to be made from ground beef. This does address the question of feasibility since horses are about the same size as cows, so adding one to the other would seem to involve the participation of fewer of each. The resulting publicity and public outrage seemed a bit severe given the popularity of a select gourmet horse loin in countries around the globe from Japan to France. At any rate, an investigation was begun to discover the source. The head of this fact-finding mission reported, “The beef had in fact started life in Romania. Only at that point it wasn’t a cow.” Some folks remained outraged; others got over it and cleaned up their plate.

It has been said that what doesn’t kill you just makes you stronger, advice we might take to heart in this complex world where international trade occasionally allows some things to slip by. Lifting another example from China, you may recall the use of melamine as an additive in infant formula. Who would think that grinding up Melmac plates and feeding it to babies was a good idea? Turns out it makes liquids appear to contain protein, hence the cost saving expediency in this application. Now, melamine is useful if you want to produce yellow ink or pesticides for instance. Unfortunately it tends to kill babies, and that result ended the manufacturer’s career after six died and some 300,000 more were poisoned.

So what’s a body to do? We can’t all go back down to the farm. Perhaps ignorance is bliss. After all, how do you really know that chicken you are preparing once roamed free upon the range? Maybe you should ask the fox. What does the fox say? (by J R)

November Income and Outlays

Thursday, January 9th, 2014

Signs of further economic recovery were evident in the Bureau of Economic Analysis’ report on personal income and outlays for the month of November. Personal income improved by $30.1 billion (0.2 percent) in the period. Spending improved at a faster pace, up $63.0 billion (0.5 percent). Also, an important measure of inflation remained tame during the month.

The upward trend in personal income continued in November despite the slight reversal in the prior period. This measure of pay has been higher in 9 of the last 10 months. As in October, only farmers’ income fell in the period, but unlike the prior month, that decrease was not large enough to cause the entire statistic to fall.

Personal consumption jumped for the seventh consecutive month. November’s increase followed October’s 0.4 percent uptick of $43.9 billion. Since the spending grew at a faster pace than income, the personal savings rate fell to 4.2 percent in November from 4.5 percent to start the final quarter of the year. The ability to increase spending faster than income cannot last forever, but the economy is benefitting from the phenomenon in the short-run.

Inflation continues to be benign at this time. The personal consumption expenditure (PCE) price index was flat for the month and is just 0.9 percent higher over the last twelve months. The central bank’s preferred measure of inflation removes volatile food and energy components from the PCE price index; this “core” PCE price index ticked up 0.1 percent in November and is a mere 1.1 percent higher year-over-year.

The PCE represents a large portion of the U.S. economy. To see personal consumption do well as 2013 was coming to a close is encouraging. This is especially true when third quarter Gross Domestic Product is considered. A significant portion of the economy’s growth between July and September came from an increase in firms’ inventories. Corporate America may have forecasted correctly as consumers seem to have gained enough confidence to spend faster as the end of the year was nearing. We will know more when December’s data is released. (by C. Cox)

November Durable Goods Orders

Wednesday, January 8th, 2014

Orders for wares expected to last longer than 3 years jumped in November according to the Census Bureau. The 3.5 percent increase followed a large upward revision for October. The initial count for the start of the third quarter was minus 2.0 percent which was revised to minus 0.7 percent after more complete data was received. Year-over-year, durable goods orders have increased by 10.9 percent.

Transportation is quite volatile and made a large impact on both October’s and November’s figures. After falling 3.5 percent in October, the subcomponent leapt 8.4 percent in November. Nondefense aircraft and parts led the category higher with an increase in orders of $3.9 billion.

Businesses increased their investments in the period. After a few months of negative figures, nondefense capital goods excluding aircraft (aka “core” capital goods orders, a proxy for business confidence) improved by 4.5 percent. Firms may be anticipating better days ahead and could be preparing for the improving conditions by procuring adequate capital goods.

Another sign of improvement is seen in the unfilled orders. In nine of the last ten months, unfilled orders have increased. This suggests firms’ capacity to produce is being challenged by the volume of new orders. This may nudge companies to add even more to their capital stock or hire additional workers.

All in all, Atlas finds comfort in November’s durable goods tally. These growing new orders will become output in the near future, and if the backlog continues to swell, firms will need to respond by hiring, spending, or both, and any of these outcomes should prove positive for the economy. (by C. Cox)

Third Quarter Revised Productivity and Unit Labor Costs

Tuesday, January 7th, 2014

After more data was collected by the Bureau of Labor Statistics, it appears that the nation’s productivity was better than first thought in the third quarter. The growth of output was revised higher to an annualized rate of 4.7 percent from the initial tally of 3.7 percent. Firms only needed 1.7 percent more labor hours to produce this higher level of goods and services, unrevised from the earlier report. Combining the change in output with the change in hours worked yields the change in productivity. It was up 3.0 percent in the third quarter but has only improved 0.3 percent year-over-year because output is just 2.1 percent higher and hours worked are 1.8 percent higher.

Hourly compensation growth was revised higher to 1.6 percent from 1.3 percent in the initial count. This measure of pay has increased by 2.4 percent in the last twelve months, which suggest income growth has slowed recently.

The final piece of information in this indicator combines the output per hour and labor expenses. This is known as unit labor cost. Since the output per hour grew faster than the hourly compensation, this measure fell in the third quarter by 1.4 percent, a good thing. The initial tally showed a decline of 0.6 percent.

Growing productivity can keep inflation at bay in a growing economy. The economy’s improving efficiency is probably one of the factors keeping price growth subdued. The early indicators in the fourth quarter point to higher output in the final months of the year, but if inflation is going to remain low, productivity will need to continue improving. If the efficacy does not continue to get better, labor costs will become a greater portion of the cost to produce the next unit of output in the economy. (by C. Cox)

November Retail Sales

Monday, January 6th, 2014

November’s retail sales are confirming what other indicators have been suggesting: the fourth quarter is performing better than the prior three months. Data from the Census Bureau indicate consumers spent 0.7 percent more in the period than in October. Also, October’s data was revised upward to 0.6 percent from 0.4 in the initial count. The first two months of the quarter are encouraging.

Autos played an important part in the monthly uptick. Consumers spent 1.8 percent more on automobiles in November after increasing it by 1.1 percent in October. Durable goods like cars tend to be expensive and may require financing, so to see upward momentum in this part of the economy suggests consumers may be feeling more confident about their future. Even after stripping out autos and gas, retail sales grew by 0.6 percent. Americans spent more money on things like home furnishings, electronics, and building materials. Food service and drinking places also saw an increase in receipts as more Americans dined away from home.

November’s retail sales report confirms October’s personal consumption expenditures report, both of which suggest a stronger economy in the fourth quarter. This acceleration in consumption should help whittle down the build in inventories seen in the third quarter. If firms’ shelves are leaner in the fourth quarter, it will negatively impact the gross domestic product figure, but it will be seen as a positive because consumers are spending more money which adds to GDP. (by C. Cox)

November Existing Home Sales

Friday, January 3rd, 2014

The National Association of Realtors reported that existing home sales have continued their recent decline, slumping by 4.3% in November. Thus the most recent history of this indicator has seen three negative months plus another that was flat, all in a row, a worrisome trend. Equally troublesome, the annual pace of sales has now turned negative, off 1.2% year-over-year, recording its first annual shrinkage in over two years.

Higher mortgage rates might be one cause for this decline. The 30-year fixed-rate paper now costs 4.47% according to Freddie Mac, up from 3.37% seen one year ago. Inventory constraints may also be in play with the current 2.09 million units available representing a rather lean 5.1 month supply. Six to seven month supply is typically seen as optimal. Further demonstrating signs of weakness, the median sales price of an existing home was $196,300 in November, well down from October’s $199,500 level, although still up 9.4% Y/Y.

In an attempt to offset this slump, some banks have reported that they are easing their mortgage standards. In addition, government lawmakers are considering ways to implement housing finance reforms while simultaneously seeming to be calling for lower standards as well. From our vantage point we can see how the threat of pending litigation by governments, both federal and state, against banks for previous housing related indiscretions can create a certain unwillingness on the part of lenders to aggressively pursue new mortgage originations. At the same time, some of the chatter coming out of both the legislative and executive branches of our government seems to be favoring a return to standards more lax than might be appropriate. Let’s hope the powers that be don’t once again help engineer another real estate debacle like the one we saw a few years ago. They need to keep their eye on the ball rather than the approaching election season. (by J R)

November Industrial Production

Thursday, January 2nd, 2014

In November, according to the Federal Reserve, America’s industrial production surged by 1.1 percent. Additionally, October’s 0.1% drop was revised to a 0.1% gain. Coming in well above consensus (+0.6%), this is good news all around.

Lest things get too heady, let me raise some caveats. First, a good portion of November’s gain came from a gigantic 3.9% increase in output from utilities. Rather than crediting any beneficial force for this, we must blame the horribly inclement weather experienced during the month. Things got really cold and heaters ran overtime. Additionally, while mining output jumped 1.7%, this was also more weather related than fundamental. In October the pending threat of Tropical Storm Karen had shut down rigs in the Gulf of Mexico, causing a 1.6% drop in output. The November surge is in part arithmetic as reversion to normalcy skewed the monthly comparison in a favorable way.

That said, the report does show a healthy 0.6% advance in the all-important manufacturing portion. This strength was wide-spread as durable goods production increased 0.8% while non-durables were up by 0.5%, their biggest positive move in roughly one year.

Capacity utilization, at 79.0 added 0.8% from October. This is also a strong number, but nowhere near worrisome as yet.

Manufacturing in America is clearing moving forward. This has no doubt been noticed by the folks at our Federal Reserve and they recently announced initial tentative steps in taking their foot off the gas pedal of quantitative easing stimulus. Like us, I’m sure they will be watching to see if that move was made a bit too early. Judging from the initial reaction by equity markets, we can reasonably hope that will not be the case. (by J R)