Archive for May, 2014

April Retail Sales

Friday, May 30th, 2014

Weather may have gotten a bad rap in the first quarter.  Many indicators Atlas follows were weak in the first three months of the year, and the harsh conditions became a plausible explanation for the economy’s lethargy.  Retail sales data for April did not show signs of a strong bounce back according to data from the Census Bureau. Month-over-month, retailers only sold $403 million more than in March on a seasonally adjusted basis, an uptick of just 0.1 percent, and the weather was much friendlier in the period across the nation.  To be fair, March’s growth was upwardly revised to 1.5 percent from 1.2 percent, making the monthly comparison a little tougher for April.

Motor vehicle & parts sales helped the overall tally remain positive.  When these components are removed from the count, the monthly change is marginally negative.  Americans poured less money into furniture and other home furnishing than a month earlier.  Spending at electronics and appliance stores fell in the period.  Non-store retailers also saw revenues cut for the month, and this category includes internet shopping, so we cannot just blame the weak spending growth on the brick and mortar stores or the weather.

Retail sales are a large component of personal expenditures and are reported monthly, so they can provide timely insight into the changing behavior of the consumer.  April’s paltry growth points to some hesitance by Americans to part with their cash.  The year-over-year comparison is positive, up 4.0 percent, so the trend is still higher, but consumers will need to open their wallets more in the months ahead in order to keep the economy moving forward.          (by C. Cox)

April Producer Price Index

Thursday, May 29th, 2014

Atlas has been adamant for years that inflation is not an issue.  This is mostly due to structural issues that the economy needs to work through (e.g. the baby boomer’s aging and changing consumption habits).  But the past two months of inflation data have been more attention grabbing than normal.  Prices paid by producers have jumped in each of the past two months according to the Producer Price Index (PPI) released by the Bureau of Labor Statistics (BLS).  Please recognize that two months of data is not enough to break the weak trend, but it has raised an eyebrow or two at Atlas, and we only have four total.

Final demand prices grew by 0.6 percent in April.  This follows March’s rise of 0.5 percent.  After these two large monthly upticks, the year-over-year price change has ticked up 2.1 percent.  This is the largest twelve month increase since March of 2012 when it totaled 2.4 percent.  So even within the context of this tepid recovery, the annual look-back on this indicator has been higher, which is largely why only an eyebrow is raised at this point and our sounding any alarm is not likely to happen–yet.

Food was the primary driver of the higher tally.  It jumped 2.7 percent in the month alone.  This is where statistics can be tricky.  It is possible that the BLS got a bad sample and that May’s sample will be more representative of the population, causing the monthly change to slow.  But even excluding the fickle components (food and energy), the monthly tally was higher by 0.3 percent.  Year-over-year, this core tally of PPI is up 1.9 percent (its highest level since December 2012), suggesting the price pressure is more pervasive than just food.

Food was also the standout story in earlier stages of production.  Within the “processed goods for intermediate demand” category (think dairy products a baker would buy), the monthly uptick was 2.6 percent.  In the “unprocessed goods for intermediate demand” category (think raw milk), prices were 3.6 percent higher, so there seems to be some price pressure happening within all stages of food.

For now, Atlas will not alter our opinion on inflation but will if the facts continue to change.  Price pressure on food can have a deleterious impact on the economy because the demand for food is rather constant (which meal are you going to go without?), but if prices grow, a larger portion of Americans’ budget will be spent on eating, leaving less available for other purchases.     (by C. Cox)

April Chicago Fed Report

Wednesday, May 28th, 2014

The Chicago Federal Reserve Branch reported that its monthly National Activity Index (CFNAI) for April came in at -0.32, a noticeable deceleration.  The negative headline came primarily from a large -0.4% hit to manufacturing, along with continued weakness in consumption and housing.  One encouraging sign came from strengthening employment figures which added a positive influence to the ultimate total.  Regardless, this negative reading must be placed in context before we run yelling for Yellen to back off the current Fed’s tapering agenda.

Your team here at Atlas looks forward to the CFNAI because it is comprised of 85 separate indicators which get compiled monthly, providing us with a good barometer of the nation’s economic health.  A reading of zero is seen as neutral, indicating neither further growth nor deterioration in America’s economic landscape over the prior month.  If growth had been registered in the earlier report, a zero reading indicates that that pace continues without either speeding up or slowing down; if the previous results had been showing a decline then a zero reading suggests conditions are neither improving nor deteriorating faster.

We entered April on the heels of March’s +0.34 tally which was actually revised upward from the original +0.20 reported a month ago.  Given that February’s reading was quite positive (+0.53), one might conclude the turnaround in April indicates a serious deterioration in some components of our economy but such is not necessarily the case.

First of all, given the potential for large swings and revisions, we prefer to use a three-month moving average to help remove some of the extremes that can occur from month to month.  In this context, we ended last month (March) at +0.4 (revised from 0), suggesting some growth was occurring, especially in view of the negative (-0.18) level reported two months ago.  In fact, the more recent positive totals bring the three-month moving average up to +0.19, a healthy, though not yet robust, level pointing to above-trend growth.

Allow me to put a finer point on this report.  While the numbers may seem tiny, they carry a lot of significance.  Readings above +0.7 are taken to indicate undesirable inflationary pressures are beginning to crop up in our economy.  Anything below -0.7 is a warning that a recession could be brewing.  I’m not calling it Goldilocks, but the current +0.19 three-month moving average does look to be almost “just right.”   (by J R)

April 2014 U.S. Treasury Budget

Tuesday, May 27th, 2014

America’s budget was in the black in April according to the latest data from the Treasury Department.  At roughly $106.9 billion, this is the second surplus of fiscal year 2014.  The first occurred in December but was not nearly as large.  Fiscal tightening and higher tax receipts have been the secrets to the budget’s improvement.   On a year-to-date basis, the budget has improved for the second consecutive year.

Personal income taxes were due on the fifteenth of the month, so the surplus is not a surprise, but tighter fiscal policies and a growing economy are helping the year-to-date total.  Receipts were $414 billion for the period, bringing the 2014 total to $1.735 trillion.   At this stage of the year in 2013, the receipts were slightly less at $1.603 trillion.  America has spent $2.041 trillion year-to-date compared to $2.269 trillion a year earlier.  Higher revenues and falling outlays combined to create the smallest budget deficit seven months into the fiscal year since 2008.

Improving deficits are encouraging, but the country could face dire circumstances if more is not done to improve the balance between federal income and outlays.  Economic growth has not been strong enough to overcome annual overindulging through revenues alone, and Atlas is not currently expecting significant upticks in receipts over the next few years, so other solutions should be considered.  Unfortunately, finding consensus on where to cut has been challenging for the beltway.  This indecision may not have recognizable consequences today, but a day of reckoning will come.  Starting back in 2011, AARP estimated there were, on average, 8,000 baby boomers turning 65 each day through 2029.  We are 2.5 years into an 18-year transition for this large cohort.  Current projections from the Congressional Budget Office show the deficit improvement coming to end in 2015 and moving back to the $1.0 trillion range by 2022 unless changes are made.  Baby boomers cannot stop aging, so the nation must demand more from our nation’s capital.     (by C. Cox)

First Quarter 2014 Productivity and Unit Labor Costs

Friday, May 23rd, 2014

Between January and the end of March, weather impacted many of the indicators Atlas follows.  Hopefully, the Bureau of Labor Statistics’ report on Productivity and Unit Labor Costs was no exception because it looks lousy.  Output per labor hour fell 1.7 percent on an annualized basis in the first three months of 2014, giving back a large portion of the 2.3 percent gain to end 2013.  Also, labor costs to produce each unit of output increased in the period by 4.2 percent which was partly due to increased compensation.

Two catalysts caused the labor unit costs to grow so quickly.  First, the number of hours worked grew faster than output increased.  Aggregate hours worked by American employees grew by 2.0 percent, but there was only 0.3 percent more output in the same period.  Leaving everything else equal, when hours worked increase faster than output grows, each unit of production will have more labor costs imbedded in it.  However, in the first quarter, everything else was not equal.  You see, compensation grew by 2.4 percent on an annualized basis in the quarter.  So not only did it take incrementally more labor to create each unit of output, but each labor hour cost more.

The combination of slower output growth, increasing hours worked, and improving compensation could converge to create an environment with higher inflation than has been normal during this recovery.  This is why the weather’s involvement is so important.  If the weather kept output from growing, a second quarter surge in output per hour may absorb the additional costs needed to generate each unit of output in the first three months of 2014.  However, if weather is only responsible for some of the slowdown in productivity’s growth, then the increased hours worked and compensation per hour may be combining to create inflation as the costs of production increases and more money is moving through the economy because of the higher wages.  Unfortunately, this indicator is quarterly, so we will have to wait until August to get data on the current quarter.  There will be revisions to the first quarter data so look for that posting in a month or so.          (by C. Cox)

March Trade Balance

Thursday, May 22nd, 2014

Transactions with America’s trading partners increased in March according to the latest data from the Bureau of Economic Analysis (BEA).  Exports increased by $3.9 billion over February’s tally of $190.0 billion.  Imports increased by $2.5 billion to $234. billion.  Seeing both components of the indicator growing larger points to continued global growth.  While exports have grown by 5.0 percent and imports by 5.8 percent from a year ago,, our balance of trade remains in the deficit column.  March’s chasm was $1.5 billion narrower from a month earlier, totaling $40.4 billion.

Annual trade data from various partners reflect a strengthening global economy.  Year-over-year, exports to mainland China have jumped by 14.8 percent.  In the same period, import growth from China has barely lagged, growing by a slightly smaller14.3 percent.  March’s gap was the narrowest in 12 months.  Japan has increased its consumption of American goods and services by 8.2 percent, even as imports from the island nation fell in the same period.  Exports to the European Union increased by 7.0 percent while imports rose 9.8 percent in the last year.

Export data reflect improved business spending overseas while import numbers point to better personal consumption in America.  Capital goods led the export improvement (an increase of $2.1 billion).  Industrial supplies and materials as well as auto vehicles, parts, and engines combined for another $1.5 billion uptick.  Imports were supported by the $1.2 billion rise in consumer goods.  Foods, feeds, and beverages added another $1.0 billion to the previous period.  American companies also pitched in by increasing their orders of foreign made capital goods by $0.9 billion in March.

Taken on its own, this indicator suggests the global economy is continuing to improve.  Global output is growing as sellers are finding buyers for their wares and services at an increasing rate.  Trade balance data is released with considerable lag, so the information does not give any new indication about the economy but does confirm the economic expansion evident in other indicators.                       (by C. Cox)

April Institute for Supply Management

Wednesday, May 21st, 2014

More than histamines are active this time of year.  Both segments of the economy accelerated in April according to the Institute for Supply Management (ISM).   Manufacturing’s index grew to 54.9 from 53.7 in March.  Services’ uptick was even stronger, moving to 55.2 from 53.1.  Any reading above 50 suggests expansion in the period.

Employment was mixed between the two measures, thus adding to the confusion about the state of the labor market.  Manufacturing’s uptick was largely lead by the employment tally within the indicator.  This acceleration corroborates the latest employment report.  However, growth in non-manufacturing employment (the largest segment of the economy) slowed in the period which is the cause of the added confusion.

New orders continued to expand in both areas of the economy.  Manufacturing orders grew at the same pace as the prior month.  This is the 11th month in a row of growing orders in this portion of the economy.  Nonmanufacturing orders have grown for 57 consecutive months and even accelerated in April.  Orders are seen as a leading indicator because output is required to complete them.

Output, according to the ISM indices, continued to expand in April, suggesting the second quarter started out better than the first quarter ended.  Service activity/production jumped 7.5 percentage points to 60.9 and also put in a 57th consecutive month of expansion.  Manufacturing output grew but did so at a slower rate than in March.

Other than the confusion this indicator created about the labor market, April’s ISM data is favorable.  Upticks in both segments of the economy point to a healthy start to the second quarter.  Harsh weather plagued the nation in the first few months of the year, so the ISM data may be reflecting a snapback of the demand deferred during the challenging winter.  With any luck, unforeseen forces will not tamper with the inertia.         (by C. Cox)