Archive for June, 2014

May Institute for Supply Management

Monday, June 30th, 2014

There are no signs of recession according to the indices produced by the Institute for Supply Management.  In fact, both sides of the economy accelerated in May according to their data.  Manufacturing increased to 55.4 from 54.9 (any reading over 50 suggests expansion) and the services indicator improved to 56.3 from 55.2 in April.

Many of manufacturing’s components were strong in the report.  New orders and production grew at a faster pace in May.  Orders should lead to additional output in the future, and production should hit GDP in the current quarter.  Employment grew but did so at a slower pace.  It appears that hiring within the printing industry is growing faster than any other segment within manufacturing.  (Insert central bank joke here)

Three of the four components that make up the non-manufacturing index improved at a faster pace in May.  Business activity and new orders expanded faster than in the prior period and each has grown for 58 consecutive months.  Construction led the activity index higher.   Employment accelerated in the month and is higher for the third month in a row as the category of arts, entertainment & recreation grew the fastest.   Supplier deliveries were the only component not improving but were unchanged.

In all, the economy appears to be on firm footing for the moment.  America’s trajectory is not stellar, but at least it remains above the horizon.  This indicator is released each month, so it can give us clues into the state of the economy before GDP figures from the government are released each quarter.  For now, it appears that the negative growth rate of the first quarter will not be repeated in the second.              (by C. Cox)

April Personal Income and Outlays

Thursday, June 26th, 2014

Personal income and outlays were mixed in April according to the Bureau of Economic Analysis.  Atlas pays particular attention to this indicator because without a consumer, America has no economy.  Personal income was up 0.3 percent to start the second quarter.  This follows March’s strong growth of 0.5 percent.  Spending did not fare as well in the period, but it was particularly strong as the first quarter came to a close.  Outlays fell 0.1 percent following the upwardly revised growth rate of 1.0 percent (originally 0.9 percent) in March.  Price levels are still within the range considered acceptable by the Federal Reserve.

All of the broad income categories increased in April.  Wages and salaries (by far the largest portion the indicator) were up 0.2 percent in the period, compared to an increase of 0.6 percent in March.  Growth for proprietors’ income matched the prior period’s growth rate of 0.4 percent.  Rental income was higher as was income from interest and dividends.  Removing taxes leaves disposable income (what consumers can actually spend), and it was 0.3 percent higher in the period.

With all of this extra money, consumers must have purchased more…right?  Well, not really.  Less was spent on goods and services than in March.  The positive side to not spending is that it goes into savings.  Americans saved $53.7 billion more in April than in March.

Inflation data continues to make price changes appear moderate.  The price index for personal consumption and expenditures moved 0.2 percent higher in April, the same increase as in March.  Year-over-year, it has moved up by 1.6 percent.  The core price index, which excludes food and energy, was also up 0.2 percent for the month and is 1.4 percent higher than a year ago.

Consumption was strong in March, so the slowdown in April is not alarming, especially because incomes continued to increase.  Inflation pressures are still tracking below the pace that has been explicitly defined by the Federal Reserve as acceptable (greater than 2.0 percent), so the zero interest rate policy is probably going to be with us for an extended period of time even though monetary policies are getting less accommodative.  It’s enough to make us wonder why the saving rate increased.  (by C. Cox)

Big Bucks

Wednesday, June 25th, 2014

Senator Everett Dirksen, probably incorrectly, is credited with saying, “A billion here, a billion there, and pretty soon you’re talking real money.”  Regardless how the phrase actually originated, it tends to be applied to government spending, often with tongue in cheek as an oblique reference to wasteful outlays.  Yet there is substantial reason to consider the quip relevant to today given that our federal government is projected to spend $3,900 billion in fiscal 2015 which starts October 1st, less than three months from now.  in this context, one billion dollars represents a mere .00025% of the total, seemingly almost inconsequential.  Nevertheless, I’ll argue a billion bucks is still a ton of money.  What could you do with that much?

President Obama has a suggestion.  He recently asked Congress for $1 billion to finance troop rotation, training, and joint exercises in Europe.  Called the European Reassurance Initiative, this is seen as an effort to show Poland and the Baltic states of Latvia, Lithuania, and Estonia that we (and all of NATO) will stand firmly by them should Russia try to intrude on their sovereignty, although not all European governments seem to be 100% behind this move.  Of course this is his response to the Ukrainian loss of Crimea and ongoing turmoil in that region.  In the words of a Warsaw based foreign policy analyst quoted recently in the Economist, “Something very dramatic has happened: for the first time since the war (WW II) a European border has been changed by force….” This is obviously very serious stuff and Obama feels the money needs to be spent, even though this means we will have to borrow it from somewhere.

In other news, Steve Ballmer of Microsoft fame has just agreed to pay $2 billion dollars for the Los Angeles Clippers, a franchise that employs men who play basketball.        (by J R)

May Consumer Attitudes

Tuesday, June 24th, 2014

Consumer attitude polls contradicted one another in May.  Consumer Sentiment, put out by the University of Michigan, fell to 81.9 from April’s tally of 84.1.  Consumer Confidence, compiled by the Conference Board, measured 1.3 points higher, currently stands at 83.0, and put in its third consecutive reading above 80.

Most but not all of the contradiction is found in the readings that illustrate consumers’ current situations.  Americans polled by the University of Michigan suggested they felt worse off in the period.  Dropping 4.2 points to 95.5, the current conditions portion of the sentiment survey is not likely to bode well for consumer outlays.  However, the present situation portion of the consumer confidence indicator pushed back on its counterpart’s deterioration with a reading of 80.4 versus 78.5 in April, so no conclusion about spending in May should be made.

Expectations also had mixed results but were not as dramatically different as the current situation figures.  Consumers told the University of Michigan that the prospects for jobs and income was less attractive than in April, causing the expectations portion of the indicator to fall by 1.0 point to 73.7.  Those polled by the Conference Board were slightly more optimistic than in the prior period as the expectations portion of consumer confidence ticked up 0.9 percent to 84.8.  Inflation expectations were higher in both polls as consumers mentioned concerns about the seasonal impact on the price for gas.

Of course, these are “soft” indicators because they measure feelings and not behaviors.  Atlas looks to things like retail sales and personal expenditures in order to reconcile the real attitude of American consumers.            (by C. Cox)


Monday, June 23rd, 2014

Not to be outdone by its counterparts, the European Central Bank (ECB) has announced its own unconventional (a.k.a. experimental) monetary policies in order to stimulate the continent’s economy.   To mark this momentous occasion, Atlas has created a portmanteau – Draghinomics (pronounced draw · gi · nomics).  With any luck, this newly synthesized word (which was carefully crafted by combing the last name of Mario Draghi, president of the ECB, with economics) will end up in the Oxford English Dictionary. Or better yet,  used in the title of a movie! Cha-ching!

Mario Draghi and his cohorts at the ECB have one fear on their minds, deflation.  Unlike the Federal Reserve, the ECB has a single explicit goal.  This central bank seeks price growth stability.  Its aim is for an inflation rate below but close to 2.0 percent over the medium term.  May’s year-over-year change was just 0.5 percent, a slowdown from 0.7 percent in the prior period and well below their stated target.

In order to increase the movement of money within Europe thus increasing the likelihood of higher inflation rates, the central bank has started penalizing financial institutions for any excess reserves they keep with the ECB.  In theory, large European banks should be flush with cash because of earlier measures taken by Draghi and his predecessor Prior to the announcement, it was not punitive to keep reserves at the ECB, but they are now charged 0.10 percent for the deposit.  In other words, the central bank pays a negative interest rate to its member banks when deposits are kept with the institution.

European banks do have two other options: keep additional cash in their vaults or loan the money to people and firms.  Keeping physical cash on hand comes with costs as banks need a safe place to securely store the banknotes. So in the ECB’s theory, this leaves lending the money as the most advantageous option.  Of course, this presumes at least two things.  First, it implies there are willing borrowers.  It seems like a stretch to think a marked change in the demand for loans will occur due to such marginal actions.  Secondly, it requires that the returns on additional loans are expected to be greater than the known costs associated with not lending.  This may be questionable considering the former zero interest rate policy was not stimulative enough to generate ample lending.

Europe is certainly following the pattern of its global central bank counterparts by generating creative policies. One cannot help but wonder if the efficacy of the measures will follow the lackluster results experienced in the U.S. and Japan.  Five years after the financial crisis, America’s growth trajectory is low and Japan continues to stagger its way through decades of tepid expansion despite monetary policy experiments that started in the 1990s.  Atlas is most concerned that an as yet unknown and unintended consequence will be the primary outcome of this new policy.  (by C. Cox)

Cygnus Albus

Friday, June 20th, 2014

Capt. Cook, when he first arrived in Australia, was taken by some of the local fauna.  “Oy, mate,  now would ye have a look at that!  A black swan,” he said, “I’ve never seen a black swan before, only the white ones.  ‘Av you ever seen such a swan before?”

Apari, one of the first aborigines to meet him, wondered to himself, “White swan?  Never heard of such a thing.  Either I’m dreaming or this bloke must be crazy.”  But then again, Apari had never seen a white man either, and he would soon learn that such a startling and unusual event was rife with danger.

So it is that today, with our northern hemisphere bias, we refer to black swan events as unexpected and potentially devastating occurrences.

One which is currently playing out in Iraq has caught even the locals by surprise.  Consider this:  OPEC concluded its 165th meeting on June 11th of this year, scheduling the next one for November 27th.  Just one week later, referring to the potential disruption of oil production in Iraq as ISIS storms across the country, a Gulf oil official said, “we did not calculate this could happen when we left the (production) ceiling unchanged.”

Oddly enough, ISIS (the Islamic State of Iraq and al-Sham), has been around for some time, functioning as one of the many rebel groups fighting against the Syrian government in that country’s long-running civil war.  Realizing the western half of Iraq was wide open, it opportunistically turned its guns around and began a sudden, vicious march on Bagdad.  That no one seemed to see it coming, even those immediate neighbors who surely understood the stakes if a new government were to suddenly emerge in Iraq, especially one which even al-Qaida denounces as being too violent, is amazing.  But such is the stuff of which black swans are made.

What will be the consequences of this surprising turn of events?  We can look to the marketplace for one answer.  On the day ISIS attacked an Iraqi oil refinery and set parts of it ablaze, prices for oil futures actually fell a bit.  That hardly suggests growing concern.  Further, both geographically and geopolitically it appears ISIS may find its reach limited to Iraq’s heartland but away from the major oil fields.  The head of the Iraqi oil company was quoted as saying  these current developments would not affect southern oil production or their 2.7 million barrel daily exports.

Let’s hope he is keeping a better eye on the entire swan flock than most of his contemporaries seem to have done.              (by J R)

What Has Changed? – Part 2

Thursday, June 19th, 2014

How many of you remember the name Daniel Ellsberg?  It’s okay to let go of your walker if you want to raise your hand.  Yes, he was the fellow who released the Pentagon Papers back in 1971, 7,000 pages detailing U.S. involvement in Viet Nam.  For his efforts, Mr. Ellsberg was charged with serious crimes by the U.S. government, including theft of government property, spying, and conspiracy.  At that time many saw him as a traitor while others hailed him as hero.  If you were there, the length of your hair probably determined upon which side of that divide you fell.

Today we have Edward Snowden in a reprise of the role.   A computer professional who worked both as a Central Intelligence Agency systems administrator and counterintelligence trainer for the Defense Intelligence Agency, as a National Security Agency contractor Mr. Snowden released thousands of pages of documents detailing a global network of CIA (and other government) surveillance systems used to gather information on, well, anyone who can fog a mirror.  Some folks see him as a hero; others as a whistleblower.  Secretary of State Kerry called him a coward and traitor.  That last bit is interesting since Kerry was called much the same when he was protesting the war in Viet Nam.  In fact, the U.S. Navy twice recommended  he be court marshaled for his behavior back then.

For us here at Atlas, the issue is more a matter first of trust, then of fairness, of having a level playing field.  We are not second guessing  the value of intelligence, but the heavy handed and clandestine way in which its pursuit spread into so many areas of American business has had unfavorable repercussions.   A list of businesses claiming to have experienced unfavorable economic consequences due to such eavesdropping includes Google, Microsoft, Yahoo!, Facebook, and IBM.  These aren’t just bit players and any hit to their credibility and sales can resonate adversely on employment.  Their customers have stopped trusting them.

A level playing field involves another issue: net neutrality.  While our government says it believes how you as an individual uses the internet should not be hampered, its actions seem intent on doing the opposite.  Specifically, creating a two-tiered internet service offered by the ever shrinking (via huge mergers) pool of providers given monopolies does not benefit the population  It does, however, benefit a small handful of mega-corporations who can control what you have access to and more easily allows the government to watch what you pull up.  Every tyrannical government in the world uses these methods to limit free speech and spy on its citizens.    Let’s hope this isn’t how things play out here, facilitated by both congress and the administration, as this issue is being discussed right now in our nation’s capitol..       (by J R)