Archive for June, 2014

Revised First Quarter 2014 GDP

Monday, June 9th, 2014

Output fell in the first three months of 2014 according to the latest data from the Bureau of Economic Analysis.  This marks the first quarterly contraction since the third quarter of 2011.  Atlas warned this could happen when we wrote about the initial Gross Domestic Product (GDP) estimates which indicated output was up just 0.1 percent (all figures are on an annualized basis).  With more complete information, it appears the economy contracted by 1.0 percent.  Pessimism does not have to set in just yet; the second quarter could make up for the dismal three months ending in March.  Unfortunately, the early signs are not pointing to a strong bounce back.

Consumers continued to carry the economy and appear to have done a bit more lifting than initially thought.  Personal consumption expenditures were upwardly revised to 3.1 percent versus 3.0 percent in the advanced GDP report.  Both durable goods and nondurable goods outlays were higher than initially thought. However, spending on service got a slight downward revision.  If consumers are growing their portion of output (and getting an upward revision), then there must be some pronounced weakness in the other portions of the economy.

Most of the downward revision can be blamed on business investment.  Inventory investment subtracted 1.62 percentage points from GDP.  This is a stark contrast to some of the stronger quarters in 2013 when GDP was led by inventory builds.  Also, firms put significantly less money into nonresidential buildings than the early estimates suggested, revised to negative 7.5 percent from the initial posting of positive 0.2 percent.  Net exports also pushed the headline revision lower.  Both components (imports and exports) were revised higher, but imports’ revision was larger.

One quarterly contraction does not equal a recession, but output in the second half of the year is going to need to pick up the pace if 2014 is to discontinue the weak pattern the current recovery has exhibited.   Most of the data that has been released about the second quarter does not point to substantial growth from April through June, so the year will need a strong push in the final six months if the economy is to cross the 3.0 percent threshold for all of 2014, a level we see as indicative of a healthy economy.       (by C. Cox)

Rug Sweepings

Friday, June 6th, 2014

When the Commerce Department recently released its initial revision to our nation’s first quarter GDP, moving it from a (barely) positive  +0.1% growth rate to a harsh negative  -1.%, you might figure the stock market would take the news badly.  Instead, it rose a bit on the day the news was released.  What’s up with that?

Weather once again was blamed for the overall slowdown.  Since this change was expected and practically ancient history already, the market essentially yawned.  Justification for the resultant ennui came from the nature of those components which dragged the original total down.  One was a sharp decline in new housing sales; another, a bigger drawdown in business inventories than was originally estimated.

Higher prices and mortgage rates got tagged for the housing decline.  Weather shared part of the blame as foot traffic drops off when you can’t open the front door without dying from exposure.  Declining business inventories need not hoist a red flag either, since continuing strength in consumer spending suggests stocks will soon need replenishing, keeping the wheels of commerce turning.  The stale nature of this data is also beneficial since many of the constituent parts have already been released for more recent months, pointing to a healthy rebound since March ended.  Markets look ahead, not behind.  Further, consumer spending figures did not see a drastic downward revision to first quarter data, remaining reasonably strong given the bitter headwinds felt in the earlier months.

For many economists, Pollyanna is their favorite forecaster whose siren song is consistently one of pleasantly positive progress.  Listen hard enough and you may hear her lute in the background.  Just don’t let the naysayers get to you, those with discordant voices asking if inclement weather really will turn back to sunny and mild as summer encroaches or those who ask us to examine why exports in a geopolitically unstable world fell more than originally thought.

Investing seem always to confront that old conundrum of half full or half empty.  Time may provide us with some resolution to the dilemma.  Meanwhile, investors seem to have swept negative thoughts under the rug.  Let’s hope no one trips on the bumps left behind.     (by J R)

April Existing Home Sales

Thursday, June 5th, 2014

Up for only the second time in the last nine months, existing home sales improved by 1.3 percent in April according to the National Association of Realtors.  On a seasonally adjusted annualized basis, home sales tallied 4.65 million from 4.59 million in March.  From a year ago, the pace of sales has slowed by 6.8 percent from April 2013’s 4.99 million units.

Some of this improvement is likely attributed to the weather.  First quarter figures were low as temperatures and precipitation kept transaction totals subdued.  Slow sales are giving inventories time to catch up.  There was a 16.8 percent uptick in the number of homes for sale, putting the national total at 2.29 million units.  At the current pace of sales, it would take 5.9 months to deplete this stock of homes, up from 5.1 months in March.

Prices were higher on both the monthly and yearly measures.  Median prices increased by 1.9 percent in the period to $201,700 versus $198,000 in March.  April’s price proxy is 5.2 percent higher than a year earlier.  Price improvements continued to slow on a year-over-year basis.  This price trend has fallen in each of the last three months and in six of the last eight months.   Interest rates cannot be blamed for the slowing trend as the national average commitment rate for 30-year, conventional, fixed rate mortgages was unchanged at 4.34 percent according to Freddie Mac.

Housing was under pressure in the first quarter, and warmer months should help determine if the weakness was endogenous to this market place or being influenced by unusual weather.  Atlas does not expect this segment of the economy to reignite into the inferno of the early 2000s but is rooting for housing’s continued healing because its improving state will assist the rest of the economy by creating a firmer foundation.  The remaining months of the second quarter may provide important indications into the true health of this portion of the economy.          (by C. Cox)

Monetary Hijackers

Wednesday, June 4th, 2014

On March 8, 2014 the Malaysia Airlines Flight 370 disappeared, and any sign of it has yet to be found.  Some evidence suggests the disaster was an inside job.  Consider the implications of an erratic unplanned but seemingly purposeful flight path which may have taken the craft across the Indian Ocean long enough for it to run out of fuel and be buried beneath the waves with all aboard already killed by deliberately initiated hypoxia.  It seems a strange question to ask, but can a pilot hijack his own airplane?  The answer now appears obvious. Certainly.

The tragic circumstances surrounding MAF370 may never be fully revealed, but pilots of another vehicle may be steering us toward a disaster of substantially greater magnitude.  I am talking about many of the world’s central bankers who currently are piloting their nation’s economies far into uncharted territory.  Here in the U.S. the Federal Reserve has nailed interest rates to the floor for years while dramatically inflating the supply of dollars in an attempt to stimulate consumption.  To date these efforts have yielded little in return and the conversation still focuses on how much longer such policies will need to remain in place before they take hold.

In Europe the conversation also turns on how to stimulate their economy.  In fact, this Thursday (June 5th) we will probably learn what new steps the European Central Bank is prepared to take in an effort to accomplish this elusive feat.  Many forecasters are looking for the ECB to take interest rates paid on deposits they hold for banks below zero!  Look for those headlines tomorrow and watch the market’s reaction; both should be interesting.

Bottom line, most of the major economies around the world are being steered by central bank policies intended to stimulate internal growth by weakening their own currencies and generating some higher level of inflation.  The main tool at their disposal involves setting interest rates at unbelievably low levels, followed closely by covertly devaluing their own currency via some form of quantitative easing (creating money out of thin air).   With so many big economies seemingly in a race for the bottom, we must wonder if anyone can actually win.  It’s as if they are all  already flying on empty.  Have the pilots hijacked our financial system?  They are, after all, now test pilots of unproven theory devoid of any previous practical application.  In other words, they are flying by the seat of their pants and have hijacked the system in the process.    (by J R)

April Industrial Production

Tuesday, June 3rd, 2014

Industrial Production contracted in April according to the Federal Reserve.  This means American firms produced fewer physically made goods than in the prior period.  After two months of exceptional growth, the falling output may not be a big deal, but this indicator will be watched carefully when May’s data is released.

Industrial production is comprised of three large categories, and just one of them rose during the month.  Mining gained in April and was up 1.4 percent after jumping 2.0 percent in March. Manufacturing is the indicator’s largest subcomponent, and it was 0.4 percent lower after gaining 1.5 percent and 0.7 percent in February and March respectively.  Utilities also dragged the indicator lower by collapsing 5.3 percent in the period.  Year-over-year output by utilities has fallen 0.2 percent.  Atlas cannot say for sure what is happening in this portion of the economy, but it is interesting to see any contraction, especially with persistently poor weather over such a protracted period.

Falling output helped cause a decrease in capacity utilization during the period.  Firms ran at just 78.6 percent of their maximum, down from 79.3 percent a month earlier; companies have added 2.3 percent to their capacities in the last year.  Lower rates of utilization will help combat any inflationary pressures caused by extra demand because firms can increase their output in order to meet growing consumption levels.

Industrial production has grown faster than the overall economy in the last year, so April’s pullback is not too alarming because it may just be waiting for consumption to catch up.  Continued slowing in the months ahead could suggest a waning economy, but until that happens, it is not worth worrying over.  For now, America’s recovery is still unfolding.  (by C. Cox)

April Consumer Price Index

Monday, June 2nd, 2014

Weather is not the only thing warming up as the year progresses.  Prices appear to be gaining some heat according to various measures of inflation, including the Bureau of Labor Statistics’ Consumer Price Index (CPI).  Headline inflation rose by 0.3 percent in April after rising 0.2 percent in March.  Core inflation grew at the same pace as a month earlier, up 0.2 percent.

Overall upward price pressures could make things tricky for the Federal Reserve.  The central bank has increased the monetary base by trillions of dollars in the past few years and continues to do so by billions of dollars each month (although this is slowing).  By mandate, this puppet master is paradoxically concerned with full employment and inflation.  Employment indicators do not suggest the labor market has healed, but the year-over-year CPI change has accelerated quickly in its last two releases after trending lower since April 2013.  This uptick could be an anomaly or a change in trend; only time will tell, but Janet Yellen is likely hoping that it is the former.  Atlas still feels structural issues like demographics and regulatory changes may be enough of an impediment to higher prices even in the face of such unconventional monetary policy, but we are willing to alter our perspective when the facts warrent.

Like the Producer Price Index, food played a large role in the growth of the headline tally.  Food was 0.4 percent higher in the month, and this follows February and March upticks of 0.5 percent each.  From a year ago, food is 1.9 percent higher, which happens to be slightly less than the 2.0 percent increase of all items on a year-over-year basis.  Food is known for having volatile (up and down) price movements which is why it is one of the items (the other is energy) that is removed from the core measure of CPI in order to removed “noise”, but the last three readings for food have only gone up and have done so at a significantly faster rate than other items in the indicator.  Atlas will be monitoring this component closer in the months ahead since everybody needs to eat, and if Americans begin to consistently spend more money on food, there will be less to spend on other goods and services.         (by C. Cox)