Archive for July, 2014

Orders for Durable Goods in June

Thursday, July 31st, 2014

Durable goods orders (items expected to last 3 years or longer) improved during the final month of the second quarter after a large decline in May.  Orders increased by 0.7 percent in June according to the Census Bureau after dropping 1.0 percent in the prior month and have been up in four out of the last five months, including an uptick of 0.9 percent in April.

Capital spending by firms increased in the period after falling in April and May.  Atlas tracks the nondefense capital goods orders excluding aircraft (core durable goods) because we see it as a proxy for business confidence since it removes government outlays and volatile aircraft orders.  When firms feel better about their prospects, they are more willing to spend money on capital equipment.  In aggregate, companies increased their spending by 1.4 percent in June which contributed to the 1.6 percent quarterly improvement versus the first three months of the year.  This should be helpful for gross domestic product (GDP) in the coming quarters because business investment is the second largest component of our nation’s output.

Shipments of durable goods give some insight into the strength of the economy.  From April through June, shipments grew by 1.3 percent, beating the first quarter tally which was virtually flat.  Shipments of core durable goods grew by 1.0 percent, accelerating from the first quarter’s growth of 0.6 percent. An uptick in this segment of the economy undoubtedly helped GDP for the second quarter, but weakness in other segments (notably personal consumption) held back America’s output.               (by C. Cox)

May Balance of Trade

Wednesday, July 30th, 2014

America’s trading shortfall improved slightly in May according to data from the Bureau of Economic Analysis.  The chasm closed to $44.4 billion from $47.0 billion (revised from $47.2 billion) in April.  The improvement came as exports increased 1.0 percent and imports dipped 0.3 percent in the period.

Much of the advance in exports can be attributed to petroleum goods.  Fueled by a 21.1 percent increase in sales to foreign buyers, the petroleum goods trade gap fell $300 million to $18.6 billion.  Unfortunately for many other exporters, including natural gas purveyors, the month-over-month change was negative for the period.  However, there must be some pressure building in the world of jewelry because exports of gem diamonds were a particularly strong, growing by 22.1 percent in the period, the strongest monthly change within the goods portion of the data.

Four out of the six major categories fell on the import portion of the report.  Foreign food purchases fell 1.8 percent.  Industrial supplies dropped 3.0 percent for the month.  Fewer consumer goods were bought, falling 1.0 percent.  “Other goods,” by itself a rather small category, collapsed 10.0 percent;.  Businesses managed to increase their capital consumption, and automotive related sales increased 5.0 percent during the month also.

Mixed feelings accompany this report.  A falling trade balance seems like a good idea, but if it comes at the expense of American consumption, it may indicate the largest contributor to our economy is fatiguing.  Many indicators Atlas follows (e.g. retail sales) are showing signs that American consumers are getting lethargic, and the balance of trade report supports this point of view.  Increased consumption of American goods and services by foreign buyers is heartening, especially when so many headlines refer to slower economic growth and political turmoil in various regions of the world, but we should not lose sight of the fact that this weak global economic recovery is also getting long in the tooth, thus making it even more susceptible to exogenous shocks like airliners in the Ukraine or missiles in Gaza.        (by C. Cox)

June Producer Prices

Tuesday, July 29th, 2014

Firms’ reprieve from inflation did not last long according to the Bureau of Labor Statistics.  The Producer Price Index (PPI) jumped 0.4 percent in June after dropping 0.2 percent in May.  Inflation did not discriminate as prices rose in both goods and services, up 0.5 percent and 0.3 percent respectively.  The earlier stage of production also rose after falling in the prior period, up 0.4 percent following May’s decline of 0.1 percent.

Final demand goods, those items purchased by end users, were heavily influenced by fuel costs.  Energy, up 2.1 percent, accounted for nearly 90 percent of the monthly uptick in goods; this was largely due to gasoline’s jump of 6.4 percent during the month.  Excluding energy, goods increased by just 0.1 percent in June.  Year-over-year, goods are 2.1 percent more expensive at the wholesale level.

Final demand services may not have jumped as much in June as their goods counterpart, but there could be price pressures building in earlier stages, and firms may try to pass these upticks on to you in the months ahead.  It appears banks are charging companies more for deposit services, increasing 3.2 percent in the month, and business loans cost 0.3 percent more than a month earlier.

Prices continue to grow, but when the annual rate of change is considered, producer inflation is not outside of its normal levels.  Declining for the second consecutive month, headline PPI has increased by just 1.9 percent in the last 12 months, down from 2.0 in May.

It is virtually impossible to discuss inflation and not mention the Federal Reserve.  Janet Yellen wants to engineer more price pressure because she and her cohorts think higher costs will spur more consumption in the near term.  Atlas does not necessarily disagree with inflation possibly stoking consumption; we just question the central bank’s ability to induce higher costs because of countervailing forces that work against the Federal Reserve like global demographics and Americans’ dearth of savings at a time when baby boomers want to retire.             (by C. Cox)

June Industrial Production

Monday, July 28th, 2014

America’s output of physically made goods ended the second quarter by decelerating from a month earlier according to the Federal Reserve’s Industrial Production report.  The indicator still managed to perform better from April through June than it did in the first quarter of 2014 even though its monthly growth slowed to 0.2 percent in June from a downwardly revised 0.5 percent (originally 0.6 percent) in May.  On a seasonally adjusted annualized basis, output grew by 5.5 percent in the second quarter versus 3.9 percent from January through March.

Two out of the three major industry groups grew in the period.  Manufacturing is by far the largest component of this indicator, and its growth was reluctant.  This industry grew by just 0.1 percent after the downwardly revised 0.4 percent tally (originally 0.6 percent) in May.  Mining output decelerated for the second month in a row falling from 1.1 percent a month earlier to 0.8 percent in June.  Utilities fell for the fifth consecutive month, dipping 0.3 percent after dropping 0.4 percent in May.

Capacity utilization was unchanged for the month.  The nation used 79.1 percent of its capacity in the period; it has been virtually at this level since March and is slightly below its long-term average run rate of 80.1 percent. In the last twelve months, firms have added 2.6 percent to their ability to produce everything from paperclips to airplanes.

Industrial production tends to move along with the business cycle, so seeing this indicator continue to improve is encouraging, especially after the gross domestic product (GDP) contraction in the first quarter.  If America’s output of physically made goods slowed in the second quarter, the prospects of getting a negative GDP figure later this week would have increased substantially, but for now it seems most likely that the number will fall between 1.5 to 2 percent.          (by C. Cox)

June Federal Deficit

Monday, July 28th, 2014

June wraps up the third quarter of our government’s fiscal year and the Treasury Department reports the annual deficit to date reached $365.9 billion.  While that is a hefty sum, it is down 28% from the level it hit this time last year.  In fact, for the month of June, our government actually recorded a $70.5 billion surplus.

To what can we ascribe this significant improvement?  Two factors loom large.  First, defense spending has fallen 5.5% as we continue to sequester some spending while drawing down our overseas presence.  Simultaneously, stronger economic growth has boosted tax receipts by 8.8% over this time last year.

While it seems encouraging to see the federal deficit shrinking, we must remember that it also reflects slower spending by a significant consumer.  Some economic theory suggests government outlays are crucial when businesses and the public at large are putting their wallets away.  Do we see any evidence therefore that these two groups are returning with renewed vigor to America’s marketplace?  Not really, nor do we get a sense that demand from our foreign trading partners is accelerating either.  That’s not to say things are rotten, but they do seem ripe for a return to something even less favorable than today’s anemic pace of growth.  For the past several years it seems the only player with any plan to get things rolling again has been the Federal Reserve and lately they have been slowing the pace of their quantitative easing program.  What can pick up the slack now?  Here at Atlas we are anxiously awaiting that white hat upon a white horse which is supposed to come galloping in at times like these.  Where’s Hoppy when we need him?

(by J R)

June Retail Sales

Thursday, July 24th, 2014

The Census Bureau reported retail sales rose a disappointing 0.2% in June; a more robust 0.6% jump had been penciled in by consensus.  That said, revisions carried the day.  May now reflects a 0.5% jump versus the 0.3% originally published, matching the April hike.  Over the past year, retail sales have shown a 4.3% gain.

Atlas likes to watch a core retail sales number which subtracts motor vehicle and gas sales since the big ticket nature of the former can combine with the occasional random volatility of energy prices in a way that causes the headline number to move erratically.  This core figure rose 0.4% in June.  The May figure was also revised upward to show a 0.3% gain from no change the prior month.  While both numbers are increasing, there seems to be some disappointment that they weren’t stronger yet.  Hopes have been building that growth in this year’s second quarter would rebound strongly from the weak first, compensating for what was seen as a weather induced contraction in the year’s first three months.  Some analysts are now questioning the validity of that excuse since a sluggish pace of improvement seems to be the best our economy can produce.

We consider this monthly retail sales report to be one of the more important data points Atlas tracks.  It accounts for a substantial portion of monthly consumption and tends to be an excellent indicator of future trends.  We will have to settle for the positive bias the numbers show, while reserving some caution as to their magnitude.    (by J R)

June Institute for Supply Management

Tuesday, July 22nd, 2014

According to data from the Institute for Supply Management (ISM), the economy grew as the second quarter ended.  Unfortunately, the indicators still fell in the final month of the quarter.  Manufacturing dropped just a stitch to 55.3 from 55.4, and the non-manufacturing measure shaved off a little more, going from 56.3 to 56.0.  Nonetheless, both sides of output (services and manufacturing) had readings above 50.0 in each of the three months of the quarter.

There are signs within each release that suggests the best is yet to come for 2014; of course, the first half will not be a very tough benchmark to beat.  First, the new orders component of the manufacturing index jumped 2.0 points in the month to 58.9; this suggests acceleration in the months ahead for these industries because new orders came in faster than at any point thus far in 2014 and will need to be filled.  Then there are the new orders for non-manufacturing firms, and they moved up 0.7 to 61.2, a level last seen in January 2011.  Both ISM figures indicate improving conditions.

Before a more robust second half of the year is considered, a quick survey of the second quarter is in order.  Based on the ISM data, April through May should prove to have been a stronger period than the first three months of 2014.  To be fair, all of the first quarter ISM releases were greater than 50.0 (the breakeven level) as well, but the period’s final GDP tally was negative, so there is no guarantee that our economy grew in the second quarter.  However, the mean values of both ISM numbers were greater than the average tally from January through March, so the outlook appears promising.  (by C. Cox)