Archive for July, 2014

May Personal Income and Outlays

Monday, July 21st, 2014

May marked the second consecutive month in which personal consumption growth lagged behind the change in personal income according to the Bureau of Economic Analysis’ (BEA) report on income and outlays.  Income growth accelerated in the period by 0.4 percent after growing by 0.3 percent in April.  Consumption grew by 0.2 percent following stagnation in the prior month.

Growth rates of the various consumption categories were mixed.  Services (the largest segment of the economy) grew sluggishly, up just 0.1 percent after growing by the same rate in April.  Purchases of durable goods made back some of the April loss, up 0.7 percent versus minus 0.9 percent to start the second quarter.  Growth in nondurable goods slowed to 0.2 percent from 0.4 percent.

Inflation appears tame.  On a year-over-year basis, the personal consumption expenditure price index has increased just 1.8 percent.  Also contained in this BEA release is the Federal Reserve’s favorite gauge of inflation.  This “core” measure subtracts food and energy because their price movements are relatively erratic, and it was only 1.5 percent higher in the last twelve months, well below the central bank’s goal of over 2.0 percent.  On a monthly basis, this inflation measure was 0.2 percent greater, high enough to cause inflation adjusted consumption to be negative for the second month in a row.

Gross domestic product (GDP), being closely tied to this indicator, is what concerns Atlas when the report is released.  Remember, our nation’s output fell 2.9 percent (annualized) in the first three months of 2014.  Consumption accounts for nearly 70 percent of American output.   We see scant evidence to date of a large bounce back in income and outlays data for the second quarter.  For some perspective, March has been the best month of 2014 for personal consumption growth and that was at the end of a quarter that contracted.  In order for second quarter consumption to increase at a percentage rate equal to the first three months of the year (up 1.0 percent), June’s consumption level will need to match that of March, growing by 0.8 percent.  It is possible that consumers accelerated their spending in the final weekend of the second quarter as they prepared for the Fourth of July holiday, but Atlas is expecting less out of the month.       (by C. Cox)

New Homes Sales

Friday, July 18th, 2014

Like the existing home market, sales for new houses are heating up.  According to the Census Bureau, May’s transaction level was the best in six years.  Matching May 2008’s total of 504,000 units on a seasonally adjusted annualized basis, the count was 18.6 percent higher than a month earlier when the revised rate was 425,000 (originally 433,000) and suggests the economy may be coming back from its slow start in 2014.

There may even be signs that the supply of new homes is too sparse. Only 189,000 new structures are on the market, no change from the prior period.  If the current transaction pace is maintained and no other homes are put up for sale, the current stock of new houses would last just 4.5 months versus 5.3 months in April.  Growing demand and stagnant inventories helped increase the median cost of a new home by 4.6 percent to $282,000 in the period.

Both housing numbers from May were surprisingly strong.  These indicators seem to point to a better second-half of the year.  As folks move into their new dwellings, they will likely want to furnish and decorate their new abodes.  Further, realtors prosper because of the transactions, and those homes purchased using financing help keep lenders in business and contributing to the economy as well.  Also, thin inventories will need to be replenished, so homebuilder will need to employ more architects, attorneys, and construction workers.  Many areas of the economy are impacted by the housing market and that impact appears positive for now.        (by C. Cox)

May Existing Home Sales

Thursday, July 17th, 2014

Signs of continued housing market improvement came in two forms in May, “for sale” and “sold.”  More of each type of sign was needed in the month as the number of transactions increased along with the inventory of homes on the market according to the National Association for Realtors. On a seasonally adjusted annualized basis, 4.89 million units were sold in the period, an increase of 4.9 percent.

Prices moved higher and inventory measures were mixed.  Houses sold in the period averaged $260,700 in May, a $10,000 improvement for the month and 3.8 percent higher in the last year.  The median price increased $11,900 to $213,400 or 5.1 percent year-over-year.  There are currently 2.28 million homes for sale, an increase of 50,000, but since the pace of sales increased faster than the stock of homes grew, the inventory measured in months of sales fell to 5.6 from 5.7 in April.

This indicator is one showing signs of bouncing back from the slow first quarter of this year.  Atlas watches this it because of the ancillary output that comes along with sales. Buying an existing home does not impact the nation’s output because the home is a used good, but people often spend money on other wares after the purchase, and spending on items like appliances, furniture, and electronics add to gross domestic product.  If this indicator can continue to improve, the second half of 2014 will likely be a much better period than the first six months of the year.              (by C. Cox)

June Employment

Wednesday, July 16th, 2014

Job growth continued to gain momentum in June according to the Bureau of Labor Statistics (BLS).  Employers added 288,000 new employees to their payrolls in the period, marking the fifth month in a row that the economy has created more than 200,000 jobs.  Faster hiring helped push the unemployment rate down to 6.1 percent (it was 6.3 percent in May), a level not seen since September 2008 when the economy was still shedding jobs in the middle of the great recession.

The labor market appears to be strengthening.  In each of the last four months, the three-month moving average has improved, with a current level of 272,000 hires versus 244,000 in May.  Hourly wages for all private employees improved by 0.25 percent in the period to $24.45.  Admittedly, this tally may be a bit misleading.    According to a study by the Economic Policy Institute (thanks for the heads up Chuck), the median income in the U.S. was $16.70 last year.  When an average is significantly higher than the median (46 percent higher in this case), it means there are outlying figures in the data.  Translation: a small group of workers are pulling the average well above the median. The same study shows how income growth has progressed since the end of the last expansion, and the first seven deciles of income have fallen on an inflation adjusted basis since 2007.  No wonder the central bank is not sure when to end its accommodative monetary policies.

Labor market data must be creating some cognitive dissonance at the Federal Reserve.  For months the unemployment rate has been falling and growth in new jobs has been accelerating, but other figures are not illustrative of a healthy labor market capable of sustaining more restrictive monetary policies.  This bifurcation is causing central bankers to draw opposing conclusions about the labor market’s wellbeing.  This is part of the reason why Atlas is not concerned about the Federal Reserve removing its assistance any time soon.  Yellen and her cohorts can mention the various ways they will normalize monetary policy all they want, but until a greater consensus is reached, Atlas feels low overnight interest rates for banks are here to stay.        (by C. Cox)

First Quarter GDP Final Revision

Tuesday, July 15th, 2014

Not since the great recession has the economy contracted as sharply as it did on a percentage basis in the first quarter of 2014.  With more information available, the Bureau of Economic Analysis is able to describe more accurately the state of the economy, and with virtually all of the data collected, they have determined that our country’s output fell by 2.9 percent.  From January through March of this year, the economy relinquished all of the 2.6 percent gain recorded  in the final quarter of 2013,.

During the 18 month slowdown from a few years ago, only two quarters contracted by more on a percentage basis than did the first three months of this year.  The two largest components of the economy were worse off than earlier estimates suggested.   Most of the downward revision came as a result of inventory drawdowns.  Put another way, firms sold more than they produced in aggregate, which may not be a bad development on its own.  Unfortunately, personal consumption expenditures grew much slower than initially thought, and America’s economy thrives on consumption.  Rigorous consumption is needed before firms will be enticed to rebuild their inventories in substantial fashion.  Additionally, exports were revised lower, thus suggesting a lethargic global economy which will likely add to the caution of firms.

From the lens of GDP, things look dour; however, there are countervailing indicators that keep Atlas from feeling too gloomy.  Consumer attitudes are at cycle highs.  Recent data from the Institute for Supply Management suggests continued economic growth in the current quarter.  Employment growth is strong as the labor market continues to heal; these new workers, even if they are folks with a second job, will help consumption.  The slow growth of the first quarter combined with the more optimistic qualities of these recent indicators leaves Atlas feeling that, on average, ongoing slow improvement will likely be the way this recovery continues, leaving us close to (or just slightly above) the 1.5 percent average growth rate experienced over the past twelve months.     (by C. Cox)

May Producer Prices

Monday, July 14th, 2014

Prices paid by producers and wholesalers fell for the first time since February on a month-over-month basis according to the Bureau of Labor Statistics’ Producer Price Index (PPI).  After increasing by an unrevised 0.6 percent in April, this measure of inflation fell 0.2 percent in May.  Year-over-year, prices increased 2.0 percent versus 2.1 percent in the prior period.  Removing volatile components like food and energy does not change the tally much as this “core” measure of PPI was down 0.1 percent but was up 2.0 percent in the last 12 months.

Prices fell for both goods and services.  Costs associated with physical wares slipped 0.2 percent after being 0.6 percent more expensive in April; year-over-year, they are 1.9 percent higher, a significant drop from 2.5 percent in the prior period.  Services fell in May by the same amount on a percentage basis after also increasing 0.6 percent a month earlier, and their year-over-year tally dropped to 2.0 percent from 2.2 percent in April.

PPI has been trending higher on a year-over-year basis since November but is not near the levels of 2011, so the central bank is unlikely concerned about the recent glide path.  Year-over-year PPI numbers were over 5.3 percent for nine months in 2011. During that period, prices paid by consumers were not growing as quickly as the producer prices, and the same can be said about today.  With America’s current economic malaise, the Federal Reserve is likely to keep the zero interest rate policy in place for many months after the likely ending of Quantitative Easing later this year.           (by C. Cox)

May Retail Sales

Friday, July 11th, 2014

Retail sales improved in May according to the Census Bureau.  Increasing to $437.6 billion, the indicator improved by 0.3 percent after increasing by 0.5 percent in April (upwardly revised from 0.1 percent).  Motor vehicle sales led the tally higher. On a year-over-year basis, this important indicator has grown by 4.3 percent.  Unfortunately, some of the perceived strength is diminished when the volatile components are removed.

After automobile and gasoline sales get deleted from the indicator, the month over month change is zero.  Fortunately, the prior month’s core figure was revised up to 0.3 percent from an initial reading of minus 0.1 percent.  This is still not an encouraging tally because there were no exogenous forces like weather that could be blamed for the month-over-month halt.  The economy should have been making up for the weakness in the earliest part of the year that did have that as an excuse.

Americans are not spending money at a faster pace, despite improving consumer attitudes.  This is seen as a cautionary development here at Atlas.  Our economy relies heavily on the consumer, and shoppers are not parting with cash enthusiastically.  Other segments of our economy are not large enough to overcome hesitant consumption.  Economic output was supposed to spring back in the second quarter, but unless Americans accelerated their purchases in June sharply, the first half of the year is likely to be described as disappointing.             (by C. Cox)