Archive for August, 2014

How You Doin’?

Friday, August 29th, 2014

In September 2013, the Federal Reserve Board’s Division of Consumer and Community Affairs conducted a poll titled Survey of Household Economics and Decisionmaking (SHED).  Decisionmaking is not a typo, that’s what they called it. It was done in order to get a snapshot of the financial well-being of U.S. households.  They looked at issues that households consider risks to financial stability.  There were 4,134 surveys that qualified as complete used to compile the recently published data.  What follows is a brief summary.

Current conditions were mixed.  Over 60 percent of the respondents reported that their household was either “doing ok” or “living comfortably” financially.  The rest of those responding characterized their situation as either “just getting by” or “struggling to get by” financially.  Americans’ ability to save seems mixed also.  A little over half were putting away some money into savings, but about 20 percent said that they are spending more than they earn.  Only 48 percent of the respondents said they could cover a hypothetical emergency costing $400 without selling something or borrowing money.

Perception about credit availability is low while the perceived value of borrowing to fund a postsecondary education was assorted.  In the prior 12 months, 31 percent of those polled applied for some form of credit, and one-third of them were declined or given less than they applied for.  Just over half of the respondents felt they could obtain a mortgage if they were to apply.  Of those who completed college, 39 percent felt the cost of education outweighed the financial benefits they received from the education.  Among those with debt for education, the average amount they were in the hole was $27,840 and the median amount was $15,000.

Responses about retirement and medical expenses were not very cheery either.  Nearly one-third of the respondents have no retirement savings, including 19 percent in 55 to the 64 age range!  Of those nearing retirement, only 18 percent expect to stop working altogether, while 24 percent expect to work as long as possible.  Paying for medical care was challenging for many of those polled, including 34 percent that reported going without some form of medical care in the prior 12 months because they could not afford it.  A surprisingly large number, 24 percent, experienced what they described as a major unexpected medical expense that they had to pay out of pocket in the prior 12 months.

It is not like the majority of America is doing poorly, but there are enough Americans who are vulnerable to certain types of shocks (financial, medical, or both) that Atlas’ long-term outlook tends to skew negatively.  Skating on thin ice only becomes life threatening when the frozen water breaks.  Likewise, the pleasant American experience will go on until the structure fails.  (by C. Cox)

July Leading Economic Index

Thursday, August 28th, 2014

Economic activity will continue to grow according to the Conference Board’s Leading Economic Index (LEI).  This forward looking indicator jumped 0.9 percent to 103.3 after two consecutive monthly upticks of 0.6 percent in May and June.  On a year-over-year basis, July’s LEI reading is the best since August 2010 when the rate of change equaled the current increase of 7.7 percent.   Furthermore, in the six months ending in July, this index has increased by an annualized 8.2 percent, suggesting the economy is strengthening.

July’s uptick is the sixth consecutive monthly improvement, and many components added to the gain.  One contributor, the yield curve, has been a persistent benefactor to the index because of the Federal Reserve’s interest rate policies.  As the short end of the yield curve is held at virtually zero, it makes it easier for longer-term rates to be higher than shorter term yields.  Building permits grew in the period, and new orders from the Institute for Supply Management moved higher as well.  Initial claims for unemployment fell, a positive for the index.  Impressively, seven out of ten indicators increased in July.

Overall, this is a strong month for the LEI.  It suggests the economy’s foundation will continue to strengthen and that any recession is beyond the “seeable” horizon.  As the calendar year changes, the Federal Reserve is expected to move away from its zero interest rate policy after concluding Quantitative Easing later this year.  The central bank’s move away from their experimental monetary policy could prove to be an important test of the economy’s fortitude.  This change in policy may also indicate how well these masters understand their universe.      (by C. Cox)

July Industrial Production

Tuesday, August 26th, 2014

America’s output of physically made goods grew in July according to the Federal Reserve’s Industrial Production report.  Increasing by 0.4 percent, the indicator has improved for six consecutive months and is 5.0 percent higher than its year-earlier level.  Also, capacity utilization ticked up 0.1 percentage point to 79.2 percent, just below the long-term average of 80.1 percent but much improved over July 2013’s tally of 77.5 percent.

Two out of the three industry categories surpassed their June readings.  Mining managed an uptick of 0.3 percent for the month following the 1.3 percent jump in June.  Most importantly, manufacturing jumped 1.0 percent.  Because it is such a large component of industrial production, this uptick offset the 3.4 percent decline in utilities.  Weather seems to have played a significant role in the utilities output as it was milder than usual for July, reducing air conditioning use.  Output by our nation’s utilities has been lower in each month this year except January and May.

Growing industrial production suggests the economy is still expanding.  Manufacturing is particularly sensitive to the business cycle so its sharp monthly increase is most encouraging.  Firms have continued to increase their capacity (up 2.7 percent in the last year) but have done so at a slower pace than output has increased.  This lack of investment by firms could create inflationary issues if demand for industrial wares keeps growing faster than companies increase their ability to produce them.  Of course, if firms accelerate their capital investment, it will add to the economy’s virtuous cycle while diminishing the threat of higher costs associated with adding  labor hours in order to make up for the lack of investment.     (by C. Cox)

July Producer Prices

Monday, August 25th, 2014

Wholesale price growth slowed in July compared to a month earlier according to the Bureau of Labor Statistics’ Producer Price Index (PPI).  Prices paid by firms for wares that will be sold to end users rose by 0.1 percent after jumping 0.4 percent in June.  This slowdown will likely be considered constructive by those concerned that inflation is gaining too much momentum.

All of the price growth can be attributed to the service sector of the economy.  The index for final demand services grew by 0.1 percent in the period while the prices for final demand goods were unchanged.  Since the majority of our nation’s output is comprised of services, this segment’s uptick overwhelmed the goods portion of the indicator, thus yielding a positive headline tally.  Perhaps confirming some of the concern expressed in Friday’s note, food costs moved higher by 0.4 percent and have increased by 3.6 percent in the last year, more than doubling the headline uptick of 1.7 percent in the same period.

One of the earlier stages in the production cycle showed a pattern similar to the final goods portion.  Intermediate demand for services ticked up 0.3 percent in the period and are 1.7 percent higher than a year ago.  Processed goods for intermediate demand ticked up 0.1 percent in July, including an increase of 0.4 percent for food and feeds.  However, there was a dramatic drop in the prices for unprocessed goods (the earliest stage), falling 2.7 percent.  Most of this decrease is attributed to the 6.4 percent collapse of energy materials, but even food fell 0.4 percent in the earliest stage of processing.

In all, PPI does not portend significant overall price hikes.  Central bankers will find this constructive because it suggests they are not “behind the curve” when it comes to inflation.  Some analysts worry that the Federal Reserve will not raise interest rates soon enough to control upward price pressures.  Food seems to be the only component of this indicator showing sharp increases, but this inflation may be beyond the control of the central bank since weather also influences it.  Until other segments increase faster, Janet Yellen may continue to rationalize keeping short-term rates at virtually zero.  (by C. Cox)

Growing Pressure and How Milli Vanilli Can Help the Fed

Friday, August 22nd, 2014

Despite its many faults, California is an exceptional state. Admittedly, the previous sentence comes from a biased perspective because I have never lived outside of its borders. Those of us lucky enough to call the Golden State our home are rarely inconvenienced by the weather. However, this exceptionalism has crept into the measures of precipitation. According to the U.S. Drought Monitor produced by the University of Nebraska- Lincoln, 58.41 percent of the state is experiencing an “exceptional drought” as of August 5, 2014.

California grows a substantial amount of food. According to the California Department of Food and Agriculture, the state is the world’s fifth largest supplier of food and agriculture goods and is America’s largest producer of such items. The state propagates over 400 different crops and is the leading producer of dairy products. If California became a separate country, it would be the fourth-largest producer of wine in the world. The point: a lot of food comes from the state known for surfing and Hollywood.

Food production requires water. Without enough of the liquid, supply disruptions may occur which would lead to higher prices unless demand for food somehow fell. Will you skip a meal? Attributing the expected dearth of water as the primary cause, the USDA’s Economic Research Service is forecasting food prices to increase between 3.5 percent and 4.5 percent in 2014 as well as between 3.0 percent and 4.0 percent in 2015. Atlas has been fielding questions about the rising costs associated with food and its impact on overall inflation. In short, it appears that the table is set for higher food prices in the near future. These increases may feel especially flagrant because food is purchased so frequently. Other segments of the economy may not experience the same rate of price growth, so the overall inflation rate may remain within the limits that the Federal Reserve finds comfortable. However, if other price increases also accelerate, Janet Yellen and her cohorts can always use the Milli Vanilli defense and “Blame It on the Rain” in order to keep from being found at fault. (by C. Cox)

July 2014 Retail Sales

Thursday, August 21st, 2014

Retail sales stalled in July according to the Census Bureau. This pause follows three consecutive months of slowing growth for this important indicator, including June’s disappointing increase of just 0.2 percent. Auto sales were one of the biggest obstructions to monthly growth, falling 0.2 percent after a decrease of 0.3 percent in June. After excluding autos, the tally still disappoints as it increased just 0.1 percent from a month earlier.

Department stores seemed particularly weak during the month. Furniture purveyors saw sales tick down by 0.1 percent. Electronics and appliance stores suffered a similar drop. General merchandise fell 0.5 percent. Sporting goods, hobby, book & music stores were up 0.2 percent but have dropped 2.3 percent on a year-over-year basis. Nonstore retailers may be capturing more of the market for many of these wares; firms without a brick and mortar presence fell 0.1 percent in June but have grown by 5.9 percent in the last 12 months. Raise your hand if you’ve purchased something online during the last year.

So is the consumer down and out? The consumer attitude surveys Atlas watches gave mixed messages in July right as these retail sales took a breather. However, we are not willing to throw in the towel just yet. Consumers spent more money on food and drinks away from home. This is probably the most discretionary portion of Americans’ budget. As long as it continues to trend higher (up 0.2 percent in July and 6.2 percent on a year-over-year basis), it will be hard to argue consumption is waning in a meaningful way. (by C. Cox)

July 2014 Treasury Budget

Thursday, August 21st, 2014

After a monthly surplus in June, the government added another $94.6 billion to the nation’s debt in July according to the Treasury Department. After July’s contribution, the 2014 deficit is currently $460.5 billion. This is an alarming figure at first glance, but it has actually improved 24 percent from a year earlier when the shortfall was $607.4 billion.

Better economic activity is helping this indicator. Payments to the Federal Government are up 4.9 percent and 14.4 percent from individuals and corporations respectively. In total, tax receipts have grown by 8.0 percent in fiscal 2014 versus the previous year. Meanwhile, government expenditures have ticked up by just 1.2 percent. Military spending, down 5.5 percent, has played a large role in the subdued growth of outlays.

Fiscal year 2014 will be the fifth year in a row that the deficit has fallen as a percentage of gross domestic product (GDP), and an estimate by the Congressional Budget Office (CBO) anticipates 2015 to be the sixth consecutive year this figure falls. But then what? Well, the CBO projects that the deficit as a percentage of GDP will grow from 2016-2022; it even expects deficits of over $1 trillion a year from 2022-2024! Headlines about falling deficits make it easy to lose sight of the fact that our nation’s debt is still growing. Atlas thinks the country should make tough decisions in the near future about the state of America’s balance sheet and that the sooner they are made, the better off we will all be in the long-run. Of course, we also don’t want these choices to negatively impact our situation. How is that for a conundrum? (by C. Cox)