Archive for September, 2014

August Durable Goods Orders

Tuesday, September 30th, 2014

Orders for goods expected to last three years or longer plunged in August according to the Census Bureau.  Month-over-month, there were 18.2 percent fewer orders than in July.  August’s collapse follows two consecutive months of gains.  Including the poor showing in the most recent tally, durable goods orders are still 8.1 percent higher on a year-to-date basis versus 2013.

For those regular readers, you may recall Atlas wrote that we expected a “substantial decline” in the August orders.  A large airplane manufacturer received 324 order for new planes in July and only 107 in August.  Planes are expensive, so a decline in their orders makes a powerful impact on the headline number, despite the obvious fact that additional orders had been received.  However, if another layer of this onion is peeled back, durable goods look rather constructive.

Atlas pays attention to something known as “core” durable goods which we see as a proxy for business confidence.  This subset strips out aircraft and defense orders from businesses’ capital goods orders.  After falling 0.2 percent in July, it bounced back by 0.6 percent in August.  For some added perspective on July’s downtick, it followed a huge 5.4 percent jump in June’s core orders.  To us, it appears firms continue to feel confident enough in their outlook for the economy to keep making additional investments in equipment expected to remain in service for years.

Despite being known primarily as a service economy, America’s market place is being helped by the nation’s physical output.  Industrial production was strong last month, and the orders included in this report will mostly become output in the months ahead.  From this vantage point, the economic expansion will continue for the foreseeable future.         (by C. Cox)

August New Home Sales

Monday, September 29th, 2014

New home sales were strong in August according to the Census Bureau.  Transactions tallied 504,000 on a seasonally adjusted annualized rate.  This followed July’s upwardly revised count of 427,000 (originally 412k) and was in stark contrast to the disappointing figure in the existing home market a few days earlier. Year-over-year, the pace of sales has increased by 33.0 percent!

Surging sales have left a tight supply.  There are currently 203,000 new units for sale on the market.  If August’s pace was to continue and no other homes were built, the entire stock of new dwellings would be depleted in just 4.8 months.  This dearth of inventory cuts two ways: it may slow transactions as potential buyers are unable find a suitable home, but it could have a constructive impact if builders are encouraged to increase their output in the months ahead.

Price measures were mixed in the period, but most regions experienced growing sales.  The median cost of a new home slipped 1.6 percent to $275,600 in the period.  The average price increased $2,800 to $347,900 in August.  With no change in the number of transactions, only the Midwest did not experience faster sales over the prior period.  The West and Northeast surged 50.0 percent and 29.2 percent respectively.   Sales in the South grew by 7.8 percent; this area is the largest portion of the country and accounted for nearly 52 percent of the transactions in August.

Housing was mixed in August.  The existing homes market is much larger than this new home counterpart, and its sales dropped 90,000, leaving the housing market with a net contraction for the month.  To be fair, new home transactions are counted earlier in the sales process, so this portion of the market may be an early indication of better outcomes in the months ahead for housing.  After homes are purchased, Americans like to add a personal touch to their dwellings by filling them with new durable goods.  If housing accelerates again, it should have a positive knock-on effect for the economy.       (by C. Cox)

August Existing Home Sales

Friday, September 26th, 2014

After four consecutive months of increases, existing home sales dropped in August according to the Nations Association of Realtors.  On a seasonally adjusted annualized basis, the number of completed transactions declined 1.8 percent to 5.05 million units.  This follows July’s downwardly revised count of 5.14 million (originally 5.15 million).  Despite the slowdown, August’s was the second highest pace of 2014.  However, sales were 5.3 percent lower than a year earlier.

Regional differences and cash buyers put pressure on the monthly tally.  Existing home sales in the south declined 4.1 percent in August.  Transactions in the west dropped 5.1 percent in the period.  Midwest and Northeast sales increased 2.4 percent and 4.7 percent respectively.  Unfortunately, the Northeast is the smallest market in the country and account for just 670,000 units.  The South is the most active of the four territories, so its decline coupled with the slowdown in the West overwhelmed the other two sections of the country.  Cash transactions were 23 percent of the total in August, down for the second month in a row after comprising 29 percent of July’s deals.  All-cash sales now represent the lowest overall share since December 2009 when they were 22 percent of the total.

Price measures were mixed.  The median existing-home price was $219,800, which is 4.8 percent higher than a year earlier.  Year-over-year price changes have been positive for 30 consecutive months.  However, month-over-month prices fell for a second consecutive period in August.  If June 2014 is the maximum value for the median sales price this year, it will be the sixth year in a row where June is the most expensive month on that basis.

Atlas finds the statistic on all-cash buyers to be the most interesting of this report.  If those capable of paying cash for a home are leaving the market, they will need to be replaced in order to support a larger number of transactions.  First-time homebuyers are one source of additional demand, but this cohort did not increase their relative participation in the period.  Their share of transactions remained level at 29 percent.  They have also been under 30 percent of the total for 16 out of the past 17 months, so they are not exhibiting signs of acceleration.  If all-cash investors and previous renters do not increase their representation in sales, demand will wane, which may cause prices to fall.            (by C. Cox)

August Chicago Fed National Activity Index

Thursday, September 25th, 2014

Economic growth slowed in August according to the Chicago Fed National Activity Index (CFNAI), a monthly report filed by that branch of the Federal Reserve System.  Falling from July’s downwardly revised 0.26 (originally 0.39), the indicator fell below zero for the first time since January 2014 to -0.21 in August.  Monthly numbers for this indicator can be volatile, so Atlas pays more attention to the three-month average which remained slightly above zero (0.07); any reading above zero suggests output is still growing faster than the historical trend.

Internally, there was a marginally negative bias to the components.  Forty-two of the indicators improved from July to August while forty-three deteriorated.   Forty-five of the 85 made positive contributions to the tally, and 40 subtracted from the total.  Of the indicators that improved, 12 continued to subtract from the headline number but did so to a lesser degree than a month earlier.

Production related components made the biggest impact on the monthly change. This portion of the economy subtracted 0.17 after adding 0.24 a month earlier.  In particular, manufacturing dropped 0.4 percent in August after increasing 0.7 percent in July; part of this can be attributed to capacity utilization declining from 77.6 percent to 77.2 percent in August.

Atlas sees this CFNAI release as additional evidence that the central bank will be very slow to raise overnight interest rates.  Our economy is currently growing very close to the slow trend it has experienced during the recovery.  Per the Federal Reserve Bank of Chicago’s release, they are expecting limited inflation from economic activity over the next 12 months.  In other words, America’s economy is not overheating.  This should allow the central bank to be very measured as it decides what to do with overnight interest rates.  Even if the zero interest rate policy disappears, these central planners are likely to move very slowly with any subsequent interest rate hikes.            (by C. Cox)

August Index of Leading Economic Indicators

Wednesday, September 24th, 2014

After a sharp increase in July, the Conference Board’s Leading Economic Index decelerated in August.  The monthly increase of 0.2 percent followed an upwardly revised increase of 1.1 percent (originally 0.9 percent) in the prior period.  America’s economy will most likely continue growing for the rest of the year according to this forward looking indicator.

Positive contributions to the indicator were limited.  Just 3 out of the 10 components improved in the period.  Beginning with the largest positive contribution, the segments adding to the index were the interest rate spread, new manufacturing orders from the Institute for Supply Management (ISM), and the Conference Board’s proprietary Leading Credit Index.  Because the interest rate banks pay to borrow money overnight from other banks is being held at zero by the Federal Reserve, the yield curve remains positive despite the slight flattening it experienced in August as the yield on the 10-year Treasury bond fell in the period.  Atlas finds more comfort in the momentum gained by new orders from the manufacturing ISM tally, a sign of real economic activity versus the central bank engineering demonstrated in interest rates.

Four of the remaining seven components negatively impacted the indicator for the month.  Building permits slipped in the period and initial unemployment claims rose.  Fewer firms put in orders for capital goods in August and the stock market subtracted from the LEI as well.  However, these latter two components were close to making no impact on the indicator.  The final three elements were unchanged in the period.

July’s LEI reading had the strongest increase on a percentage basis since October 2013, so August’s deceleration does not alarm Atlas.  Many measures of economic activity remain favorable, the LEI is positive, and inflation measures are tame.  In the absence of unusual price pressures, the central bank will likely keep its accommodative policies in place as the Federal Reserve supports the economy in a way that it feels is best.            (by C. Cox)

August Consumer Price Index

Tuesday, September 23rd, 2014

Inflation, disinflation, and deflation: the August Consumer Price Index (CPI) from the Bureau of Labor Statistics had them all.  On a year-over-year basis, this price index is 1.7 percent higher (inflation).  However, this is less than the 12-month look back in July when the tally was 2.0 percent (disinflation). Finally, the month-over-month change was -0.2 percent (deflation).

Headline CPI was heavily influenced by lower energy costs in the period, and food prices hardly offset this downward pressure.  Energy prices dropped 2.6 percent in August.  Gasoline led the fall, collapsing 4.1 percent!  Food inflation decelerated to +0.2 percent in the period versus a +0.4 percent jump in July.  August is the first month since April 2013 that the headline figure fell.

It has been even longer since the core tally was not positive.  Removing food and energy price changes because they can be so volatile gives us the “core” measure.  This steadier measure of price movements did not change in August.  Prior to this latest release, core CPI has been higher in each month since October 2010.

One way of describing inflation is to say that there are too many dollars chasing too few goods.  America’s central bank has been creating dollars out of thin air for quite some time, so there is not a dearth of dollars in our economy.  But inflation data found in indicators like the CPI and the Producer Price Index make it hard to argue that these dollars are doing much chasing.  Price increases have been rather measured despite the Federal Reserve’s explicit desire for greater than normal upward cost pressures.  If the recent trend continues, it will be interesting to see how the central bank reacts to the recent disinflation in the months ahead, especially as the planners consider removing experimental policies like quantitative easing and zero interest rates for banks needing to borrow overnight.  Atlas thinks it will, at the very least, have to keep the overnight rate at nil longer than most professional projections presume.     (by C. Cox)

August Producer Price Index

Monday, September 22nd, 2014

Wholesale prices stagnated according to the latest data from the Bureau of Labor Statistics’ (BLS) Producer Price Index (PPI).  After advancing 0.4 percent and 0.1 percent in June and July respectively, the headline tally was unchanged in August.  The BLS recently reformatted the way this report is configured, adding services, construction costs, export prices, and a bit more to the mix, thereby expanding and subsequently relabeling the old crude, intermediate, and final goods categories.  Thus in this latest report, we see our economy was split as an uptick in service costs was offset by a price decline in goods.

The new category “Final Demand Services” was up 0.3 percent in August.  A miscellaneous component that subtracts out trade, transportation, and warehousing costs from that figure caused most of the rise, accounting for 80 percent of the uptick.  Price increases from the transportation and warehousing providers themselves contributed to the rest of the monthly gain.

Prices for “Final Demand Goods” dropped 0.3 percent in the period.  This segment was primarily influenced by the two most volatile components within the indicator, food and energy.  Food purveyors paid 0.5 percent less than a month earlier for their supplies.  Energy sank 1.5 percent in August, the second consecutive monthly decline, having fallen in six of the last seven months.

In this new PPI format, definitions of the earlier stages in the production of goods have been expanded and service costs added.  On the “goods” side these used to be referred to as crude and intermediate phases of production; services weren’t even included.  The new “processed goods for intermediate demand” category dropped 0.3 percent as foods & feeds fell 0.8 percent and energy dropped 1.7 percent.  Without these two components, this “core” intermediate stage rose by 0.2 percent.  The earliest stage, “unprocessed goods for intermediate demand,” collapsed 3.3 percent in the period, and is now 0.8 percent cheaper than a year earlier.  For services, the earlier stage ticked up 0.2 percent in the period, and by 1.6 percent in the past 12 month.  Interestingly, 60 percent of this increase is attributed to the prices of business loans which surged 2.1 percent in August.

Notwithstanding the efforts of the Federal Reserve to boost the economy by creating money out of thin air, inflation is not manifesting according to the producer price measure.  This indicator has remained at or (mostly) below 2.0 percent on a year-over-year basis since March 2012.  This slow rate of change in producer prices should help the central bank justify zero interest rates well into 2015, even if their lower bound is not producing the Federal Reserve’s desired effect.       (by C. Cox)