Archive for November, 2014

October Existing Home Sales

Wednesday, November 26th, 2014

Sales of existing homes improved to the highest reading of the year in October, but the rate of improvement decelerated according to the National Association of Realtors.  After growing by 2.6 percent in September, the most recent data show an increase of only 1.5 percent on a month-over-month basis.  Growing by 2.5 percent on a year-ago basis, the seasonally adjusted annualized rate of sales was 5.26 million units in the period.

Other data within the report were mixed.  Interest rates (reaching the lowest level since June 2013) were even more supportive in the period as the average commitment rate for a 30-year conventional, fixed-rate mortgage fell to 4.03 in October from 4.16 in September according to Freddie Mac.  Inventories dropped 2.6 percent to 2.22 million homes for sale.  At the current pace of sales, this inventory would be depleted in 5.1 months.  Price measures fell for the fourth consecutive month.  The average price of an existing home dropped $200 to $254,800 while the median price lost $800 for a total of $208,300.

The NAR released a separate report in the month of November which explored first-time buyers and their representation within existing home sales.  The study revealed the annual share of first-time buyers fell to its lowest level in nearly three decades.  The long-term average, which dates back to 1981, shows that first-time buyers traditionally represent 40 percent of the existing home purchasers; however, they made up less than 30 percent of transactions for the 18th time out of the last 19 months in October.  Like many indicators Atlas follows, existing home sales are demonstrating evidence that post financial crisis recoveries are different than typical business cycle recoveries.       (by C. Cox)

October 2014 Producer Price Index

Tuesday, November 25th, 2014

Wholesale prices reversed course in October according to the Bureau of Labor Statistics’ Producer Price Index.  After deflating 0.1 percent in September, this measure of inflation rose 0.2 percent in the following period.  Despite the monthly pickup in prices, the year-over-year tally dropped to 1.7 percent from 1.8 percent a month earlier.

Increasing service costs led the headline figure higher.   Costs increased within both stages of service.   Jumping 0.5 percent, the service index for final demand was heavily influenced by an uptick in margins received by retailers and wholesalers.  Costs associated with intermediate services inched up 0.1 percent; widening sales margins, up 0.8 percent, were the primary cause of the price increase within this earlier stage of services too.  Despite the monthly increase in price pressure, the year-over-year change for services is the lowest since February of this year.

Unlike service costs, prices for final demand wholesale goods dropped in the period.  The index for final demand goods fell 0.4 percent in October.  Food was 1.0 percent higher in the period.  However, energy prices plunged 3.0 percent.  Excluding the volatile food and energy components, the core goods measure edged down 0.1 percent.  Earlier stages of goods do not indicate higher prices are in the near future.  Processed goods for intermediate demand fell 0.9 percent and unprocessed goods dove 2.4 percent.  On a year-over-year basis, prices decelerated for processed goods to 0.4 percent from September’s 1.3 percent uptick, and unprocessed goods’ deflation increased to 1.9 percent after being 0.2 percent lower a month earlier.

In all, this PPI report is a mixed bag.  Services are a large part of America’s output, so the uptick in their costs cannot be ignored.  However, this is only one month’s worth of data, and the year-over-year price trend for all final demand is still decelerating.  While we take note of the uptick in services, Atlas sees the bigger picture still pointing to mild inflation.              (by C. Cox)

October Industrial Production

Monday, November 24th, 2014

America produced fewer physically made goods in October according to the Federal Reserve’s Industrial Production report.  This indicator fell 0.1 percent after an increase of 0.8 percent in September (revised lower from 1.0 percent).  Two out of the three components declined in the period.  Capacity utilization also fell in October.

Despite the lower headline figure, details within the report were not awful.  Manufacturing, the largest component of the indicator, rose 0.2 percent in the period after improving by the same percentage a month earlier.  It was led by non-durable output growing 0.3 percent.  Durable wares were set back by a decline in vehicle assemblies which fell 400,000 units to an annualized tally of 11.1 million.  Mining output, falling 0.6 percent, may have been hurt by lower petroleum costs.  As crude oil prices fell, some wells were no longer profitable and therefore, at least temporarily, shut down.  Utilities gave back some of their 4.2 percent weather related surge in the prior period, dropping 0.7 percent.

Capacity utilization fell in the period.  Dropping from 79.3 to 78.9, some of the decrease can be explained by firms adding to their capacity.  Firms have accelerated their investment for eight consecutive months.  Our nation’s capacity has grown over 3.0 percent on a year-over-year basis for the first time in the current recovery which officially began in June 2009.  Significantly, the trend in capacity has been favorable as the year-over-year increase accelerated in each of the last 13 months; firms are investing.

Industrial Production is another of Atlas’ indicators pointing to an improving economy.  Firms are confident enough of future prospects  to invest in their means of production.  This keeps capacity from becoming stressed, which helps keep inflation at bay.  For now it appears that America’s economy remains in a virtuous cycle.         (by C. Cox)

Pay It Forward

Friday, November 21st, 2014

In yesterday’s blog (Unclear and Present Danger) we raised the prospect that America is being asked to boost its contributions to the International Monetary Fund (IMF).  Why would Christine Lagarde, the current Managing Director of that organization, feel the need for additional funds from us and other developed nations?

Ever since the world’s major central banks have dropped interest rates down almost to zero, financial institutions have been looking for places to invest that paid better than what was available stateside.  In response, banks and shadow banks alike have been lending to emerging market companies.  Many of the loans were done via offshore subsidiaries in places like the Cayman Islands that provided better tax treatment on the returns, sometimes allowing loans (bonds) to be provided to firms in countries where asset managers could not otherwise do business.

And the point?  Turns out these companies often denominated these bonds in dollars, taking the funds received and converting them into their own county’s currency in order to use them at home.  This exchange must be reversed when repayments are made.   Lately, such firms are finding it more difficult to pay off the loans because the U.S. currency has been strengthening relative to their own.  This makes it more expensive to service the debt, thus eating into profitability and decelerating output.

Furthermore, banks and shadow banks may begin to sell their holdings of these loans and/or make fewer loans available.  It is unclear how devastating this sequence may be to various countries because the total amount of the outstanding loans is not fully understood.  Since many of the transactions occur offshore, they do not get counted in official statistics.  Estimates from the Bank of International Settlements (BIS) suggest there are nearly twice as many of these bonds outstanding as the standard count demonstrates.  For example, the BIS estimates Russian firms are on the hook for $115 billion when standard count indicates the amount owed is only $42 billion.  Oh yeah, Chinese real-estate firms have been some of the most prolific borrowers, and many recent anecdotes from this nation’s economy have not sounded positive.

If, for any number of reasons, too many sellers of this paper suddenly emerge, liquidity could dry up in a heartbeat and lead to a freezing of global finance much like we saw back in 2008.  Should such circumstances develop, a run on some emerging market companies could have dire consequences.  To lower the odds of this occurring, the International Monetary Fund (IMF) wants to fatten their purse by asking developed nations to pony up more funds.  According to the Wall Street Journal, the IMF currently has around $1.4 Trillion available for such bailouts and would like to see us provide an additional $64 billion above our current quota.  The problem is, our Congress, led by strong Republican resistance, has, since 2010, blocked any attempt to raise the amount we donate.  With the latest election strengthening their hand, Atlas sees little chance new funds will be forthcoming anytime soon.  The needed push for resolution of this situation may once again come down to brinksmanship, not leadership.        (by C. Cox and J R)

Unclear and Present Danger

Thursday, November 20th, 2014

Lately, Atlas has been voicing our concern about the American economy’s ability to support  global output.  Arguably, America’s economy is currently in the best shape seen during this recovery.  Growth has been above trend for the last two quarters, employment continues to improve, and several forward looking indicators suggest further positive developments are on the horizon.  Notwithstanding the cheer within our borders, other countries remain relatively weak and are looking for support in various forms from the U.S.  One obvious form of assistance is in trade, as our economy improves and dollar strengthens, domestic consumers and businesses will likely increase their purchases of foreign goods and services.  However, America’s role within the International Monetary Fund (IMF) may not be as obvious.

The IMF is a Washington D.C. based organization that, during tumultuous times, acts as one of the final defenses against national financial crises.  If a nation finds itself unable to pay for its obligations (e.g. Greece, Portugal, Ireland, Romania, and Ukraine have all been helped in recent years), the IMF can be called in to “renegotiate” the terms of the country’s debt, but the assistance tends to require strict budgeting or austerity measures in order for the assistance to remain in place.  For now, it is the only provider of such services and is largely funded by American tax dollars.

Until recently, emerging market countries could not afford to participate in funding the IMF, so they have little to no say about the terms of the assistance they receive.  However, China has been complaining about its lack of influence within the IMF and has even proposed the Asian Infrastructure Investment Bank as an alternative institution that would not act directly in the interests of America, Europe, and Japan.

Responding to these demands, the IMF proposed giving China more clout.  In this same proposal it wishes to require higher contributions to the fund from other countries, including an additional $65 billion from America.  Here is the rub: this action requires an 85 percent approval rate from the voters within the IMF, and the U.S. has a 16.7 percent share of the vote.  Atlas doubts Congress will give it an up vote.

America’s economy may be strong enough to support weaker trading partners, but putting us on the hook for more bailouts may not be politically popular.  It appears the probability of countries needing more help from the IMF is increasing because, as you’ll see in tomorrow’s note, the increasing global use of dollar denominated loans is currently at odds with international currency market trends.  Yes, the statistics show our economy is improving, but averages mask variances within the data.  Many Americans are still trying to reach the standard of living they enjoyed decades ago.  If the additional IMF funding issue comes up, the 114th Congress may make a lasting mark on geo-politics and economics.        (by C. Cox)  

October Retail Sales

Wednesday, November 19th, 2014

Retail sales rebounded 0.3 percent in October after falling by the same percentage in September according to the Census Bureau.  Year-over-year, this indicator has improved 4.1 percent.   Widespread gains within the indicator suggest the economy is still expanding.

Spending on food services and drinking places moved higher once again.  This is the epitome of discretionary spending.  Americans can easily substitute away from this category by cooking and entertaining at home, but receipts at restaurants and bars grew faster than those for food and beverage stores.  Restaurants’ relative improvement suggests consumers feel comfortable enough with their current situation and have lofty enough expectations for the near term future to spend more money eating away from home.

Only three categories (gasoline stations, electronics, and general merchandise) declined in the period.  Falling energy prices are to blame for the downtick at the pumps, not exactly a bad thing.  Electronics experienced a bump in September because of the latest iPhone release, so October’s downtick is not alarming. General merchandise was unchanged in the period, but its department store subcategory fell.  Brick and mortar companies may be losing ground to their non-store rivals who gained in the period.

As the year winds down and holiday spending shifts into gear, falling gasoline prices and an improving labor market should combine to bolster non-fuel components within this indicator.  Because retail sales represent roughly one-fifth of the economy, they are regarded as a bellwether for the nation’s output.  From the looks of it, the fourth quarter of 2014 is off to a good start.      (by C. Cox)

Happy U.S. Fiscal 2015 New Year!

Tuesday, November 18th, 2014

After shrinking the budget deficit by 29 percent in fiscal year 2014, America did not get off to a good start in in fiscal year 2015.  According to the Treasury Department, the Federal Government spent $121.7 billion more than it took in during October.  This shortfall was 34 percent greater than the deficit a year earlier, and followed September’s surplus of $105.8 billion.

Increased government spending caused the substantial change.  Outlays were 15.5 percent greater than in the same period last year.  Fortunately, increased expenditures were primarily caused by the calendar.  November 1st fell on a weekend, so benefit payments for the military, veterans, social security, and Medicare were made in October instead of November.  Expect November’s outlays to diminish considerably.

Revenues firmed in the period.  Part of the 6.9 percent uptick from a year ago stems from the improving labor market and economy.  As a greater number of Americans join the workforce, tax collection grows.  Taxes paid by individuals grew 7.6 percent.  Also, corporate income taxes jumped 58.0 percent versus the same period last year.  While this is a large change on a percentage basis, companies pay much less in taxes than individuals, so the surge had a minimal influence overall.

Despite Congress not having a budget in place for fiscal year 2015, the Congressional Budget Office (CBO) expects the annual deficit to shrink this year.  Their projections are for the shortfall to be roughly 2.6 percent of gross domestic product (GDP) or $469 billion, down from $483.4 billion in fiscal 2014.  Unfortunately, 2015 is the last fiscal year in which CBO expects the deficit to shrink.  Between fiscal 2016 and 2024, CBO anticipates increasing budget shortfalls, reaching $960 billion or nearly 4.0 percent of GDP by the end of the period.  It is no secret that our nation is experiencing a demographic shift that will, all else equal, increase our country’s outlays as retiring Baby Boomers begin collecting various entitlements.  What remains a unknown is how America’s budgeting will adjust in order to accommodate the change.                (by C. Cox)