Archive for December, 2014

Green Light, Red Light

Wednesday, December 31st, 2014

Go!  Accelerating economic activity pushed the Chicago branch of the Federal Reserve System’s National Activity Index (CFNAI) higher in November.  The monthly tally was strong, moving to +0.73 from an upwardly revised count of 0.31 (originally 0.14) in October.  However, green lights were not the only signal in the report.  While production led the indicator higher, the other three major categories within this report remained negative or deteriorated in the period.

Manufacturing and industrial production chirped the tires with increases of 1.1 percent and 1.3 percent respectively.  On the other hand, employment approached a yellow light, but instead of speeding up like most American drivers, it decelerated from +0.22 in October to +0.17 in November.  Sales reacted similarly, slowing to +0.02 from +0.11 in the prior period.   Consumption indicators remained in reverse although they are now heading in the wrong direction at a slower pace, increasing to -0.10 from -.11 a month earlier.

Atlas watches the three-month moving average for the CFNAI because the monthly totals often start and stop like a new driver learning to use a manual transmission.  This average shifted gears higher, accelerating to +0.48 from an upwardly revised +0.09, (originally -0.01).  Our economy nears its redline when this average reaches +0.7; like the temperature of an engine running at too many RPMs, inflation heats up at this critical level.  The current reading on the dashboard indicates the motor is operating efficiently, the temperature is acceptable, RPMs are accelerating a bit, and our economy is moving smoothly up hill.    (by C. Cox)

November 2014 Leading Indicators

Tuesday, December 30th, 2014

According to the November release of the Conference Board’s index of Leading Economic Indicators (LEI), economic growth should continue to improve in the near-term.  November matched October’s uptick of 0.6 percentage points; however, October was downwardly revised from an increase of 0.9 percentage points.

Positives were widespread with eight out of the ten components improving in the period.  Interest rates continued to make the largest impact on the index through the interest rate spread.  Of course, the Federal Reserve is keeping the overnight bank lending rate at virtually zero, so it is easy for the 10-year Treasury yield to create that differential.  Manufacturing looks set to continuing improving as new orders within the separate Institute for Supply Management report expanded.  U.S. stocks were higher in November, thus adding to the positive outlook from the LEI.  A proprietary credit indicator increase in the month, so it appears financing is set to continue making a positive contribution to American output as well.  Only initial claims for unemployment and building permits subtracted from the indicator.  The average initial claims for unemployment crept back over 300,000 per week in November, but recent December figures have eased away from that peak in the prior period.

From the looks of the index of leading economic indicators, our economy is poised to continue growing.  Global headlines are souring, but America has been strong enough to avoid another recession thus far, and there are no storms on the horizon that the LEI report is able to see.  However, winter is coming and terrible weather was largely to blame for the first quarter contraction earlier this year; in other words, America is still susceptible to exogenous shocks.  We doubt such an event, should it develop, will originate from North Korea however.
(by C. Cox)

November 2014 Consumer Price Index

Monday, December 29th, 2014

Prices deflated in November according to the Consumer Price Index (CPI) data from the Bureau of Labor Statistics.  The headline figure shows overall costs falling 0.3 percent in the period after being unchanged in October.  On a year-over-year basis, prices are just 1.3 percent higher, a notable fall from 1.7 percent in the prior period.  When food and energy are removed, the core measure ticked up 0.1 percent for the month and 1.7 percent in the last year; these measures were up 0.2 percent and 1.8 percent respectively in October.

Energy costs have been making front page news for months now, and they were the primary cause of the headline decline in the CPI.  Energy fell 3.8 percent in November after dropping 1.9 percent a month earlier.  Gasoline alone plummeted 6.6 percent in the month.  The other volatile component, food, ticked up 0.2 percent with major grocery store food groups mixed; this index has increased 3.2 percent in the last year.

Core prices were mixed.  Shelter bounced 0.3 percent higher in the period.  Other core components (medical care, airline fares, and alcoholic beverages) rose during the month.  However, prices for apparel, used cars and trucks, recreation, household furnishings, personal care, and new vehicles fell in the period.

Price growth has remained subdued since the end of the last recession in June of 2009.  Such slow moving price increases are partially the reason our Federal Reserve has been able to be so accommodative during the current economic upswing.  CPI data are not showing a substantial change in price growth and should, to an extent, allow the central bank to keep the overnight interest rate relatively low for all of 2015.       (by C. Cox)

Let them Eat Burgers

Friday, December 26th, 2014

At one of our pie parties this year, Bob B. mentioned his family was hosting a visitor from Germany who observed that her currency, the euro, was much stronger than ours.  This opinion was based on the fact that one euro bought a good bit more that one dollar U.S. when being exchanged.  Currency traders would have been quick to disagree, and rightly so, but how can we explain the difference in exchange rates in a more accurate fashion?

The Economist, a British weekly, long ago began to employ a couple of methods intended to gauge the relative value between currencies.  The first, and more academic of the two, is called purchasing power parity (PPP).  It attempts to measure variables between nations that reflect how much people throughout the world pay for similar items in their native coin and how long the average worker must stay on the job before earning enough to buy it.  Bob’s visitor would have been better served to focus on the first part of that equation instead of exchange rates.

How to illustrate that point brings us to the second method employed by The Economist when discussing PPP.  They sought to answer a seemingly simple question: what item(s) should we use  to compare relative cost between countries around the world.  Whatever is chosen should be readily available to the general population, virtually identical everywhere, and generally within the reach of the average citizen.  What would you use?  They chose McDonald’s Big Mac.

McDonald’s tries to apply stringent quality control on this signature item regardless of the country where it is served, using locally baked or raised products and produce.  The basic ingredients are thus quite similar and work well when calculating PPP; only costs such as labor, land use, and taxes skew the results.  According to the latest survey I have from the folks at The Economist, Bob’s German visitor spends about fifteen cents more for a Big Mac there than we do here.  By that measure our dollar is worth more than her euro.

If you are curious as to who spends the most to enjoy such a delicious gourmet treat, as of last July when this survey was released, it was Norway.  Interestingly, Russians were spending substantially less then, suggesting their ruble was more valuable than our dollar.  Since then the ruble has lost a substantial amount of value so I’m not sure what a babushka would pay today, if she could buy one.  I understand Vladimir closed down McDonald’s local eateries as pay-back for recent sanctions imposed on Russia.  I wonder who suffers the most from that?     (by J R)

Defense! Defense!

Wednesday, December 24th, 2014

Alabama, Oregon, Florida State, and Ohio State have made it to the first college football four-team playoff, a new era for the collegiate sport.  All of these teams are led by strong quarterbacks (even Ohio State’s third stringer looked impressive against Wisconsin) and have potent offenses capable of scoring virtually at will against most opponents.  Their offensive potencies have carried them far into the season, but these schools would not be in a position to compete for the national title without some equilibrium provided by their defenses.  According to a USA Today ranking, not one of these top four ranked teams has a defense positioned in the top 10.  Nonetheless, the teams still keep defensive squads because balance is required to succeed even when you have standouts in key offensive positions.

For years, the Russian Federation’s economy has been able to thrive with a strong offense led by energy exports.  Whether you approve of coach Putin’s play calling or not, petroleum helped pay for the most recent Winter Olympics, is funding the continued annexation of Crimea, and has kept Russia’s patient citizens content via a state-driven economy.   But recent global pricing dynamics have left Russia’s star player sidelined.  As energy costs have fallen, so have the nation’s revenues.  When coupled with U.S. led trade sanctions, Russia’s economy is far from the red-zone.

Now, their central bank is on the field because other segments of the Russian economy are not strong enough to withstand the decline in petroleum prices.   As the world’s energy prices fall, the Russian ruble is suffering a similar fate since the economy is so closely tied to crude oil   In order to keep its currency from collapsing, the Russian central bank has stepped in to play defense.  For a currency to fall in value, the volume of sellers must be greater than that of willing purchasers.  Buying the currency was the first play called by the central bank in an attempt to keep the value from falling too far.  However, the central bank can only do a finite amount of buying.  Despite selling copious amounts of its foreign currency reserves to fund the purchases, the ruble continued to slide.  Next, the central bank raised its overnight lending rate to 17.0 percent in order to entice other investors to buy ruble denominated debt.  So far, the results have been nil.  Defending a currency and an economy has a limited playbook, and Russia’s offensive star is not in a position to help.

When the Ducks’ offense takes the field against the Seminoles, they will rely heavily on their Heisman Trophy winning quarterback.  But when Florida State has the ball, Marcus Mariota will be off of the field because teams must plan for times in which their opponents have possession.  Russia has only practiced for offense and now its central bank is lining up a defense that appears ill prepared for the strength and speed of its global market opponents.      (by C. Cox)

November 2014 Industrial Production

Tuesday, December 23rd, 2014

America’s output of physically made goods surged in November according to the Federal Reserve.  Industrial production’s monthly improvement of 1.3 percent is the largest uptick since May 2010. From a year ago, this indicator is 5.2 percent higher, the best year-over-year tally since January 2011.  At 80.1 percent, capacity utilization is now running at its long-term average.

Two of the three major industry groups increased in the period.  Manufacturing output grew 1.1 percent in November.  Furthermore, the gains were widespread with output for both durable and nondurable goods growing by over 1.0 percent, and not one category within either of these two components was negative in the period.  Output for utilities grew 5.1 percent in the period as electricity increased 4.8 percent and natural gas grew 6.9 percent.  Only mining fell in November, down 0.1 percent after dropping 1.0 percent in October.

Capacity utilization matched the average level from 1972 through 2013.  Durable goods manufacturing is primarily skewing the count higher, but even mining is a touch above its long-term average.  Makers of durable goods used 78.4 percent of their capacity versus their long-run average of 77.0 percent.  Nondurable manufacturers are still running below their average.  Mining capacity utilization hit 87.9 percent in November, putting it slightly above its 87.3 percent trend.  Despite the jump in utilities’ output, their 82.4 percent capacity utilization rate remained well below its 86.1 percent long-term tendency.

Industrial production in November was solid and is among other signs suggesting the economy is strengthening.  Employment measures are trending higher, retail sales in November were robust, and production measures all point to the economy being in a virtuous cycle.  America’s economy is not invincible, but it has many more buttresses keeping it up than at earlier points in this expansion.           (by C. Cox)

November 2014 Retail Sales

Monday, December 22nd, 2014

Retail sales accelerated to November according to the Census Bureau.  After increasing 0.5 percent in October, the indicator grew 0.7 percent last month.  Retail sales have improved 3.8 percent on a year-to-date basis, and sales in November 2014 were 5.1 percent higher than in the same month last year.

Sales were strong despite falling gas prices.  This indicator does not adjust for price changes so the lower pump costs negatively impact the tally.  Increased retail sales while fuel prices fall mean Americans are spending money elsewhere within the economy at growing rate.  One area of strength in the period was autos-sales.  After climbing 0.8 percent a month earlier, vehicle purchases jumped 1.7 percent in November.  However, auto sales tend to be lumpy, so it is useful to look at retail sales after excluding cars and trucks; this measure still improved 0.5 percent after increasing 0.4 percent in October.  One of Atlas’ favorite components within the report is eating and drinking away from home; this is an extremely discretionary way in which consumers can spend money, and it has an intuitive substitute if Americans’ moods change, eating at home.  Restaurant and bar receipts grew 0.7 percent in November, very encouraging.

Retail sales are benefiting from an improving economy and simultaneously contributing to the growing strength of our nation’s output.  Continued labor market gains push more dollars into retail purchases as more Americans receive paychecks, and an uptick in store traffic will further justify additional hiring.  This pro-cyclicality should be bolstered by even lower gasoline prices in December, allowing 2014 to end economically strong.        (by C. Cox)