Archive for January, 2015

November 2014 Trade Balance

Wednesday, January 21st, 2015

The U.S. trade deficit narrowed in November according to the Bureau of Economic Analysis.  Improving for the second consecutive month, our trading shortfall of $39.001 billion was $3.248 billion better than a month earlier.  Thus far, November’s trade deficit was the second smallest of 2014, bested only by January.

Internally, the data tells the familiar narrative of the global economy which includes falling petroleum prices, American prosperity, a strengthening dollar, and slowing foreign economies.  Even as America continues to increase its production and exports of crude oil products, our nation is still a net importer of that commodity.  Therefore, as the price of this energy source falls, it helps our import tally more than it hurts our exports.  In addition, America’s services surplus fell $100 million (which is relatively unchanged) as fewer dollars were spent on travel to the U.S. and financial services firms took in less revenue from foreign customers.  Excluding petroleum, the goods trading chasm increased as American consumption of items made outside of the U.S. was bolstered by our improving economy and a strengthening dollar that made foreign wares marginally more affordable compared to their American made counterparts.

America remains the bright spot within the global economy, and petroleum is increasing the brightness of the flame by subtracting less from our gross domestic product (GDP).  However, falling energy prices are not without consequences.  With the recent collapse in the price of oil, domestic firms are beginning to shut down drilling operations because the cost of extraction exceeds market prices in some locations.  Ultimately, this will come at the expense of jobs in areas of the nation that have relied heavily on newer and more expensive techniques of extracting oil.  Energy helped reduce the nation’s trade deficit, but we will likely see some negative effects in the coming months, and one place Atlas will be looking for them is in the jobs report.           (by C. Cox)

December 2014 Employment Report

Tuesday, January 20th, 2015

Headline figures for the last employment report of 2014 were strong.  According to the Bureau of Labor Statistics, our economy added 252,000 new jobs in the final month of the year.  Not only that, but November’s tally was revised higher by 32,000 and October’s was boosted by an additional 18,000.  America’s unemployment rate dropped to 5.6 percent from 5.8 percent a month earlier, approaching the higher end of a narrow range considered by the Federal Reserve to represent full employment..

There were a couple of flies in the ointment.  First, the average workweek for all employees was unchanged; this means the average employee with a job in November did not work any additional hours in December.  On its own, that is not so bad, but when combined with slightly lower average hourly earnings, it means the typical worker took home less money in the period.  Finally, labor participation dropped back to October’s reading of 62.7 percent, a level which prior to a few months earlier had not been seen since February 1978!

Flies or not, the economy put up an impressive net new jobs number in 2014. Not since 1999 has the economy generated more jobs than last year, 2.953 million net new positions after the dust has settled.  Economics is more concerned with marginal measures than absolute counts (i.e. better or worse; not good or bad), and employment keeps improving.  Atlas recognizes that the falling participation rate, stagnant wage growth, and the stalled average hours worked are not optimal, but the labor market’s direction remains relatively constructive from our perspective.    (by C. Cox)

Pump You Up

Friday, January 16th, 2015

The amazing string of good comedic actors who have appeared in Saturday Night Live skits is legion and lately you have probably seen two of them, Kevin Nealon and Dana Carvey, resurrect Hans and Franz on a commercial with Aaron Rodgers.  The gist of this ad is that they want to help make the Green Bay Packers’ quarterback more buff, that they want to pump him up.  ‘Nuf said about that.

It appears that the world at large is helping to accomplish much the same for our own markets.  The effect of this seems to be apparent in many ways.  Our dollar has been strengthening versus most of the world’s other major currencies, prices for our higher quality bonds have seen improvement, and equity markets, while rather volatile at present, have been stringing together record highs of late.  No doubt some of this increase can be laid off on improving economic fundamentals domestically, but there are others involved whose hands are hardly invisible.  We are seeing the result of their actions as a pumping up of valuations across a wide swath of investment choices.

It is not too difficult these days to see from whence alternative sources of demand could spring; economically, things are a mess in much of the world.  Uncertainty about Chinese banking, the Euro’s future, and Japan in general are all serving to drive money to our side of both oceans.  These funds have to go somewhere and banks are probably the least likely landing spot today.  Rather, it seems to be the bond and stock markets who are primary beneficiaries of this inflow.

MarketWatch recently featured a Goldman Sachs report which showed the share of U.S. stocks owned by foreign entities hit 16% in 2014, the highest level ever seen since record keeping began almost seventy years ago.  Canadian and British investors are the major players at present, followed by Japan.  Various well-known tax havens such as Luxembourg and the Cayman Islands also show a strong presence, but the sources of demand are wide spread.

Goldman’s report expects such inflow into our stock market will continue this year and even increase by twenty percent or so.  That said, the article also forecast demand from within our borders to be even more robust.  As a single factor, this flood of cash is seen by Atlas as both a blessing and curse.  While surging demand should equate to higher market valuations, it seems driven in part by events both economic and political.  Such headline risk tends to carry increased volatility in its wake, so we expect to see some pronounced swings in prices as the year progresses toward what we hope will be a profitable ending.         (by JR)

December 2014 Purchasing Manager’s Report

Thursday, January 15th, 2015

America’s output continued to grow as 2014 came to a close according to data from the Institute for Supply Management (ISM).  Both sides of the economy, manufacturing and services, improved in December, but the pace of increase appears to have slowed from somewhat heady levels.  Manufacturing’s reading moved down to 55.5 from 58.7 in November.  Nonmanufacturing dropped to 56.2 from the red hot reading of 59.3 in the prior period.

Manufacturing’s decline was pervasive but not worrisome.  This indicator remains well above any level associated with economic contraction.  Nonetheless, the pace of new orders slowed which could hold back growth in the months ahead.  Production also decelerated, and this slowdown is part of the reason Atlas does not think economic output was as strong in the fourth quarter of 2014 as it was in the prior period when gross domestic product (GDP) increased by an annualized rate of 5.0 percent.  We will get an initial look at GDP in final quarter of last year at the end of January.

Nonmanufacturing experienced a similar deceleration.  This index is comprised of just four components, and all were weaker in the period.  Business activity dropped to 57.2 from 64.4 a month earlier.  After a reading like November’s count, this slowdown is not alarming because 64.4 is an exceptionally robust tally.  New orders were also weaker and suggest some slowing in the months ahead as fewer orders turn into slower output.  Even with the recently strong labor market trend, the employment measure dropped a touch, falling to 56.0 from 56.7.  Finally, six percent of purchasing managers commented that their orders were getting to them faster than a month earlier, so deliveries also subtracted from the nonmanufacturing total.

These reports point to a slightly slower growth pace but growth nonetheless.  Economic expansion continues here in the U.S. despite headlines about many countries not being able to generate much, if any, progress of their own.  America remains a glowing ember within the global furnace.  Meanwhile, other nations attempt to ignite their own economies but various headwinds (e.g. political, economic, demographic, etc.) tend to be countering such efforts.  Time will tell if our heat is sufficient to maintain the glow long enough for the rest of the world to kindle.         (by C. Cox)

December 2014 Consumer Attitudes

Wednesday, January 14th, 2015

Americans expressed cheer in the final consumer attitudes surveys of 2014.  Consumer Confidence, put out by the Conference Board, rose to 92.6 from the upwardly revised tally of 91.0 (originally 88.7) in November.  Its counterpart, the University of Michigan’s Consumer Sentiment Index, recorded it highest reading since January 2007 (93.6); for those keeping score, that predates the Great Recession.

Part of the reason Atlas writes about these surveys together is that they are constructed in similar ways and often have results that resemble one another.  That being said, December’s headline figures moved in the same direction, but their internals looked somewhat different.  Americans expressed a relatively better improvement of their present situation in the Consumer Confidence Survey.  This measure now stands at its best reading since February 2008.  However, expectations suffered a mild setback within the Conference Board’s poll, but its minor deterioration was outshined by the previously mentioned improvement in feelings about the present.  When asked by the University of Michigan, Americans indicated that they felt better about both their current situation and the future.  The two components improved in the period, but expectations actually increased by a larger percentage.

Atlas’ takeaway from consumer attitudes in December is that the improving trend in Americans’ feelings continues, which in turn portends positive improvements in other indicators will probably follow.  Small differences in the internals may easily reverse in the months ahead, so the negligible downtick within Consumer Confidence’s expectations can be overlooked this time.  For now, consumers, the largest driver of the economy, are feeling good, and this ebullience may lead to additional consumption in the near future.              (by C. Cox)

ex-Government Motors

Tuesday, January 13th, 2015

Costs are a tricky figure.  First, there are at least four types.  The two most understood fall under accounting costs: fixed and variable.  Whether or not costs are the same each time a good or service is purchased or vary based on other circumstances, these are the prices paid by the vendor.  The moment a costs is incurred, it transforms into a more abstract concept, becoming the third type of cost known as a sunk cost.  Finally, there are opportunity costs (i.e., costs associated with not taking the best alternative action).   Each of these costs can be considered when looking at the bailout of General Motors that occurred via the Auto Industry Financing Program which was part of the Troubled Asset Relief Program (TARP) starting in 2008.  In the final hours of 2014, the Treasury Department closed its books on the controversial rescue.

So what were the costs associated with aiding the firm?  First, there’s the sticker shock of the accounting type.  According the Daily TARP Update published by the Treasury Department, America provided the troubled automaker and its financing arm with $66.67 billion dollars, and recovered just $53.04 billion, a loss of $13.63 billion.  Ouch! But it could have been worse, right?  Atlas is not going to take a position in arguing the counterfactual but will consider a few arguments that can never be proven.

Consider the sunk cost perspective.  At the time of the bailout, America’s economy had hundreds of thousands of jobs in the automotive industry.  If a firm as large as General Motors were allowed to fail, many jobs would have been lost.  Federal income tax revenues would have fallen as even more workers were displaced during the Great Recession.  Giving up on a large investment within the American economy would have resulted in losses much larger than the $13.63 billion accounting loss.  At the time, the nation could not give up a firm of this magnitude.  The Center for Automotive Research estimated the cost of not helping the automotive industry at would have been $105 billion or nearly eight times as great.

Finally, looking at opportunity costs, some argue that other firms missed out on the spoils of competition.  Couldn’t automakers that did not need help sweep up the mess left by a failed company and reallocate the assets more effectively?   One might even take a stance which suggests our moral authority to counsel foreign governments against similar market intrusions has been diminished or that a dangerous precedent has been strengthened by insulating a privileged cohort from losses which could lead to greater malinvestment in the future.  These points were shared in a testimony to a subcommittee within the U.S. House of Representatives in 2011 by Daniel Ikenson of the Cato Institute.

Before this note costs you any more of your time, Atlas will wrap it up.  Could the automotive industry crisis been handled better?  Possibly, but there is no way of knowing. Or, you could choose believe in an imaginary parallel universe where firms did not need help, kept thriving, and maintained ample payrolls.             (by C. Cox)

Greecing the Slide

Monday, January 12th, 2015

When I was somewhat younger, a buddy of mine suggested we apply waxed paper to our favorite slide in the playground.  He said it would make it faster.  “Why not?” I wondered, and so we did, vigorously rubbing the slide’s surface from the bottom as far up as we could reach.  Climbing the ladder to the top, I soon discovered once again how, when theory meets practice, the end result can still be quite surprising.  And so it was.  In fact, the end result is that my end shot down that bad boy like a rocket, off the bottom edge and hard onto the well-packed earthen dent at the lip with an sudden, surprisingly painful stop.  Climbing back up to repeat the ride hurt like heck, but a man’s gotta do what a man’s gotta do.

The government in Greece has been on a similar tear of late, led by the current Prime Minister Samaras who decided about one month ago to hold a surprising vote in their parliament, hoping to establish one Mr. Dimas as the next PM.  If he wanted to get a vote of confidence for ongoing  austerity measures, Mr. Samaras was disappointed.  Should such a move fail to pass initially, the Greek system requires that their Parliament vote up to two more times on such a measure, hoping for approval.  In this case Samaras’ New Democracy party lost all three elections, forcing him now to hold a general election nationwide.

The front-runner in this new contest seems to be Alexis Tsipras, head of the Syriza party which looks favorably on substantially reducing the strict austerity measures put on Greece by the European Commission, International Monetary Fund, and European Central Bank, collectively referred to by him as the Troika.  Syriza also looks unfavorably on the Euro, even suggesting they could possibly return to their old currency and abandon membership in the European Union.

The election is slated for this coming January 25th.   Should Syriza win, they will probably have to form a coalition with the socialist Pasok party in order to achieve something close to a majority when voting on such matters.  This slide by Greece back toward default on their debt resurrects fears that Spain, Italy, or Portugal may follow suit.  None of this is good for either the European economy or the global banking system’s stability.  Ironically, it could drive even more money into our dollar and treasury bonds as foreign investors seek a safe haven for their wealth.  Whatever the result, January looks to be an interesting month as the days slip past.     (by J R)