MarketKapz

Here we are on the last day of just the second month of 2015, and there have already been 21 central banks, covering 39 countries, that have loosened monetary policy.  These various attempts to avoid domestic deflation has led to global easing at a time when our own Federal Reserve is hinting, although less so lately, at tightening in the quarters ahead.  Diverging policies brings Atlas back to a question we asked earlier this year: can America support the rest of the world’s economy?

Not all rate cutting central banks represent large economies, but the pervasive wave points to concern about global output nonetheless.  Uzbekistan started the trend on January 1^st, but this is a nation with relatively small economic output, so its cut alone is not enough to raise eyebrows.  However, 12 other banks (Romania, Switzerland, India, Egypt, Peru, Denmark, Turkey, Canada, European Central Bank, Pakistan, Singapore, Albania, and Russia) eased policies before January ended.  The most recent cut came on Monday, February 23, 2015 from Israel, but before this cut, seven others (Australia, China, Denmark, Sweden, Indonesia, Azerbaijan, and Botswana) eased their monetary stance in February. You may have noticed Denmark was listed twice, but this country cut rates four times in less than three weeks!

Easier monetary policies tend to have a negative impact on the underlying currency.  This may help explain some of the strength behind the American dollar, as our policy has remained untouched in an absolute sense but has become relatively stricter versus various trading partners.  A stronger dollar here at home impacts import prices, making foreign-made goods less expensive than their domestic counterparts.   In order to remain competitive, American producers will have to price their wares aggressively if they want to retain market share.  Such a move will, in turn, tend to subdue any incipient inflationary pressures.  This helps explain why Atlas does not believe the Federal Reserve will hike interest rates this year.  America, as the world’s primary consumer, seems to have the economic weight of the world on its back.  Any rate hike by us at this time would likely cause our dollar to strengthen even further, encouraging rather than preventing deflation here at home.     (by C. Cox)

Prices paid by producers and wholesalers as measured by the Producer Price Index (PPI) for final demand goods and services dropped a third consecutive month in January according to Bureau of Labor Statistics.  The 0.8 percent drop follows declines of 0.2 percent in both November and December; this measure of price change has been lower in five of the last six months.  Year-over-year, PPI declined 0.1 percent, pointing to deflation.

All stages of both goods and services fell in the period.  Final demand goods dropped 2.1 percent, led by the 10.3 percent collapse in energy costs.  An earlier stage, processed intermediate goods, fell 2.8 percent, the largest decline since December 2008; energy was again the primary driver.  The earliest stage, unprocessed intermediate goods, gave back 9.4 percent, the largest decline since November 2008, as energy plummeted 13.2 percent in this segment.  For services, both final demand and the intermediate stage fell 0.2 percent.

Deflationary pressures are global.  According to the most recent data from the European Central Bank, general prices in the Euro zone fell 0.2 percent in December.  While PPI is not the most watched measure of inflation, the year-over-year decline is noteworthy.  Our own central bank has been hinting at raising the overnight interest rate in the months ahead, but if other price measures follow PPI’s lead, the Federal Reserve will likely soften its rhetoric as the year matures.              (by C. Cox)

America’s growth could decelerate further in 2015 according to the Conference Board’s Leading Economic Index (LEI).  This forward looking indicator has been moderating since November.  January’s increase slowed to 0.2 percent from the downwardly revised 0.4 percent uptick (originally 0.5 percent) in December.

Five out of the ten components led the indicator higher, one was unchanged in the period, and the other four fell. The spread between 10-year treasury bonds and the overnight federal funds rate provided the largest uptick in the indicator.  Consumer expectations for business conditions followed with the next largest contribution.  Credit conditions, as measured by the Conference Board’s proprietary Leading Credit Index, also made a considerable positive impact.  Two of the three measures of new orders for manufactured goods had a marginally positive influence on the indicator, but the third component was negative in the period.

Some slowing may be on the horizon, but output should continue to grow in the months ahead. Gross domestic product (GDP) grew quickly in the third quarter of 2014 (+5.0 percent) but slowed in the final three months of the year (+2.6 percent in the advanced estimate).  While the LEI points to further deceleration during the first half of 2015, GDP growth has been strong in the last nine months, enough so that when the end of March arrives, our economy’s will likely have grown by over 3.0 percent in the first quarter on a year-over-year basis.              (by C. Cox)

Industrial production improved in January according to the Federal Reserve.  The uptick of 0.2 percent follows December’s downwardly revised contraction of 0.3 percent (originally -0.1 percent).  From a year earlier, output of physically made goods (paperclips to airplanes) is 4.8 percent higher, a level consistent with economic expansion.  Also, capacity utilization fell slightly in the period.

Two of the three major industry groups improved in the period. Manufacturing managed an increase of 0.2 percent after being unchanged in December; within this category durable goods rose 0.4 percent while nondurables remained unchanged.  Utilities made a partial bounce back of 2.3 percent after collapsing 6.9 percent to end 2014.  Mining gave back nearly half of its 2.4 percent gain in the prior period, falling 1.0 percent in January.

Capacity utilization has some room to grow before hitting its long-run average.  Virtually unchanged from December, 79.4 percent of the nation’s capacity was used in the first month of the year versus the average of 80.1 percent from 1972 through 2014.  Over the past year, capacity has grown by 3.1 percent.  Included in this release of industrial production is the central bank’s forecast for capacity growth.  Unfortunately, the Federal Reserve estimates growth will slow to 1.8 percent in 2015.  This includes just 1.7 percent growth for manufacturing, the largest segment of our industrial base, after it increased 2.2 percent last year.

Like many of the indicators we follow, industrial output points to additional growth, but shows signs of deceleration.  Manufacturing will continue to be the most important figure within this indicator since it is so sensitive to the business cycle.  Atlas will be looking closely at the Institute for Supply Management data that comes out next week for clues to any further slowing in the manufacturing side of our economy.      (by C. Cox)

Greece is a nation with a rich past, but inabilities to manage fiscal affairs have dominated its recent history.  Considered the cradle of Western civilization, some of the most influential ideas and people (e.g. Alexander the Great, Aristotle, Western drama, and democracy) are rooted in the Mediterranean country.  However, stories about powerful titans like Phoebe or Atlas do not seem appropriate for its current state.  Instead, today’s Greece evokes the “Popeye” comic book character Wimpy.

Greece needs financing today to pay back old loans that are due next week and will likely run out of money if a deal is not reached by the expiration of its current bail-out on the last day of this February 2015.  The country is in negotiations with the European Union (EU) to secure the needed funds, and it has a few interesting advantages.  First, the threat of default carries some heft because of the potential knock-on effects it may have on the euro currency experiment; it hearkens back to J. Paul Getty saying “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”  Secondly, Greece’s finance minister, Yanis Varoufakis, is an expert in the study of strategic decision making or game theory, having authored several books on the subject.  Up until now, the talks with the other 18 EU finance ministers have ended in a stalemate; perhaps part of his strategy.

Politics is at the center of the negotiations.  On one side, Greece’s current prime minister was elected last month on a platform that promised to ease the austerity measures the nation agreed to before taking earlier bail-out financing.  On the other side is Germany’s leadership who does not want to lend more money to a country with a profligate history unless austerity guarantees are part of the deal; its citizens will find the terms disagreeable otherwise.

Resolving this issue is a Herculean task, and even he may require some of Popeye’s spinach.  Up until now, the negotiations have looked promising only to fail at the end of the day, similar to Sisyphus’ problem.  Unlike the king of Ephyra, the two sides cannot repeat this action forever, the deadline is next Friday. Oh the drama!        (by C. Cox)

Retails sales dropped for a second consecutive month in January 2015 according to the Census Bureau.  After falling 0.9 percent in December, 0.8 percent fewer dollars were spent on retail wares to start the year.  As was the case in the previous period, falling gasoline prices played a significant role in the drop.  Despite significantly lower pump prices versus a year ago, retail sales were still up 3.3 percent from January 2014.

Removing volatile components (gasoline and automobiles) yields a better tally.  Month-over-month, this figure has increased 0.2 percent.  Areas of monthly growth include electronics and appliance stores, building materials, health & personal care, and general merchandise.  Atlas likes to look at eating and drinking out figures to get a sense of the consumers’ collective attitude toward discretionary spending; once again, additional money was spent eating away from home.  If the economy were to hit the skids, this should be one of the first areas to suffer since it can be easily substituted by dining at home.  For now, that is not on the menu.

Retail sales are trending higher, and the virtuous cycle of our current expansion should support further growth.  As the number of employed people grows, this indicator should be a direct beneficiary since the newly employed will begin spending their paychecks.  Economic utopia this is not, but America’s expansion is continuing as evidenced in the retail portion of the nation’s output.            (by C. Cox)

America’s year-to-date budget deficit worsened in January according to the Treasury Department’s monthly statement.  The Federal Government increased the shortfall by 6.2 percent from the same year-to-date point in 2014.  Some of the deterioration can be blamed on the calendar.   The first day of February was a Sunday, so payments to retired and active military as well as Veteran’s benefits, Supplemental Social Security Income and Medicare payments to HMO’s were paid in January.  In all, the shortfall was $17.5 billion in the period.

Economic improvement seems to have kept the matter from being worse.  Receipts were higher, 8.7 percent greater on a year-to-date basis.  Income taxes, the largest source of revenue for Washington D.C., were up 8.2 percent so far this fiscal year, aided in part by the improving labor market.  In addition, corporate income taxes were up a whopping 35 percent!  Outlays have increased 8.3 percent thus far in fiscal 2015, but this was impacted by the earlier mentioned calendar issue, so the next iteration of this indicator should give a clearer picture of change in our government’s spending.

Improving economic conditions make the budget easier to manage for now, but there does not seem to be any concern about dealing with the accumulative effect of annual deficits, aka debt.  For example, the nonpartisan Congressional Budget Office (CBO) expects tax receipts to rise each year through 2025.  Even with the assumption that there is no recession in the next 10 years, the CBO predicts the deficit as a percentage of gross domestic product will increase more than 42 percent over last fiscal year’s relative shortfall.  In the event of a normal business cycle recession, Atlas presumes it will be worse.              (by C. Cox)