Archive for February, 2015

Fourth Quarter 2014 Productivity and Unit Labor Costs

Thursday, February 19th, 2015

The Productivity and Unit Labor Costs report, put out by the Bureau of Labor Statistics (BLS), is both a measure of U.S. economic efficiency and the influence of wages on price increases.  Theoretically, in a perfect world, productivity gains would offset inflationary pressures caused by improving wages.  Unfortunately, this did not happen in the final quarter of 2014.  Instead, on an annualized basis, productivity dropped 1.8 percent while wages grew 0.9 percent.

America’s productivity is tallied by combing the quarter-over-quarter changes in output and hours worked.  Output, as measured by the BLS, grew 3.2 percent.  However, this production growth required 5.1 percent additional labor hours (the largest increase since 1998), resulting in the 1.8 percent drop.  On a year-over-year basis, productivity was unchanged as both components moved 3.1 percent higher.

Rising wages combined with falling productivity caused unit labor costs to jump 2.7 percent on an annualized basis.  On its own, this looks alarming because it suggests inflation could be growing well above the 2.0 percent level that the Federal Reserve has been targeting.  However, this is a volatile figure so it is helpful to look at the change during 2014 which was just 1.5 percent, in line with other measures of inflation.

This indicator continued telling a familiar narrative in the final quarter of last year.   America’s business cycle is expanding, and labor markets are gradually improving.  Atlas characterizes this indicator as relatively positive, but we would like to see the productive side of it accelerate in the quarters ahead.    (by C. Cox)

December 2014 Trade Balance

Tuesday, February 17th, 2015

America’s trade deficit worsened in December according to the Bureau of Economic Analysis.  Our shortfall increased to $46.6 billion, up $6.8 billion since November’s revised total of $39.8 billion (originally $39.0 billion).  For 2014, the goods and services deficit was $505.0 billion, up $28.7 billion or 6.0 percent from the prior year.  Indicative of a growing global economy, both imports (up 3.4 percent) and exports (up 2.9 percent) improved for the year.

Nearly all of December’s change originated from the physical side of the economy which widened by $6.9 billion to $66.0 billion.  In particular, America imported 7.7 percent more petroleum while exports of the stuff plummeted 11.6 percent.  On the other side, services, our surplus managed to grow by $100 million in the period to $19.5 billion.

Trade’s trend is deteriorating, and headwinds do not appear to be subsiding.  The three-month moving average widened $1.1 billion to $42.7 billion.  From a year earlier, the three-month moving average for the goods and services deficit increased $5.2 billion.  Economically, America is the strongest developed nation, and this strength has partially caused the dollar to appreciate against our trading partners’ currency as investors seek its safety.  This makes foreign goods more affordable in the U.S.  Even without the recent strength of the greenback, our relatively stronger economy would be enough to cause the gap to grow, but the current state of global currencies is exacerbating the phenomenon.  Outside our borders there is no shortage of central banks wanting to boost their economies with lower interest rates.  One likely consequence of these monetary policies is depreciating foreign currencies, so the stronger dollar is likely to buy relatively more foreign-made wares; this will subtract more from America’s gross domestic product in the quarters to come.        (by C. Cox)

So, What’s Going On Over At Your House?

Friday, February 13th, 2015

Every three years, the Federal Reserve conducts its Survey of Consumer Finances.  This comprehensive poll collects information about household incomes, net worth, and other financial characteristics.  The most recent report analyzed the 2010 thru 2013 period, and its results are less than encouraging.

While it looks at various age ranges from less than 35 to over 75, Atlas paid particular attention to the 55-64 year old group.  Our interest in this cohort stems from our fascination with the Baby Boomers and their continuing impact on America’s economy. While this age bracket does not cover the entire generation, it is the only segment within the report comprised solely of Boomers.

During the period covered by this report, income and net worth fell for this important age group.  The average wage for a home headed by a person in the 55-64 year old age bracket fell 3.0 percent, and the median income dropped 7.0 percent.  The discrepancy in the two statistics suggest higher earning households suffered less than those in the lower end of the income distribution.  In the same period, the average net worth for these households dropped 15 percent and the median level fell 14 percent.  The implication is that wealthier families were hurt more in this category; this additional pain is partially explained by the impact real estate prices made on the balance sheets of the propertied group.

As Atlas parsed this report, we were once again reminded of the demographic situation America faces.  Our economy has been dependent on the baby boomers for decades, and the entire cohort is quickly approaching an age when the purse strings get tighter as they prepare and enter into retirement.  If their income and net worth trends continue lower, this group may have no choice but to become even more miserly in the years ahead.  Until there is a substantial increase in the number of high earning 40-year olds, Atlas’ concerns about the nation’s demographic issues remain intact.        (by C. Cox)

January 2015 Unemployment

Thursday, February 12th, 2015

Labor market healing continued as 2015 started according to the latest data from the Bureau of Labor Statistics.  Our economy has now added 200,000 or more jobs in each of the last 12 months, including 257,000 net new jobs in January.  Wage statistics also looked better at the start of the year.  Despite strong hiring, the unemployment rate increased to 5.7 percent.    Overall, this indicator looked strong in the period.

All of the increase in the monthly count is attributed to private firms.  Businesses increased payrolls by 267,000 while government entities shed 10,000 employees.  In the service portion of the economy, healthcare and social assistance accounted for 49,700 of the headline total, the largest gain for any category.  Construction hiring led the goods producing segment with 38,000 new hires.  Manufacturing’s increase of 22,000 jobs was due mostly to the addition of 18,000 new workers within the durable goods portion the economy.

America’s labor force increased in January.  An influx of 1.051 million workers into the labor force caused the participation rate to rise to 62.9 percent from 62.7 percent in December.  This increase helped push the unemployment rate higher, a development Atlas considers encouraging because it suggests many people who had been left behind since the unemployment peak are beginning to feel they have a place within the labor economy once again.

The average workweek category remained stuck at 34.6 hours, but earnings moved higher, growing 0.5 percent in the period, and are up 2.2 percent from a year ago.  This higher aggregate income should show up as increased demand for our nation’s output in the months ahead unless the personal savings rate increases

Labor market shortcomings still exists, but the employment situation is improving.  This is one of the data sets that argues in favor of the central bank raising interest rates.  There is a strong trend in hiring, but by itself may not be enough to cause our Federal Reserve to begin hiking interest rates any time soon.     (by C. Cox)

January 2015 Institute for Supply Management

Wednesday, February 11th, 2015

When I started learning to drive, my father took me to the Sears parking lot in Riverside to grind the gears of the family’s 1963 Volkswagen Beatle; her name was Gladys.  Since the transmission was manual, it was practically impossible for me to keep one foot on the brake while pushing the accelerator. This was not the case for our economy as 2015 got started.  Manufacturing and services (the two drivers) simultaneously hit the gas and brakes in January according to data from the Institute for Supply Management (ISM).

Manufacturing output decelerated in the period, falling to 53.5 from 55.1 in December.  As is the case of a VW Bug that has had its brakes applied while traveling in a parking lot, this segment of the economy still moved forward in January, but it did so a slower pace.  There was particular weakness in order backlog, deliveries, and new orders.  Firms were able to complete existing orders faster than in the prior period, suggesting their capacity was not as strained as a month earlier; this could argue for slower capital investment and hiring in the near-term.  New orders, a forward looking component, decelerated as well and may portend reduced manufacturing growth as 2015 matures.

Services added a little pressure to the gas pedal, increasing 0.2 percentage points for a reading of 56.7 in January.  Three of the four components were positive in the period.  Business activity accelerated which bodes well for first quarter gross domestic product (GDP).  New orders increased a touch, up 0.3 percentage points.  Deliveries were slower which could lead firms to put more money into the means of production.  The only slowdown came from the employment portion of the data, as the increase in hiring decelerated.

At some point, the driver must choose which pedal is needed at any particular moment.  Our economy may not have to reconcile the same dilemma.  Manufacturing has global headwinds (e.g. stronger U.S. Dollar, new questions about the fate of the Euro, and slowing foreign economies) that may make it difficult to justify letting off the brakes.  Nonmanufacturing is in a better position to take advantage of America’s improving condition since so few services are imported.  Only time will tell if our economy’s trajectory is destined for smoother movements than the herky-jerky nature of my earlier driving attempts.      (by C. Cox)

December 2014 Personal Income and Outlays

Tuesday, February 10th, 2015

Personal income increased in the final month of 2014, but the added pay did not translate into climbing consumption according to the Bureau of Economic Analysis.  Americans took home $43.1 billion more in the period, an increase of 0.3 percent over November, but consumption fell $40.0 billion.  This 0.3 percent decline in spending is attributable to many factors including softer prices, especially falling energy costs.

All categories of income improved in the period.  Wages and salaries, the largest source, grew by $6.9 billion, a deceleration from November’s $42.2 billion increase.  Proprietor’s income changed directions, adding $12.8 billion after falling $3.3 billion in the prior period.  Rental income doubled November’s uptick, growing $5.0 billion to end the year.  Government social benefit payments increased $12.7 billion; a portion of this jump is a result of a retroactive Social Security payment of $7.8 billion.   After taxes are removed from these figures, we are left with disposable personal income (DPI) or the money that consumers can put into the economy directly.  DPI improved 0.3 percent or $35.8 billion.

Unfortunately, the uptick in DPI did not translate into an increase in spending, but that means Americans’ savings rate improved.  Fewer goods were purchased as the year ended.  Both durable and non-durable spending were lower.  Nondurable consumption dropped for the second month in a row, down 1.3 percent in December (vs. off 0.3 percent in November).  Outlays for services were up just 0.1 percent.  Despite December’s decline, the fourth quarter of 2014 logged the largest personal consumption figure ever!  Finally, after subtracting taxes and expenditures, consumers put 4.9 percent away for a rainy day.

Like many nations around the globe, America experienced deflation in December.  The Personal Consumption Expenditure Price (PCE) Index dropped 0.2 percent for the second month in a row and is down over the last six months.  In order to create their favorite inflation gauge, the Federal Reserve takes this index and subtracts food and energy since these components can move erratically, creating the core PCE price index.  For the second month in a row, this inflation measure has been unchanged.  On a year-over-year basis, core inflation increased by just 1.3 percent, the lowest reading since March 2014.

American central bankers cannot be enthused by this report.  According to its jawboning, the Federal Reserve wants to increase the overnight lending rate, but this report pushes against their desire.  Outlays are dropping and prices have rolled over at a time when the central planners are trying to get prices to accelerate.  Is it too soon to make another round of quantitative easing an official Atlas prediction?  It may not be a prediction yet, but it is now an official lean.  (by C. Cox)

December 2014 Chicago Fed National Activity Index

Monday, February 9th, 2015

Output growth slowed below its recent level in December according to the Chicago Branch of the Federal Reserve’s National Activity Index (CFNAI).  This indicator is calibrated in such a way that the recent trend always equals zero.  Unfortunately, December’s tally fell short of that trend, dropping  -0.05 from an upwardly revised +0.92 (a very strong reading; originally +0.73) in November.  Since the indicator can be volatile month-over-month, Atlas watches the three-month moving average.   From this perspective, the economy is still growing above trend, but it decelerated to +0.39 from +0.54 in the prior period.

Internals were not strong.  Of its 85 components, 45 made a negative contribution to the indicator.  Fifty-two of the 85 deteriorated in the period.  Of the 33 that improved, 14 still made a negative impact.  Production-related components contributed -0.12 after a strong +0.71 in November.  Employment-related elements were somewhat lower, falling to +0.16 from +0.21 a month earlier.  The consumption and housing category fell to -0.12 from -0.03.

Our economy appears to have lost some steam at the fourth quarter came to a close.  Atlas expects this indicator will be watched closely in the weeks and months ahead by the Federal Reserve.  Our central bank is faced with a dilemma regarding its interest rate policy.  The central planners have been consistently suggesting their zero interest rate policy will need to come to a halt in 2015, but this indicator does not bode well for their argument.  When the three-month moving average of this indicator reaches +0.7, it suggests inflation pressures are  growing, but even after years of zero overnight interest rates and a tremendous amount of money printing,  this indicator has not reached its critical level and could be rolling over and heading in the wrong direction.  While there is no single piece of data keeping the Fed’s foot on the gas, the CFNAI must be adding some weight.              (by C. Cox)