Archive for April, 2015

No, you’re not in trouble…

Thursday, April 30th, 2015

We’re just disappointed.  Atlas follows many indicators, and we try to provide some perspective on the various components of our economy once the data are released.  However, we do not get involved in providing specific forecasts because even the best predictors are wrong most of the time, so we avoid this alchemic-like endeavor.   Of course, this does not keep the hubris of others from making predictions, and there are a few indicators that track whether or not the economy is keeping up with these economists’ expectations.  Lately, the economy has disappointed the prognosticators.

According to data from Bloomberg, the economy is disappointing analyst more than at any time since 2009.  Their proprietary Bloomberg Economic Surprise Index is sitting at its lowest level since the Financial Crisis.  This means that the professional forecasters were too optimistic about the economy; their complicated models did not recognize the slowing pace of output and job creation.  Perhaps they will tweak their presumptions and get more correct next time.

What stands out to Atlas is the apparent deceleration versus the forecaster’s rosier glasses.  Any number of causes share responsibility for the loss of velocity, and in a complex system like our economy, we may never fully understand the reasons it has slowed.  With any luck, our economy is not in immediate trouble, but it has certainly disappointed many, including your crew here at Atlas.   (by C. Cox)

March 2015 Durable Goods Orders

Wednesday, April 29th, 2015

Orders for wares expected to last longer than three years jumped 4.0 percent in March 2015 according to the Census Bureau.  This most recent uptick followed a 1.4 percent decrease in February, but durable goods orders (DGO) have been higher in two of the first three months of the year.  Unfortunately, most of the gains this year have been from aircraft orders which tend to be large and happen at irregular intervals.  Other segments of manufacturing have not enjoyed a similar trajectory.

Core durable goods orders continued their string of weakness.  This segment represents nondefense capital goods excluding aircraft, and Atlas sees it as a proxy for business confidence.  Falling for the seventh consecutive month, this important subset of DGO lost 0.5 percent in March.  On a year-over-year basis, core durable goods fell nearly 4.0 percent, the first such decline since January 2014.

Shipments suggest consumption of durable goods is weakening.  Even after an uptick of 1.1 percent in this latest reading, shipments declined for the second consecutive quarter.  Slower shipments do not argue favorably for gross domestic product (GDP) in the first quarter.  More specifically, shipments of core durable goods fell in March, and this downtick should show up as falling investment growth in the nation’s output figures; more on this will be revealed later this morning when GDP is released.

Core durable goods shipments are another indicator demonstrating a recent slowdown in our economy.  In addition to the weakening of this proxy for business investment, retail sales fell in the first three months of 2015 as did government expenditures.  Unless there was a material positive change in Americans’ demand for services and/or a significant tightening in the trade gap during March, output in America probably slowed in the first quarter; Atlas expects that this deceleration could contribute to the Federal Reserve’s continued rationalization for keeping the overnight interest rate low for the rest of the year.  Labor markets might spoil this point of view if job creation regains the upward velocity it lost in March because some Fed officials are worried about raising rates too late.  The next report on our nation’s employment situation is scheduled to be released a week from this Friday, so we will know more then.  For now, we know new orders for durable goods are contracting, and this does not bode well for capital investment the months ahead because fewer orders tend to turn into slower output.  (by C. Cox)

New Home Sales March 2015

Wednesday, April 29th, 2015

Don’t count the Spring daffodils just yet; not all the buds have burst.  New home sales moved in the opposite direction of their existing home counterpart in March 2015.  After a recovery high in February of 543,000 units (upwardly revised from 539,000), the number of purchases dropped to 481,000 on a seasonally adjusted annualized rate according to the Census Bureau.  This is 11.4 percent below the previous month’s level but 19.4 percent higher than a year earlier.

Perhaps there is something wrong with the Census Bureau’s seasonal adjustment.  A look back at previous years of data reveals that since 2012, March has always been lower than the previous month.  This may have something to do with the fact that February 2011 was the bottom of the market, so February’s seasonal adjustment factor could be too strong.  Of course, this is only an observation.

Per the report, regional figures were mostly weaker.  There were 3.4 percent fewer transactions in the West.  Southern buyers were reluctant to commit to a contract as sales in the South fell 15.8 percent.  Sales in the Northeast plummeted 33.3 percent.  However, Midwest new residential transactions improved by 5.9 percent.

Prices measures suffered in the period.  The average price of a new home fell $2,200 or 0.63 percent to $343,300.  The median priced home fell 1.5 percent and sold for $277,400.  Interestingly, the median price is lower than a year earlier, suggesting slower price gains for lower priced houses;  the median prices is down 1.7 percent versus March 2014, but the average price has gained 3.55 percent versus a year ago.

Inventory measurements were higher in the period.  There were about 4,000 more units on the market in March than in February.  Since the pace of sales slowed while the stock of homes grew, the amount of time needed to deplete the inventory increased to 5.3 months from just 4.6 months in the prior period.

Housing, especially new construction, remains an important part of the economy and is trending higher despite this monthly setback.  This segment of our nation’s output is likely to benefit from the continued economic expansion and relatively low interest rate environment. It will not likely see a major hiccup until interest rates begin rising materially, but that does not appear to be on the immediate horizon.          (by C. Cox)

March Existing Home Sales

Monday, April 27th, 2015

Spring may have sprung in the housing market.  According to the National Association of Realtors, existing homes sales jumped 6.1 percent in March 2015 after increasing just 1.5 percent (upwardly revised from 1.2 percent) in February.  The sharp increase helped push the year-over-year tally to 10.4 percent, a stark increase from 4.7 percent a month earlier.

All four regions of the country logged better numbers in March.  Sales in the South increased 3.9 percent in the period and are 11.7 percent higher than a year ago.   Transactions in the West improved 6.3 percent, and were 11.3 percent higher than March 2014.  Northeast sales posted an increase of 6.9 percent, and are 1.6 percent greater than 12 months ago.  Finally, Midwest transactions jumped 10.1 percent in the period and have tallied an increase of 12.1 percent in the past year.

Prices firmed.  The average existing home in America sold for $257,400 in March, an increase of 3.9 percent over February.   The median measure moved even faster, increasing 7.3 percent to $212,100 from $197,600 a month earlier; the median price improved in three out of the four regions with the Northeast being the only exception.

Interest rates remained helpful to the housing market.  Although it increased for the second consecutive month, the average commitment rate for a 30-year, conventional, fixed-rate mortgage was just 3.77 percent, according to Freddie Mac.  Despite the slight uptick from 3.71 percent in February, the monthly average remained below 4.00 percent for the fourth straight month.

Inventory measures were mixed.  The existing home market added roughly 100,000 units.  However, since the pace of sales improved faster than the increase in homes for sale, the inventory relative to sales decreased; it would now take 4.6 months to deplete the stock of existing homes for sale, a marginally tighter figure than the 4.7 month count a month earlier.

After a post-recession peak of 5.44 million annualized units in November 2009, the existing home market has meandered along.  March’s tally is the best monthly figure since September 2013, so better times could be ahead.  It is easy to imagine that certain parts of this country were impacted by the tough winter.  Perhaps pent up demand is blossoming as a new season matures.            (by C. Cox)

Greek Butterfly

Friday, April 24th, 2015

Initial conditions are an important determinant of outcomes.  In meteorology, something as innocuous as the air current caused by a butterfly’s wing in one region of the world is theorized to have some possible influence on future weather patterns elsewhere on the globe.  Based on some work done by the mathematician and meteorologist Edward Lorenz at the Massachusetts Institute of Technology, this influence was dubbed the Butterfly Effect.

Greece finds itself in a unique condition, and it is likely to have some impact on the global markets no matter how its situation is resolved.  The gorgeous isle nation has mismanaged it fiscal affairs, albeit with aid from multinational financial firms headquartered in New York, and is once again trying to find a way to avoid the likely serious repercussions of any resolution.  In 2012, markets were thrust into turmoil when the threat of a Greek default was making daily headlines.  Since then, global institutions have tweaked their balance sheets in preparation for this drama’s conclusion.  Are the actors now ready for the final act?

Greece’s elected officials are leaning hard against the demands of the European Union (EU) and the International Monetary Fund (IMF).  The anti-austerity Syriza party was elected in January 2015 in part because of its platform against more government spending cuts, the very things the IMF and EU are asking for.  Several paths may yet lead them out of this imbroglio but two possible conclusions still end in a large default. One would require that Greece leaves the euro currency altogether (aka Grexit); another resolution may let them remain in the currency union while still not paying in accord with the original terms of their loans.  Either way, there has to be some global impact, despite the preparations by large multi-national financial firms.  Perhaps our dollar strengthens further.  What would that do for our trade balance?  Or what if a large firm has not adequately prepared for the tornado created by a butterfly in Greece?  Could a storm emerging from their Chaos turn into the next illiquidity event?  Whether you like theatre or not, you have a ticket to the show.  (by C. Cox)

Below Average

Thursday, April 23rd, 2015

Our economy continued to weaken as the first quarter came to a close, according to the Chicago Fed National Activity Index (CFNAI).  March’s reading fell to -0.42 from the downwardly revised count of -0.18 (originally -0.12) in February.  These lower tallies pulled the three-month moving average down to -0.27 from the revised -0.12 (initially reported as -0.08) a month earlier.

This indicator is comprised of 85 components, and the majority of these segments made negative contributions and deteriorated in the period.  Forty-seven individual indicators had minus signs, while 38 were positive.  Forty-eight deteriorated and 37 improved versus a month earlier.  Production related indicators contributed -0.27 in March, down from -0.08 in February.  Employment measures moved from +0.11 to -0.03 in the period.  While it remained negative, the contribution from the personal consumption and housing category increased to -0.13 from -0.22 a month earlier.

When looking at this indicator, it is best to consider the three-month moving average because there are so many moving parts within the headline number; this average removes monthly noise and makes it easier to identify changes in the trend.  The current three-month average is at the worst level since October 2012.  Being less than zero is not an inherently bad (negative) sign, but it does suggest the economy is growing slower than its recent trend.  This average will need to deteriorate to -0.70 before concerns about recession arise.  However, this indicator is produced by one of the regional branches of the central bank, so its weakness is likely on the minds of some of the monetary policy makers as they come to terms with what do with the overnight interest rate.  Inflation has been mostly benign lately, and now this indicator shows a demonstrable deceleration occurred in the first quarter of this year.  When combined, these circumstances suggest to Atlas that Janet Yellen and the other members of the Federal Open Market Committee will remain patient with regards to monetary policy.       (by C. Cox)

March 2015 Consumer Price Index

Wednesday, April 22nd, 2015

Inflation remained tame for consumers in March 2015 according to the Consumer Price Index (CPI) most recently released by the Bureau of Labor Statistics.  Prices rose 0.2 percent, matching February’s uptick on a percentage point basis.  However, on a year-over-year basis, the index declined 0.1 percent before seasonal adjustments.

Declines in the food index were more than offset by price gains in energy and shelter.  Overall food fell 0.2 percent, but the food at home index dropped the most since April 2009, falling 0.5 percent in the period; good news for us vegetarians, the fruits and vegetables index fell 1.4 percent, its third monthly decline in a row.  However, energy was 1.1 percent higher than a month earlier, led by the gasoline and fuel oil indices.  Shelter rose 0.3 percent; rent and owner’s equivalent rent each rose 0.3 percent, and lodging away from home increased 0.4 percent.

After stripping out food and energy, core prices rose 0.2 percent in March.  Year-over-year core inflation increased by 1.8 percent, rising for the third consecutive month and inching closer to a level that is in line with the Federal Reserve’s desired level at or slightly above two percent.  Shelter and medical care have led the core measure higher in the last twelve months as their indices have increased 3.0 percent and 2.5 percent respectively.

The CPI appears to be starting to rise.  Services like shelter and medical car are leading this indicator higher.  Some of our central bankers may become alarmed about inflation edging closer to their explicit 2.0 percent target; however, Atlas is not too concerned yet because other data suggest the economy has been softening, and our dollar is still relatively strong versus other currencies.  Both of these factors should help keep the price of goods from increasing too quickly.  Atlas still expects the central bank to remain cautious while adjusting rates, but services are a large part of the economy, so we will be keeping a particularly close watch on their price movements in the months ahead.    (by C. Cox)