Archive for April, 2015

March 2015 Leading Economic Index

Tuesday, April 21st, 2015

Economic growth appears to be set for continued slowing according to data in the latest release of the Leading Economic Index (LEI) from the Conference Board.  After increasing by just 0.1 percent in February, the index managed to improve 0.2 percent in March, but the trend is moving lower.

Signs of slowing were found in many components of the economy.  Building permits were the biggest drag on index.   Next, both the average workweek for production employees and new orders from the Institute for Supply Management also subtracted from the total.  Even the financial components of the index worsened overall; the leading credit index added less than a month earlier, stock prices contributed nothing to the total, and the interest rate spread between the overnight Federal Funds Rate and the 10-year treasury provided the same drag to the headline as a month earlier.  Only the average weekly initial claims for unemployment made a noticeable positive contribution.

Atlas sees the trend in this indicator as the most significant development in the March report.  Both the year-over-year and six-month averages slowed in the period.  These slowing trends do not necessarily portend a change in the business cycle, especially since the LEI has predicted many more recessions than have actually occurred, but do add another morsel of evidence that the economy is not likely to run red hot, thus allowing the Federal Reserve to remain patient in its monetary policy for the remainder of this year.  (by C. Cox)

March 2015 Industrial Production

Monday, April 20th, 2015

America’s output of physically made goods decreased in March 2015 according to the Federal Reserve’s report on Industrial Production.  After a minor uptick of 0.1 percent in February, the indicator ended the first quarter by falling 0.6 percent.  Year-over-year, this indicator has grown 2.0 percent, slowing dramatically from an annualized 3.6 percent a month earlier.

Industry results were mixed but mostly lower.  Mining fell 0.7 percent in the period; a majority of this drop was created by the 17.5 percent decline in the index for oil and gas well drilling.  Utilities fell 5.9 percent, erasing all of the prior period’s uptick of 5.7 percent and then some as March’s temperatures warmed versus the cold of February.  Only manufacturing, the largest industry within the report, recorded an increase, growing 0.1 percent.

Capacity utilization was lower.  Dropping to 78.4 percent from 79.0 percent, this measure has been lower in every month since December 2014.  Part of the drop is due to the economy’s growing capacity which is now 3.0 percent higher than a year earlier, but slowing output is also accountable.

Industrial production is an indicator that causes some concern about the economy here at Atlas.  All first quarter data has been released, and the results are not favorable.  This measure of output fell at an annual rate of 1.0 percent, the first quarterly decrease since the second quarter of 2009.  Energy prices cannot be fully blamed for the decline since the biggest contributor, manufacturing, contracted overall in the first three months of the year.  In addition, capacity utilization has been falling recently which may add downward pressure to inflation measures.  All of this argues in favor of the central bank delaying its interest rate increases.  Patience will be required as we all wait to see how their policy unfolds.           (by C. Cox)

Cooing Doves

Friday, April 17th, 2015

Central bankers tend to get categorized into one of two camps, doves or hawks.  Those that lean toward a more accommodative approach to monetary policy fall into the dove camp, and the relatively less indulgent are considered hawks.  As financial data are released, they tend to support, incrementally, one side or the other.  Coming into 2015, many thought the economy was strengthening to a level that would allow a more hawkish approach as the year wore on.  Lately there have been some bumps in the road that have made it harder to presume the inevitability of higher overnight rates.

Economic data are coming in soft relative to a quarter earlier.  Many indicators suggest growth in gross domestic product slowed in the first three months of this year compared to the fourth quarter of 2014 (we’ll know more at the end of this month).  In addition, the most recent jobs data was considerably weaker than its trend.  One of the central bank’s mandates is to promote full-employment, so the unemployment report will garner even more attention in the months ahead because the Federal Reserve needs to know if the pace of improvement in the labor market is slowing.

Along with full-employment, price stability is the other mandate given to our central bank by Congress.  Here, the Federal Reserve’s goal is for inflation to increase by 2.0 percent a year, but this has not been happening according to various measures of price.  Now a recent report from the Bureau of Labor Statistics (BLS) shows prices for imports and exports are deflating!  Atlas mentioned the idea of importing deflation in our note on February 27th, and evidence supporting the concept is mounting.  The BLS shows import prices have collapsed 10.5 percent in the last twelve months.  Of course, the plummeting price of petroleum made a major impact on this figure, but nonfuel prices still deflated 1.9 percent from March 2014 to March 2015.  To stay competitive, American companies may feel a need to price their goods lower to match their imported counterparts, thus likely keeping a lid on higher prices.

There is a lot of chatter in the financial press about when the Federal Reserve will make a change to its zero interest rate policy (ZIRP).  At the beginning of the year, most pundits expected the central bankers to begin increasing the rate at its June meeting.  However, the economy got off to a sluggish start as the calendar turned and these same talking heads began to push back the date of their predicted rate hike.  Data pointing to a weaker economy, a slowing labor market, and low inflation feeds the doves within our central bank.  If a tenuous trend is developing, cooing doves may drown out the sound of screeching hawks, causing ZIRP to remain the Federal Reserve’s chirp.    (by C. Cox)

March 2015 Retail Sales

Thursday, April 16th, 2015

Americans consumed more from retail establishments in March than a month earlier according to the Census Bureau.  In total, $441.4 billion was spent in the period, an increase of 0.9 percent from February.  This tally is 1.3 percent higher than March 2014.  Also, the first quarter’s total improved by 2.2 percent versus the same period a year earlier.

Most categories in the report were higher than in February.  Americans spent more on automobiles, furniture, building materials, health & personal care, clothing, sporting goods, and general merchandise.  Atlas’ favorite component, food services & drinking places, also showed an improvement after declining a month earlier.  We pay particular attention to this segment because it represents an easily substituted discretionary expenditure.  If Americans are looking to spend less money, this is likely to be one of the first areas of the household budget to be cut.  March data show no sign of a change in the component’s upward trend.

First quarter retail sales lagged the prior quarter but ended on a high note.  This indicator demonstrates the slow pace of the economy as the year began.  However, March’s tally is a silver lining because it was the first time since November that the indicator improved on a monthly basis.  It is reasonable to infer the economy is thawing out after a challenging winter, analogous to the same period last year.  Consumer attitudes and spending in the next few months should help explain whether or not the recent slowdown has been a function of weather or is something more pernicious, like a change in the business cycle.              (by C. Cox)

March 2015 Producer Price Index

Wednesday, April 15th, 2015

Prices paid by wholesalers and producers rose in March 2015, the first increase since October 2014 according to the Bureau of Labor Statistics.  The uptick of 0.2 percent followed decreases of 0.8 percent and 0.5 percent in January and February respectively.  On a year-over-year basis, the indicator is still deflating, down 0.8 percent.

Most of the headline tally is attributed to an increase in the price of goods.  After dropping 0.4 percent a month earlier, their prices increased 0.3 percent in March.  However, food prices still fell and have not been positive since November.  Energy was 1.5 percent more expensive in the period.  Of course, food and energy are volatile, so it is useful to exclude them from the total and look at the core measure of goods; it was up 0.2 percent, following two consecutive months of lower prices.  Service costs, representing the other side of the economy, ticked up 0.1 percent after deflating in the previous two months.

Earlier stages of goods production continue to show signs of deflation while the trend in services remained modestly higher.  Prices for processed goods for intermediate demand fell for the eighth consecutive month, dropping 0.1 percent.  Costs for unprocessed goods for intermediate demand fell 1.7 percent and have fallen in 10 of the last 11 months.  Services for intermediate demand rose 0.2 percent and are up 1.0 percent on a year-over-year basis.

While upward price pressures are not yet materializing, the deflationary trend seems to be moderating.  Looking at the twelve-month percent change in the headline figure, the rate of decline is merely slowing.  For now, this indicator continues to suggest to Atlas that the Federal Reserve will be cautious in its approach to raising the overnight bank lending rate.  Until the central bank sees an inflation trend closer to its 2.0 percent target, it seems most likely that these planners will keep the rate at or near the zero lower bound.         (by C. Cox)

March 2015 Treasury Budget

Tuesday, April 14th, 2015

America’s debt increased by $52.9 billion in March 2015 according to the Treasury Department.  The monthly deficit was an improvement over February’s $192.4 billion shortfall.  However, compared to a year ago, it worsened from March 2014’s deficit of $36.9 billion.  Year-to-date, our nation’s deficit is $439.5 billion, an increase of 6.3 percent.

America’s improving economy is keeping this figure from becoming worse.  As our output grows, Americans pay more taxes; this additional revenue, along with other increasing receipts, has partially offset the government expenditures uptick in fiscal 2015.  Year-to-date, revenue to the government has improved 7.3 percent versus a year earlier.  Outlays have grown by just 7.1 percent.  At first glance, this looks good.  However, since outlays are a larger figure than receipts, the net result is a larger deficit so far this fiscal year.

At the current stage of the business cycle, the monthly deficit and America’s overall debt do not appear to be concerns for investors or the economy.  Despite the large debt profile of our nation, the country can borrow at relatively low rates, suggesting market participants remain confident in America’s ability to make good on its promise of repayment.  Atlas, like many of our clients, is concerned about the long-term risks associated with the country’s debt, but for now it appears to be an issue over which we need not fret.             (by C. Cox)

March 2015 Institute for Supply Management

Monday, April 13th, 2015

Economic activity seems to have decelerated in March 2015, according to data from the Institute for Supply Management (ISM).  While both segments of output slowed, services remained strong.  Unfortunately, manufacturing’s tally dropped to 51.5 (the lowest level since May 2013) from 52.9 in February, inching ever closer to the 50.0 mark which is a level associated with stagnation.  Meanwhile, nonmanufacturing dropped to 56.5 from 56.9 in the prior period, but this is nowhere near the stall speed level.

Manufacturing is subject to more influence from the global economy than its service counterpart, and March’s survey is reflecting this impact. Export orders dropped 1.0 percentage point to 47.5, a level that suggests exports should contract in the months ahead.  For some perspective, this most recent decline is the third consecutive monthly drop after 25 months of continuous growth.  Of the thirteen exporting industries in the survey, eight noted decreasing orders in the period.  Before this segment of today’s missive becomes too glum, it should be noted that the overall manufacturing tally has grown (meaning a reading above 50) for 70 months in row.

Nonmanufacturing experienced a slight setback, but its reading is still indicative of a healthy economy.  Not only was the headline figure strong, but an important leading component showed additional promise with new orders accelerating to 57.8 versus 56.7 a month earlier.  This bodes well for the near-term future of services, the largest segment of our economy.

In all, this iteration of ISM demonstrated the global situation.  America’s manufacturing base is suffering at the hand of global trade patterns, something to which services are largely not subject.  Nonmanufacturing continues to ride the coattails of America’s strength, but even so it lost some momentum in March.  U.S. output is still moving forward, but its rate of increase has slowed.             (by C. Cox)