Archive for May, 2015

No Longer Charging Into the Future

Friday, May 29th, 2015

It is no secret that America’s economy is dependent on consumers.  According to the latest gross domestic product figures compiled by the Bureau of Economic Analysis, personal consumption expenditures made up 68.5 percent of our nation’s output in the first quarter of 2015.  Any impediment to Americans parting with their cash, whether current or future earnings, could pose a threat to the current economic expansion.

Earlier this month, the Federal Reserve Bank of New York released its Quarterly Report on Household Debt and Credit for the first quarter 2015.  According to their data, debt growth is slowing.  In the period, there was only an inconsequential increase in mortgage balances, the largest component of household debt.  Also, home equity lines of credit remained unchanged in the period.  However, there was an uptick in non-housing debt balances of 0.7 percent.  This was mostly caused by an increase in student loans (up $32.0 billion) which were only partially offset by the $16.0 billion reduction in credit card balances.

It’s the last category that is the most challenging to our economy.  John Maynard Keynes popularized the paradox of thrift.  To wit, if one person saves (or pays down debt), it is good for the individual.  However, if a large portion of the population is squirreling away money, less demand could cause a nation’s output to fall, thereby reducing aggregate wages enough to actually lower overall savings.

Does this obscure report point to higher savings and lower growth levels?  Perhaps, but it cannot be considered conclusive; however, if it is this phenomenon, it could be a result of something Atlas has been harping on for years: demographics.  As the aging baby boomers edge closer to, or in some cases further into, retirement, credit card debt and the rates charged on these balances threaten their ability to die before running out of money.  This risk could be putting downward pressure on consumption for years.           (by C. Cox)

April 2015 National Activity Index

Thursday, May 28th, 2015

Economic output remained beneath its recent trend in April 2015 according to the Chicago Fed National Activity Index.  However, the tally did edge closer to this trend, improving to -0.15 from -0.36 (upwardly revised from -0.42) in March with a reading of zero representing the trend.  This early look into second quarter output suggests the sluggishness of the first quarter did not cease just because a new period began.

Internals were mixed in the report.  Employment data were the best, contributing 0.08 to the figure after subtracting the same amount a month earlier.  Personal consumption and housing remained negative but was less so than in March, improving to -0.06 from -0.12 in April.  While unchanged from a month earlier, production subtracted the largest amount from the tally with its -0.16 reading.  Overall, 38 of the 85 individual indicators made positive contributions while the other 47 made a negative impact.  There were more improving components (46) than those that deteriorated (37) with two remaining unchanged.

Many analysts expect growth in the second quarter of 2015 to bounce back, but this early indication does not support their story.  Instead, it looks as if some of the first quarters’ weakness has bled into the second quarter.  This puts our central bank in an interesting predicament.  These planners are trying figure out a way to normalize the overnight interest rate which currently sits virtually at zero.  They would like to get it somewhat closer to two percent before the next recession but are afraid raising rates could actually ignite another contraction.  More data is necessary to know if the economy is strengthening or losing steam, but for now it appears slower than trend growth is the most likely outcome in the current quarter.  (by C. Cox)

April 2015 Existing Home Sales

Wednesday, May 27th, 2015

Sales of existing-homes declined in April 2015 according to the National Association of Realtors.  On an annualized basis, 5.04 million homes were sold, a decline of 117,000 or 3.3 percent versus a month earlier.  April is the second straight month in which annualized sales have been greater than five million.  From a year ago, sales have increased 6.1 percent.

Three of the four regions contracted in the period.  Sales in the West slumped 1.7 percent.  Transactions in the Northeast declined 3.1 percent.  Existing-home sales in the South, the largest region, declined 6.8 percent.   However, realtors in the Midwest executed 1.7 percent more sales than in March.

Prices were higher in the period.  Rising for the 38th consecutive month, the median price rose to $219,400, an increase of 4.1 percent over March and 8.9 percent from a year earlier.  The average price rose 3.2 percent in the period and is up 5.5 percent in the past 12 months.  Cooperative rates may have helped price measures as the cost to borrow remained subdued in the period.  According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 3.67 percent from 3.77 percent a month earlier, remaining below 4.0 percent for the fifth consecutive month.

Inventories rose in the period.  The total number of homes for sales jumped 10.0 percent to 2.21 million units.  At the current pace of sales, it would take roughly 5.3 months to deplete the supply of homes on the market, up from 4.6 months in March.

Despite the monthly setback in sales volume, the existing home market continues to heal. Interest rates are still low enough to have a positive bias for this marketplace.  The stock of homes remains tight relative to the historic norm; anything less than 6 months has been seen as the threshold for a normal supply.  While the sale of an existing home does not directly add to our nation’s output, several ancillary industries are impacted by these transactions.  Lenders, appraisers, title researchers, movers, and furniture sales all benefit when you or your neighbor moves.  For now, there appears to be enough activity in this “used good” marketplace to consider it a contributor to the American economy.  (by C. Cox)

April 2015 Leading Economic Index

Tuesday, May 26th, 2015

According to the Conference Board’s Leading Economic Index (LEI), our economy should continue to grow in the near-term.  This 10-component index increased 0.7 percent in the period, accelerating from March’s upwardly revised improvement of 0.4 percent (originally 0.2 percent).  In the six months ending April 2015, the LEI increased 2.0 percent (roughly 4.0 percent on an annualized basis); unfortunately, this is slower than the 3.5 percent growth in the previous six months.

This most recent increase was led by an outsized jump in building permits but had other positives as well.  Firms appear to be gearing up to accelerate their pace of construction, causing permits to rise.  Interest rates also made a considerable contribution to the indicator, as the difference between the overnight interest rate set by the Federal Reserve and the rate paid on a 10-year treasury bond remains relatively wide; prior to March, this had been the largest contributor to the index for many consecutive months.  Credit availability and jobless claims also pushed the index higher in April.   The only negative contribution came from the Institute for Supply Managements New Orders tally.

Our economic expansion appears to have life left.  However, this latest acceleration in the LEI was rather unbalanced and could prove unsustainable for that reason.  Anytime something takes an unusual jump, as was the case with building permits in April, it is reasonable to expect the component to revert to its mean in the near-term.  Because of this reversion to the mean phenomenon, it will not surprise Atlas to see weaker growth in the LEI soon unless other areas of the economy begin to increase at a faster rate.       (by C. Cox)


Friday, May 22nd, 2015

I’ve heard it said that history doesn’t exactly repeat itself, but it does tend to echo.  The same could be said about certain cycles which seem to permeate history.  The rise and fall of great empires for instance.  Or the shorter eighty year cycle that seems to punctuate American history.  The book Generations by Strauss and Howe is a fascinating read; it develops this theme quite convincingly.

Cyclical turning points can be marked by significant events.  For instance, the 2009 financial system rupture seems to have led to an ongoing state of uncertainty.  Try as they will, the world’s central banks continue throwing huge buckets of money into the global system in an attempt to stimulate the economy and resurrect growth.  To date these efforts seem to have yielded less than desired.   Nowhere in the developed world have we seen an economy recover to its historic growth trend.

Hoping stimulus would lead to a wealth effect among citizens that would in turn bolster spending and the hoped for recovery has not been successful.  This comes as no surprise to Atlas.  We feel excessive money creation can’t compensate for pernicious demographic trends.  More specifically, since the collapse, most people seem to be saving more relative to such a desired increase in their spending.  In other words, current circumstances seem to scare the heck out of folks for reasons they can’t quite define.

Do you hear an echo?  Back in 1933, incoming president Franklin D. Roosevelt said “the only thing we have to fear is fear itself.”  His words then and our somewhat similar circumstances now fit quite well with the 80 year cycle paradigm Strauss and Howe developed.  Of course, an obvious turning point for the economic dilemma confronting governments today is the banking collapse that culminated in 2009.  Let’s see, what would you get if you subtracted 80 years from 2009?                     (by J R and C. Cox)

April 2015 Industrial Production

Thursday, May 21st, 2015

Output of physically made goods (paperclips to airplanes) has experienced considerable friction this year.  Industrial production declined in April, falling 0.3 percent, according to the Federal Reserve, the fifth consecutive monthly drop.

Not a single major industry group increased output in the period.  Manufacturing was the best performer and it did not grow at all.  Mining output contracted 0.8 percent, the fourth consecutive decline; oil and gas well drilling continued to lead the industry lower.  Utilities dropped 1.3 percent in April.

Capacity utilization contracted in the period, falling to 78.2 from a revised 78.6 in March (originally 78.4).  Demand for the goods of various industrial firms was too weak to employ the means of production (labor and capital) at the same pace as a month before.  In other words, companies may have asked workers to go home early or reduced their payroll levels.  This was evident in the weak manufacturing numbers within the latest employment report.  Also, this does not bode well for capital investment because companies seem to have enough machines on hand to meet the current level of demand; Atlas will look for signs of this within the details of the next Durable Goods Orders release.

The trend in this indicator is under considerable pressure.  On a year-over-year basis, industrial production peaked in June 2010 and has meandered under the 5.0 percent level since roughly January 2011.  However, it slowed considerably at the start of this year, dropping from 4.6 percent in December 2014 to just 1.9 in April.  Industrial production tends to be more sensitive to the business cycle, so this weakening will likely cause some at the Federal Reserve to be even more cautious about the overnight interest rate policy.  While industrial production is not important enough on its own to cause the central bank to delay the inevitable increase of the Fed Funds Rate, it likely adds to the planner’s concerns.              (by C. Cox)

April 2015 Producer Prices

Wednesday, May 20th, 2015

Producers and wholesalers paid less for good and services on average in April 2015 according to the Bureau of Labor Statistics.  The monthly change for the Producer Price Index for final demand dropped below zero once again, falling 0.4 percent.  This followed March’s uptick of 0.2 percent, the only reading above the unchanged level since October 2014.  Year-over-year, the headline tally has not breached zero since December 2014, and it worsened in April to -1.3 percent from -0.8 percent a month earlier.

Both sides of the economy exhibited deflation in the period.  Final demand goods fell 0.7 percent.   Energy led this count lower, declining 2.9 percent.  Foods moved in a similar direction declining 0.9 percent.  Services dropped for the third month this year, slipping 0.1 percent.  Trade services led this portion of the economy lower caused by falling margins received by wholesalers and retailers.  Excluding trade, transportation and warehousing (publishing, lodging, banking, and healthcare for example), service prices rose 0.2 percent during the month.

Earlier stages of demand were mixed.  Processed goods for intermediate demand dropped 1.1 percent in April and are down 7.8 percent from a year ago.  Food and energy led this segment lower for the month as they were down 1.7 percent and 3.4 percent respectively.  However, the earliest stage of physical output, unprocessed goods for intermediate demand, increased for the first time in seven months, up 0.9 percent; in this stage, both food and energy costs were higher.  Despite the modest pickup in April, the year-over-year change for this earliest stage has collapsed 26.6 percent!  Finally, services for intermediate demand were 0.5 percent more expensive than in March.  Here, the twelve month change is the highest since December when it was also up 1.8 percent.

This indicator’s headline number has spent most of the last twelve months near or below zero.  However, there could be some change in the direction of the tally next month.  As Atlas noted in the retail sales missive a few days ago, energy prices have been moving higher in the past few weeks, and this could put upward pressure on the overall prices for goods.  Coupled with the apparent resistance to a strong decline in service prices, we feel this indicator could be beginning an upward trend.  If so, a period of outright deflation here in the U.S. might be avoided, a goal at the forefront of Federal Reserve policy.  If such a trend toward higher prices does manifest, Atlas worries that it may not have enough staying power to allow the central bank to begin raising rates to any meaningful extent.       (by C. Cox)