Archive for June, 2015

April 2015 Income and Outlays

Tuesday, June 9th, 2015

Consumption comprises about two-thirds of America’s output, so when the Bureau of Economic Analysis released the April 2015 report on Income and Outlays, its results disappointed Atlas.  Yes, income levels rose 0.4 percent in the period, but spending remained unchanged.  After contracting from January through March, our nation’s gross domestic product (GDP) does not appear to have gotten off to a fast recovery in the second quarter.

All sources of income increased in the period.  Wages and salaries (the largest sources of income) improved by $17.7 billion after growing $9.5 billion in March.  Proprietors took in $2.5 billion more than a month earlier.  Rental income generated $3.9 billion more income than in the prior period.  Interest and dividend payments increased by $26.6 billion after falling $30.9 in March.  After taxes, disposable personal income improved 0.4 percent or $48.8 billion.

Additional income primarily helps the economy when the recipients spend it, but that did not happen to start the second quarter.  In fact, it actually dropped $2.6 billion; in an economy as large as America’s marketplace, this is a rounding error, so the official statistic shows no change in April.  Even when adjusted for inflation, outlays were unchanged.

All of the added income did not just disappear.  Instead, Americans increased their savings rate to 5.4 percent in the period from 5.2 percent in March.  Americans have saved 5.0 percent or more for five consecutive months.  This is the longest streak since 2013 where the savings was rate above this threshold.

Inflation measures, including the Federal Reserve’s favorite gauge, were low.  On a month-over-month basis, the Personal Consumption Expenditures Price Index was unchanged.  This same measure has only increased 0.1 percent in the last twelve months.  However, the Federal Reserve prefers to remove food and energy when looking at inflation because these components are volatile.  This subset of the consumable goods and services increased 0.1 percent in April and has grown 1.2 percent in the past year.  This year-over-year figure disinflated from 1.4 percent a month earlier.

There does not appear to be a lot in this iteration of incomes and outlays that would pressure the Federal Reserve to make changes to its policy on Fed Funds Rate.  Our economy’s sails are not full of wind, and inflation is moving away from their explicit 2.0 percent target.  However, the labor market seems to be moving with a full head of steam.  For now, these two important indicators appear to be at odds with one another.  One will have to give way to the other, either spending increases to support additional hiring or the labor market could cool off.  Atlas would like to see the former put an end to this quagmire.               (by C. Cox)

Revised First Quarter 2015 GDP

Monday, June 8th, 2015

Gross domestic product (GDP) was lower than initially counted in the first quarter of 2015 according to the revised tally from the Bureau of Economic Analysis.  America’s output contracted 0.7 percent on an annualized basis, down from +0.2 percent in the preliminary release.  Not long after the initial estimate was made, trade data for March 2015 were released, and they were dramatically worse than the prior two months in the quarter.  Atlas mentioned this likely GDP contraction in our May 7th 2015 note about the March trade deficit.

As more information becomes available, figures from most segments of the economy are revised. Personal consumption (the largest contributor to America’s output) was lower than first counted, adding just 1.23 percentage points to the total instead of 1.31 in the preliminary tally.  Private investment was revised slightly lower, adding just 0.12 percentage point from the total instead of 0.34 percentage point as was first thought.  Governments were more austere than first estimated as their contribution was revised lower to -0.20 percentage point versus -0.15 percentage point in the preliminary count.  Finally, net exports subtracted 1.90 percentage points from the growth rate, initially estimated as -1.25 percentage points.

After the economy contracted from January through March in 2014, output in the next two quarters came back strong.  Initial data from the indicators Atlas watches are not suggesting a similar acceleration in the bounce back this year.  Fortunately, the contraction in the first quarter of 2015 was not as serious as the downtick a year earlier, so growth in the final 9 months of this year will not need to have the same velocity in order for 2015 to achieve similar or better results than calendar year 2014.     (by C. Cox)

Going Public

Friday, June 5th, 2015

In a public speech yesterday, the head of the International Monetary Fund (IMF), Christine Lagarde, suggested it would be better for the Federal Reserve to leave the Federal Funds Rate at zero for a while longer.  Madame Lagarde said she would like to see our central bank wait until the first-half of 2016 before taking the overnight lending rate off of zero.  The IMF seems to feel the global economy is too fragile to handle a rate increase in America before the start of next year.

When the headline first came out, one could not help but wonder why the IMF was taking the unprecedented step of addressing the world’s most influential central bank in such a forum.  Christine Lagarde must have a motivation for the public comments, right?  Perhaps conditions in overseas markets are worse than is generally understood, and with a country like Greece perpetually on the verge of default, it is already widely accepted that the state of things in Europe is far from optimal.  But is it even more dire than is currently apparent to Atlas and others?

Many economists expected our central bank to increase rates in the first six months of this year.  While June is far from over, it looks as if a rate hike will not manifest.  In 2014, Atlas starting mentioning 2016 as likely the year in which rate hikes would begin.  Our primary concern was the lack of upward price pressure in the various measures of inflation.  For the most part, inflation has remained low relative to our central bank’s explicit target of 2.0 percent.  However, the Federal Reserve operates under a dual mandate created by Congress in 1977 when it amended The Federal Reserve Act.  This piece of legislation requires the central bank to monitor both employment and price stability.  From the looks of things, the labor market is getting healthier each month. We’ll know more about that in a few hours when the Bureau of Labor Statistics releases the results of their most recent survey (the May employment report; we’ll tell you more about it in a subsequent blog), but in the meantime other labor market indicators have also been strong.

Whatever the central bank does, there will be unintended consequences.  For example, if the state of Europe is more fragile than is generally understood and the Federal Reserve does not heed Madame Lagarde’s warning, conditions may deteriorate further both here and, as a consequence, in Europe.  However, there cannot be a free lunch, so if the overnight lending rate remains pegged to zero, unknown imbalances are likely to continue growing.  In other words, negative consequences that have already started to develop as a byproduct of experimental monetary policies will probably be exacerbated

So, what is the Federal Reserve to do?  Does it begin entertaining the requests of outside organizations?  Because it is ultimately beholden to Congress, probably not.  Many forecasters expect the group to begin raising rates before the end of this year because the Fed is supposed to be focused on the U.S. economy, and these prognosticators are worried about the labor market reaching full employment which tends to add inflationary pressures to an economy.  Despite the unparalleled nudge from the IMF, the central bank will probably make its decision based on the dual mandate, which in turn makes inflation data, not Christine Lagarde, the thing to watch in the weeks and months ahead. (by C. Cox)

May 2015 Consumer Attitudes

Thursday, June 4th, 2015

Polls surveying consumer attitudes were mixed in May 2015.  The Conference Board’s Consumer Confidence level improved to 95.4 from 95.2 in April.  However, Americans surveyed for the University of Michigan’s Consumer Sentiment were less enthusiastic as this reading dropped to 90.7 from 95.9 from a month earlier.  Each of these measures is lower than their cycle peaks earlier this year.  Attitudes are still good, but they have been better.

Consumers are showing more concern over their current situation.  In the University’s survey, the current conditions component dropped to 100.8 in May from 107.0 in April.  The labor market was mixed in the minds of those polled by the Conference Board.  There was a larger change in the number of Americans classifying jobs as “plentiful” than those feeling labor opportunities were “hard to get.” The “plentiful” reading moved to 20.7 percent from 19.0 percent, but the “hard to get” measure moved up to 27.3 percent from 25.9 percent a month earlier.  In all, the gap between the two groups is narrowing but there is still a larger cohort expressing that the labor market remains challenging.  Fortunately, the Conference Board’s findings suggest consumers, in aggregate, feel business conditions are improving; this is because the decline in the number saying business conditions are “good” was smaller than the decline the number of Americans describing the conditions as “bad.”  Two negatives made a positive.

Unfortunately, outlooks dipped in both surveys.  The University’s expectations component dropped to 84.2 from 88.8 in April.  The Conference Board’s measures for the near-term future edged down as the percentage of consumers expecting business conditions to improve over the next six months inched up to 15.6 percent from 15.4, but the percentage of those who anticipate worsening conditions increased 1.7 percentage points to 10.8 percent.

Consumer attitudes are not bad, but they are not improving, and it is the rate of change that is most important.   Atlas is more concerned with measuring “better or worse” than the “good or bad” of things.  In the case of consumer attitudes, while the levels could be classified as “good,” the readings have worsened over the last several months.     (by C. Cox)

April 2015 Orders for Durable Goods

Wednesday, June 3rd, 2015

After surging 4.0 percent in March, durable goods orders (DGO) dropped 0.5 percent in April 2015 according to the Census Bureau.  On a year-over-year basis, these orders have declined for the third consecutive month and have been less than zero in five out of the last six months.  While these headline figures appear discouraging, a further look into the report yields some encouragement for the balance of this year.

Transportation wreaked havoc on the headline tally, but other components improved.  On its own, transportation fell 2.5 percent, its second decline in three months.  However, removing this volatile category leaves 0.5 percent growth in the rest of the indicator.  Looking at “core” durable goods orders which exclude both transportation and defense spending, we are provided an insight into the attitudes of businesses.  These capital goods orders increased 1.0 percent in the period, the second consecutive month of improvement.  These indicate firms are looking to spend money on their means of production and should turn into output during the months and quarters ahead.

April’s DGO release leaves plenty to be desired but is far from awful.  Economically, this year is not off to a tremendous start, but the recent new orders from businesses could help the gross domestic product statistic in the last half of the year as these requests are completed.  Of course, business investment is a relatively small component of our nation’s output, so consumers will need to pick up the pace of their spending if the final six months of 2015 are to be better than the first six.      (by C. Cox)

April 2015 New Home Sales

Tuesday, June 2nd, 2015

The volume of new home sales jumped 6.8 percent in April according to the Census Bureau.  The uptick to 517,000 units on a seasonally adjusted annualized rate is higher than March’s revised total of 484,000 (originally 481,000).  The monthly total has improved by 26.1 percent from 410,000 in April 2014.

Regional data was mixed.  Sales dropped in the Northeast and the West, falling 5.6 percent and 2.3 percent respectively.  Transactions grew 5.8 percent in the South, but this was not enough to make up for the 11.8 percent drop within this portion of the country a month earlier.  Midwest sales jumped 36.8 percent in the period as 21,000 more units were sold in April than in March.

Price measures were mixed.  The median price increased 4.1 percent to $297,300; it is up 8.3 percent in the past twelve months.  The average price fell to $341,500 in April, a decline of 0.5 percent for the period, but this measure is up 5.0 percent since the same month last year.

Housing’s trend remains positive. This segment of the economy is not as large as it was prior to the financial collapse but remains important.  When families move into new homes, other spending tends to occur.  Yards need to be landscaped, rooms must get decorated, and house warming parties have to be thrown.  This is all in addition to the team of professionals required to buy a home (think mortgage lenders, title officers, and moving companies).  There are many knock-on effects associated with this portion of the economy, and continued improvements in this area will help reinforce the foundation of our economy.              (by C. Cox)

April 2015 Consumer Prices

Monday, June 1st, 2015

Prices paid by consumers moved higher in April according to the Consumer Price Index (CPI) produced by the Bureau of Labor Statistics.  The headline count puts the price increase at 0.1 percent in the period.  However, on a year-over-year basis, CPI has actually declined 0.2 percent.  If food and energy are removed, the narrative change; core prices went up 0.3 percent for the month and 1.8 percent in the last year.

One thing bothering the Atlas crew lately has been the possible influence of currency trends and energy prices on this and other price measures.  For this reason, more attention will be paid to the services portion of the economy in this missive.  Services are not subject to the vagaries of currency exchanges in the same way goods are impacted.  Americans tend to see the same dentist even if another country’s currency is weakening against the dollar, right?  Within the CPI report is a line dedicated to services without energy services.  During April, it increased 0.3 percent, matching the headline figure mentioned earlier.  However, its year-over-year count is up 2.5 percent from a year earlier.  As you may recall from some of our postings on personal consumption expenditures, roughly 2/3 of personal spending is done on services, so inflation is making an impact on households.  For example, my neighbors took some out of town guests to the happiest place on earth, and I nearly fell over when he told me the price per ticket.  I reminded him that wasn’t their 60th anniversary; they went nonetheless.

Upward price pressure could be forming under the surface of the various measures of inflation.  This could be something short-lived if demographics play a large enough influence, but for now it is garnering more attention here at Atlas.  If energy prices continue to move away from their recent bottom, CPI could see some momentum build in the months ahead.  No doubt, this will influence interest rates and possibly the central bank’s policy on overnight lending.              (by C. Cox)