Archive for July, 2015

Existing Home Sales June 2015

Thursday, July 30th, 2015

Sales of existing homes increased 3.2 percent in June according to the National Association of Realtors.  On an annualized basis, there were 5.49 million units sold.  This is the best monthly total since February 2007, before the great recession.  Year-over-year, the total has improved by 9.6 percent.  Internals looked strong, including first-time buyers who accounted for 30 percent or more of the total sales for the fourth month in a row.

All regions improved in the period.  Sales in the Northeast jumped 4.3 percent in June and have improved 12.5 percent from a year earlier.  The uptick in the Midwest was even stronger, up 4.7 percent in the period and 12.7 percent over the past 12 months.  Sales in the South increased 2.3 percent and 7.3 percent on a monthly and annual basis respectively.  Finally, existing home sales in the West were 2.5 percent higher from a month earlier and were 8.8 percent above a year ago.

Price measures were boosted in June.  The average cost of a home in America is now $280,300, up from $273,000 in May and $268,100 a year earlier.  A new record was set for the median price.  Passing the previous record set in July 2006, June’s median home sold for $236,400.

The cost of borrowing money rose in the period but remains relatively low.  According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 3.98 percent from 3.84 percent in May.  However, this measure remained below 4.0 percent for the seventh straight month.

Inventory figures were mixed.  The total number of homes for sale increased 0.9 percent to 2.3 million units.  On a relative basis, the stock of homes fell.  At the current pace of sales, the entire supply of homes would be sold in 5.0 months versus 5.1 months in May.

Housing remains a strengthening segment of our economy.  A rising trend in this indicator bodes well for spending as the second half of the year matures.  As families move into their homes, ancillary spending for durable items like furniture and appliances is expected to follow.  Ever been to a house warming party?  Nondurable spending goes into throwing these celebrations.  From the vantage point of this indicator, America’s economic expansion is continuing.        (by C. Cox)

June 2015 Leading Economic Index

Wednesday, July 29th, 2015

According to the Conference Board’s Leading Economic Index (LEI), America’s economic expansion is poised to continue.  This 10 component indicator improved 0.6 percent in June 2015, following May’s uptick of 0.8 percent.  Since April, this indicator’s readings have been strong.

Nine of the LEI’s components were either unchanged or positive while one was negative.   The usual suspect, interest rate spread, made the most significant change to the headline, accounting for nearly 40 percent of the entire uptick.  Building permits were the next largest contributor, providing over 34 percent of the improvement.  Positive contributions were also made by two measures of new orders, credit availability, and consumer expectations for business conditions.  The only negative sign in the monthly tally came from the performance of the stock market.

The latest LEI figure leaves Atlas with mixed feelings.  The strength of the past three months is encouraging, but the contributions are so concentrated that it creates some concern.  In particular, the concentration is centered on the Federal Reserve’s manipulation of the yield curve as the central bank keeps the overnight interest rate nailed to zero.  One cannot help but wonder about the impact the Fed will have on this indicator once the lending rate banks charge one another for 24-hour loans is increased.  At the very least, the current monetary policy and the jawboning by the central bank about the desire to raise the rate create some doubt in my mind over the validity of LEI’s headline figure.  Nonetheless, building permits have been strong since April and temper some of this concern.  For now, the odds of continued economic expansion appear to be better than even.              (by C. Cox)

Chicago Fed National Activity Index June 2015

Tuesday, July 28th, 2015

America’s output in June 2015 was roughly in line with the recent trend according to the Chicago Fed’s National Active Index (CFNAI).  After contracting 0.17 in May, this indicator moved back above zero to 0.08 as the first half of the year came to a close.  The economy’s expansion is continuing.

Internals were mixed.  Production output improved by being less negative than a month earlier; industrial production helped the uptick after taking from the total in May.  Employment added 0.12 to the total, accelerating from 0.06 a month earlier.  Unfortunately, consumption figures deteriorated.

Most of the 85 components remained positive in the period and a small majority of them improved versus May’s tally.  Forty-eight of the individual indicators made positive contributions while 37 were negative.  Forty-four improved from a month earlier, 40 declined, and one was unchanged.  Of the indicators that were higher, 13 still made negative contributions.

It is helpful to look at the 3-month moving average of this indicator because it has so many moving parts that are capable of making statistical noise on a monthly basis.  This average gives clues into inflationary pressures and risks of recession.  With a reading of 0.19, June’s moving average is not signaling either.  During an expansion, an average above 0.7 can signal upward price pressures while a count below -0.7 is seen as signaling contraction.  For now, both worrisome marks are far away for this economy.     (by C. Cox)

How Much Is Enough?

Monday, July 27th, 2015

How much money do you want to hold?  In other words, do you have some quantifiable amount that you want to have in savings?  If so, have you reached that goal?  Is your number a desired floor or ceiling?  What would it mean to you dollar-wise to say you have too much set aside in such an account?

There are just a few things you can do with money, spend it or putting it away for the future are the big ones.  Savings, especially with today’s rates approaching zero, might as well be buried in the back yard.

Banks see it differently.  They usually want your deposits.  After all, bank profits are based on taking it from you and handing it out to spenders, borrowers, or lenders.

What happens when that transfer mechanism breaks down, when both borrowers and lenders become too cautious?  Enter the Fed, or more exactly, conventional monetary policy of which they are the engineers.  When our economy slows down, the Federal Reserve tends to push more money into the banking system.  Ideally, they hope to add more than enough cash to overcome the concerns of savers, expecting that folks will eventually spend when they feel comfortable with the size of their nest egg.

But it doesn’t seem to be working as expected.  After plumping up the money supply by trillions of dollars without seeing convincing evidence that solid growth and its accompanying inflation were manifesting, the Fed seems to be having second thoughts.  They may be growing uncomfortable with short-term interest rates, their traditional tool for managing the economy’s ups and downs, near zero.  Perhaps they are asking themselves, “If the current economy’s pace now represents a new standard of normal, what will we do if things begin to slow even more?”  With rates hovering around zero, they are out of traditional ammunition.

Here at Atlas we have been saying current short-term interest rates, now essentially at a zero bound for the sixth year, are doing way more damage than should be tolerated.  Pension plans and annuities are struggling to meet their obligations.  Some are on the brink of collapse.  Retirees are being squeezed as CDs and other traditional bank deposits yield ridiculously low returns.  Banks are feeling the squeeze as well.  Who wants to spend or borrow when conditions appear so tenuous?  Current Fed policy had a good run but it seems to be letting us down.  It’s time for the Fed to reload, raise the overnight rates they control directly, and allow folks other than the super-rich to realize a living return on their hard-won savings.  Unfortunately, we aren’t expecting them to do so any time soon.   (by J R)

Political Purgatory

Friday, July 24th, 2015

With a mere 16 months before the next presidential election, it seems obvious that this missive should be about some politician making headlines due to something he or she said, but Atlas refuses to be part of the unnecessary noise this far from the vote.  Instead, just a quick note about Puerto Rico and its relationship with our Federal Government.   This island is home to roughly 90 percent of people living in unincorporated territories of America, and it is struggling to pay its debt.

A couple of years ago, the leaders of the Caribbean island made it known that paying back debt would be tough to manage.  According to the Economist, the governor announced measures to correct Puerto Rico’s fiscal course; tax increases, spending cuts, and pension reforms were put into place, but it now seems obvious that this was not enough.  The governor now calls the debt “unpayable.”  When debt loads become unmanageable for people and entities, America’s version of capitalism allows debtors to restructure the liability side of their balance sheet, but this is not an option for the island because it does not have the access to federal bankruptcy protections that are made available to the 50 states.

Economically growing their way out of debt could be an option.  Sure.  However, this island fell into a recession 10 years ago from which it has not yet recovered.  Corporations left the port around this time because shields to protect profits from taxes were removed.  In other words, Washington D.C. initially helped put wind in the sails of this economy by implementing the protection and then left Puerto Rico in the doldrums.  Our current congress seems unwilling to help because they are all trying to manage the fires in their own districts and cannot see any self-serving advantages to be gained by coming to the aid of the island where over 3.5 million U.S. citizens lack voting rights.  For now, Puerto Ricans are waiting to find out their fate.  (by C. Cox)

Big Mac Index July 2015

Thursday, July 23rd, 2015

The U.S. dollar has been on a tear lately.  Its value relative to a basket of other currencies that Atlas follows has been increasing steadily since the middle of June 2015.  The measure of this move, combined with its rapidity, has caused more than a few eyebrows to lift.

Understanding why this surge has elicited some concern from various quarters can be laid to a variety of expected results, some contradictory.  For instance, a stronger dollar could hamper our exports, causing concern among domestic manufacturers.  Simultaneously, it could boost our purchases from other countries that see their products more affordable in dollar terms as their currencies fall in value.  Since some attribution for this rise is given to perception that dollar-based interest rates are soon to climb, the IMF’s recent suggestion our Fed delay any such hike is interesting, suggesting perhaps their concern about Yankee bonds outweighs trade issues.

If all that sounds like a load of gobbledy-gook, allow me to take a different tack.  Somewhat infrequently, The Economist publishes a study on purchasing power parity (PPP).  It asks and answers how much items as close to identical as possible currently cost in countries around the world.  Given strict quality controls combined with ubiquity, this study chooses to use McDonald’s Big Mac as the standard.  By taking the price of that delectable in Japan for instance, and converting it into our dollars, we find a Big Mac there costs just $2.99, a deal relative to the $4.79 average cost stateside.  Russia had placed sanctions on the McDonald’s in Pushkin Square as push back against the sanctions we levied for their unfriendly incursions.  Now that Putin has had them lifted, the comparative cost of such a meal there is a measly $1.88!  In fact, should your palate be so inclined, only Switzerland and Norway are more expensive and to be avoided when taking the grandkids out for dinner.

Should we see the cost of this symbol of American influence decline locally, it might portend either incipient deflation or a temporary surfeit of cows.  Alternatively, a rise might suggest an outbreak of Brucellosis or rising wages in the service industries.  As a global standard of PPP it suggests U.S. markets are the place to be, especially in view of monetary concerns elsewhere.  And so long as fixed-income rates stay extremely low, a corollary to our currency’s favorability, equity choices will likely also remain popular.  Chew on that for awhile.    (by J R)

June 2015 Consumer Prices

Wednesday, July 22nd, 2015

Americans paid more for goods and services in June 2015 according to the Bureau of Labor Statistics’ Consumer Price Index (CPI).  Overall prices rose 0.3 percent in the period, a slight slowdown from the 0.4 percent uptick a month earlier.  This measure of inflation has increased in each of the last five months after declining in October through January.  Year-over-year, prices have increased just 0.1 percent versus being unchanged in May; this is the first 12-month increase since December!

Many essential items were more expensive in the period.  Energy, shelter, and food all contributed to the uptick.  Three out of the four components of the energy segment (gasoline, electricity, and natural gas) increase during June; only fuel oil was lower.  However, the energy index is still 15.0 percent lower than a year ago. Shelter increased 0.3 percent in June.   Food costs jumped the most since September 2014, partly due to a sharp increase in the price of eggs.

Core inflation remained in line with its recent trend.  This price measure, which excludes food and energy, increased 0.2 percent in June, matching its six month average.  The earlier mentioned increase in shelter accounted for over two-thirds of the increase in core CPI.  Over the last year, core CPI increased 1.8 percent.

At first glance, the year-over-year core CPI figure looks to be getting close to the Federal Reserve’s target of 2.0 percent.  However, the 12-month change has remained in a range of 1.6 percent and 2.0 percent since August of 2012.  The jury is still out on whether or not inflation is taking hold, so the hawks may not be able to use their talons just yet.         (by C. Cox)