Archive for July, 2015

June 2015 Industrial Production

Tuesday, July 21st, 2015

Up, yet down is one way to describe industrial production.  Output of physically made goods grew in June 2015 but was down in the second quarter according to the Federal Reserve.  Industrial production increased 0.3 percent in the final month of the quarter but fell 1.4 percent from April through June.

Two out of the three major industry groups increased in the period.  Mining increased for the second time in 2015, improving 1.0 percent following declines of 0.2 percent and 2.1 percent in April and May respectively.  Utilities put in a second consecutive monthly uptick, increasing 1.5 percent after improving by 1.2 percent in the prior period.  Unfortunately, the largest segment, manufacturing, was unchanged for the second month in a row.  On a year-to-date basis, manufacturing is down 0.3 percent.

Capacity utilization made its first uptick since January 2015 in June.  Firms used 78.5 percent of their potential in the period, an improvement over 78.2 percent in May.  Notwithstanding the monthly increase, capacity utilization remains lower than all of last year with the exception of the reading in January 2014.  Over the last twelve months, firms have increased their capacity by 2.6 percent.

With all of the second quarter readings on industrial production in the books, it appears the goods side of our economy did not add too much to the nation’s output in April through June.  This should put downward pressure on the quarter’s first reading of GDP due out later this month.  With capacity utilization running below the long-term trend, it does not appear that the means of production are being stressed, so this should not contribute much if any to inflation.  In all, this indicator is not adding to the Federal Reserve’s pressure to raise interest rates.
(by C. Cox)

June 2015 Producer Prices

Monday, July 20th, 2015

Prices paid by producers and wholesalers rose in June 2015 according to the Bureau of Labor Statistics.  After rising 0.5 percent in May, June’s prices tacked on another 0.4 percent.  Despite the two consecutive upticks, the year-over-year measure has fallen 0.7 percent, the fifth straight 12-month decrease.

Most of the uptick can be attributed to the goods portion of the economy, although service prices increased as well.  The index for final demand goods rose 0.7 percent, a deceleration from the 1.3 percent uptick a month earlier.  Within the goods segment, energy contributed 60 percent of the uptick, climbing 2.4 percent in the period as gasoline surged 4.3 percent.  Services moved higher by 0.3 percent

Earlier stages of production got more expensive as well.   Processed goods for intermediate demand prices increased 0.7 percent; over two-thirds of this uptick is attributed to energy.   Versus a year ago, this earlier stage of output has deflated by 6.3 percent.  Unprocessed goods for intermediate demand were 1.2 percent higher in the period, following May’s jump of 1.2 percent.  Once again energy pushed this measure higher as related materials contributed 60 percent of the increase.  Services for intermediate demand moved up 0.4 percent in the period.  Over the last 12 months, prices for this earlier stage of services have climbed 1.6 percent.

A completely made up word seems to describe this indicator best: disdeflation.   It’s like the opposite of disinflation; prices are deflating as slower pace.  Year-over-year numbers are still negative for headline tally and many measures within the report, but they are less negative than in prior months.  Ultimately, this could lead to an inflationary trend for this indicator, but for now the prices trend is still soft while firming, like unset Jello.             (by C. Cox)

One of Two Ways

Friday, July 17th, 2015

We are living in a polarized era.  Identifying oneself or others in simple groups has become a pastime.  Here in America, presidential elections are often too close to call before bedtime on election night.  Congress cannot progress because of irreconcilable differences across the aisle, one aisle.  Supreme Court rulings get decided by swing justices.  Somehow, nuance is being lost as the world gets more complex.  Even the folks at our central bank get lumped into just two categories, doves or hawks.

Approaches to monetary policy determine whether a member of the Federal Open Market Committee (the folks responsible of setting the overnight lending rate) falls into the hawkish or dovish camp.  Those with a more relaxed approach to inflation, willing to let such pressure manifest clearly, are given the moniker doves.  Those more willing to influence the economy more quickly, even before inflation begins to manifest, are labeled hawks.

Currently, Janet Yellen, long considered a dove, is at the helm of the institution.  In that position, she sets the current tone for the central bank.  From the most recent Federal Open Market Committee (FOMC) meeting minutes, a gentle coo could be heard.

The Federal Reserve is charged with creating an environment in which the economy can reach full employment while maintaining stable price growth.  According to the minutes of the most recent Fed meeting, the bank feels that the economy is growing at a moderate pace after very little change in the first quarter of 2015.  Looking forward, these interest rate policy makers expect growth to continue being moderate over the medium term.  Business investment is partially to blame for their uncertainty about a near-term pickup; the expectation for capital goods spending is that it will remain soft, and they feel net exports will continue to be restrained by the earlier appreciation of the dollar.  Also, the committee is concerned about the underutilization of labor resources.  In other words, even as the unemployment rate nears the group’s target level of 5.2 percent (currently 5.3 percent), they are not satisfied because of the relatively low percentage of Americans participating in the workforce.  Notes on inflation did not have a screeching tone either.  Price pressures were described as being well below the target.  Despite the labels of the individual players, the Federal Reserve talons are not looking very lethal.

Six years into the current recovery/expansion and the doves are still in control.  Amazing!  There is some debate as to when the overnight lending rate will be pushed higher, but an upward increase on its own is hardly a change in the nature of monetary policy.  Initially, the interest rate would still be at an accommodative level.   There are four more Fed meetings in 2015, including one at the end of this month, but only two of the meetings (September and December) have press conferences afterwards.  Atlas feels the first rate increase will likely happen during a month with a press conference.  Apparently, the market place feels the same.  According to the Fed Funds futures traded at the Chicago Mercantile Exchange, the market does not put the probability of a rate hike above 50 percent until December 2015, and at the time of this writing it was just 3 percentage points higher than that of a coin flip.  However, the first meeting in 2016 with a press conference is in March, and the market puts the probability of a hike then at nearly 80 percent.  Waiting until the end of the first quarter of next year to raise rates does not seem like an improbable outcome to traders in the Midwest or to Atlas, but we want to see several more months of hard data first before making that call.    (by C. Cox)

June 2015 Retail Sales

Thursday, July 16th, 2015

Retail fails sales dropped in June 2015 according to the Census Bureau.  This is the first monthly decline in four months.  Receipts fell $1.2 billion or 0.3 percent in the period.  Adding to the somber tone of the release was the revision to May’s data; the increase in the prior period was just 1.0 percent versus the original tally of 1.2 percent.  To summarize, retail sales disappointed as the first half of 2015 came to a close.

No matter how you slice it, the indicator was not constructive in June.  Motor vehicle sales dropped 1.1 percent, but even if autos are excluded, the indicator dropped 0.1 percent.  If gasoline sales are also removed, the indicator’s core sales dropped 0.2 percent.  In addition, Atlas’ favorite component of the retail sales report declined in the period; revenues at restaurants and bars declined 0.2 percent from a month earlier.  This segment of the report warrants special attention in the months ahead because this portion of the economy will likely be the first place from which consumers pull away if they are indeed closing their wallets because food and drinks are easily substituted at home.

Consumption comprises over two-thirds of our economy which is why retail sales get so much attention by those tracking the economy.  However, retail sales are about one-third of consumption, so there is no need to hit the panic button just yet.  With any luck, consumers simply shifted their spending toward other services in the period.  If this is the case, it will show up in the income and outlays data due to be released at the beginning of August by the Bureau of Economic Analysis.  Now you have something other than a vacation to look forward to this summer!        (by C. Cox)

June 2015 Treasury Budget

Wednesday, July 15th, 2015

The Federal Government’s fiscal year is two-thirds complete and data on the budget looks promising for this year.  According to the Treasury Department, our country ran a surplus in June 2015.  After dipping into the red by $82.4 billion in May, the nation managed to be in the black by $51.8 billion a month later.  Compared to June of a year earlier, the surplus was less, but the year-to-date tally remains well ahead of the 2014 count.

America’s improving economy helped the total.  Tax receipts improved 8.2 percent on a year-to-date basis.  However, without the improving economy and subsequent tax collection, the report would not have looked as healthy.  Federal spending grew versus the same period a year earlier, up 15 percent.  Fiscal year-to-date, outlays have increased 5.1 percent.

Shrinking shortfalls are encouraging, but this appears to be a short-term narrative.  The Congressional Budget Office expects the annual budget deficit to remain near its current levels through 2018.  However, their projections indicate deficits will begin growing faster in 2019 and beyond.  The accelerating annual shortfalls will be on top of already historically high levels of debt; not since the end of World War II has the Federal debt relative to GDP been as high as it is now, and the CBO feels 2018 will be an inflection point marking a faster rate of change.  Look for this issue, among many others, as the conversation about the next president develops between now and next November.   (by C. Cox)

June 2015 Institute for Supply Management

Tuesday, July 14th, 2015

Dour headlines are everywhere; it’s enough to make one wonder if the wheels are falling off the wagon.  Well, one indicator Atlas follows suggests the hubs are firmly fastened to the axel.  Data from the Institute for Supply Management continue to suggest the business cycle is still in the expansion phase.  Both sides of the economy remained well above the breakeven mark and accelerated in the period.

Manufacturing’s reading increased to 53.5 from 52.8 in May.  This figure suggests the cyclically sensitive portion of output is growing moderately.  New orders and employment data look even more promising which bodes well for the economy’s health in the months ahead.  Forward looking new orders rose to 56.0 from 55.8 in May.  Employment jumped 3.8 percentage points to 55.5 and has accelerated in the past two months.

Non-manufacturing accelerated to 56.0 from 55.7 a month earlier.  Production (a proxy for output) jumped 2.0 percentage points to 61.5, a very strong reading.  New orders increased to 58.3 from 57.9 and have improved for 71 consecutive months.  Deliveries slowed in the period which suggests firms are have a more difficult time filling orders; apparently demand driven, this could result in additional hiring or capital investment.  Employment growth slowed  in this segment of the economy (although it continues to expand), paralleling the Bureau of Labor Statistics’ jobs report for the same period; this makes sense because the service sector is the largest employment portion of our economy.

Scary headlines aside, America’s wheels seem to be attached and camber fairly vertical.  Our output continues to grow and more Americans are working each month.  For now, it appears this pattern will continue.  As frightening taglines scroll across the bottom of your television and computer screens, remember the ISM data and take a deep breath. I did.    (by C. Cox)

May 2015 Trade Deficit

Monday, July 13th, 2015

America’s trade gap widened in May according to the Bureau of Economic Analysis.  The monthly shortfall was $41.9 billion.  However, April’s deficit was smaller than initially thought, revised to $40.7 billion from $40.9 billion.  On a year-to-date basis, the deficit has grown 0.5 percent in 2015, an increase of just over $1 billion.

Unfortunately, both components of trade fell in the period.  Exports declined $1.47 billion to $188.595 billion. A significant portion of this drop is attributed to a $1.2 billion downtick in aircraft exports.  Imports dropped 0.13 percent to $230.466 billion.  American firms seemed reluctant to increase their stock of foreign made capital goods as this category dropped 0.8 percent in May.   Signs of slower global economic growth are evident in the year-to-date figures; thus far in 2015, imports and exports have fallen 2.2 percent and 2.7 percent respectively from the same period a year ago.

Trade figures with various countries were mixed.  America’s trade deficit with China increased by $4.0 billion to $30.5 billion.  The shortfall with the European Union fell $0.8 billion to $12.5 billion.  The trade gap with Japan narrowed while our deficit with Mexico increased.  Interestingly, for the first time since 1990, America posted a monthly trade surplus with Canada.

Global headlines are crammed with stories of economic woes, and this indicator is picking up on some of the trouble.  However, net exports are a relatively small component to GDP and will not likely cause too much damage to the second quarter’s figure when it is released later this month.  America’s output is still expanding and being propelled by our residents’ unique capacity to consume.  The virtuous portion of this business cycle is getting long in the tooth, but there seems to be more time before the gum line recedes further and its teeth fall out.           (by C. Cox)