Archive for August, 2015

July 2015 Employment Situation

Wednesday, August 12th, 2015

Employment’s growth trend is slowing from it fastest levels in the current expansion.  America added 215,000 jobs in July 2015 according to the Bureau of Labor Statistics.  While the headline figure is healthy, it is below the 12-month moving average of 243,000 new jobs.  In February, this moving average was 269,000 jobs a month, so some momentum has been lost.  Holding steady versus a month earlier, the unemployment rate stands at 5.3 percent.

Other statistics within the report improved.  On average, employees worked 34.6 hours a week in July, an improvement of six minutes per person versus June.  Hourly wages also ticked up in the period, up five cents or 0.2 percent to $24.99; this measure of income has increased 2.1 percent in the past year.

As the Federal Reserve considers normalizing the overnight interest rate, the bankers are paying particular attention to the underemployment rate which is a statistic that includes everybody working fewer hours than they prefer.  This rate fell to 10.4 percent, down from 10.5 percent in June.  But our central bank is also keeping a watchful eye on the labor force participation rate; currently sitting at 62.6 percent, this measure reached its lowest level since 1977 in June but was unchanged in July.

America’s labor market is healing but still has some nasty scars left over from the great recession.  By historical standards, the unemployment rate looks healthy, but it is being artificially boosted by the generationally low labor force participation rate.  Year-over-year wage gains were in line with the increases experienced over most of the current expansion, so the rate of change is not warning of incipient inflation.  If the Federal Reserve raises the overnight bank lending rate in the next few months ahead, an overheated labor market is unlikely to be primary justification.              (by C. Cox)

Consumer Attitudes July 2015

Tuesday, August 11th, 2015

Americans’ attitudes soured in July 2015 according to various measures of consumer outlooks.  Consumer Sentiment, put out by the University of Michigan, was off slightly, falling to 93.1 from 93.3 a month earlier.  The Conference Board’s Consumer Confidence Index dropped to 90.9 from June’s downwardly revised count of 99.8 (originally 101.4).  Bloomberg’s Consumer Comfort Index (at 40.5), which is compiled weekly, fell in each release during July.  With these indicators it is not so much the absolute number but the trending direction that Atlas watches, with an upward bias generally seen as favorable.

Most of the weakness originates from Americans’ presumption about what lies ahead versus their current situation.  Within the Consumer Sentiment report is a measure of expectations, and it fell to 84.1 from 87.8 in June.  A similar measure in the Consumer Confidence suffered a similar albeit more dramatic fate, falling nearly 13 points to 79.9.  Most of this collapse reflects a sudden pessimism in the jobs outlook; twenty percent of those polled see fewer jobs opening up in the next six months.

Americans’ concern about the here and now is much less pronounced.  The current conditions reading within the University’s index softened slightly to 107.2 from 108.9 a month earlier.  The Conference Board’s present situation component gave back three points for a reading of 107.4

Consumer attitudes are a soft indicator because they measure opinions and not actual behavior, so their value as an indicator can be limited.  With that being said, waning consumer attitudes are more likely to be negative for the economy than positive.  If consumers’ spending begins to parallel their feelings, the second half of the year may not be as robust as many, including the central bank, are expecting, making it even tougher for Janet Yellen to justify raising the overnight lending rate.    (by C. Cox)

July 2015 Institute for Supply Management

Monday, August 10th, 2015

Economic growth was mixed in July 2015 according to data from the Institute for Supply Management (ISM).  Our nation’s manufacturing continued to expand in the period, albeit at a slower pace.  However, service growth surged in month, suggesting the current expansion is unlikely to end soon.

Despite the slower pace, manufacturing expanded for the 31st consecutive month in July.  Atlas would have liked to have seen the breadth of the uptick be healthier as just 11 of the 18 manufacturing industries reported growth.  However, new orders improved which should help output in the months and quarters ahead.  The employment component of the manufacturing ISM slowed in July.

All four components of the nonmanufacturing ISM tally accelerated in the period.  Output increased for the 72nd consecutive month; this will help third quarter GDP.  New orders picked up the pace which should help output in the near future.  Payrolls increased faster than in June.  Finally, suppliers are delivering at an even slower pace than a month earlier.  This suggest  firms are producing at a rate that is closer to their capacity than before, which could cause firms to invest in more labor and (eventually) capital equipment as demand for their services continues to accelerate.

America’s economy is still growing.  This expansion in getting long in the tooth, a theme Atlas has been discussing for some time now, but the ISM data is not pointing at an immediate turn in the business cycle.  Instead, forward looking components of this indicator bespeak future growth is on the horizon.  Of course, Atlas recognizes the pace of the expansion is slow, but there is still some wind left in America’s sails which is  better than the doldrums experienced by other nations.                 (by C. Cox)

They’re Baaaack

Friday, August 7th, 2015

They’re Baaaack

In the beginning of the 1982 flick Poltergeist, the ghosts have a seemingly friendly disposition.  They move objects around the house, and everyone is entertained by their antics.  However, there is a point in the story when they become unpleasant and begin terrorizing the Freeling family.  In fact, they eventually take the Freeling daughter and hold her in another dimension; fortunately, she is recovered.  Four years later, Poltergeist II is released and the Freeling’s are under duress again.

Sound familiar?  Perhaps you saw the movies (I vaguely remember seeing the sequel at Riverside’s drive-in theater) or you may sense the parallels between the movies’ plotlines and our nation’s mortgage situation.  Risky loans moved our economy along prior to the collapse some six years or so ago.  Then, they got nasty and terrorized the global economy, holding it in a peculiar dimension.  And now, “they’re baaaack.”  A large financial institution associated with a certain bank in America is offering its clients a 25-year adjustable rate mortgage with interest only payments!  For the first 10 years a borrower need only to pay interest; then they have 15 years to pay the balance.  This loan is coming from a bank that was bailed out by your tax dollars after its earlier poltergeist loans disrupted the economy.  Could this the beginning of the second haunting?  Practitioners of bad lending are probably like roaches, there’s never just one.

The Poltergeist franchise eventually became a tetralogy; the last one was released in May 2015.  My taste in movies has changed over the years, so I missed the final two.  Unfortunately, at least one large financial institution’s palate for loans is not evolving, and it is not tough to imagine other firms offering similar loans.  Let’s hope this haunting is short-lived and that Americans remember the bad taste and sick feeling with which these ghosts left us last time.          (by C. Cox)

Second Quarter 2015 Advanced GDP

Thursday, August 6th, 2015

America’s economy reaccelerated in the second quarter of 2015 according to the Bureau of Economic Analysis.  On an annualized basis, output grew by 2.3 percent from April through June.  This follows the first quarter’s 0.6 percent rate of growth, upwardly revised from -0.2 percent.  While it is comforting to see the quarterly figure improve, the year-over-year change worsened.

Components of GDP were mixed.  Personal consumption expenditures (PCE), the largest segment of our economy, accelerated versus the prior period.  PCE increased 2.9 percent versus 1.8 percent in the first quarter.  Americans consumed 2.1 percent more services.  Durable goods led the consumption of physical wares, jumping 7.3 percent; nondurables were 3.6 percent higher.  Home building led business investment, increasing 6.6 percent.  However, capital investment (i.e. machines, non-residential structures, and intellectual property) declined 0.6 percent.  Spending by governments was mixed; federal outlays fell while state and local expenditures rose.  Finally, exports made up most of the prior quarter’s loss of 6.0 percent by increasing 5.3 percent in the second quarter.  Imports, which subtract from the total, increased 3.5 percent.

Inflation data in the report jumped relative to a quarter ago but remained tame.  The price index for gross domestic purchases, a measure of prices paid by U.S. residents, increased 1.4 percent in the quarter after falling 1.6 percent in the first three months of the year.  Excluding food and energy, the price index rose 1.1 percent, compared to 0.2 percent in the prior period.

From the looks of it, this economy is far from overheating.  Of course, this puts the Federal Reserve in an interesting predicament because it wants to raise rates but the inflation remains tepid, and the economy is not charging ahead.  As mentioned earlier, the year-over-year rate of change fell versus the prior quarter; Atlas imagines Janet Yellen will have a hard time justifying raising rates unless this trend line reaccelerates and inflation firms.              (by C. Cox)

Income and Outlays June 2015

Wednesday, August 5th, 2015

Consumers remained hesitant to accelerate their spending in June according the Bureau of Economic Analysis.  Despite an income increase of 0.4 percent, they only spent 0.2 percent more in the period.  Perhaps some of the slow growth can be explained by the downwardly revised income data from May, up 0.4 percent versus an initial tally of 0.5 percent.  Outlays were also downwardly revised for the prior month; consumption grew by 0.7 percent not 0.9 percent as first counted.  Inflation figures within the report, including the Federal Reserve’s favorite measure, are not heating up.

All measures of income moved higher in June.  Wages and salaries, the largest source of income for Americans, rose $18.3 billion versus $32.0 billion in May.  Most of this increase was in the private sector as government wages increased by $2.3 billion versus $2.4 billion a month earlier.  Proprietors’ income accelerated, growing by $11.0 billion after ticking higher by just $7.4 billion in May.  Rental income increased slightly less than a month earlier, up $7.4 billion versus $7.7 billion.  Finally, personal income receipts on assets (interest and dividends) jumped $20.2 billion after an uptick of only $8.4 in May.  Of course, Uncle Sam took his share of the earnings (which leaves what is termed disposable income); it increased 0.5 percent or $60.6 billion.

Once the government takes its portion, there are two things Americans can do with their disposable income.  As noted earlier, spending increased, but it did not keep up with the rate of increase for this category.  That means the second option, the savings rate, improved.  Americans put away $646.3 billion or 4.8 percent in June, an improvement compared to $616.2 billion or 4.6 percent in May.

Inflation data continued to be soft in June.  Month-over-month, the personal consumption expenditure (PCE) price index increased 0.2 percent, slowing from 0.3 a month earlier.  Year-over-year this measure has only increased 0.3 percent.  Energy prices have a lot to do with the small change in this measure, so it is helpful to look at the “core” number which strips out food and energy.  The core PCE price index (the Federal Reserve’s favorite measure of prices) increased just 0.1 percent in June and is up only 1.3 percent from a year earlier.

Our economy continues to muddle through.  Consumption is growing at a lackluster pace, and inflation remains tame, yet the central bank is seriously considering raising the overnight lending rate, a move typically associated with wanting to control an overheating economy.  Atlas has serious doubts about their actually choosing to do so before the end of this year, and this indicator supports our perspective.          (by C. Cox)

Durable Goods Orders June 2015

Tuesday, August 4th, 2015

Orders for goods expected to last longer than three years jumped in June according to the Census Bureau.  This forward looking indicator increased $7.7 billion or 3.4 percent in the period, following two consecutive monthly decreases.  Durable goods have struggled in the past year, contracting 2.0 percent in the past 12 months.

No matter how you look at June’s numbers, this indicator was positive.  Transportation is volatile, so it is important to consider the tally without this fickle component; new orders still managed to increase 0.8 percent without transportation.  Another way to consider these orders is to remove defense spending because the military may order durables (like a new tank) even if the rest of the economy is not marching forward; excluding defense, new orders increased 3.8 percent.  Finally, there is Atlas’ favorite way to look at this indicator; we prefer to look at capital goods orders excluding aircraft and defense spending.  This “core” version of the indicator shows us whether or not firms are investing money into themselves and provides an insight into business confidence.  Following contractions in April and May, companies were willing to commit more money in June as the core durable goods orders increase 0.9 percent.

June’s strong reading is teeing up July through September for stronger economic output compared to the second quarter.  These orders should turn into production in the months ahead, and weak shipments of durable goods in the second quarter (a measure of output) have given the third quarter a low hurdle to get over.   Of course, additional growth in the new orders will still be necessary, so the uptick in investment is not a guarantee set in stone.  (by C. Cox)