The Economist is running a great multi-page story on this topic in this weeks edition. You can read it online here. It's a really good explanation of the problems and possible solutions.
Monday, February 28, 2011
Agricultural Prices/Situation Round-Up
Over the last week, there have been several very important news stories regarding the agricultural price situation.
Here's a brief recap of the events that got us here:
Here's a brief recap of the events that got us here:
A drought and fire in Russia last summer, coupled with export restrictions imposed by the government there, helped bring about soaring wheat prices. Meanwhile, bad harvests in the U.S., Europe, Australia and Argentina have contributed to soaring agricultural commodity prices on international markets.And, despite an increase in production, we are seeing larger increases in demand:
Growers from Canada to Russia boosted annual output of wheat, rice and feed grain by 16 percent since 2000, not enough to keep up with the 20 percent gain in demand, U.S. Department of Agriculture data show. While a Bloomberg survey of 25 analysts shows the agency on Feb. 24 may forecast a 3.5 percent increase in U.S. corn planting, the government says world stockpiles will equal 15 percent of use, the lowest since 1974.In addition, we are seeing increased demand from developing countries:
Strong income growth and rising populations in developing countries have increased demand for high-value food products, such as meats, dairy products, and a greater variety of fruit and vegetables, as well as a broad range of prepared foods. Growing urbanization also contributes to dietary changes. City dwellers are exposed to new food varieties, and their lifestyles often lead to less cooking and increased purchases of prepared foods.As a result of these developments, the USDA says we'll see an increase in planting next year:
Developing countries now account for more than half of all U.S. agricultural exports. Mexico and China are two major markets for U.S. agricultural exports, and countries such as India, Indonesia, and Colombia are becoming important export destinations. Among the large number of developing-country trading partners, 16 low- and middle-income countries account for 37 percent of U.S. agricultural exports, up from 15 percent in 1990. Since 1990, the average growth of U.S. exports to these countries has exceeded 10 percent annually.
While low- and middle-income countries are becoming increasingly important export markets for the U.S. agricultural sector, high-income markets are moving in the opposite direction. Nine high-income countries, most prominently Canada and Japan, accounted for 55 percent of U.S agricultural exports in 1990, but their share fell to 43 percent by 2008. Average annual growth in U.S. exports to these high-income countries was just 2.4 percent during that period.
An additional 9.8 million acres will be planted to crops in 2011, the largest year-over-year increase in planted acreage to the eight major crops in the U.S. since 1996, according to USDA Chief Economist Joe Glauber.All of these stories highlight several underlying trends.Here are the acreage levels that Glauber said USDA currently expects:
- Corn: 92.0 million, up 3.8 million acres
- Soybeans: 78.0 million, up 0.6 million acres
- Wheat: 57.0 million acres, up 3.4 million acres
- Cotton: 12.8 million acres, up 2.9 million acres
The level of area planted to the eight major crops at 255 million acres will be the highest total for these crops since 1998, Glauber said. "It will be a real challenge to get to the 10 million acres needed," Glauber said.
"Despite increased production of corn and soybeans, grain and oilseed markets are still forecast to be tight due to strong export demand and strong demand for biofuels," Glauber said. "Unless this year’s weather is better than normal or plantings increase more than expected, stock levels for corn and soybeans should see only modest rebuilding in 2011/12. This will likely mean continued volatility in those markets."
1.) This year we've had a ton of "odd" weather. In Houston, Texas (where I live), we had nearly a month of near-freezing weather for which the city was ill-prepared. Russia caught on fire last summer -- literally. China is experiencing drought and Australia was hit with series conditions as well. From my perspective, it sure looks like global warming/climate change has started, meaning we can expect further situations like this to develop.
2.) Notice that this is a supply/demand issue. In broad terms, as the standard of living has increased in various countries diets have changed, increasing demand. At the same time, supply is understandably constrained because there are only so many acres that can be farmed meaning global yields have to increase.
3.) From the U.S.' perspective, this is a great opportunity, as agriculture is an area where we clearly excel.
2.) Notice that this is a supply/demand issue. In broad terms, as the standard of living has increased in various countries diets have changed, increasing demand. At the same time, supply is understandably constrained because there are only so many acres that can be farmed meaning global yields have to increase.
3.) From the U.S.' perspective, this is a great opportunity, as agriculture is an area where we clearly excel.
Bright Future For Ex Farepak Director?
William Rollason has joined Bright Futures (a holding company focussed on providing specialist contract catering services within the corporate business, local authority and independent schools sectors) as a non-executive director.
However, his tenure as NED may be short lived, Rollason was chief executive of European Home Retail, the parent company of Farepak (the Christmas hamper business that went bust in 2006) and moves are afoot in the High Court by the Insolvency Service to disqualify the 9 directors of Farepak and its parent from holding a directorship again.
However, his tenure as NED may be short lived, Rollason was chief executive of European Home Retail, the parent company of Farepak (the Christmas hamper business that went bust in 2006) and moves are afoot in the High Court by the Insolvency Service to disqualify the 9 directors of Farepak and its parent from holding a directorship again.
Sunday, February 27, 2011
The Importance of Labor Unions
With all of the talk surrounding Wisconsin and the governor's desire to end collective bargaining, the issue of unions has again come to the forefront of debate. While I don't talk about it much, I am a big fan of unions and think they are an important part of the economy. However, the primary reason why I support unions is based in law, not economic policy.
The U.S. has a long legal tradition that stretches back to England in the middle ages. We can trace our legal roots in property, trusts, wills and criminal law to this era. Just as importantly, we can also trace contract law to this time. Contracts are a remarkably powerful tool; they essentially allow two or more parties to form a relationship within the broadest of boundaries. A court will not void a contract so long as the subject matter is not for an illegal act or voided because it is against public policy. In other words, people can form their own private law to further mutually beneficial relationships and the courts will uphold these agreements so long as they don't hurt the greater part of society.
However, inherent in the establishment of this relationship is the concept of equality of bargaining power. The law recognizes that a contract, whose terms are written by one party, is inherently biased. It calls these adhesion contracts and courts will interpret the contract terms of an adhesion contract against the drafter. But these interpretive maxims can only go so far; careful and well-drafted contracts, modified over many years by numerous lawyers can help to blunt that maxim.
Therefore, in order to establish a contract that is truly private law between two parties, it is imperative for the parties participating in the negotiations to be as close to equal as possible. This is the primary reason why labor unions are a vital part of the legal and economic process -- they provide a legal counter-weight to management.
There are numerous other benefits, such as increased wages and benefits for union members (which usually spread out an benefit non-union members), better working conditions and a social network that provides financial and emotional support. However, I personally view these benefits as ancillary -- although no less vital. The real benefit from unions is to provide another strong voice at the bargaining table when contracts are formed.
The U.S. has a long legal tradition that stretches back to England in the middle ages. We can trace our legal roots in property, trusts, wills and criminal law to this era. Just as importantly, we can also trace contract law to this time. Contracts are a remarkably powerful tool; they essentially allow two or more parties to form a relationship within the broadest of boundaries. A court will not void a contract so long as the subject matter is not for an illegal act or voided because it is against public policy. In other words, people can form their own private law to further mutually beneficial relationships and the courts will uphold these agreements so long as they don't hurt the greater part of society.
However, inherent in the establishment of this relationship is the concept of equality of bargaining power. The law recognizes that a contract, whose terms are written by one party, is inherently biased. It calls these adhesion contracts and courts will interpret the contract terms of an adhesion contract against the drafter. But these interpretive maxims can only go so far; careful and well-drafted contracts, modified over many years by numerous lawyers can help to blunt that maxim.
Therefore, in order to establish a contract that is truly private law between two parties, it is imperative for the parties participating in the negotiations to be as close to equal as possible. This is the primary reason why labor unions are a vital part of the legal and economic process -- they provide a legal counter-weight to management.
There are numerous other benefits, such as increased wages and benefits for union members (which usually spread out an benefit non-union members), better working conditions and a social network that provides financial and emotional support. However, I personally view these benefits as ancillary -- although no less vital. The real benefit from unions is to provide another strong voice at the bargaining table when contracts are formed.
Saturday, February 26, 2011
Weekly Indicators: dueling inflection points edition
- by New Deal democrat
This week was thin on monthly data: housing sales are still awful, but no more awful than they've been for the last two years. Housing prices are still falling (a mixed blessing, I really should write more on that), regional manufacturing reports were very good, but durable goods ex-Boeing stunk. This last one is of a piece with the weak industrial production report from the last week, and will have an impact on the LEI. Finally, 4th quarter GDP was revised downward, due in part to the effect of the "50 little Hoovers." I've drafted a piece on state financing which has been sitting unfinished for 2 weeks, maybe I ought to get to that too....
Anyway, as I've said I am watching our high frequency indicators especially to contrast the forces of continued strengthening (initial jobless claims) vs. Oil's choke hold on the economy. As I've reported already, both moved to or past their inflection points this week. Initial jobless claims came in at 381,000 and the 4 week average at 402,000 is the lowest since before the Black September 2008 meltdown. At the same time the price of a barrel of Oil briefly crossed $100, pushing it past the point of 4% of GDP that in the past has heralded recessions.
Oil jumped over $10 to $97.88 a barrel. Gas at the pump rose five more cents to $3.19 a gallon. This is an increase of $.50 in 4 months. If this week's spike in Oil does not reverse, expect pain at the pump to be palpable shortly. Despite that, this week gasoline usage was 37,000 barrels a day higher than last year, or +0.4%, all things considered a welcome sign.
Railfax showed a rebound for the second week in a row, up 11.9% YoY. Baseline and motor vehicle carrier traffic still remain barely ahead of last year on a 4 week moving average, and shipments of waste and scrap metal remain at last year's levels. Intermodal traffic, a gauge of imports, is the reason for the overall rebound, as it is up 10% YoY.
The Mortgage Bankers' Association reported an increase of 5.1% in seasonally adjusted mortgage applications last week, essentially canceling out last week's decline. This series remains generally in a flat range since last June. Refinancing increased 17.8%, also rebounding from last week's double-digit decline, but remains near its lowest point since last July 3. Spring selling season is about to begin, and the effect of higher mortgage rates is something to watch.
The American Staffing Association Index remained at 90 again. This was 13% higher than a year ago, but this series has completely stalled out in terms of relative YoY gains. In other words, it has stopped making progress towards its pre-recession peak.
The ICSC reported that same store sales for the week of February 19 increased 3.0% YoY, and also increased 2.6% week over week. This series' YoY comparisons had been trending lower since the first of the year, so this is actually quite good. On the other hand, Shoppertrak reported that sales actually declined 0.4% YoY for the week ending February 13. This is the second YoY decline in a row. Shoppertrak believes this can be attributed to the calendar effects of President's Day. On a week over week basis, sales increased 5.4%.
Weekly BAA commercial bond rates dropped -.07% to 6.15%. This compares with a -0.8% decrease in the yields of 10 year treasuries to 3.60%. Both series are near recent highs, but there is still no relative weakness in corporate bonds.
M1 was down 0.5% w/w, up 1.6% M/M, and still up a strong 9.0% YoY, so Real M1 is up 7.3%. M2 was up 0.1% w/w, up .8% M/M and up 4.1% YoY, so Real M2 is up 2.4%. M2 has dropped back below the 2.5% "green light" zone.
Adjusting +1.07% due to the recent tax compromise, the Daily Treasury Statement showed adjusted receipts for the first 16 days of February of $119.9 B vs. $123.5 B a year ago, for a loss of -3.0%+ YoY. For the last 20 days, $147.7 B was collected vs. $143.4 B a year ago, for a gain of 3%. This 20-day gain is poor compared with most comparisons over the last 10 months.
In the case of the dueling inflection points, I expect Oil prices to win. The question is, whether this recent spike is a blip, which will be reversed shortly, or whether there will be pain at the pump again this spring and summer.
This week was thin on monthly data: housing sales are still awful, but no more awful than they've been for the last two years. Housing prices are still falling (a mixed blessing, I really should write more on that), regional manufacturing reports were very good, but durable goods ex-Boeing stunk. This last one is of a piece with the weak industrial production report from the last week, and will have an impact on the LEI. Finally, 4th quarter GDP was revised downward, due in part to the effect of the "50 little Hoovers." I've drafted a piece on state financing which has been sitting unfinished for 2 weeks, maybe I ought to get to that too....
Anyway, as I've said I am watching our high frequency indicators especially to contrast the forces of continued strengthening (initial jobless claims) vs. Oil's choke hold on the economy. As I've reported already, both moved to or past their inflection points this week. Initial jobless claims came in at 381,000 and the 4 week average at 402,000 is the lowest since before the Black September 2008 meltdown. At the same time the price of a barrel of Oil briefly crossed $100, pushing it past the point of 4% of GDP that in the past has heralded recessions.
Oil jumped over $10 to $97.88 a barrel. Gas at the pump rose five more cents to $3.19 a gallon. This is an increase of $.50 in 4 months. If this week's spike in Oil does not reverse, expect pain at the pump to be palpable shortly. Despite that, this week gasoline usage was 37,000 barrels a day higher than last year, or +0.4%, all things considered a welcome sign.
Railfax showed a rebound for the second week in a row, up 11.9% YoY. Baseline and motor vehicle carrier traffic still remain barely ahead of last year on a 4 week moving average, and shipments of waste and scrap metal remain at last year's levels. Intermodal traffic, a gauge of imports, is the reason for the overall rebound, as it is up 10% YoY.
The Mortgage Bankers' Association reported an increase of 5.1% in seasonally adjusted mortgage applications last week, essentially canceling out last week's decline. This series remains generally in a flat range since last June. Refinancing increased 17.8%, also rebounding from last week's double-digit decline, but remains near its lowest point since last July 3. Spring selling season is about to begin, and the effect of higher mortgage rates is something to watch.
The American Staffing Association Index remained at 90 again. This was 13% higher than a year ago, but this series has completely stalled out in terms of relative YoY gains. In other words, it has stopped making progress towards its pre-recession peak.
The ICSC reported that same store sales for the week of February 19 increased 3.0% YoY, and also increased 2.6% week over week. This series' YoY comparisons had been trending lower since the first of the year, so this is actually quite good. On the other hand, Shoppertrak reported that sales actually declined 0.4% YoY for the week ending February 13. This is the second YoY decline in a row. Shoppertrak believes this can be attributed to the calendar effects of President's Day. On a week over week basis, sales increased 5.4%.
Weekly BAA commercial bond rates dropped -.07% to 6.15%. This compares with a -0.8% decrease in the yields of 10 year treasuries to 3.60%. Both series are near recent highs, but there is still no relative weakness in corporate bonds.
M1 was down 0.5% w/w, up 1.6% M/M, and still up a strong 9.0% YoY, so Real M1 is up 7.3%. M2 was up 0.1% w/w, up .8% M/M and up 4.1% YoY, so Real M2 is up 2.4%. M2 has dropped back below the 2.5% "green light" zone.
Adjusting +1.07% due to the recent tax compromise, the Daily Treasury Statement showed adjusted receipts for the first 16 days of February of $119.9 B vs. $123.5 B a year ago, for a loss of -3.0%+ YoY. For the last 20 days, $147.7 B was collected vs. $143.4 B a year ago, for a gain of 3%. This 20-day gain is poor compared with most comparisons over the last 10 months.
In the case of the dueling inflection points, I expect Oil prices to win. The question is, whether this recent spike is a blip, which will be reversed shortly, or whether there will be pain at the pump again this spring and summer.
Friday, February 25, 2011
Weekend Weimar and Beagle
Wow -- it has been a long time since I've put any of these up, hasn't it? That being said, here are the kids
Weekly Indicators: tote dat barge, lift dat bale ...
- by New Deal democrat
I am up to my eyeballs in work today. Weekly indicators will be posted in full tomorrow.
In the meantime, maybe the proprietor of this here blog's doggies have done something endearing this week?
I am up to my eyeballs in work today. Weekly indicators will be posted in full tomorrow.
In the meantime, maybe the proprietor of this here blog's doggies have done something endearing this week?
The German Miracle
In my piece yesterday a commenter noted that German manufacturing seemed to defy my central thesis. As if on cue, Time Magazine has an article on the "German Miracle." Here are the highlights:
First, we have to give credit to the German government for a slate of reforms and programs that have really helped job creation. Germany (much like Spain) had a chronic unemployment problem, a result of a labor market that was too highly regulated and offered too much protection for workers. German policymakers began to change the system back in 2003 with a series of measures that made the labor market more flexible and encouraged greater participation in the workforce. Then during the Great Recession, the government and corporations devised all sorts of schemes to prevent the kind of mass layoffs that plagued the U.S. Most interesting was a government-funded short-time work program. Companies put workers on reduced working hours rather than laying them off; the government stepped in with subsidies that paid part of the workers' salaries.But there is something much more fundamental going on as well. German industry is committed to making the sort of high-quality, high-performance, innovative products for which the world will pay extra. In other words, Germany is making BMWs, not Chevys. If you're making a BMW and charging so much for it, you can manufacture in a high-cost environment and still make a nifty profit. If you're making a Chevy, which to a greater degree competes on price and doesn't have a strong brand reputation, you can't charge the premium that makes profitable manufacture in the U.S. as easy to accomplish. Germany manufacturers are extremely focused on quality, engineering and research & development, and that shows in the products they make, and the prices they can charge. They make stuff that can't so easily be reproduced elsewhere. So even though Germany is being challenged by Chinese industry, German companies have managed to stay a step ahead as well. In other words, it all gets back to innovation, in whatever industry you happen to be in.
Even that's not the whole story, however. There is something much harder to define behind Germany's jobs miracle. That has to do with the commitment of executives to keeping jobs in Germany. Sure, German companies have opened factories in China and outsourced to Eastern Europe. Yet many German firms are stubbornly maintaining a certain amount of production within Germany as well. Part of the reason is skills. Germany has a lot of very talented engineers and assembly-line workers who are crucial to making those high-quality products that sell for so much money. But I'm going to speculate that part of the reason can be found in Germany's corporate structure. The backbone of German manufacturing is small to mid-sized firms that are often family-owned. These families are in many cases committed to keeping factories at home. Though they want, of course, to make as much money as possible, they're not under the same pressure from shareholders to show bigger and bigger profits each quarter. That allows them to take a long-term view. German management also just seems more determined to find ways of staying profitable while still manufacturing in Germany. The chairman of power-tool maker Stihl, Bertram Kandziora, told me that U.S. companies "don't try hard enough to keep production inside the country.”. That's especially true, he pointed out, since labor costs in Germany are actually higher than in the U.S.
Inflection point number 2: Gas prices
- by New Deal democrat
As I noted last week, two indicators - initial jobless claims and the price of Oil - were nearing inflection points. Yesterday the 4 week average of jobless claims came within a whisker of crossing the 400,000 threshold consistent with a self sustaining recovery that adds more jobs than it needs to accomodate population growth.
This week the price of Oil actually did cross the threshold of 4% of GDP (about $94 a barrel based on the latest data) historically associated with economic slowdowns and recessions. As I indicated last week, I'm a little less sanguine about this than my co-blogger Bonddad, whose latest post is just below, here.
Professor James Hamilton has done some excellent work on oil-induced recessions, but all of those involved (1) a sudden spike in Oil prices that (2) with one exception went substantially above the 4% of GDP threshold. What his data doesns't have much to say about is the few cases where Oil has gradually approached or brushed the 4% threshold. In the 1990 recession, there was a spike that just passed the 4% threshold. The only other occasions are 2005-2007, last spring, and now.
Since the St. Louis Fred only tracks Oil prices monthly, in the graphs below I have made use of their weekly gasoline price data (blue) compared with the S&P 500 index (red). First, here is a look at the last 10 years:
Note first of all tht in general gas prices track economic growth. As there is more growth, there is more demand, and prices go up -- up to a point. Secondly, note that in 2005 (Katrina) and 2006, when gasoline crossed $3/gallon, the S&P 500 backed off. Indeed in 2006 GDP slowed down for one quarter to a just barely positive crawl. Both of these spikes to ~4% of GDP were short-lived. When in 2007 prices decisively moved through the barrier, the S&P anticipated that move by a couple of months. Finally, last spring when Oil brushed $90 a barrel (4% of GDP then), the S&P backed off 15%, and GDP immediately slowed to 1.7%. In all of these cases, of course, Oil was not the exclusive culprit, but the pattern remains.
Now here is a close up of the last 12 months:
The 15% downward move in the S&P last spring described above shows up more clearly here. While again generally energy prices are highly positively correlated with economic growth, note that this week as gas prices moved decisively above $3 a gallon, and Oil shot up from ~$90 a barrel to briefly over $100 a barrel, the stock market moved inversely to those prices, showing that the inflection point has been reached.
While as I say I am less sanguine than Bonddad, our points of view (and that of Prof. Hamilton) are not that different. Prof. Hamilton expects a few tenths of percent of GDP to be shaved off by prices as of a few days ago. I am expecting a slowdown similar to spring of last year - and I believe that is already showing up in real retail sales, for example.
So long as Oil supply from the Mideast is not disrupted, that is all I am expecting. Specifically, I do not foresee a "double dip." If on the other hand, disruptions in supply or speculation do cause Oil prices to continue to climb another $20 a barrel (or about $.50 a gallon of gas) as they have in the last 5 months, there will be further damage and I am sure Prof. Hamilton will agree with that.
In the Bigger Picture, it would be nice if Versaille could look beyond trying to apply the Shock Doctrine to seniors and the states, and actually take action that would begin to immediately loosen the choke collar that is Oil around the neck of the economy.
As I noted last week, two indicators - initial jobless claims and the price of Oil - were nearing inflection points. Yesterday the 4 week average of jobless claims came within a whisker of crossing the 400,000 threshold consistent with a self sustaining recovery that adds more jobs than it needs to accomodate population growth.
This week the price of Oil actually did cross the threshold of 4% of GDP (about $94 a barrel based on the latest data) historically associated with economic slowdowns and recessions. As I indicated last week, I'm a little less sanguine about this than my co-blogger Bonddad, whose latest post is just below, here.
Professor James Hamilton has done some excellent work on oil-induced recessions, but all of those involved (1) a sudden spike in Oil prices that (2) with one exception went substantially above the 4% of GDP threshold. What his data doesns't have much to say about is the few cases where Oil has gradually approached or brushed the 4% threshold. In the 1990 recession, there was a spike that just passed the 4% threshold. The only other occasions are 2005-2007, last spring, and now.
Since the St. Louis Fred only tracks Oil prices monthly, in the graphs below I have made use of their weekly gasoline price data (blue) compared with the S&P 500 index (red). First, here is a look at the last 10 years:
Note first of all tht in general gas prices track economic growth. As there is more growth, there is more demand, and prices go up -- up to a point. Secondly, note that in 2005 (Katrina) and 2006, when gasoline crossed $3/gallon, the S&P 500 backed off. Indeed in 2006 GDP slowed down for one quarter to a just barely positive crawl. Both of these spikes to ~4% of GDP were short-lived. When in 2007 prices decisively moved through the barrier, the S&P anticipated that move by a couple of months. Finally, last spring when Oil brushed $90 a barrel (4% of GDP then), the S&P backed off 15%, and GDP immediately slowed to 1.7%. In all of these cases, of course, Oil was not the exclusive culprit, but the pattern remains.
Now here is a close up of the last 12 months:
The 15% downward move in the S&P last spring described above shows up more clearly here. While again generally energy prices are highly positively correlated with economic growth, note that this week as gas prices moved decisively above $3 a gallon, and Oil shot up from ~$90 a barrel to briefly over $100 a barrel, the stock market moved inversely to those prices, showing that the inflection point has been reached.
While as I say I am less sanguine than Bonddad, our points of view (and that of Prof. Hamilton) are not that different. Prof. Hamilton expects a few tenths of percent of GDP to be shaved off by prices as of a few days ago. I am expecting a slowdown similar to spring of last year - and I believe that is already showing up in real retail sales, for example.
So long as Oil supply from the Mideast is not disrupted, that is all I am expecting. Specifically, I do not foresee a "double dip." If on the other hand, disruptions in supply or speculation do cause Oil prices to continue to climb another $20 a barrel (or about $.50 a gallon of gas) as they have in the last 5 months, there will be further damage and I am sure Prof. Hamilton will agree with that.
In the Bigger Picture, it would be nice if Versaille could look beyond trying to apply the Shock Doctrine to seniors and the states, and actually take action that would begin to immediately loosen the choke collar that is Oil around the neck of the economy.
Oil and the Recovery
A commenter asked me if I thought the current price spike in oil changed my outlook.
First, I believe the evidence is clear: the U.S. economy is in the middle of a recovery. We've had six straight quarters of GDP growth, a solid manufacturing sector and a recovering service sector. Other countries are growing, which is giving strong support to U.S. exports. PCEs are now higher on an inflation adjusted basis than pre-recession levels. The two laggards are employment (which is typical as it is a lagging indicator) and housing (which will be a problem area for the next year at least). So, will the current spike in oil prices derail the recovery?
I don't believe we are there yet for several reasons. First, the events in the oil market are only a week old. (although they seem to have gone on far longer). Second, I think the overall economic recovery now has legs -- the recovery is no longer fueled by government spending and inventory restocking but by broader based foreign and domestic demand. As previously mentioned, PCEs are up and increasing; retail sales (a smaller subset of this data) are also doing well. Businesses are investing and commercial real estate is coming back. While the increase in demand is still new, it is there. A broader economic recovery implies one that is harder to slow down by external shocks.
Professor James Hamilton -- on whose judgment I defer to in most matters oil -- concurs in a recent post, where he concludes:
Let me add a few caveats.
First, I believe the evidence is clear: the U.S. economy is in the middle of a recovery. We've had six straight quarters of GDP growth, a solid manufacturing sector and a recovering service sector. Other countries are growing, which is giving strong support to U.S. exports. PCEs are now higher on an inflation adjusted basis than pre-recession levels. The two laggards are employment (which is typical as it is a lagging indicator) and housing (which will be a problem area for the next year at least). So, will the current spike in oil prices derail the recovery?
I don't believe we are there yet for several reasons. First, the events in the oil market are only a week old. (although they seem to have gone on far longer). Second, I think the overall economic recovery now has legs -- the recovery is no longer fueled by government spending and inventory restocking but by broader based foreign and domestic demand. As previously mentioned, PCEs are up and increasing; retail sales (a smaller subset of this data) are also doing well. Businesses are investing and commercial real estate is coming back. While the increase in demand is still new, it is there. A broader economic recovery implies one that is harder to slow down by external shocks.
Professor James Hamilton -- on whose judgment I defer to in most matters oil -- concurs in a recent post, where he concludes:
My bottom line is that events as they have unfolded so far are not in the same ballpark as the major historical oil supply disruptions, and are unlikely to produce big enough economic multipliers that they could precipitate a new economic downturn. They might shave a half percent off annual GDP growth, but I don't anticipate a whole lot worse than that.But the worry of course is that the big geopolitical changes we've been seeing didn't stop with Tunisia, and didn't stop with Egypt. So maybe it's not a good idea to assume it's all going to stop with Libya, either.
Also consider this data point from Deutsche Bank:
According to our analysis, a $10 increase in oil prices translates into roughly a 25 cent increase in retail gasoline prices. Every one penny increase in gasoline is then worth about $1 billion in household energy consumption. (In decimal terms, it is actually $1.4 billion.) Therefore, a sustained $10 increase in oil prices translates into $25 billion in additional household energy spending. Assuming this price rise crowds out spending elsewhere in the economy, effectively acting as a tax, means that a sustained $10 rise in oil prices reduces annual real GDP growth by 0.2%. Therefore, we would need oil prices to rise substantially from their current level and then remain elevated for some time before becoming more concerned about economic growth.
And Macroadvisers weights in with this:
An increase in oil prices of $10/bbl for one year starting in the first quarter of 2011 would:Also see this article at Angry Bear......
- Reduce GDP growth by about 0.3 percentage point over the first half of the year and by 0.2 percentage point over the entire year.
- Headline PCE inflation would be about 0.1 percentage point higher over the year, and the unemployment rate about 0.1 percentage point higher.
Nevertheless, these results suggest that if the energy futures markets have the extent and magnitude of the crisis in North Africa and the Middle East properly gauged, the economic fallout for the U.S. is likely to be relatively modest.
An important caveat is that the simulations reported here assume that product prices, the prices that really matter, will move proportionally with crude prices. However, since the shift toward diesel fuel consumption in Europe has put a premium on light sweet crudes, the relationships among the prices of oil of varying qualities has changed dramatically of late. As a result, the relationship between any particular crude price and product prices has also broken down. This fact puts a somewhat larger confidence interval around these results than would be the case if these prices were more or less moving together as they have historically, over most periods.
Let me add a few caveats.
First, as I mention above, this has only been going on for a week. The longer this lasts, the greater the damage that can be done to the economy. Think of it as a sliding scale. However, looking at the price chart, we see a price spike last a few days, not weeks. That's a very important point to make.
Second, consider professor Hamilton's second paragraph. As this wave of change sweeps the Middle East it is entirely likely we'll see profound change in the oil market. That uncertainty will increase prices -- and the more uncertainty the worse the effect will be (leading to higher prices).
LSE Suspends Trading
Share trading in London has been suspended all morning as a result of ongoing technical problems with the London Stock Exchange's prices data (initially, and incorrectly, described by the LSE as a "glitch").
The LSE had to close its Italian stock exchange operation close earlier in this week, because of technology problems.
LSE went live on Monday with a new technology platform called Millennium (a Sri Lankan design).
It would seem that more work needs to be done on the system, and that the LSE needs to explain as to why it went live without evidently being thoroughly tested in parallel with the old system.
The LSE had to close its Italian stock exchange operation close earlier in this week, because of technology problems.
LSE went live on Monday with a new technology platform called Millennium (a Sri Lankan design).
It would seem that more work needs to be done on the system, and that the LSE needs to explain as to why it went live without evidently being thoroughly tested in parallel with the old system.
Yesterday's Market
I've just switched to a new computer and I'm still transferring programs etc.. Quote tracker takes a bit of time to "reprogram" on the new computer. These will be back on Monday.
Thursday, February 24, 2011
Thoughts on International Trade
There has been a great round robin discussion on international trade in the economic blogsphere over the last week or so. I believe it started with this article from William Polley and was followed up on by Mark Thoma and Kash over at Angry Bear. I wanted to throw my two cents into the discussion as it were, especially as it relates to manufacturing jobs and the overall benefits of international trade.
Let me first make what I believe are two very important points regarding this discussion.
There seems to be a desire to return to the "glory days" of US manufacturing in the 1950s and 1960s when a manufacturing job could provide a middle class wage etc.. There is one problem with this argument: there is no way that will happen again. The glory days of US manufacturing were great, but were also characterized by a massive lack of competition. After WWII Japan and Europe were literally in ruins; Russia and Eastern Europe were behind the Iron Curtain, China was under Mao and India was an economic basket case. In short, the US was the only game in town. Hence, our labor market benefited from being a monopoly. As we see various regions of the world come back on line we start to see the effects of the competition on the US labor market. I wouldn't call the situation a degradation or a collapse. Instead, I would argue we're now simply one of many choices for the location of a manufacturing facility. Hence, we have to compete along many different criteria, some of which where we are at an extreme disadvantage.
Second, as other countries came on line economically, the US was the largest world economy with a higher standard of living competing with lower cost alternatives. Given that situation, its far more likely poor countries will start to take away market share, thereby lowering the US' manufacturing base and negatively impacting our standard of living. Remember -- economics is the science of studying how we allocate scarce resources. If the US was eating the whole pie and now other people want a slice, we, by definition, get less. More practically, if a manufacturer was looking to start a new plant in the early 1990s and narrowed his choices down to China and the US, chances are China would win for one simple reason: their labor costs were far cheaper, even after counting in price factors such as transporting the product back to the US.
So, before moving forward, let's sum up the two points.
1.) The U.S.' previous position as the manufacturer of the world was caused by lack of competition.
2.) Because the US was at the top of the economic heap, it was far more likely we would be negatively impacted by international trade.
Now, let's move forward.
What started the discussion was this paragraph:
In other words, it's hard to tell someone who has lost their job to an overseas competitor that free trade is good for you. Fair enough; I won't try and make the argument.
However, I believe the excerpt misses the mark. I think the better way to phrase the issue is in a developing country, the benefits of free trade are exciting and vibrant, whereas here they are far less exciting. For example, living in China right now -- and over the last 10 years or so -- would be an exciting time. The middle class is growing; there are more and more jobs available; GDP is up, wages are slowly increasing -- you get the idea. Someone who looks around in China now and compares it to ten years ago sees the benefit of international trade and thinks "great."
However, the benefits in the US are far less visceral and far harder to sell. For example, in my opinion one of the biggest benefits of free trade is lower inflation -- as we import lower cost goods from overseas, we have less inflationary pressure. I think that's a great benefit. But, it's also really hard for non-econo-geeks to get truly excited by that benefit. And frankly, I can't see a PSA swinging public debate to our side. Then there is the issue of more, lower cost products to choose from. We also like that, but, again, it's hard to sell. And then there are the export markets we have for our products. But the problem here is, thanks to higher productivity over the last 20 years, US manufacturing needs less labor. Plus, once, the goods leave our shores, they're gone. In other words, the benefits for us are very hard to see.
All this leads to the primary point: free trade does provide numerous benefits. But the problems for us seem far more tangible and the benefits seem far less exciting than for the beneficiaries in the developing countries.
Now, let's turn to how to deal with the negative ramifications.
First, as I mentioned at the beginning of this, it's important to be realistic. We're not going to return to the age when any person has a job for life and is only employed by the same company. The general historical background that led to that scenario don't exist. Please stop arguing from the perspective that it can be duplicated.
Secondly, industries will disappear. I realize this is a rather unpleasant thought, but there are times when other countries will make better and cheaper products. This is especially true as products become commoditized. While we can erect trade barriers to shield industries (the textile industry comes to mind), all we're doing there is putting off the inevitable. We need to be realistic about industries that are currently marginal (again, textiles come to mind) and start to help the labor force make the transition.
Third, the US labor force needs to be highly educated. Lower cost -- and less intellectually intensive -- manufacturing booms in other countries, but not here. While US manufacturing is currently booming, it's important to remember that we handle far more advanced manufacturing and assembling that requires a smarter work force. To that end, we need to make life long learning the norm, and this learning must be inexpensive. The current method of funding education -- lower governmental inputs and higher individual debt levels -- is at best counter-productive and at worst leads to a life of near indentured servitude as recent graduates work to pay off debt for the first part of their professional lives, thereby preventing them from saving money etc... Instead, education needs to be cheaper and available to increase the skill set of our labor force.
Fourth, the US government needs to establish a list of potential industries that we can do here. I always recommend nano technology, stem cell research and alternate energy, but there are many others. The government should fund the pure research that forms the intellectual basis of these industries, probably through the college/university system but also through government programs and agencies. And yes -- this is governmental direction of the market -- but direction that will work. Why? Anyone remember all the benefits of the space program? From products like Velcro to aerospace applications, NASA spun off literally thousands of benefits. The internet was created by the military so the country could have a communication system in the event of a nuclear attack. And government funding of research for medical cures spills over lots of ways.
Anyway -- as I mentioned at the beginning -- that is my two cents.
Let me first make what I believe are two very important points regarding this discussion.
There seems to be a desire to return to the "glory days" of US manufacturing in the 1950s and 1960s when a manufacturing job could provide a middle class wage etc.. There is one problem with this argument: there is no way that will happen again. The glory days of US manufacturing were great, but were also characterized by a massive lack of competition. After WWII Japan and Europe were literally in ruins; Russia and Eastern Europe were behind the Iron Curtain, China was under Mao and India was an economic basket case. In short, the US was the only game in town. Hence, our labor market benefited from being a monopoly. As we see various regions of the world come back on line we start to see the effects of the competition on the US labor market. I wouldn't call the situation a degradation or a collapse. Instead, I would argue we're now simply one of many choices for the location of a manufacturing facility. Hence, we have to compete along many different criteria, some of which where we are at an extreme disadvantage.
Second, as other countries came on line economically, the US was the largest world economy with a higher standard of living competing with lower cost alternatives. Given that situation, its far more likely poor countries will start to take away market share, thereby lowering the US' manufacturing base and negatively impacting our standard of living. Remember -- economics is the science of studying how we allocate scarce resources. If the US was eating the whole pie and now other people want a slice, we, by definition, get less. More practically, if a manufacturer was looking to start a new plant in the early 1990s and narrowed his choices down to China and the US, chances are China would win for one simple reason: their labor costs were far cheaper, even after counting in price factors such as transporting the product back to the US.
So, before moving forward, let's sum up the two points.
1.) The U.S.' previous position as the manufacturer of the world was caused by lack of competition.
2.) Because the US was at the top of the economic heap, it was far more likely we would be negatively impacted by international trade.
Now, let's move forward.
What started the discussion was this paragraph:
If we economists stubbornly insist on chanting 'free trade is good for you' to people who know that it is not, we will quickly become irrelevant to the public debate.
In other words, it's hard to tell someone who has lost their job to an overseas competitor that free trade is good for you. Fair enough; I won't try and make the argument.
However, I believe the excerpt misses the mark. I think the better way to phrase the issue is in a developing country, the benefits of free trade are exciting and vibrant, whereas here they are far less exciting. For example, living in China right now -- and over the last 10 years or so -- would be an exciting time. The middle class is growing; there are more and more jobs available; GDP is up, wages are slowly increasing -- you get the idea. Someone who looks around in China now and compares it to ten years ago sees the benefit of international trade and thinks "great."
However, the benefits in the US are far less visceral and far harder to sell. For example, in my opinion one of the biggest benefits of free trade is lower inflation -- as we import lower cost goods from overseas, we have less inflationary pressure. I think that's a great benefit. But, it's also really hard for non-econo-geeks to get truly excited by that benefit. And frankly, I can't see a PSA swinging public debate to our side. Then there is the issue of more, lower cost products to choose from. We also like that, but, again, it's hard to sell. And then there are the export markets we have for our products. But the problem here is, thanks to higher productivity over the last 20 years, US manufacturing needs less labor. Plus, once, the goods leave our shores, they're gone. In other words, the benefits for us are very hard to see.
All this leads to the primary point: free trade does provide numerous benefits. But the problems for us seem far more tangible and the benefits seem far less exciting than for the beneficiaries in the developing countries.
Now, let's turn to how to deal with the negative ramifications.
First, as I mentioned at the beginning of this, it's important to be realistic. We're not going to return to the age when any person has a job for life and is only employed by the same company. The general historical background that led to that scenario don't exist. Please stop arguing from the perspective that it can be duplicated.
Secondly, industries will disappear. I realize this is a rather unpleasant thought, but there are times when other countries will make better and cheaper products. This is especially true as products become commoditized. While we can erect trade barriers to shield industries (the textile industry comes to mind), all we're doing there is putting off the inevitable. We need to be realistic about industries that are currently marginal (again, textiles come to mind) and start to help the labor force make the transition.
Third, the US labor force needs to be highly educated. Lower cost -- and less intellectually intensive -- manufacturing booms in other countries, but not here. While US manufacturing is currently booming, it's important to remember that we handle far more advanced manufacturing and assembling that requires a smarter work force. To that end, we need to make life long learning the norm, and this learning must be inexpensive. The current method of funding education -- lower governmental inputs and higher individual debt levels -- is at best counter-productive and at worst leads to a life of near indentured servitude as recent graduates work to pay off debt for the first part of their professional lives, thereby preventing them from saving money etc... Instead, education needs to be cheaper and available to increase the skill set of our labor force.
Fourth, the US government needs to establish a list of potential industries that we can do here. I always recommend nano technology, stem cell research and alternate energy, but there are many others. The government should fund the pure research that forms the intellectual basis of these industries, probably through the college/university system but also through government programs and agencies. And yes -- this is governmental direction of the market -- but direction that will work. Why? Anyone remember all the benefits of the space program? From products like Velcro to aerospace applications, NASA spun off literally thousands of benefits. The internet was created by the military so the country could have a communication system in the event of a nuclear attack. And government funding of research for medical cures spills over lots of ways.
Anyway -- as I mentioned at the beginning -- that is my two cents.
Inflection point number 1: Initial Jobless Claims
- by New Deal democrat
Last week I wrote that initial jobless claims was one of two series that appeared to be at inflection points. By that I meant that a small move in either one could result in the economy "turning a corner" - but in opposite directions.
This morning's report that Initial jobless claims were only 391,000 brings the 4 week moving average down to the lowest point since before the September 2008 meltdown: 402,000. A number of ~410,000 or less next week will bring this average under 400,000.
The inflection point is that such a number is consistent with average monthly job growth in excess of that necessary to keep up with population growth. It is also consistent with a continuing decline in the unemployment rate. In short, it represents an economy attempting to achieve escape velocity.
Here is an update of the weekly new claims for the last 3 months:
2010-11-20 410000
2010-11-27 438000
2010-12-04 423000
2010-12-11 423000
2010-12-18 420000
2010-12-25 391000
2011-01-01 411000
2011-01-08 447000
2011-01-15 403000
2011-01-22 457000
2011-01-29 419000
2011-02-05 385000
2011-02-12 413000
2011-02-19 391000
With the exception of the two post-January storm outliers, in the last two months every single week has been under 420,000. And now we have had 2 numbers under 400,000 in the last 3 weeks.
This is good news - or at least pretty close.
Last week I wrote that initial jobless claims was one of two series that appeared to be at inflection points. By that I meant that a small move in either one could result in the economy "turning a corner" - but in opposite directions.
This morning's report that Initial jobless claims were only 391,000 brings the 4 week moving average down to the lowest point since before the September 2008 meltdown: 402,000. A number of ~410,000 or less next week will bring this average under 400,000.
The inflection point is that such a number is consistent with average monthly job growth in excess of that necessary to keep up with population growth. It is also consistent with a continuing decline in the unemployment rate. In short, it represents an economy attempting to achieve escape velocity.
Here is an update of the weekly new claims for the last 3 months:
2010-11-20 410000
2010-11-27 438000
2010-12-04 423000
2010-12-11 423000
2010-12-18 420000
2010-12-25 391000
2011-01-01 411000
2011-01-08 447000
2011-01-15 403000
2011-01-22 457000
2011-01-29 419000
2011-02-05 385000
2011-02-12 413000
2011-02-19 391000
With the exception of the two post-January storm outliers, in the last two months every single week has been under 420,000. And now we have had 2 numbers under 400,000 in the last 3 weeks.
This is good news - or at least pretty close.
Wednesday, February 23, 2011
Oil Prices and Recessions
With oil spiking, it seems appropriate to look to an expert on the effect of oil shocks on the economy. In the blogsphere - and the real world -- there is no better expert than Professor James Hamilton at Econbrowser. Here is a link to a piece that shows the very strong relationship between oil shocks and economic recessions. The link also contains another link to a paper written by Professor Hamilton on the subject. For those of you who can't wait, here is the conclusion:
I would also strongly recommend searching their website for "oil" as there are several other posts worth reading on the topic. Here are two:
How much are gasoline prices weighing on consumers?
Brent-WTI Spread
Finally, from a real world perspective, Libyan oil production may have already shut down at least 350,000/BBL/Day of production although, a shut down of 500,000 is not unlikely.
I've just completed a new research paper that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper's summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.
I would also strongly recommend searching their website for "oil" as there are several other posts worth reading on the topic. Here are two:
How much are gasoline prices weighing on consumers?
Brent-WTI Spread
Finally, from a real world perspective, Libyan oil production may have already shut down at least 350,000/BBL/Day of production although, a shut down of 500,000 is not unlikely.
CPI Up .4%
From the BLS:
First, notice that the month to month percentage increase over the last six months is more or less in line with the rate of increase before the recession. In other words, our current experience is not out of line with past experience.
Just as importantly, the year over year percentage increase is still below previous levels, indicating inflation is not out of control in any way.
With food prices spiking, it's important to remember that food as a percentage of income in the U.S. is the lowest in the world. Hence, it's it's far easier for the U.S. to absorb rising food prices. However, private transportation prices represent 16.082% of the CPI, making energy prices a bit harder to shake off.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.Let's take a look at the data in graph form.
Increases in indexes for energy commodities and for food accounted for over two thirds of the all items increase. The indexes for gasoline and fuel oil both increased in January, continuing their recent strong upward trend. The index for food at home posted its largest increase in over two years with all six major grocery store food group indexes rising.
The index for all items less food and energy also rose in January. The indexes for apparel, shelter, airline fares, and recreation all posted increases. In contrast, the indexes for new vehicles and for used cars and trucks declined in January.
Over the last 12 months, the food index has risen 1.8 percent with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009. The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent. The index for all items less food and energy has risen 1.0 percent.
First, notice that the month to month percentage increase over the last six months is more or less in line with the rate of increase before the recession. In other words, our current experience is not out of line with past experience.
Just as importantly, the year over year percentage increase is still below previous levels, indicating inflation is not out of control in any way.
With food prices spiking, it's important to remember that food as a percentage of income in the U.S. is the lowest in the world. Hence, it's it's far easier for the U.S. to absorb rising food prices. However, private transportation prices represent 16.082% of the CPI, making energy prices a bit harder to shake off.
Libya, the Middle East and the Stock Market
The events of the Middle East -- first and foremost -- are reminding me of the democratic changing of the guard that occurred in Eastern Europe. Watching the events from afar is fascinating and scary.
More importantly, these types of events can cause fundamental disruptions to the stock market as they cause a realignment of trading strategies. Here are some general points to look for.
The US markets have been in a strong rally for some time. The A/D line has been rising and the CMF confirms an inflow of money in the market. But this type of event could be the catalyst for a correction. Yesterday, the SPYs fell to the 20 day EMA. The next logical area of support is the 50 day EMA, which is currently at 128.55, or 2.5% below current price levels. A sell-off that stops at this level would be a baby correction. I've drawn support lines -- most of which occur near round numbers (click for a larger image).
Finally, remember that sell-offs are good things, as they weed out the shaky longs.
More importantly, these types of events can cause fundamental disruptions to the stock market as they cause a realignment of trading strategies. Here are some general points to look for.
The US markets have been in a strong rally for some time. The A/D line has been rising and the CMF confirms an inflow of money in the market. But this type of event could be the catalyst for a correction. Yesterday, the SPYs fell to the 20 day EMA. The next logical area of support is the 50 day EMA, which is currently at 128.55, or 2.5% below current price levels. A sell-off that stops at this level would be a baby correction. I've drawn support lines -- most of which occur near round numbers (click for a larger image).
Finally, remember that sell-offs are good things, as they weed out the shaky longs.
The Miguided Hawks of The MPC
The Telegraph reports that according to the latest MPC minutes, released today, the Bank of England chief economist Spencer Dale has joined Martin Weale and Andrew Sentance in calling for an interest rate rise.
The "hawks" deem inflation to be a significant threat to the economy.
They are wrong:
1 The impact of the austerity budget has yet to be felt, once that kicks in there will be a significant deflationary pressure on the economy.
2 The economy is teetering on the edge of another recession, any upward increase in interest rates will push the economy over the edge.
3 An inflation rate of 4%-5% is bearable for a year or so.
4 The "inflation" that the MPC hawks fear is largely down to the rise in VAT in January, and the ONS (as per usual) erroneously under reporting inflation (clothing) for several years.
In short, rate should be kept where they are for the time being.
The "hawks" deem inflation to be a significant threat to the economy.
They are wrong:
1 The impact of the austerity budget has yet to be felt, once that kicks in there will be a significant deflationary pressure on the economy.
2 The economy is teetering on the edge of another recession, any upward increase in interest rates will push the economy over the edge.
3 An inflation rate of 4%-5% is bearable for a year or so.
4 The "inflation" that the MPC hawks fear is largely down to the rise in VAT in January, and the ONS (as per usual) erroneously under reporting inflation (clothing) for several years.
In short, rate should be kept where they are for the time being.
Tuesday, February 22, 2011
Consumer Confidence at Three Year High
From Bloomberg:
The number is still pretty low by historical standards, so I'd be cautious to read too much into this move. In addition, with gas prices going up (and today's price spike) I think this number will come under strong downward pressure in the near future.
Big upward revisions to an already accelerating consumer confidence report point to a pivot higher for the consumer sector. The Conference Board's index rose to 70.4 in February for the best reading in three years. January was revised more than four points higher to 64.8.
The assessment of the jobs market definitely improved. On the current assessment, a reading that offers an indication on the monthly employment report, fewer consumers in February said jobs are hard to get, at 45.7 percent vs January's 47.0 percent. On the outlook, substantially fewer consumers, at 15.4 percent vs January's 21.2 percent, see fewer jobs six months from now. In a partial offset, fewer consumers see more jobs ahead, 19.8 percent vs January's 20.8 percent.
Upward revisions are especially striking in the assessment of future income which before this report had been in unprecedented inversion, that is more saw their income decreasing than increasing. Not anymore as 17.3 percent of the roughly 3,000 initial sample see their income improving vs 13.8 percent seeing a decrease. Revisions now show the inversion reversing back in December.
The prospect of future income is a critical assessment when making decisions on discretionary purchases. Revisions now show big gains for buying plans especially for cars and appliances. Home buying plans are still depressed but a little less depressed.
The number is still pretty low by historical standards, so I'd be cautious to read too much into this move. In addition, with gas prices going up (and today's price spike) I think this number will come under strong downward pressure in the near future.
The Sheer Stupidity of U.S. Political Dialog
The standard crap from the political right:
1.) All regulation is bad
2.) Any data which might force us to change our current method of doing business or behavior is a liberal conspiracy
3.) There is a giant press conspiracy to paint conservatives in a negative light which warrants my near paranoid methodology of interpreting press stories.
4.) "Socialism"
5.) Arm everybody with as many guns as possible -- and make sure the guns are as large as possible
The standard crap from the political left:
1.) Money is evil and those whose incomes are above $75,000/$100,000 per year are clearly in league with Satan.
2.) Wall Street causes all bad things
3.) Positive economic numbers are rigged; negative economic numbers are sacrosanct. As a corollary, all bullish economists are tools while bearish economists are completely trustworthy. Finally, take one bad economic number in a series of good numbers and claim it is a sign that the end of the world is upon us.
4.) All corporations are evil
5.) All market based solutions are evil, rigged and to be avoided at all costs
While I may have missed some of the popular themes, the point is clear: U.S. political dialog is not about data or solving problems. Instead, it's about repeating talking points and cramming events into preconceived perceptions. NDD has pointed out this is "confirmation bias," meaning we only seek out opinions that confirm our preconceptions, regardless of the lack of data "supporting" our opinion.
People on the right can remain in a sealed echo chamber of talk radio, Fox news and right wing blogs. People on the left can remain on the political left's blogs. Both of these methods of information delivery have been taken over by extremists who could care less about data and facts, instead focusing on pushing the latest "meme."
In short, the political blogs have become pure garbage. Assume that any economic analysis from any of them is -- at best -- deeply suspicious, and, at worst, pure crap.
1.) All regulation is bad
2.) Any data which might force us to change our current method of doing business or behavior is a liberal conspiracy
3.) There is a giant press conspiracy to paint conservatives in a negative light which warrants my near paranoid methodology of interpreting press stories.
4.) "Socialism"
5.) Arm everybody with as many guns as possible -- and make sure the guns are as large as possible
The standard crap from the political left:
1.) Money is evil and those whose incomes are above $75,000/$100,000 per year are clearly in league with Satan.
2.) Wall Street causes all bad things
3.) Positive economic numbers are rigged; negative economic numbers are sacrosanct. As a corollary, all bullish economists are tools while bearish economists are completely trustworthy. Finally, take one bad economic number in a series of good numbers and claim it is a sign that the end of the world is upon us.
4.) All corporations are evil
5.) All market based solutions are evil, rigged and to be avoided at all costs
While I may have missed some of the popular themes, the point is clear: U.S. political dialog is not about data or solving problems. Instead, it's about repeating talking points and cramming events into preconceived perceptions. NDD has pointed out this is "confirmation bias," meaning we only seek out opinions that confirm our preconceptions, regardless of the lack of data "supporting" our opinion.
People on the right can remain in a sealed echo chamber of talk radio, Fox news and right wing blogs. People on the left can remain on the political left's blogs. Both of these methods of information delivery have been taken over by extremists who could care less about data and facts, instead focusing on pushing the latest "meme."
In short, the political blogs have become pure garbage. Assume that any economic analysis from any of them is -- at best -- deeply suspicious, and, at worst, pure crap.
PPI Increases .8%
Last week all the BLS issued both the PPI and CPI. Let's start out by looking at PPI
From the BLS:
The Producer Price Index for finished goods rose 0.8 percent in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed increases of 0.9 percent in December and 0.7 percent in November and marks the seventh straight rise in finished goods prices. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 1.1 percent, and the crude goods index rose 3.3 percent. On an unadjusted basis, prices for finished goods advanced 3.6 percent for the 12 months ended January 2011.
Let's take a look at the chart on a five year basis:
Notice that the recent price increases are in line with the increases seen at the end of the last expansion before the huge spike in prices. While this could mean overall PPI is "heating up" we would need more data to confirm the trend.
Let's take a look at the same data from a year over year perspective:
First, it's been over a year since the large drops of PPI into negative territory, so the YOY numbers are less skewed by the extreme movements during the recession. Notice these numbers are right in line with those seen during the last expansion.
Let's broaden our view by looking at the data in a chart that compares core and total PPI for the last 30 years:
In the above chart, the red line is core PPI while the blue line is total PPI. Notice the following:
1.) During the 1990s expansion, total PPI prices were far tamer and actually decreased for a period near the end of the expansion.
2.) Total PPI was far more volatile during the last expansion.
3.) So far, it appears the PPI is behaving more like it did during the 2000s expansion, with far more volatility.
The above chart shows crude, intermediate and end producer prices for the last 30 years. Notice that we can group these prices into two groups: crude prices (which are far more volatile) and intermediate and finished PPI (which are far less volatile). Also note the intermediate stages of production appear to absorb the price increases of crude goods very well and by the time we get to finished goods the impact of crude price volatility is noticeably diminished.
The above chart simply highlights the previously mentioned point in a year over year format.
In short, the above historical data indicates later stages of production have the ability to absorb the highly volatile nature of crude prices, which is good news, as it appears we are in the middle of volatile crude price markets.
Brown's Legacy
I have written many times on this site about the failure or Gordon Brown's tripartite regulatory system (imposed on the City in 1997).
It is interesting to see that others have also now realised that this system was a failure, and played a large part in the recent banking crisis in the UK.
The Telegraph reports that US treasury secretary Timothy Geithner said:
"Remember your colleagues in the UK ran a strategy for a long time called light touch approach to financial regulation that was designed consciously to pull financial activity from New York and Frankfurt and Paris to London. That was a deeply costly strategy for financial regulation."
It is interesting to see that others have also now realised that this system was a failure, and played a large part in the recent banking crisis in the UK.
The Telegraph reports that US treasury secretary Timothy Geithner said:
"Remember your colleagues in the UK ran a strategy for a long time called light touch approach to financial regulation that was designed consciously to pull financial activity from New York and Frankfurt and Paris to London. That was a deeply costly strategy for financial regulation."
Monday, February 21, 2011
Self Fulfilling Prophecy
It would seem that, if this report in the Telegraph is accurate, we are in danger of talking ourselves into another recession:
"Concerns about the economic outlook, job losses and consumer spending saw 34 per cent of households seeing a worsening of their finances, the lowest level since March 2009."
"Concerns about the economic outlook, job losses and consumer spending saw 34 per cent of households seeing a worsening of their finances, the lowest level since March 2009."
Friday, February 18, 2011
Weekly Indicators: Oil and Jobless Claims at inflection points Edition
- by New Deal democrat
Last week I said that I was currently watching our high frequency indicators especially to contrast the forces of continued strengthening (initial jobless claims) vs. Oil's choke hold on the economy. The data this week shows the contrast of both of those indicators at inflection points. As I wrote this morning, Oil's rise past $90 during January already seems to be having an impact on consumer spending. Its level near that point since last spring is also showing up in slowing industrial production. More than a a whiff of inflation - primarily but not exclusively caused by energy prices - showed up in both the PPI and CPI. Meanwhile the LEI gave us a paltry +.1 increase, due in part to range-bound initial jobless claims and a decline in the manufacturing workweek (plus housing permits, which is probably a one month blip taking back December's big increase).
So let's see how those contrasting forces played out in this week's high frequency data:
I want to give some extra attention to the BLS's report of initial jobless claims increasing to 410,000. The 4 week moving average fell slightly to 415,000. I suspected that we would see a spike this week, perhaps to 440,000 or above. It didn't happen. Here are the weekly readings since jobless claims first hit 410,000 three months ago:
2010-11-20 410000
2010-11-27 438000
2010-12-04 423000
2010-12-11 423000
2010-12-18 420000
2010-12-25 391000
2011-01-01 411000
2011-01-08 447000
2011-01-15 403000
2011-01-22 457000
2011-01-29 419000
2011-02-05 385000
2011-02-12 410000
Here is the last time before then that jobless claims were this low:
2008-07-19 405000
Thus the "spike" was to a level that is (horror of horrors!) tied for the 4th best week in two and a half years! We have been rangebound in the 4 week average between 410,000 and 430,000 for 3 months. The last three weeks average 405,000. If next week comes in at under 425,000, we will establish a new post-recession low. We'll see.
Meanwhile, Oil retreated during the week to under $85 a barrel before trading at $86.35 Friday morning. Gas at the pump rose one penny to another new post-recession high at $3.14 a gallon. Gasoline usage was 66,000 barrels a day lower than last year, or -0.7%. This is the third consecutive negative YoY reading, and is more evidence that gas prices are beginning to "bite." It is also proof of the adage that "the cure for high gas prices, is high gas prices."
Railfax has really proven its worth over the last couple of months. Week after week, I have noted the odd sluggishness of its YoY comparisons, finally noting that it might be signaling a slowdown. This week, industrial production and retail sales showed us it wasn't odd at all. I guess even I ought to pay more attention to this proven and up-to-the-minute indicator. This week, total YoY rail shipments rebounded to 11.0% higher than in 2010. Nevertheless, baseline and cyclical traffic remain barely ahead of last year on a 4 week moving average, and shipments of waste and scrap metal remain actually below last year's levels.
The Mortgage Bankers' Association reported an decrease of 5.9% in seasonally adjusted mortgage applications last week, which maintains this series generally in a flat range since last June. Refinancing decreased 11.4%, and is at its lowest point since last July 3. Higher mortgage rates - up over 1% in the last few months - have really bitten these two series. This is yet more evidence that a slowdown is likely to develop, as a decline in refinancing in particular means slower consumer deleveraging, and less free cash to spend.
The American Staffing Association Index remained at 90 for the third week in a row. This was 14% higher than a year ago, and remains only about 9% below its pre-recession peak levels. But it too has stopped making progress towards that peak.
The ICSC reported that same store sales for the week of February 12 increased 2.7% YoY, but declined -1.4% week over week. This series' YoY comparisons have been trending lower since the first of the year. Shoppertrak reported that sales actually declined 0.4% YoY for the week ending February 5, and also increased 6.1% from the week before. Together, these are tepid to poor compared with recent readings.
Weekly BAA commercial bond rose +.05% to6.22%. This has broken out of its recent range and is at the highest since last June. This looks bad, but it compares with another 0.14% increase in the yields of 10 year treasuries to 3.68%, which is their highest rate since last April. This correlates with increasing inflation risk, but on the other hand certainly does not imply relative weakness for corporate bonds.
M1 was down 1.9% w/w, up 1.9% M/M and up a strong 9.0% YoY, so Real M1 is up 7.3%. M2 was up 0.6% w/w, up 6.7% M/M and up 4.3% YoY, so Real M2 is up 2.6%. Both of these remain in ranges where economic expansion has always taken place.
Adjusting +1.07% due to the recent tax compromise, the Daily Treasury Statement showed adjusted receipts for the first 12 days of February of $91.7 B vs. $95.7 B a year ago, for a loss of -4.0%+ YoY. For the last 20 days, $147.2 B was collected vs. $142.8 B a year ago, for a gain of 3%. February has stunk so that even the 20-day gain is poor compared with most comparisons over the last 10 months.
Altogether there are ample signs that we are entering another slowdown (note: NOT a "double-dip"). The culprits are increasing interest rates and $90+ Oil. Whether the slowdown is small or not depends on whether Oil increases as we move towards the summer driving months, or bounces off $90 as it did last year. It also depends on what Bonddad calls the "Washington lobotomy factory."
Have a great President's day weekend! If you have never been there, a visit to Washington's estate at Mount Vernon is an excellent way to spend a day (and I highly recommend it's colonial- food- themed restaurant). He was a Big Thinker, an innovator, had a first-class eye for talent, and a laser-like focus on detail. But while his will freed his (few) slaves, Martha's (many) slaves were not.
Last week I said that I was currently watching our high frequency indicators especially to contrast the forces of continued strengthening (initial jobless claims) vs. Oil's choke hold on the economy. The data this week shows the contrast of both of those indicators at inflection points. As I wrote this morning, Oil's rise past $90 during January already seems to be having an impact on consumer spending. Its level near that point since last spring is also showing up in slowing industrial production. More than a a whiff of inflation - primarily but not exclusively caused by energy prices - showed up in both the PPI and CPI. Meanwhile the LEI gave us a paltry +.1 increase, due in part to range-bound initial jobless claims and a decline in the manufacturing workweek (plus housing permits, which is probably a one month blip taking back December's big increase).
So let's see how those contrasting forces played out in this week's high frequency data:
I want to give some extra attention to the BLS's report of initial jobless claims increasing to 410,000. The 4 week moving average fell slightly to 415,000. I suspected that we would see a spike this week, perhaps to 440,000 or above. It didn't happen. Here are the weekly readings since jobless claims first hit 410,000 three months ago:
2010-11-20 410000
2010-11-27 438000
2010-12-04 423000
2010-12-11 423000
2010-12-18 420000
2010-12-25 391000
2011-01-01 411000
2011-01-08 447000
2011-01-15 403000
2011-01-22 457000
2011-01-29 419000
2011-02-05 385000
2011-02-12 410000
Here is the last time before then that jobless claims were this low:
2008-07-19 405000
Thus the "spike" was to a level that is (horror of horrors!) tied for the 4th best week in two and a half years! We have been rangebound in the 4 week average between 410,000 and 430,000 for 3 months. The last three weeks average 405,000. If next week comes in at under 425,000, we will establish a new post-recession low. We'll see.
Meanwhile, Oil retreated during the week to under $85 a barrel before trading at $86.35 Friday morning. Gas at the pump rose one penny to another new post-recession high at $3.14 a gallon. Gasoline usage was 66,000 barrels a day lower than last year, or -0.7%. This is the third consecutive negative YoY reading, and is more evidence that gas prices are beginning to "bite." It is also proof of the adage that "the cure for high gas prices, is high gas prices."
Railfax has really proven its worth over the last couple of months. Week after week, I have noted the odd sluggishness of its YoY comparisons, finally noting that it might be signaling a slowdown. This week, industrial production and retail sales showed us it wasn't odd at all. I guess even I ought to pay more attention to this proven and up-to-the-minute indicator. This week, total YoY rail shipments rebounded to 11.0% higher than in 2010. Nevertheless, baseline and cyclical traffic remain barely ahead of last year on a 4 week moving average, and shipments of waste and scrap metal remain actually below last year's levels.
The Mortgage Bankers' Association reported an decrease of 5.9% in seasonally adjusted mortgage applications last week, which maintains this series generally in a flat range since last June. Refinancing decreased 11.4%, and is at its lowest point since last July 3. Higher mortgage rates - up over 1% in the last few months - have really bitten these two series. This is yet more evidence that a slowdown is likely to develop, as a decline in refinancing in particular means slower consumer deleveraging, and less free cash to spend.
The American Staffing Association Index remained at 90 for the third week in a row. This was 14% higher than a year ago, and remains only about 9% below its pre-recession peak levels. But it too has stopped making progress towards that peak.
The ICSC reported that same store sales for the week of February 12 increased 2.7% YoY, but declined -1.4% week over week. This series' YoY comparisons have been trending lower since the first of the year. Shoppertrak reported that sales actually declined 0.4% YoY for the week ending February 5, and also increased 6.1% from the week before. Together, these are tepid to poor compared with recent readings.
Weekly BAA commercial bond rose +.05% to6.22%. This has broken out of its recent range and is at the highest since last June. This looks bad, but it compares with another 0.14% increase in the yields of 10 year treasuries to 3.68%, which is their highest rate since last April. This correlates with increasing inflation risk, but on the other hand certainly does not imply relative weakness for corporate bonds.
M1 was down 1.9% w/w, up 1.9% M/M and up a strong 9.0% YoY, so Real M1 is up 7.3%. M2 was up 0.6% w/w, up 6.7% M/M and up 4.3% YoY, so Real M2 is up 2.6%. Both of these remain in ranges where economic expansion has always taken place.
Adjusting +1.07% due to the recent tax compromise, the Daily Treasury Statement showed adjusted receipts for the first 12 days of February of $91.7 B vs. $95.7 B a year ago, for a loss of -4.0%+ YoY. For the last 20 days, $147.2 B was collected vs. $142.8 B a year ago, for a gain of 3%. February has stunk so that even the 20-day gain is poor compared with most comparisons over the last 10 months.
Altogether there are ample signs that we are entering another slowdown (note: NOT a "double-dip"). The culprits are increasing interest rates and $90+ Oil. Whether the slowdown is small or not depends on whether Oil increases as we move towards the summer driving months, or bounces off $90 as it did last year. It also depends on what Bonddad calls the "Washington lobotomy factory."
Have a great President's day weekend! If you have never been there, a visit to Washington's estate at Mount Vernon is an excellent way to spend a day (and I highly recommend it's colonial- food- themed restaurant). He was a Big Thinker, an innovator, had a first-class eye for talent, and a laser-like focus on detail. But while his will freed his (few) slaves, Martha's (many) slaves were not.
Gas Prices are beginning to choke off the Recovery
- by New Deal democrat
Yesterday Bonddad asked whether gas prices will choke off the recovery. My view of the industrial production and retail sales reports this week is less sanguine than his. In fact I believe that $90+ Oil is already beginning to choke off the recovery.
Let's begin with retail sales. As you may recall, real retail sales is one of my favorite economic metrics, since it captures a huge swath of the consumer economy on a monthly basis, and has an excellent record as a leading indicator for jobs. In the last two months, real retail sales have completely stalled:
Now let's compare real retail sales with Oil. In the graph below, the price of Oil is subtracted from its $90 inflection point (this is slightly simplified, since with inflation and GDP growth this year it is closer to $94), and the difference is divided by 10 to better visualize the comparison:
Note that Oil prices have a strong correlation with real retail sales lagged by one to three months, and that correlation is holding up now.
Now here is industrial production:
Note that in the last 8 months, the growth in industrial production has slowed noticeably compared with the first 11 months after its recession bottom.
Here's a small suggestion: there are plenty of tour buses that aren't being used because of the economic downturn. These buses tend to be very comfortable -- the antithesis of public transportation. How about fast-tracking approvals for bus companies to use these buses for park-and-ride suburban expressway routes? Give me that plus a local jitney service to take riders to and from the bus drop-off point to their nearby offices, and I will give you an extremely pleasant and profitable alternative to suburban expressways jammed during rush hour with inefficient cars.
Yesterday Bonddad asked whether gas prices will choke off the recovery. My view of the industrial production and retail sales reports this week is less sanguine than his. In fact I believe that $90+ Oil is already beginning to choke off the recovery.
Let's begin with retail sales. As you may recall, real retail sales is one of my favorite economic metrics, since it captures a huge swath of the consumer economy on a monthly basis, and has an excellent record as a leading indicator for jobs. In the last two months, real retail sales have completely stalled:
Now let's compare real retail sales with Oil. In the graph below, the price of Oil is subtracted from its $90 inflection point (this is slightly simplified, since with inflation and GDP growth this year it is closer to $94), and the difference is divided by 10 to better visualize the comparison:
Note that Oil prices have a strong correlation with real retail sales lagged by one to three months, and that correlation is holding up now.
Now here is industrial production:
Note that in the last 8 months, the growth in industrial production has slowed noticeably compared with the first 11 months after its recession bottom.
Next, I've added in Oil prices in with the same formula used above:
Note that there is a considerably longer lag. To help you see this point, here is the same data extended back 5 years:
Oil prices appear to have a good correlation with industrial production, lagged by about 6 to 8 months.
My conclusion: Oil prices are already beginning to "bite." Consumers are beginning to retrench their other spending already. All else being equal, I would expect industrial production to continue to trend towards zero over the next half year.
I have been talking about Oil being a choke collar on recovery for close to two years, and needless to say I have been far from alone. Possibly someone in Versailles ought to notice, and try to do something NOW (not something that will help in 20 years)?
Note that there is a considerably longer lag. To help you see this point, here is the same data extended back 5 years:
Oil prices appear to have a good correlation with industrial production, lagged by about 6 to 8 months.
My conclusion: Oil prices are already beginning to "bite." Consumers are beginning to retrench their other spending already. All else being equal, I would expect industrial production to continue to trend towards zero over the next half year.
I have been talking about Oil being a choke collar on recovery for close to two years, and needless to say I have been far from alone. Possibly someone in Versailles ought to notice, and try to do something NOW (not something that will help in 20 years)?
Here's a small suggestion: there are plenty of tour buses that aren't being used because of the economic downturn. These buses tend to be very comfortable -- the antithesis of public transportation. How about fast-tracking approvals for bus companies to use these buses for park-and-ride suburban expressway routes? Give me that plus a local jitney service to take riders to and from the bus drop-off point to their nearby offices, and I will give you an extremely pleasant and profitable alternative to suburban expressways jammed during rush hour with inefficient cars.
Breast Beating
It appears the controversy du jour centers around first lady Michelle Obama's decision to "promote breast-feeding, particularly among black women, as part of her campaign to reduce childhood obesity." In conjunction with this initiative, "The Internal Revenue Service...announced that breast pumps, which can cost several hundred dollars, would be eligible for tax breaks."
Michele Bachmann immediately jumped in to completely misrepresent the situation: "To think that government has to go out and buy my breast pump — You want to talk about nanny state, I think we just got a new definition." To its credit, the Times points out that Bachmann's statement is wrong on its face.
And, of course, Sarah Palin could not help herself but to enter the fray by displaying complete and total ignorance of consumer prices:
Really, Sarah? Really? Yup, it's as "high" now as it was about seven years ago, in mid-2004:
And there is no serious debate about the benefits of breast feeding. The Times also points out that the government is among the largest buyers of baby formula, and that promoting the use of breast milk "might actually help reduce government spending," clearly a top priority of Tea Partiers like Bachmann.
But none of this will stop folks from simply making things up.
Michele Bachmann immediately jumped in to completely misrepresent the situation: "To think that government has to go out and buy my breast pump — You want to talk about nanny state, I think we just got a new definition." To its credit, the Times points out that Bachmann's statement is wrong on its face.
And, of course, Sarah Palin could not help herself but to enter the fray by displaying complete and total ignorance of consumer prices:
“No wonder Michelle Obama is telling everybody, ‘You better breast-feed your baby,’ ” she said at a speech on Long Island. “Yeah, you’d better, because the price of milk is so high right now.”
Really, Sarah? Really? Yup, it's as "high" now as it was about seven years ago, in mid-2004:
Of course, we can't just give infants just whole milk, so let's drill down into the specific category of "Baby Food":
So there's been no inflation in "Baby Food" in about three years, while Milk has actually declined and is lower now than it was for about a two year period in the late aughts.
And there is no serious debate about the benefits of breast feeding. The Times also points out that the government is among the largest buyers of baby formula, and that promoting the use of breast milk "might actually help reduce government spending," clearly a top priority of Tea Partiers like Bachmann.
But none of this will stop folks from simply making things up.
Manufacturing Still in Good Shape
This week, we've had three important reports on manufacturing -- industrial production, the New York Fed's Empire State Manufacturing Survey and the Philly Fed's Manufacturing Survey. Let's examine the details of each.
From the Fed:
The above highlights the importance of details in the overall report. While IP did decline, the output in utilities was the primary reason for the decrease. Notice that utilities increased at a strong rate (4.1%) in the preceding month, making last months decrease more pronounced.
Before we look at the details, let's take a look at the chart of the overall number:
Notice overall IP has been increasing for the better part of two years.
Let's look at the details:
From the Fed:
Industrial production decreased 0.1 percent in January 2011 after having risen 1.2 percent in December. In the manufacturing sector, output increased 0.3 percent in January after an upwardly revised gain of 0.9 percent in December. Excluding motor vehicles and parts, factory production rose 0.1 percent in January. The output of utilities fell 1.6 percent in January, as temperatures moved closer to normal after unseasonably cold weather boosted the demand for heating in December; the output of utilities advanced 4.1 percent in that month. In January, the output of mines declined 0.7 percent. At 95.1 percent of its 2007 average, total industrial production in January was 5.2 percent above its level of a year earlier. The capacity utilization rate for total industry edged down to 76.1 percent, a rate 4.4 percentage points below its average from 1972 to 2010.
The above highlights the importance of details in the overall report. While IP did decline, the output in utilities was the primary reason for the decrease. Notice that utilities increased at a strong rate (4.1%) in the preceding month, making last months decrease more pronounced.
Before we look at the details, let's take a look at the chart of the overall number:
Notice overall IP has been increasing for the better part of two years.
Let's look at the details:
Manufacturing output rose 0.3 percent in January after having increased 0.9 percent in December; the level of output in January was 5.5 percent above its year-earlier level. Capacity utilization for manufacturing was 73.7 percent, a rate 5.4 percentage points below its average for the period from 1972 to 2010.The output of durable goods moved up 0.6 percent in January. A large gain was recorded in the index for motor vehicles and parts; smaller increases were recorded for many other industries, including fabricated metal products, machinery, computer and electronic products, aerospace and miscellaneous transportation equipment, furniture and related products, and miscellaneous manufacturing. Output decreased for wood products; nonmetallic mineral products; primary metals; and electrical equipment, appliances, and components.
Nondurable manufacturing declined 0.1 percent in January after having advanced 1.0 percent in December. The decline in production in January reflected decreases for food, beverage, and tobacco products; textile and product mills; printing and support products; and petroleum and coal products. The production of apparel and leather products moved up more than 1 percent, and the output indexes for paper, for chemicals, and for plastics and rubber products recorded smaller increases. The index for non-NAICS manufacturing industries, which comprises publishing and logging, rose 0.3 percent.
In January, mining output fell 0.7 percent, and capacity utilization declined to 88.1 percent, a rate 0.7 percentage point above its 1972-2010 average. After a sizable increase in December, the output of utilities dropped 1.6 percent in January, as production declined in both electric and natural gas utilities. The utilization rate for utilities fell to 81.2 percent.
Durables manufacturing increased broadly, including an increase in auto production. This increase indicates two points: first, end users are growing more confident because durable goods require financing to make purchases, and second, financing is becoming more available as these types of purchases usually require some type of credit facility. Both of these developments indicate fundamental economic strength. Here is a five-year chart of the data:
Notice the durables manufacturing is clearly in an uptrend, increasing on a month to month basis.
The .1% decline in non-durables manufacturing occurred after a 1% increase in December. While the decline was fairly broad-based, covering a wide range of industries, the overall decline was shallow, indicating it was probably as much a simple slackening of demand after a strong increase the previous month. Here is a chart of the data:
Notice the overall uptrend that is clearly in place.
Finally, we have mining, which appears to have topped over the last 5 months:
However, the overall output is now at levels above those preceding the recession, indicating this area of IP has recovered.
Again, note the latest report from the Federal Reserve on Industrial Production fell, but that decline was largely utility related. A look at the underlying data indicates the strong uptrends are still intact.
Let's turn to the Empire State Index:
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve in February. The general business conditions index rose 3.5 points to 15.4. The new orders index edged down just slightly, to 11.8. The shipments index retreated 14 points, reversing much of January's 18-point surge, but remained positive at 11.3. The inventories index continued to climb from its December low, reaching its highest level since April. The index for number of employees fell, but the average workweek measure moved up. The prices paid index climbed to a two-and-a half-year high in February, but the measure for prices received was little changed, suggesting some pressure on profit margins. The forward-looking indexes continued to signal widespread optimism, though to a somewhat lesser degree than in January. Indexes for expected prices, both paid and received, declined moderately, after reaching multiyear highs last month.
Several months ago, this number dropped into negative territory. However, it has clearly rebounded and again printing good numbers. Here is a chart of the data:
Finally, we have the Philadelphia Fed:
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 19.3 in January to 35.9 this month. This is the highest reading since January 2004 (see Chart). The demand for manufactured goods is showing continued strength: Although the new orders index was virtually unchanged in February, it has increased over the past six months. The shipments index also improved markedly, increasing 22 points. Firms also reported a rise in unfilled orders and longer delivery times this month.Firms’ responses continue to indicate improving labor market conditions. The current employment index increased 6 points, and for the sixth consecutive month, the percentage of firms reporting an increase in employment (29 percent) is higher than the percentage reporting a decline (5 percent). More than twice as many firms reported a longer workweek (23 percent) than reported a shorter one (10 percent).
Notice this is the highest reading since 2004, indicating this region has clearly bounced back from the recession and is doing better than in the previous expansion.
The data indicates that manufacturing -- a backbone of the current recovery -- is still doing well.
