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  • ECONOMIC & MARKET ANALYSIS - June 30, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell rose 0.6%.

    S&P 500 Index - The Index finished at 1960.96, down 0.1% from last week.

    US Dollar Index - The Index finished at 80.04, down 0.4% from last week.

    Gold - Gold finished at 1321.49, up 0.6% from last week.

    Single-Family Home Sales - The 12-month rolling average in the value of homes sold rose 0.5% in May.

    Disposable Personal Income - The 12-month rolling average in May, annualized, was 3.6% in May.

    Consumer Spending - The 12-month rolling average rose 0.3% in May.

    Orders for Durable Goods - The 12-month rolling average of new orders in May rose 0.5%.

    The larger community of investors, which we collectively call the Market, doesn't always get the economic picture right, it's always instructive to interpret what the Market is thinking.  Looking at this week's pattern: commodities down, gold up, Dollar down, and stocks basically unchanged--what we can divine is that the Market is telling you it expects a bit of economic softening and...monetary softening to go along with that, as well.

    We did previously tell you the summer would feel comfortable, but it's hard to be sure that the fall and winter will continue in the same vein.

    In other words, the Market may not have it wrong.

    If you're a longtime reader, you can probably guess that we'd say that if you were to pay attention to just one of this week's data points, it should be Durable Goods.  And the result this week?  Not bad.  An increase of 0.5% is what we'd call very moderate, which is not great, but it's better than what we'd call modest.  Excluding transportation-related goods, the increase drops to 0.4%, though.

    Income and Spending...big topics, no?  To a great extent they're lagging indicators, but that doesn't eliminate their usefulness.  Both rose 0.3% in May...that's what we'd characterize as quite modest.  If we look at income on a per-capita basis, the increase there drops to 0.2%, which is a level that starts to flirt with being stagnant when you factor in Inflation.  However, that 0.2% increase, low as it is, is the highest result since November.  And that dovetails nicely with one of our indirect indicators: consumer savings.  

    Here's the thing: trends in saving don't forecast how consumers will feel going forward, but they do tell you a lot about what consumers are feeling at the moment.  So, when we look at the months of March, April, and May, we find that savings has risen each month, a reflection, we believe, of consumers' diminution of confidence after that rough economic first quarter.  But, in both April and May, those increases in saving have declined over the month before.  All of this is consistent with our forecast a couple of months ago, that the summer would likely feel fairly comfortable.  But here's the more important point: higher consumer confidence is associated with decline in consumer savings.  And that's something we do not have.  Keep that in mind.

    If all of this has been modestly positive, we're going to throw some cold water into the picture.  The good news is that the 12-month rolling average of the value of new single-family homes sold in May rose 0.5%...and that's, yes, a moderate result.  There's a little more to the story, however.  Open inventory of homes sold rose, in May, for the 15th consecutive month.  We told you roughly nine months ago that the recovery in Housing would moderate, and it has...this steady rise in housing inventory is not a harbinger of an acceleration of the Housing recovery.  Higher inventory?  That translates, other things being equal, to the same number of dollars competing for a greater supply.  Supply...demand...you can do the arithmetic.  With more to choose from, that means less competition on price.

    Remember: a strong expansion in Housing does not equate, alone, to a strong economy, but there will be no consistent economy-wide expansion without a sustained expansion in the Housing sector. 

    Grading the week, we're calling it a B-.

  • EDITOR'S LETTER - June 23, 2014

    Editor's Letter

    In recent weeks, we've been given pause to re-evaluate the pace at which Inflation should be expected to pick up later this year.  Over the last few weeks, however, we've gotten nothing but confirmation that our original forecast is on the money.

    First, fresh data on Capacity Utilization shows the Index continuing to move up and is now at the point that it begins to flirt with what we'd call inflationary levels (see the Economic & Weekly Analysis).

    Second, while the Dollar has essentially traded in a narrow range for the past few months, it has only traded in a narrow range.  The kind of strength you want to see to prevent Inflation is simply not there.

    Third, the upward climb in commodity prices has been fairly steady and strong.  Get the picture?

    Now, as we point out in this week's Economic & Market Analysis, while rising Inflation is always a concern, it's less of a concern to the extent that growth in Industrial Output outstrips it.

    Why is all of this important?

    Well, if you're intelligent, you've probably been accepting the conventional wisdom on the Stock Market.  And that is that as long as short-term interest rates remain in the figurative basement, even if corporate earnings don't blow the figurative lights out, it's hard to see anything but an inexorable climb in the major market indexes.

    As long as your understanding is that the chief reason for the Market's returns are about (1) being a refuge for investors reaching for yield and (2) corporate profits being buoyed by low rates, you should be extremely sensitive to the issue of when the Federal Reserve will move to raise interest rates.

    Let's be frank: it's not really all that difficult to determine the factors that would inform a change in monetary policy.  The problem: it's more than slightly probable that labor conditions are going to lag the factors that would normally be persuasive in moving rates higher. Our bet: the Fed will drag its heels on actually raising rates even after those factors kick in.  Chair Yellen has already addressed the issue, stating that the preferred route in that event would be to undertake tactical steps to curb lending (and thereby Inflation) rather than actually raise rates.

    What does all of this have to do with you?

    Let's back-track for a minute.  A couple of months ago, we told you that we expected the summer of '14 to feel relatively comfortable.  Why?  Well, it's a combination of factors:  Inflation has been trending up, but Industrial Production and Retail Sales, low as they still are, have been trending up, as well, in excess of Inflation; and Labor conditions the last couple of months have improved a little.

    So far, so good.  But what happens if Inflation picks up faster than both Retail Sales and Industrial Production?  You can bet your last sou it will hit corporate earnings and consumer confidence. 

    Now, you can be confident that the Fed will be successful in using its toolbox to contain Inflation, but understand that those tools will also hit economic growth.  Just as importantly, you should be skeptical about the Fed's ability to contain Inflation in the absence of actually raising interest rates.  Yellen thinks that giving banks disincentives to lend will contain Inflation.  You can believe that.  But you'd be believing it in the face of rising Capacity Utilization, a Dollar that's stable at best (and likely to weaken in the face of the Euro and the Yen), and rising commodity prices.

    That is not a bet we're going to take. 

    Also, don't bet against the Euro lightly.  Remember: the European Central Bank lowered its key lending rate two weeks ago, and already the Euro is advancing on the Dollar.

    Smart money says that the time to be wary is when everyone else is superbly confident.

    For now, the Stock Market seems to be on safe ground, for the reasons we cited.

    But you need to stay vigilant.  We will let you know when we're approaching the danger point...and our guess is that it will be relatively soon.

    And keep this in mind, now: psychologically, there is little that's more difficult than choosing to not make money in the short- to medium-term while everyone else is showing a weekly profit.  But it's all about long-term capital management.  You can choose the comfort of knowing your neighbor's portfolio didn't beat yours in one week, or you can avoid the kind of risk and decline that your neighbor will be diving head first, into.

    It's not too early to start handicapping your psychological frame of mind and preparing yourself.

  • ECONOMIC & MARKET ANALYSIS - June 23, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.2%.

    S&P 500 Index - The Index finished at 1962.87, up 1.4% from last week.

    US Dollar Index - The Index finished at 80.37, down 0.3% from last week.

    Gold - Gold finished at 1313.58, up 3.0% from last week.

    Industrial Production - The 12-month rolling average in the Index rose 0.3% in May. 

    Consumer Prices - The 12-month rolling average in May, annualized, was 1.9%, up from 1.5% last month.

    Capacity Utilization - The 12-month rolling average rose 0.1% in May, to an index level of 79.1.

    U.S. Dollar - The 12-month rolling average of the U.S. Dollar's Broad Index rose 2.4% on an annualized basis in May.

    This was a very important week, data-wise, because of the release of two of the most critical indicators for understanding the economy's direction.

    The story we got this week in Industrial Output mirrors that in Retail Sales, which we discussed last week.  The 12-month rolling average rose 0.3% in May and that's the highest rate of increase since August 2012.  In other words, some growth in Industrial Production has been afoot.  However, growth has been extremely anemic.  An increase of 0.3% is just barely above a level we associate with stagnation.  Add in the effect of Inflation and the result is more sobering, especially since Inflation is slowly making a comeback.   Taking Inflation into account, the net result, this month is smaller than than two of the three months in the first calendar quarter...and everyone, by now, should remember how poorly the economy fared in the first quarter.  So, keep that in mind.

    Inflation, of course, can be a great destroyer of economic gains.  Growth in Inflation without commensurate gains in nominal measures of output can be particularly dangerous.  In May, the 12-month rolling average, if annualized. works out to 1.9%, and that's the highest rate since October 2011.  One way to look at it: the annualized rate of increase in Consumer Prices has risen 40% since February.

    Excluding food and energy from the Index, the picture, superficially looks better since the Index is basically unchanged from February.  The bad news: the annualized rate is essentially the same as the all-in figure.  In other words, non-food and non-energy prices are catching up to food and energy.

    But--and there is a huge "but" here--the fact is that while Inflation has inched up, so has Industrial Production, at a rate that is just high enough to show some real improvement, however small.  If you are surprised to read us being this positive, don't be: we try to report the facts as they are.  Besides, it's a modest improvement. 

    Based on the importance of these two indicators, alone, because of their importance, we're grading the week a B.  Why isn't it higher?  For the reasons we mention: on a net basis, the direction is positive, but it's not very strong, either.  But it dovetails very well with our forecast, if you remember, that the summer will be a little more comfortable than the start of the year.

    A word about Capacity (or Factory) Utilization is in order since it's a major input to Inflation.  Even though, the Index has been steadily rising for two years, it's been rising at a very slow rate, keeping the Index relatively low and not a major factor in fueling Inflation.  The last few months that has started to change.  Now the Index has reached 79.1, a level that we consider mildly inflationary.  It won't take much of a move upward for it to become solidly inflationary.  To keep Inflation subdued at this point, you need to count on either a rising Dollar or lower commodities prices or both.  We caution you to think very carefully if you bet on either.   

    Now, we don't normally report on or heavily weight indicators related to Residential Construction.  But we do keep an eye on them.  And there's one that we think sheds the most light on economic conditions; that's the number of new permits issued to construct new housing.  It's interesting to note that, this month (ending May), the 12-month rolling average of new permits issued fell 1.2%.  That is the first decline in more than three years.  We think that fact alone makes it worthy of paying attention to.  As we have said--and repeat in this week's Editor's Letter, we think the short-term outlook is looking up a little.  But something like this can't be ignored.  But we'll say this: despite the very short-term outlook having improved very mildly, that disconnect we talk abut from time-to-time, between monetary policy and economic activity has not changed in any significant way.  In other words, don't let a mild short-term improvement take on too much meaning.

    Every week, we try to make sense of what the Market made of the week.  When we look at the Market, the major inputs we weigh are the moves in the major equities index, the US Dollar, and Gold.  It's our conviction that at least 85% of the market's persuasion can be explained by how these moved in relation to each other.  And the fact is that there are only so many patterns of how these moves can occur.  This week is a little trickier than usual.  Normally, based solely on the results we got, we'd firmly ascribe the Market's sentiment to being roughly positive about the near term, economically.  The Dollar declined on a firmer Euro, and a declining Dollar, ceteris paribus, is always a welcome thing for exports, and, of course, the S&P 500 rose very nicely on both that fact and the belief that a low-interest rate environment will continue for at least the balance of 2014. 

    All of that is true, but while normally, yes, Commodities, including Gold, would rise along with that decline in the US Dollar, we have to look a little beyond that.  Gold had a fairly strong week (along with Oil rising, having a significant effect on the Commodities Index), much more than we'd expect on merely a slightly weaker Dollar, especially if the Market is demonstrating optimism.  We ascribe roughly a quarter of the move in Gold to a rise in regional tensions this week, particularly the Iraq situation.  There are many who will tell you that Gold ceased to be significant as a safe haven a long time ago. Don't believe them.  Gold is still the ultimate store of value and it's where investors tend to flock in times of political uncertainty, globally.

    Remember: next time someone tells you that we have, as a globe, settled what currency is, remind them of the rise in popularity of virtual currencies.  

  • ECONOMIC & MARKET ANALYSIS - June 16, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.5%.

    S&P 500 Index - The Index finished at 1936.16, down 0.7% from last week.

    US Dollar Index - The Index finished at 80.58, up 0.2% from last week.

    Gold - Gold finished at 1275.51, up 1.3% from last week.

    Retail Sales - The 12-month rolling average in the Index rose 0.4% in May. 

    Business Sales - The 12-month rolling average in April rose 0.3%.

    Business Sales, as an indicator, certainly isn't in the first rank of our economic indicators, though it does play a part.  The signal problem with it is that it's reported on a one-month lag compared to Retail Sales.  The good news is that Business Sales have trended up the past few months, but, at 0.3% that doesn't mean much.  That level of monthly increase is roughly one-third of what we'd want to see to view the indicator as pointing to expansion.  Add in the effect of Inflation, and the result is even less to get excited over.

    The story is similar in a more important indicator:  Retail Sales.  That rise of 0.4% is the strongest result since September 2013 and, in point of fact, sales have been rising the past few months, but...it's still not a strong result.  Add in the fact that Inflation, year-over-year, in April, was the highest since July 2013 and you have more reason to be phlegmatic.  The situation should give you even more reason to pause when we subtract auto-related sales from the total...giving us an increase of just 0.2%.  Granted, this is the strongest result for core retail sales since December 2013 and, again, sales show an improvement the past three months, but we're still far below levels that you can reasonably associate with an accelerating economy.  

    Now, it's important to understand that though the Market doesn't necessarily read the figurative tea leaves perfectly accurately it's still essential to make sense of where the Market's psyche is.  There are weeks in which the various aspects of the Market perform randomly in the sense of responding to a consistent view.  That is not the case this week.  This week, this is what you had:  the equity market down, gold up, and the Dollar up.  That pattern?  That message is that the Market is fearful of a major economic slowdown.  Is a decline in the Dollar necessarily an early forecast of a declining economy?  No.  In general, however, you associate a strengthening economy with a strengthening Dollar.  So, when the Dollar rises (in this case largely due to Euro weakness), but equities decline, the Market is telling you that it's not sanguine about corporate profits.  Yes, it's true that the Market likes a lower Dollar as a lower Dollar will tend to spur export sales.  In this case, however, the Dollar rose, not because of strengthening fundamentals, but solely on Euro weakness   And Gold?  If the Market thought that the economy were picking up steam, it would send Gold lower. When Gold rises, especially in the face of a rising Dollar, you can be sure that the Market is thinking that further or more extended monetary easing is on the horizon.  

    The good news is that, even as Inflation has trended higher the last couple of months and we have been voicing a warning over rising Inflation, the fact is that, while our Model is still pointing toward rising Inflation, it's telling us that there will likely be far less pernicious upward pressure on Inflation later this year than we expected.  

    In next week's Editor's Letter, we're going to take a broad review of the economy, an expansion on what we talk about in the Domestic Scorecard

    Grading the week?  No higher than a C. 

  • EDITOR'S LETTER - June 9, 2014

    Editor's Letter

    Late this week, the European Central Bank took steps to fan the flames of monetary easing.  Specifically, the Bank took two steps:

    1.  It lowered its overnight lending rate (the equivalent of Fed Funds) from 0.25% to 0.15%.

    2.  It lowered the interest rate it will pay member banks on deposits in excess of required reserves to -0.1%.

    In the case of the former, the move is nominal at best; a difference of 10 basis points is not particularly potent.  The change now puts the ECB's overnight lending rate almost exactly in line with the Fed's.  Will this have an effect on the carry-trade business, with the effect of making investors more indifferent about parking funds in Euro-denominated instruments over USD-denominated instruments?  Maybe, but it's a negligible change in the rates, so you should also expect a negligible effect in currencies...at least from that perspective.

    It's that second step that should intrigue you.  The Central Bank is going to pay member banks -0.1% on excess deposits.  In other words, it is going to charge the banks for keeping these deposits with the Central Bank.  In other words, the Central Bank is creating an incentive for member banks to put funds to use, specifically...lending. 

    Now, turn this on its head...another way to understand this is that the Central Bank is creative a disincentive for member banks to build up reserves.

    Should you be concerned about that?  A little, yes.  The problem is not completely different in our own country.  Lending is very subdued and Inflation is already running around the 2.0% mark...AND a great deal of the reserves that the banks have built up at the Federal Reserve are phantom reserves (a function of the money manufacturing process the Fed has been engaged in).

    You are reading this correctly.  A reasonable person would find it nearly incredible that the makers of monetary policy would, after the Financial Crisis, not be highly attuned to the issue of building adequate reserves.  But, to our longstanding issue: monetary policy is not having the result that those in charge want...so what do you do?

    Now, let's put the ECB's action into a little more perspective.  From every angle in the Business Press, it has been represented as a step to stave off Deflation. 

    This is a very silly way to characterize what the Central Bank is doing.  First, a little more background.

    For months we've been telling you to be optimistic about the economic situations in Japan and Europe...for a number of reasons.  And, if you've been paying attention, you know that if you go back a few months, there was a string of several months during which economic activity did pick up in both Europe and Japan.  It is, also, true, however, that things have begun to slow down again.

    What does this mean for our concern about the prospect of rising Inflation in the United States?  Well, it suggests that the threat of Inflation becomes lesser.  But, it does not eliminate it.  First of all, it's true that commodity prices have come down in the past two weeks; it is also true that they are still showing price gains over the past year; in other words, based on that isolated factor alone, while the threat of rapidly rising Inflation may be diminishing, the thread of mildly rising Inflation is intact.  This is a very, very key point.

    Secondly, how will the ECB's steps affect the Inflation picture?  Well, if the ECB has its way, lending will grow significantly in the Euro Zone within a timeframe of six months, and that spells strong things for a rising Inflation picture in Europe.

    Of course, however, what the ECB is trying to effect is stronger industrial output.  Face facts: no one really worries about the prospect of Deflation if Industrial Production is rising.  What the ECB is really trying to bring about his greater economic activity, not Inflation for its own sake.  And, if the ECB has its way, that will mean giving the ECB a strong reason six-to-nine months out from now to mildly tighten monetary policy.

    Here are the three crucial points:

    First, the ECB is taking steps that are all but unprecedented...charging banks fees for depositing funds.  This is a fairly drastic step and an accurate reflection of economic malaise.

    Second, to the point that we make persistently, you should not underestimate the will of the major European leaders to effect economic growth.  One of two things will happen: they will use every tool available to do it or fail so utterly that the Euro coalition falls apart, and with it, the global financial system.  As we often say, do not underestimate how crucial the Euro Zone is to the global trading market.  The Euro Zone is the single largest monetary and trade zone on the globe.  Failure, short of ability to avoid failure, is not an option.

    Third, you should, indeed, be concerned about the soundness of the banking system in Europe, based on this latest action.  Given how weak economic activity and growth are, is now the right time to cut back significantly on the build-up of reserves with the Central Bank? 

    We think you know the answer.

  • ECONOMIC & MARKET ANALYSIS - June 9, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims dropped 0.7%.

    S&P 500 Index - The Index finished at 1949.44, up 1.3% from last week

    US Dollar Index - The Index finished at 80.41, unchanged from last week.

    Gold - Gold finished at 1258.79, unchanged from last week.

    Case-Shiller Housing Index - The 12-month rolling average in the Index rose 1.0% in March.

    Lending - The 12-month rolling average in all Lending rose 0.3% in April.

    Employment - The Employment Rate in May, was unchanged, from April, at 58.7%.

    Starting last fall, we counseled that a slowdown in the housing recovery was on the horizon.  And that, in fact, is what transpired.  While the 12-month rolling average, did not, at any point, decline, the Index did decline, month-over-month, for four consecutive months.  This month, the 12-month rolling average rose 1.0%.  We are now saying that we expect the housing market to settle into a pattern of slow growth, though not as robust as the recovery we experience in late 2012 through late 2013, however. 

    If you want to put the housing recovery into perspective, you should know that the Index is now at the level it was at in July 2008. 

    The difficulty with looking at Lending as an indicator is that, to some extent, it's a lagging indicator.  Nevertheless, economic growth and lending tend to go hand-in-hand.  The good news is that Lending grew in April, but it grew at a modest rate, nothing that can be considered expansionary.  And, interestingly, Real Estate-related lending was flat.  If that sounds worrisome, we need to remember that for several months, Lending in that sector actually declined modestly.  We consider this month's result consistent with our perspective that the Housing sector will grow in the short-term, but very modestly.  

    And...the marquee data of the week: Labor.  Our most significant indicator is the Employment Rate, which has remained unchanged for three consecutive months at 58.7%.  To put this figure into perspective, it's 0.5 percentage points up from the low since the Financial Crisis and just 0.2 percentage points off the high since the Financial Crisis.  In other words, it's not good.  You can try to argue that economic growth and the Employment Rate are not correlated, but you won't have us backing you.

    On a 12-month rolling basis, the number of those employed in May grew at the standard pace of 0.1%.  And, the number of net newly employed (our measure of those newly employed adjusted for those who leave the labor force) rose 3.5% month-over-month.  This is a fairly respectable result.  The three-month rolling average (our typical methodology) places the change in the 12-month rolling average at -5.8%, but that's a function of unusually poor labor results in January and February. 

    If you read our updated Domestic Scorecard last week, you'll know that we said that Consumer Confidence ticked up slightly recently...just enough that we said that you should expect a slightly better summer and third quarter than this past winter and first quarter.  The signal reason for this is a labor market that has shown minor improvement in the past two months.  Nevertheless, you can try to argue that economic growth and the Employment Rate are not closely correlated, but you won't have us backing you: the fact of the persistently low Employment Rate is one of the strongest indications that there is no expansion on the horizon.

    As for the Market, this week is in many ways a signal example of what you should expect to come.  As the outlook for corporate profits continues to be under pressure, there will be less reason for investors to actively take a strong position with regard to the economic outlook.  And that's what we see this week:  the U.S. Dollar was essentially unchanged, as was Gold.  What we got was a nice little advance in the Equity Market, a reflection of investors' preference for an investment class that is giving investors a reason to park money there as a function of how low interest rates are.  Were investors motivated by a sense of growing profits or increased economic activity, you'd be looking at different week-ending results, likely including a rising Dollar and more weakness in Gold.   

    All around, however, it wasn't such a bad week...we're grading it B+.

  • SCORECARDS - June 9, 2014

    Current Scorecard - Domestic

    June 2014

    Quick View:

    Weighted Average:    1
    Current Month:        13

    Consumer Confidence

    Current Month:    18
    Last Month:         11
                                                        
          

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                  6

                 6

               -3

    Leading Indicators

                19

               13  

               11 

    Confirming Indicators

                 8

               15  

                5

    Foundation

               -29

              -27 

               -48 



    A reminder of the relatively new feature at the top.  The Quick View tells you quickly where we are.  The Weighted Average tells you the directionality over the past year, rather than how strong the economy actually is.  The best way to think of that figure is as a sense of how things likely feel right now, which will be a reflection, not just of what's happening now, but an accumulation of the past year's experience. The second figure tells you our forecast for how the economy is trending.  We think it's a good way for you to get a quick sense of what's going on.

    We have also added a new feature, Consumer Confidence.  It's our attempt to measure, not how Consumers feel, or even what their expectations are, but how likely they are to spend based on objective criteria.  

    The first thing to observe is that our current month's figure for Leading Indicators, at 19, though hardly at an expansionary, is at the highest level it's been since October of last year.  And therein lies the clue to a subtle change we're making in our forecast. 

    Somewhere in the fourth quarter of last year, the model signaled that the forecast for the foreseeable future would be one of very modest growth.  And, that is, in fact, what occurred.  By now, it's fairly common knowledge that the Government's second estimate of first quarter GDP was actually negative.

    Embedded in our Leading Indicators is our base data for Consumer Confidence, a metric we have put enormous effort into calculating: in other words, we have a lot of confidence that our metric for the Consumer's propensity to feel good about the economy for the near term is very accurate.  The good news is that, at 18, the figure is the highest since last June of last year.

    This is not an upward revision to an accelerating pace of economic growth.  To phrase it simply, we would characterize our perspective on growth for the near term as being upgraded from very modest to...modest.  The pace of growth will pick up slightly...but it will not approach anything like acceleration into expansion, which is something you may confidently expect to hear from some quarters at the first sign of any new growth.

    A word about the timeframe is in order.

    No economist can, with any high degree of probability in being accurate give you a forecast that's good for nine months to 12 months in the future.  If your goal is to work with a forecast that you can have high confidence in, the furthest out you can look is four - six months.  And, given our very deep concerns about Inflation, our revised forecast is good for two - four months. 

    It's simply too early to say with anything approaching 100% confidence that Inflation will be a different story a year from now than it is today.  

    As for specifically what's driving this slight uptick in the forecast for now, we point you to good recent results in Orders for Durable Goods, Retail Sales, and a good reversal of developments in the Labor Market.  For some months, the economy was not adding jobs fast enough to compensate for those leaving the labor force, but that has begun to reverse itself.  If that development changes--and we don't think it will in the next two or three months--it could very suddenly impact Consumer Confidence.

    To summarize, we are solidly forecasting a mild uptick in the pace of economic activity for the balance of the summer.

    There's one other area that deserves your consideration: and that's the Equity Market.  Thanks to ultra-low interest rates, it's very difficult to see anything but a continuation of investors' preference for the Market, however...our view is that the outlook for Corporate Profits is nothing more than stable...it's very difficult to forecast any kind of significant growth...largely as a result of monetary stimulus that, on a net basis, is positive, but not aggressively so. 

    And, one last short word about where we are in the business cycle is in order, especially in view of talking about an uptick in growth.  We are squarely in the middle of an ongoing recovery...there is no case to be made for the view that we have left the recovery and are now in expansion.

    Current Scorecard - Global

    June 2014

    Full Scorecard:

                                                        Current                   Four                         12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                10

                 8 

               N/A

    Leading Indicators

               13

               14  

               N/A  

    Confirming Indicators

                 9

                7  

               N/A

    Foundation

                 5 

               (2)

               N/A

     
    In attempting to assess the prospects for a stronger or weaker outlook, we need to take a look at the factors that are working in both directions.  And, the strongest case that can be made for a sustained economic recovery is the combination of strong equity markets and low long-term interest rates that are having the effect of making it cheaper for the private sector to borrow, thus boosting earnings. 

    That really is just about all there is.  Taken together, our Leading and Confirming indicators average out to a numeric result of 11.  You can shoe-horn that figure into a recovery framework, but just barely.  If you isolate Consumer Confidence, the figure is even lower, just 8.  

    In what is probably the most notable demonstration that the global recovery is anemic, the European Central Bank announced that it is reducing the interest rate it pays on member banks' deposits to negative territory.  In other words, the Central Bank will begin charging member banks for depositing funds with the ECB in excess of reserve requirements.  Obviously, this measure is intended to give banks a strong incentive to put capital to work, most notably by lending it. 

    A few specifics...Unemployment, globally has improved, but just barely, off the worst of the Financial Crisis.  Deficits?  On a global basis, deficits are not that bad...however, the relatively large deficits of a few major players that have the potential to have significant impact on global markets are still a  problem.  

    The European Central Bank's move is understandable, but it's a concern:  Japanese and European markets had been demonstrating real improvement.  However, European leaders are justifiably now concerned about sustaining that level of growth, and in Japan, it's highly questionable whether the surge in economic output that was achieved by the depreciation of the Yen will continue...as (1) the Government appears to be running out of steam to push the Yen down and (2) organic accelerating growth is not demonstrated yet to be a fact.

    Economic anemia in Europe and Japan are sources of great, great concern...however, it does mean that the likelihood of accelerating Inflation, domestically, diminishes greatly.  However, there's another risk that's starting to grow: even as the ECB is working to give European banks incentives to lend, there are preliminary indications that American banks' levels of debt are beginning to approach the lower threshold of danger in relation to income and output. 

    Nevertheless, much as the prognosis for the near- to-medium term is sober, it is not negative.  Keep in mind that, net monetary stimulus is, indeed, positive.  And, as low as our Leading Indicator figure is, it is positive.  In other words, let the model guide you: if the present situation is just slightly positive, so the prognosis is also just slightly positive...not much reason for an optimistic case for expansion, but a phlegmatic case for very modest growth.

    Understanding the Scorecards

    Domestic Scorecard

    The Scorecard is our concise means for measuring the current level of strength in the economy, where the economy is headed, and how sustainable expansion is.

    The components:

    1. Overall Grade is a consolidated measure of how strong the economy is now, where the economy is headed, and the risk factors that pose a threat.
    2. Leading Indicators provide a reading on the primary drivers of the economy.  
    3. Confirming Indicators are a good read on how things are at the moment.  
    4. Risk Factors measure significant threats to economic expansion.

    The grades: 

    The grades are not unlike school grades.  The scale goes from -100 to +100.  Anything within a range of -16 to +16 roughly indicates a maintenance of the status quo, though, with higher or lower figures indicating the direction in which the economy is trending.   

    Global Scorecard

    Our Global Scorecard uses the same numerical scale as the Domestic Scorecard.  It includes the United States.

     

  • ECONOMIC & MARKET ANALYSIS - June 2, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims dropped 3.5%.

    S&P 500 Index - The Index finished at 1923.57, up 1.2% from last week

    US Dollar Index - The Index finished at 80.37, unchanged from last week.

    Gold - Gold finished at 1257.78, down 0.3% from last week.

    Orders for Durable Goods - The 12-month rolling average of New Orders for Durable Goods rose 0.5% in April.

    Disposable Personal Income - The 12-month rolling average rose 0.3% in April.

    Consumer Spending - The 12-month rolling average rose 0.3% in April.

    There are many indicators that don't align perfectly with the economy's trajectory, but among them is not Durable Goods Orders. 

    The 12-month rolling average rose a quite respectable 0.5% in April.  This is a figure that we associate with moderate growth....it's a figure that's quite a bit below what you'd expect as a precursor to an expansion, but it's most certainly in the range of what you'd expect once the acceleration stabilized.  Somewhat reassuring as well is that the month-over-month change was also in the same range, about 0.6%.   Even more reassuring, orders for "core" goods, I.e. those excluding transportation goods (which are typically high-ticket items that can skew the result), came in at an increase of 0.4%.

    If you were looking for a reason to believe in the modest growth scenario, it's right there.

    Results for Income and Spending were respectable, but not strongly encouraging, either.  Both exhibited increases of 0.3%, which, especially given Inflation's trend, are only slightly large enough to suggest growth.  Were Inflation running at rates that we had much earlier in the year, these results would be more helpfully encouraging.  The difficulty is that year-over-year Income and Spending have risen 0.3 and 0.2 percentage points.  Meanwhile, Inflation...rose a strong 0.5 percentage points, year-over-year.  In other words, Inflation is rising at a faster rate than both Income and Spending. 

    We have talked extensively about the risk of rising Inflation, and if Income and Spending don't quickly keep pace, the results could be deeply problematic for the economy as a whole and the Federal Reserve, specifically

    Looking at the key three pieces of market-based data that we find useful, we conclude that the Market clearly felt optimistic about the economy this week.  It would have been more reinforced had the Dollar risen, but a decline in Gold, a safe haven, combined with a rise in the price index of the S&P 500, is a strong indication that investors are feeling sanguine about matters for now. 

    This week, our updated Domestic Scorecard dovetails well with the Market, as we issue a revised forecast for the economy for the short-term.  However, that upwardly revised forecast is for the very short-term.  If we are correct about Inflation, the forecast by late fall will be very different.  But it's too premature for that, at this point.

    You can grade the week a B+ and may as well indulge in being less worrisome...for now.