Natural gas surplus

Wednesday’s report that natural gas supplies increased by 2 billion cubic feet (bcf) to 3,835 bcf probably marks the peak in supplies heading into the winter heating season.

Stocks are now 404 bcf higher than last year at this time and 442 bcf above the 5-year average of 3,393 bcf.  The recession, which has hurt industrial demand, heavy injections earlier in the year, and the mild summer in much of the country account for the surplus in the commodity used to heat just over half the homes in the US.

And that surplus goes a long way in explaining why natural gas prices remain at low levels.

Sharp drop in jobless claims argues against double-dip recession

Recent reports on the economy, including falling housing starts, sluggish industrial production, and the latest downward revision in 3Q GDP have given proponents of the double-dip recession argument (or a W-shaped recovery) added ammunition in recent weeks. 

But today’s report from the Labor Department of a steep decline in weekly jobless claims is probably the most solid argument that the slow and fragile economic recovery may be on a firmer foundation than many believed possible.

Weekly initial jobless claims fell 35,000 in the week ending November 21 to 466,000, the lowest level in 14 months and well below the consensus forecast offered by Bloomberg of 495,000.

The 4-week moving average continues to cooperate, dropping 16,500 to 496,500, the first dip below 500,000 in over a year. And continuing claims slid 190,000 to 5.42 million. However, the expiration of standard benefits and not job creation is probably the main reason for the downward trend.

Weekly jobless claims can be volatile and seasonal adjustments do not always accurately capture recurring changes in the job market.  But in searching through the data, I did not find any comments that Wednesday’s early report (weekly claims are typically reported every Thursday)  influenced the latest drop.

The timeliness of jobless claims makes this one of my favorite barometers of economic activity, and the downward trend in layoffs implies that companies are slowly detecting an improvement in the economic outlook.

In addition, today’s steep decline provides hope that we may soon see diminishing job losses and eventual gains in employment.

Too soon to give the all clear sign

Still, any enthusiasm should be tempered with the second-straight monthly decline in consumer sentiment, as measured by the University of Michigan’s survey on confidence.  This doesn’t bode well heading into the all-important Christmas shopping season.

And an unexpected drop in orders for durable goods, which which was  also released this morning, suggests a modest recovery at best.

Fed minutes and worries about inflation, bubbles

The minutes released today from the Fed's meeting early this month made if very clear that Committee members are intent on keeping rates at rock-bottom levels for the foreseeable future. But policymakers are not operating in a vacuum and discussed risks related to the very loose monetary policy that has been in place for nearly a year.

Members are mindful that very low short-term rates could lead to "excessive risk-taking in financial markets or an unanchoring of inflation expectations."

Officials in both China and Japan have recently expressed concern that low interest rates in the U.S. could be fueling the carry trade - borrowing where rates are cheap and investing the proceeds in parts of the world that fetch higher returns - and speculative bubbles in Asia.

Although some members saw inflation risks leaning to the downside in the near term, others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits.

Moreover, these participants noted that banks might seek to appreciably reduce their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Either way, the money supply would surge.

Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation, the minutes said.

To keep inflation expectations anchored, all agreed it was important for policy to be responsive to changes in the economic outlook and for the Fed to continue to clearly communicate its ability and intent to begin "withdrawing monetary policy accommodation at the appropriate time and
pace."

In my view, a small rate hike would send a strong signal to the financial markets that the U.S. is serious about its commitment to a strong dollar and stable inflation, and it could help dampen the speculation in gold as well as curtail some of the commodity inflation we are seeing (see Rate hike: sooner rather than later?). However, a minor boost should have little negative impact on the fragile economic recovery.

With the unemployment rate now above 10% and poised to head higher, there is little likelihood that Fed will take that kind of bold action. Nonfarm payrolls, which showed no signs of stabilizing over the past three months (see Thoughts on unemployment), will need to begin evening out before the Fed signals it is in the twilight of its current policy.

Baltic Dry Index signaling further gains in global economy

Back in early September, I published an article entitled, “Baltic Dry Index flashing yellow.”

At that time, the important measure of shipping rates had fallen approximately 40% from its early June peak, suggesting a possible pause in the global economic recovery. Or a spate of new ships coming online.

But what a difference a couple of months can make.  More specifically, what a difference just three weeks can make!

The chart provided by Bloomberg shows that shipping rates have surged since the beginning of the month, suggesting that economic activity has picked up considerably, even if technical factors may be boosting rates.

Much of the improvement is likely coming out of China amid strong demand for raw materials , but the economy in the U.S. and Europe has also shown signs of life recently.

Manufacturing expands per Philly Fed

The Philadelphia Fed’s Business Outlook Survey indicates that output in the mid-Atlantic regions accelerated in the latest month.

The Philly Fed index increased from 11.5 in October to 16.7 in November, topping the forecast by Bloomberg of 12.0  A reading of zero is a sign that production is neither increasing nor decreasing.

New orders and shipments improved, but there was little in the way of new employment.  On the inflation front, prices received increased slightly to –1.5 as the lack of demand at the retail level makes it very difficult for companies to raise prices.

Companies are still optimistic going six months out as  the future general activity index remained positive for the 11th consecutive month, but the index did decline from 39.8 in October to 36.8.  Still, the level is near where we saw it over 5 years ago, which is an encouraging sign that manufacturing will continue to recover as companies re-stock.

However, the strength and length of the manufacturing recovery will depend heavily upon how strong demand comes back in the U.S.

Weekly jobless claims hold steady

Weekly initial jobless claims held steady at 505,000 versus one week ago, but the slow downward trend remains intact, suggesting the economic recovery that probably began during July is still in place.

The 4-week moving average, which removes some of the volatility in the weekly number, fell 6,500 to 514,000, while continuing claims, which have dropped dramatically in recent months, fell another 39,000 to 5.6 million.

Before we get too excited about the drop in continuing claims that totals over1 million from its peak, it is important to note that much of the decline is probably the result of standard benefits expiring after six months rather than job creation, especially given that the economy is still shedding jobs at a heady pace (see Thoughts on unemployment).

Nonetheless, the drop in weekly claims is modestly encouraging and signals the economy is slowly recovering from a very deep hole, but the slow pace and still-high level is a clear sign that we are not experiencing a robust recovery.

For a detailed explanation of weekly claims, please see Economy 101: What are weekly jobless claims?

A pause in the new home market

New home sales make up less than 10% of overall housing sales, but a plunge in housing starts last month suggests the originally-scheduled end of the new home buyers tax credit had an adverse impact on the market in October.

Housing starts fell a steep 10.6% last month to a seasonally adjusted annual rate of 529,000.  Building permits, which are used for forecast future starts, fell 4.0% to 552,000.  Single-family authorization, which is considered a more important indicator, was down just 0.2% to 451,000.

The declines exceeded forecasts but are likely the result of the expected expiration of the $8,000 tax credit for first time home buyers, which had not yet been extended by Congress.

Rising real estate construction spending aided GDP in 3Q and further gains are a crucial ingredient if the economic recovery is to become self-sustaining.

Elsewhere, yesterday’s release of the Housing Market Index, which was unchanged from October’s downwardly revised reading of 17, also signaled the tentative situation builders were in as they awaited Congressional approval of an extension of the tax credit.

A reading of 50 indicates builders are neither optimistic nor pessimistic about the new home market.

The extension and expansion of the credit, coupled with historically low mortgage rates and improving affordability, are expected to lend support to the housing market going forward. But high unemployment and a still high level of layoffs will probably remain headwinds to a housing recovery.