Saturday, May 30, 2009

Silver and gold

Silver prices have jumped in recent weeks, capping off the best month in over two decades.  The shiny metal that normally takes a back seat to gold is buoyed by industrial demand, and therefore, was hit hard when commodity prices collapsed last year. 

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Recent signs that the global economy will emerge from the worst slump since the 1930s has spurred some investors to scurry into the metal.  In addition, weakness in the dollar has also encouraged some of the run-up.

On the other hand, gold has limited industrial uses and is mostly considered a hedge against inflation and economic uncertainty.  Hence, the rise has been tepid in comparison.

The near meltdown in financial markets last year underpinned the yellow metal, and worries that massive fiscal stimulus and pump-priming by central banks will ignite inflation next year have also lent support.

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What about platinum?

According to the NYMEX, platinum is among the world’s scarcest metals and production totals only about 5 million ounces per year, while gold tops 80 million ounces.  It is also considered a precious metal, and like gold, is used in the production of jewelry. 

But catalytic converters accounts for 29% of annual usage, and with automotive production flattened by the recession, I suspect that the weak recovery in price is tied to the outlook for the auto industry.

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Friday, May 29, 2009

Eurozone inflation at zero

Preliminary data showed that the initial estimate for the CPI in the eurozone economy fell from a year-over-year rate of 0.6% in April to 0.0% in May, the lowest level since data began 13 years ago. The collapse in oil prices from a year ago has played a major role in extinguishing inflation, while declining commodity costs and falling demand around the world have also been big contributors.

Chart showing the monthly HICP inflation rate in the euro area since 1991 and the average

European Central Bank officials expect inflation to briefly turn negative but the risk of deflation is seen as small. Policymakers earlier in the month cut the key lending rate to 1.0% and have hinted the rate-cutting campaign may not be over.

ECB vs. the Fed

The ECB had been particularly hawkish last year, focusing on it sole mandate of price stability. Unlike the Federal Reserve, which does not have an explicit price target, the ECB's stated aim is to keep inflation slightly below 2%.

In theory, it does not focus on growth or unemployment, whereas the Federal Reserve has a dual mandate that includes price stability and economic growth. The Fed does have an "implicit" price target for core inflation, minus food and energy, of 1-2%.

The ECB came under heavy criticism in 2008 when it bumped rates up to fight inflation even as the US economy was slipping into a recession. The drop in crude prices quickly brought headline inflation under control, but monetary bankers expect a slight acceleration later in the year.

What can we glean from Dr. Copper

I have heard a number of analysts refer to “Dr. Copper” as their favorite economist. Sounds strange but the price of copper has historically done a great job reflecting strength and weakness in economic activity and at the same time has a good record calling turns in the economy.

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Source: Metalprices.com

Why? Because copper is a key industrial metal. When economic activity is strong, the law of supply and demand kicks in and the price rises. Conversely, when the economy weakens, demand recedes and prices fall.

The price of the metal has rallied from cyclical lows, suggesting we will see a pickup in global activity. Some of this demand is likely coming from China, and I would not discount the probability that the “smart money” is sniffing at the metal, anticipating a worldwide recovery.

Over the past month, copper has been going sideways and I would not be overly concerned unless the price drops below $1.85-1.90. Although steep recessions have normally produced sharp recoveries (see Steep Recessions and Subsequent Recoveries), we are more likely to see a gradual improvement in economic activity when the recession ends.

Why? Housing usually leads an economic recovery, but this time around, prices are declining and banks are still dealing with bad loans. We may be at or near a bottom in housing sales, but rates below 5% and tax incentives from Washington, DC have not set off a buying stampede. And the latest bump in mortgage rates won’t help either.

Consumer sentiment pushes ahead

Following Tuesday's large gain in consumer confidence from the Conference Board, the survey from the University of Michigan showed that consumer sentiment improved to 68.7 in May from 65.1 in April.

It's clear that most of us are growing more optimistic about a recovery even as housing prices keep falling and unemployment continues in an upward trend.

I suspect we'll see nonfarm payrolls take another hit in May because of still elevated jobless claims this month, but the worst of this recession appears to be behind us.

Given that a decline in consumer confidence early last year foreshadowed the recession, the improvement in sentiment is welcome.

One final point, the Chicago Purchasing Managers' Index fell to a disappointing 34.9 in May from 40.1 in April. A reading below 50 suggests Midwestern manufacturing is shrinking. The index tends to be volatile, and I'm not overly concerned and will wait for the ISM Manufacturing Index next week.

Today's update on 1Q GDP is available at Examiner.com.

Thursday, May 28, 2009

Oil tops $65

Remember just a few months ago when the cost of oil was just above $30 per barrel and drivers were enjoying prices that hadn't been seen in years? Seems like a distance memory as gasoline rises above $2.40 per gallon and crude tops $65 per barrel.

Retail Price Graphs.

The latest data from the Energy Information Administration showing that stockpiles fell 5.4 million barrels in the latest week is lending support to prices today. Inventories, however, remain well above the average for this time of year.

Gasoline reserves are still holding below the average range and fell another 600,000 barrels in the latest week. That is also propping up prices at the pump.

What gives? I would say it's good news-bad news. On the one hand, expectations that the world economy is nearing a bottom and a recovery may begin in the US later this year are helping to push prices back up. However, the state of the economy remains fragile, and the extra dollars from cheap gasoline could fuel additional consumer spending.

Elsewhere, OPEC voted to hold the line on production as expected. A more detailed look can be viewed at Huliq.com.

Treasuries stabilize

I have been spending quite a bit of time on Treasury bonds lately because of the importance the yield has to the economy.

Earlier today, prices bounced back and yields fell as buyers stepped in to take advantage of more attractive rates. Yesterday, Moody's reassured nervous investors that the triple-A rating the US enjoys is safe, at least for now, aiding the benchmark security.

But sellers have stepped and the ten-year note is holding slightly above the unchanged mark. The story remains little changed: the extraordinarily high level of supply needed to finance a burgeoning budget deficit is scaring away investors.

Consequently, mortgage rates, which are tied closely to the ten-year bond, have jumped in recent days.

Separately, a look at jobless claims, durable goods orders, and new home sales can be seen on my homepage at Examiner.com.

Wednesday, May 27, 2009

Bailing out of bonds

The yield on the benchmark US Treasury note jumped 19 basis points (0.19%) to 3.73% today, causing the difference between the yield on the two- and ten-year notes to rise to the highest ever.



Everything from concerns about the ability of the US to maintain its triple-A credit rating to the huge supply of debt that must be sold to finance the growing federal deficit to the Fed's eventual pullout from the Treasury market are forcing up yields.

But the jump is presenting the Fed with a big problem. Typically, a widening yield curve - defined as the difference in yields for differing maturities of the same debt instrument - is a sign that better economic times lie ahead.

But rising yields are pushing up mortgage rates at a time when monetary officials want to keep rates low in order to support housing activity. The last thing Bernanke (or any of us) wants to see is his green shoots being singed by the heat of high mortgage rates.

I saw one major institutions offering a 30-year fixed rate at 5.75% today. That may force a few potential buyers off the fence, but it could keep many more on the sidelines.

Durables, jobless claims up to bat

We received great news from the Conference Board's survey of May consumer confidence, and existing home sales may not have turned up, but since October, they have been bumping along the bottom. Thank record low mortgage rates and great deals on foreclosures.

Tomorrow, durable goods orders are expected to creep higher. The ISM Manufacturing Index and other surveys of the goods-producing sector show that manufacturers are not seeing an upturn so we are not likely to get much in the way of good news when April's number hit early Thursday morning. Whatever the result, durables can be very volatile month-to-month so trends are key.

Jobless claims are released weekly and are a great indicator when it comes to gauging the health of the economy. As I've mentioned before, it is timely and provides a good reading on business confidence because employers will start cutting back on layoffs if they anticipate an upturn in the near future.

If they continue to jettison employees, that signals a a lack of confidence. However, the numbers may be skewed somewhat given recent layoffs concentrated in the auto industry.

New home sales for April will also be out on Thursday, but builders still face stiff competition from numerous foreclosures.

Gasoline versus diesel

It was just a few months ago when gasoline prices were hovering at an average of slightly above $1.50 per gallon, while diesel fuel was well above $2 per gallon. 

U.S. Retail Gasoline and Diesel Fuel Prices

Gasoline prices have jumped since January and are comfortably above $2  but diesel has barely budged.  What gives? 

The Energy Information Administration said gasoline prices usually rise above diesel this time of year because of  high demand in the summer, while distillate fuel prices, including diesel and heating oil, drop from their highs in the cold of winter.

Though the pattern broke down in 2005 and 2006, the EIA calls this “crossing of the price paths” a regular rite of spring.

Refineries are also operating well below capacity due to the drop in demand for gasoline.  I suspect that the dip in production and resulting restriction in supply may also be impacting prices.

U.S. Gasoline Stocks Graph.

Tuesday, May 26, 2009

Mass layoffs decline but still elevated

A mass layoff is defined by the Bureau of Labor Statistics as new filings for unemployment insurance benefits during a given month and involve at least 50 persons from a single employer.

Employers took 2,712 mass layoff actions in April, down 221 from March.  The April layoffs affected 271,226 workers. Nothing here that we didn’t already know but the data provide a different perspective – the employer.

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You may also view other articles at my home page at Examiner.com.

Saturday, May 23, 2009

BoJ sees light at end of very dark tunnel

The Bank of Japan kept its key overnight lending rate at 0.10% as expected on Friday but offered some relatively upbeat comments and raised its assessment on the economy for the first time in almost three years.

The BoJ said in its statement, "Economic conditions have been deteriorating, but exports and production are beginning to level out against the backdrop of progress in inventory adjustments both at home and abroad. Financial conditions have remained tight, although there has been some easing of tension compared to some time ago."

It added that the pace of deterioration in economic conditions is likely to moderate gradually, leading to a leveling out of the economy. In April, the central bank noted that conditions had deteriorated significantly.

Japan has seen its GDP shrink at an annualized in excess of 14% during the last two quarters but recent data do confirm the BoJ's latest assessment. Nevertheless, the country is heavily dependent on overseas sales and has been struggling since the early 1990s when its real estate bubble burst, saddling the major banks with plenty of problem loans.

Japan's economy may be flattening but solid growth is unlikely unless the global economy picks up dramatically. China seems to be showing signs of life, according to government figures, but Europe and the US are lagging.

Friday, May 22, 2009

Natural gas supplies jump

About once a month, I like to look at the natural gas market just to see where we are at. This time of year, the US typically experiences huge builds in supply because we are past the heating season and have yet to feel the searing temperatures that require heavy air-conditioner usage.

The Energy Information Administration reported that reserves in the latest week surged by 103 billion cubic feet (bcf) and are 514 bcf above a year ago and 387 bcf ahead of the five-year average for this time of year.

Working Gas in Underground Storage Compared with 5-Year Range Working Gas in Underground Storage Compared with 5-Year Range

Slack industrial demand and rising production a year ago account for most of the excess quantities of natural gas heading into summer. Unless the country bakes in extremely hot temperatures during the next three months or major hurricanes rock the Gulf Coast and shut in supplies, consumers are likely to benefit in the form of lower prices due to surplus stockpiles heading into next winter.

Wellhead Prices

But prices could find some support since natural gas rig counts have fallen for 24 consecutive weeks, according to the EIA. The agency also noted that the dramatic drop in prices over the past year increases the potential for displacing coal-fired power generation with natural-gas-fired generation.

Thursday, May 21, 2009

Taiwan and Singapore GDP down sharply

Taiwan's economy contracted by a record 10.2% in the first quarter and Singapore's GDP shrank by a record 10.1%. Both island economies are heavily dependent on trade, and the dearth of demand around the world have taken a huge toll on both nations. The news follows Tuesday's preliminary report that GDP in Japan fell at its fastest pace ever.

Signs that China is reviving and indications that the worst is over for Europe and the US should help stabilize the economies of nation's that rely on exports.

UK in danger of credit downgrade

Standard & Poor's said UK government debt could approach 100% of GDP in the medium term, prompting the ratings agency to warn that the country could lose its coveted triple-A credit rating.

S&P believes, "A government debt burden of that level, if sustained, would in (its) view be incompatible with a 'AAA' rating."

The deficit as a percent of GDP in the US is below 80%, depending on how you measure it since unfunded liabilities generally are not included, but it is rising quickly. With the deficit looking to reach almost $2 trillion in the US this year and at least another $1 trillion in the next fiscal year, it's reasonable to ask whether the US may lose its triple-A credit rating. Or at a minimum, be placed on CreditWatch for possible downgrade by a major agency.

That seems unlikely in the near-term because US capital markets are deeper than anywhere in the world, and the US still has considerable capacity to borrow. Nonetheless, banks are saddled with bad loans and there is a need for the government to provide some type of solution.

In addition, grand spending plans by the current administration do not seem to have been derailed by the economic crisis, so the situation bears watching. Or... just read between the lines, i.e., hold on to your wallets!

Philly Fed up slightly, Leading Index gains

The Philly Fed's Business Activity Index signaled that the manufacturing sector in the mid-Atlantic regions is still contracting, albeit at a slightly slower pace.

The survey rose from -24.4 in April to -22.6 in May, just shy of the consensus and the best reading since September. At least the pace of the recession isn't getting worse as evidenced recent data, but there's little out there that says the economy has started to grow again.

The six-month outlook among businesses is definitely brighter. The future general activity index remained positive for the fifth consecutive month and increased 11 points, from 36.2 in April to 47.5. The index has now increased 33 points in the past two months. We should be seeing an upturn later in the year. Zero marks the line between expansion and contraction.

We did get some good news from the Leading Index, which jumped 1.0% in April. This is the first rise in seven months. The numbers pretty much matched, but given that we know the components that make up the indicator of future activity, the number is generally easy to forecast by economists, and most analysts don't read much into the report. Still, it's good to see a positive number.

Today's look at jobless claims and comments by Greenspan are available at Examiner.com.

Wednesday, May 20, 2009

What is all this talk about green shoots?

Japan’s economy just registered its steepest contraction since records began and is shrinking at a pace that would be labeled a depression in the US. On a percentage basis, US nonfarm payrolls have declined more than the severe recessions of 1974 and 1982, and industrial production fell 20% on an annualized basis over the first three months of 2009, giving rise to the term Great Recession.

Germany, Europe’s largest economy, and the eurozone, the second-largest economic zone in the world, saw their respective economies shrink dramatically in 1Q. And the IMF recently offered a sobering analysis of the crushing debt load the global economy still faces.

Interest rates have been driven to rock-bottom levels by central banks in order to stimulate growth. But so far, the deleveraging that is taking place around the world has overwhelmed monetary stimulus.

With all of the bad news getting plenty of coverage, I would like to take a few moments to survey the economic landscape, focusing in on some of the emerging signs that suggest the economy is near or at a bottom.

The IFO World Climate Indicator increased in 2Q2009, the first time since 3Q2007, with North America and Asia showing the best improvement. Europe lagged.

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Moreover, the survey indicated that price increases are expected to weaken further in the course of the coming six months. The decline of inflation is particularly strong in Western Europe and North America. Inflation fears through the end of 2009 are greatly exaggerated in my opinion.

Released yesterday, the influential ZEW survey of German institutional sentiment jumped 18.1 points in May to 31.1 points, rising above its historical average of 26.2 points. Despite the strong backing by many analysts, it does seem to have gotten a little bit ahead of itself. Nonetheless, the rise in sentiment is welcome.

Elsewhere around the globe

China is unlikely to return to growth rates seen earlier in the decade until world trade rebounds, but aided by government spending, manufacturing has turned positive.

Consumer confidence in Japan is up for the fourth month in a row and exports appear to be stabilizing. Consumer sentiment in the US is also off its low, suggesting the worst may be over. And jobless claims in the US, though still high, have probably peaked.

Commodity prices and oil have also perked up, signaling a stabilization in demand. One of the best known measures of a broad range of raw materials, the Reuters-CRB Index, is up 20% off the early March low.

Part of the rise may be in response to the recent weakness in the dollar. But these commodities are very sensitive to changes in supply and demand and recent gains may also signaling that global economic activity is stabilizing.

Tuesday, May 19, 2009

Japan GDP implodes

Japan's GDP shrank by a record annualized pace of 15.2% in 1Q which comes on top of a 14.4% drop in the final quarter of last year. In comparison, US GDP fell 6.1% in the quarter just ended.

The world's second-largest economy is heavily dependent on exports and the collapse in demand around the world has taken a particularly heavy toll on activity. Furthermore, the strength of the yen has impeded the competitiveness of overseas sales - a strong yen makes exports more expensive - and has exacerbated an already bad situation.

Businesses have responded by sharply curtailing expenditures, while Japanese consumers also retrenched. However, recent signs suggest 1Q may be the low-water mark for the economy.

Credit card rules likely to change

The Senate voted 90-5 to overhaul regulations governing credit cards. "This is a victory for every American consumer who has ever suffered at the hands of a credit card company," said Sen. Christopher Dodd, D-Conn.

Senator Harry Reid of Nevada pounded his chest and noted, “We stood up for consumers and stood up to abusive credit card companies,” The Senate's "courageous" move followed a 357-to-70 vote in the House last month. Differences still need to be ironed out, but in this atmosphere, that should come quickly.

But "what has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said the president and CEO of the American Bankers Association. He added, "It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate."

The truth is probably somewhere in between. Do credit card agreements really need to have all of that fine print that few understand or take the time to read? But what concerns me is that those who have been paying their bills on time, and paying them in full, will now be subsidizing consumers who default or pay slowly.

The ramifications: Reward programs and grace periods could be pared back, while no-annual fee cards may become endangered.

I realize there are abuses among some card companies. But Congress' haste to pass legislation will likely go overboard and unintended consequences may abound.

Credit markets are finally melting

One quick way to measure credit risk is to look at the difference between the fed funds rate, the overnight rates banks lend to one another, and what’s called the US dollar LIBOR rate. LIBOR is available in most major currencies, but I will stick with the US for simplicity as well as the dollar’s status as the world’s reserve currency.

LIBOR tells us what banks can borrow unsecured over varying periods that reach one year. During normal times, the spread typically runs anywhere from 10 to 15 basis points (bp), or 0.10-0.15%, for three months. If Citigroup or Bank of America needed additional funds to meet reserve requirement, there were plenty of participants willing to lend over the short term. Remember, this is what happens in normal times.

But when the lending crisis began to get out of hand and banks started to lose faith in one another, they began to hoard funds, fearing that a short-term loan to another institution might go unpaid.

The results were predictable. Funds dried up and LIBOR rates soared, with the three-month LIBOR peaking at 4.82% last October as credit markets practically broke down. Even guarantees by major governments did not quickly quell jitters in the credit markets.

But a number of factors including time, those guarantees mentioned above, nascent signs that an economic recovery is on the horizon, and a renewed interest in risk all colluded to bring down rates. This morning, the three-month LIBOR fell 3 bp to 75 bp.

The TED spread – the difference between US Treasury bills and the rate banks can borrow – is another measure of risk. When fear was running rampant through the financial markets, investors eschewed all but the safest securities. Remember the yield on the three-month T-bill actually falling below zero? People were paying the Feds to hold their money!

What a difference a few months can make. Yesterday, the TED spread fell to the lowest rate since August 2007, per Bloomberg News, which pre-dates that start of the credit crisis.

The banks still have problems and all of those mortgage securities that are stamped Made in the USA still have the potential to do some damage. But credit markets are thawing, the uncertainties are known and apparently factored in, and any uptick in risk taking is sure to lend support to economic activity.

One final comment, growing confidence in the credit markets may also have an indirect but positive effect on mortgages rates, potentially narrowing the spread between the ten-year US Treasury note and the 30-year fixed mortgage. And many ARMs are tied to LIBOR so a pleasant surprise may be in store when the rate resets.

Monday, May 18, 2009

Home builder confidence improves

The National Association of Home Builders reported today that confidence in the market for new, single-family homes reached the highest level since last September. The Housing Market Index added on to April's five point gain, rising two points to 16.

The index remains at very depressed levels - a reading below 50 marks the line between good and poor conditions - but the rebound from the extremely low reading of 8 in January is the latest signal that builder sentiment is improving and confirms that April's jump was not a fluke.

The NAHB pointed out that recent announcements by the Department of Housing and Urban Development that would enable home buyers to use the new $8,000 tax credit at the closing table are "especially encouraging."

But let's not get carried away. The housing market still faces plenty of steep hurdles. Unemployment is rising, home inventories are bloated, and consumer confidence, though improving, remains shaky. Still, the latest numbers are encouraging as a bottom in the housing market would go a long way toward laying a foundation in for an economic recovery. Keep in mind, housing normally leads and economic recovery.

Tomorrow,we will get a look at April housing starts and building permits. A preview is available at Examiner.com.

Saturday, May 16, 2009

Tame inflation keeps deflation at bay

An unchanged reading on the Consumer Price Index in April and a 0.3% rise in the core rate of inflation, that is prices that exclude the volatile food and energy categories, are easing fears among policy makers that deflationary forces might be creeping into the economy.

The CPI is down 0.7% versus a year ago amid a 25% plunge in energy prices, but the core rate of inflation has been holding just under 2%.

Monthly change in core inflation

Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09

0.0%

0.1%

0.0%

0.2%

0.2%

0.2%

0.3%

Prices were quick to react to the wrenching dislocations from the credit crisis late last year, but core inflation has since stabilized.

Before the inflation hawks start buzzing, let me point out that tobacco prices accounted for over 40% of the rise last month in the core rate according to the Bureau of Labor Statistics, making this the second-straight month of outsized increases in tobacco.

The reason is simple – states and the Feds are looking for ways to make up lost revenues and cigarettes are an easy target.

Inflation through the rest of the year should remain well-contained since retail demand is under pressure and slack in the economy is high. That means businesses will have a hard time raising prices because there are plenty of companies looking for new customers, and they will hold the line on price increases and maybe offer a few incentives to get them.

Germany GDP crumbles

The recession in Germany accelerated in 1Q, with GDP falling a record 3.8% from 4Q. Remember, figures in the US are annualized so Germany's decline is much worse than what we saw released in the US a couple of weeks ago.

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Germany, which is Europe’s largest economy, is clearly showing the strains of the export-led recession, while the government also noted that capital formation was considerably lower versus 4Q.

Officials expect GDP to shrink by 6% this year and over $100 billion in stimulus spending is in the pipeline to rescue the weak economy. Exports, however, do appear to be stabilizing, and business confidence has come off the lows.

Plus, the European Central Bank is finally comprehending the magnitude of the economic crisis and is belatedly taking more forceful action to support the eurozone economy.

Friday, May 15, 2009

Industrial production, Empire suggest end in sight

We’re not out of the woods yet, but the latest data on manufacturing are signaling that the pace of the recession is slowing. Industrial production in April fell 0.5%, the smallest decrease since October.

Manufacturers have been extraordinarily swift in cutting production and have exacerbated the severity of the recession as demand around the globe evaporated. In the first three month of the year, US production fell at an annualized rate of 20%! But as the ISM survey indicated in April, the pace of the contraction is slowing.

With the drop in overall production, capacity utilization slipped from 69.4% in March to 69.1% in April. This came in slightly above forecasts but once again set another 42-year low. The exceptionally high level of slack in the economy highlights the severity of the recession.

The Empire Manufacturing survey is small in geographical scope and only looks at conditions in New York state but is valued because it provides the first glimpse of how manufacturers are performing in the current month.

Although still in negative territory, the index climbed 10 points in May to –4.6. A reading below zero indicates that activity is still contracting. However, the level stands at the highest since last August. Though the economy remains in a fragile state, the survey suggests that business conditions may be starting to stabilize.

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The prices subcomponent of the index remained in negative territory, with prices received dropping 10 points to a record-low -27.3. I don’t believe this is a sign that deflation is poised to seep into the economy, but inflation is not an issue at this time. Meanwhile, the survey showed that employers continue to cut jobs. We're likely to see more big losses in nonfarm payrolls this month.

Separately, I've prepared a guide at Examiner.com on how to deal with the financial aspect of a layoff.

Thursday, May 14, 2009

Jobless claims affected by autos

The Chrysler's slide into and the subsequent layoffs helped push weekly jobless claims up by 32,000 to 637,000, the government said. Initial weekly numbers tend to be volatile, and the general trend remains to the downside, and that's good news, but stabilizing the contracting economy will probably be a slow process.

Wholesale prices mixed

In the meantime, a big jump in food prices translated into a 0.3% rise in the Producer Price Index in April, but stripping out the impact of food and a tiny decline in energy, the core rate was up just 0.1%.

Compared to a year ago, core wholesale prices eased from an increase of 3.8% in March to 3.4%. Falling demand for goods and services are finally starting to take pressure off prices at the wholesale level. We will probably see more declines in the core rate in the coming months as the lingering impact of last year's spike in commodity prices fades.

For other informative articles, please see my home page at Examiner.com.

Wednesday, May 13, 2009

Oil prices flirt with $60

Crude oil prices have been creeping higher of late, rising from recent lows in the mid $30 per barrel range to within a whisker of $60 per barrel. What gives? I mean, isn’t the US in its worst recession since the the 1930s, and the contraction, though slowing, continues. Supply and demand, right?

The chart provided by the Energy Information Administration shows US supplies are well above the normal range for this time of year. Moreover, since the beginning of 2008, domestic production is up 3.6% versus the same period a year ago and demand is down close to 6%!

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We can’t discount what’s happening around the world, and much of the global economy remains mired in a recession. Hence, basic economics and the law of supply and demand suggest crude prices should be flirting with recent lows.

So what’s up? In my mind, a few things. First, the collapse in crude from $145 per barrel to $32 was probably a bit overdone. Go back to the panic selling of late last year, and hedge funds and speculators were quickly unwinding positions to raise cash.

Stocks, commodities, including oil, were being dumped. We are seeing some recovery from those lows, signaling the selling was probably a bit overdone.

But I don’t think that explains everything. China’s economy has been showing signs of life, and surveys that measure manufacturing are now in the plus column for the Asian giant. It’s difficult to say how much China puts into its own reserves in the event of a disruption of supplies, but growth in its economy is supporting demand for oil.

I want to take a closer look at this in another day but falling prices have also started to dampen activity in the oil fields, which in turn will limit future gains in supply.

image

And we can’t discount speculators. Look back at last year. A US recession was being birthed and crude rose from $80 per barrel to $147. At the time, well-respected analysts debated whether or not the increase was a reflection of the fundamentals or a bubble brought on by speculators. It’s clear now that the latter argument took the prize in the debate.

So a good part of the rise is also likely coming from those who suspect a bottom in US economic activity is in sight, i.e., specualtors may once again be testing the waters. One of my concerns, however, is that the upward creep in gasoline prices is taking money away from consumers at a time when the extra cash could go along way in supporting spending.

I don’t believe the sizable jump in gasoline prices is enough to derail a recovery at this time, but the economy remains extremely fragile.

Retail sales disappoint

Retail sales in April fell 0.4% from the prior month, and excluding autos, fell 0.5%. I like to pull out gasoline station sales, which dropped a steep 2.3%, in order to get a clearer picture of how consumers are spending, but ex-autos and gasoline, sales were still down 0.3%.

The losses come on top weakness in March and are disappointing given that consumer confidence has been showing signs of improvement lately and Easter fell well into April. And that should have provided some support for retailers.

There have been recent signs that the pace of the recession is slowing, but job losses have been steep and uncertainty abounds, so consumers continue to focus on bulking up their savings. Since consumer spending accounts for almost 70% to total economic activity, we'll likely need to see some life at the cash registers before we see a meaningful recovery.

Forecasters had anticipated little change in the headline number and a 0.2% drop in sales ex-autos.

Tuesday, May 12, 2009

A closer look at the trade deficit

There’s nothing like a good old-fashioned recession to bring the US trade deficit back down to more reasonable levels. Don’t get me wrong, there isn’t much good about a recession and the consequences that have sprung out of the global slump have been economically devastating on many.

Besides, there really isn’t anything old fashioned about this contraction either. Most recessions are inventory corrections, i.e., companies slash production as a result over too much stuff in their warehouses and ramp production back up when goods on hand return to reasonable levels. This one, however, has been brought on by massive and painful deleveraging in the economy.

But for now, let’s look at one silver lining – the big drop in the US trade gap.

image

The bite from oil imports has lessened dramatically and is the single largest reason why imports have fallen. In the first three months of 2009, our bill for crude fell to$37.4 billion, down from $85.1 billion, according to the US Census Bureau.

But that’s now at all. Falling demand in the US has translated into fewer imports across the board. It should be no surprise to anyone who has been looking at the financial news that auto imports are down. In fact, imports are down 50% to $32.0 billion in the first three months of the year versus the same period in 2008. And consumer and capital goods have also fallen significantly.

In the meantime, the global recession dented sales of goods overseas, pushing down exports of aircraft, autos, telecom equipment, and industrial supplies and materials.

It may come as a surprise to many that the US sends cars overseas, but the Census Bureau reported that autos, including parts and engines, are down about 40% to $17.3 billion in the first three months of 2009.

Exports do appear to be stabilizing, suggesting that the global contraction may be starting to abate. And China has shown signs of life over the past couple of months. A rise in demand would assist US exports, but oil prices have come well off the lows and are flirting with $60 per barrel. Thus, the best news on the trade gap may be behind us.

Sunday, May 10, 2009

Economic data may show recession easing

The upcoming week will have a modest number of economic reports, with retail sales (Wednesday) and industrial production (Friday) probably showing more signs of stabilization.

There was an unexpectedly-large drop in March retail sales but we will probably see the number bounce back some for April, especially since Easter was later this year. I should point out that government statisticians try to adjust for such seasonal variations but they don’t always capture the nuances.

Rising consumer confidence may also lend support since any easing of worries might encourage shoppers to take advantage of the deals that many stores are offering.

Though jobs are still disappearing at a fast clip, nonfarm payrolls released last Friday show that companies are not being quite as aggressive when it comes to letting workers go (Unemployment rate approaches 9%...). In addition, it looks as if weekly jobless claims have peaked, which is also a sign that the steepest drops in payrolls are in the rear view mirror.

Manufacturing

The buyers strike in the US and around the globe has hit manufacturing hard. In the first three months of the year, US industrial production declined at an annual pace of 20%, the quickest rate since the end of World War II. Yes, this recession has been particularly harsh on manufacturers.

The good news is that the ISM survey, which looks very closely at a number of key components among manufacturers, is signaling that output among these businesses is not contracting as quickly (Economy slowly stirring) and we may see just a modest decline in April output.

Other reports this week include data on inflation, but since rising prices over the short-term are not a worry, these reports are likely to get less attention unless they are way off the consensus forecast.

Saturday, May 9, 2009

ECB takes new action

Because the labor report and stress test from the Fed took up most of the spotlight late in the week, I thought I’d take a few moments now to look across the Atlantic and discuss actions taken by the European Central Bank on Thursday.

First, a brief synopsis on the situation. The European Central Bank has been slow to react to the global crisis, lagging behind its major counterparts in cutting interest rates as it held steadfast to its inflation-focused mandate. The graph below highlights the ECB’s rate decisions over the past year versus what has occurred at the Bank of England. The Fed began easing in late 2007.

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In the meantime, Germany, the biggest economy in the eurozone, has been among the hardest hit of the large industrial nations because of its heavy dependence on exports.

The International Monetary Fund expects the country’s GDP will contract a steep 5.6% this year amid the near collapse in worldwide demand. Germany did get some welcome news when the government reported a jump in industrial orders recently and business confidence has stabilized, but problems remain. Only Japan is expected to see a larger drop in total output.

ECB fiddled while Germany burned

The ECB’s stubborn resistance to lending support to the sagging fortunes of the eurozone has contributed to the decline in output. The bank sheepishly acknowledged that 1Q was weaker than forecast and cut rates by a quarter point to 1.0% on Thursday. And it did not close the door on further reductions.

But more importantly, officials promised to purchase 60 billion euros (about $80 billion) in covered bond – bonds collateralized by mortgages or government loans. The move is seen as a way to support the housing market and aid the struggling eurozone economy, which is beginning to show signs of trying to stabilize.

Though there has been criticism in some corners that the ECB did not go far enough, monetary officials are taking more serious steps to jump-start growth.

Friday, May 8, 2009

Unemployment rate at 26-year high

The unemployment rate rose from 8.5% in March to 8.9% in April, the highest level in 26 years and companies continued to trim payroll. Details can be found on my post at Examiner.com. What I want to do here is compare the three worst recessions since the 1970s and how they affected employment on a percentage basis.

The chart I put together comes from data provided by the Bureau of Labor Statistics and reflects the percentage decline in the number of jobs from the peak of employment, i.e., month number one is the peak in jobs before the onset of each recession. Why percentage comparisons? Because growth in population makes for distorted comparisons with prior periods.

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The chart shows that the current contraction is the worst of the three, resulting in a 4.2% loss in the number of jobs since the top of the employment cycle in December 1997. We are now just shy of the percentage drop in payrolls seen in the 1958 recession and another half-million loss in payrolls would make this the worst labor market in terms of percentage job losses in over 60 years. Does the word "sobering" come to mind?

In contrast, nonfarm payrolls fell just over 3% in the 1982 recession and 2.8% in the recession of 1974, when the economy was racked by double-digit inflation and an oil embargo.

You can see that the drop in employment this time around was modest until the credit freeze in September severely jolted the economy, forcing firms to quickly slash payrolls amid falling demand for goods and services. The 1974 recession saw sharp losses after the first three month, followed by a recovery, while layoffs in 1982 were fairly steady until a bottom was reached.

It does appear, however, that the steepest losses may be behind us. A 500,000 reduction in nonfarm payrolls remains unacceptable, but April's losses were the lowest since October and Thursday's release of weekly initial jobless claims put the level at a three-month low. The unemployment rate seems destined to top 9% but expectations are rising that job declines will soon moderate.

Thursday, May 7, 2009

Labor report on tap

Of all the economic reports that wind up in the newspapers, the labor report is one of the most anticipated because of its impact on Federal Reserve policy and politics at the national level. The ease or difficulty in finding employment has a large impact on consumer confidence, and in turn, politicians keep a close eye on the figures.

This recession is turning into one of the worst economic slumps since the 1930s, impacting nearly all segments of the economy. As a result, companies have slashed payrolls to protect profits, and in some cases, to avert bankruptcy.

As can be seen by the chart provided by the Bureau of Labor Statistics, payrolls are down just over 5 million since the recession began over a year ago. But the real damage to the job market did not occur until after the credit markets froze in late September following the failure of Lehman Brothers.

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Credit is the lifeblood of the economy. The commercial paper market and lines of credit provide businesses with financing to expand inventories and factories as well as provide the funds needed to meet payroll. Banks and credit unions also enable consumers to make large purchases such as autos and homes.

When financing was severely restricted for legitimate lending needs, economic activity came to a halt, consumers headed into hibernation, and companies reacted accordingly.

The 5 million plus decline in payrolls since late 2007 has been the biggest drop on record. Moreover, the percentage decline in job losses has exceeded the severity seen in the steep contractions of 1974 and 1982. For those keeping track, the recessions in the late 1940s and late 1950s produced greater percentage declines, but that provides little solace right now for those searching for new opportunities.

But let’s not end on a glum note. It is important to point out that despite the poor near-term outlook for the labor market, companies have not stopped hiring.

Friends, family, and networking contacts are a great avenue to find new leads and many job transition groups have sprung up in local churches and communities. I also spotted this list of companies that are looking for new talent, which includes some of the largest firms in the nation.

If you are so inclined, another batch of insightful articles can be viewed on my homepage at Examiner.com.

Tuesday, May 5, 2009

Services rise, Bernanke sniffs out recovery

Every month the Institute for Supply Management provides a detailed look at conditions in the broad-based service sector. The survey looks at a number of factors that make up these businesses in order to get a better feel for what’s what’s going on and what may happen in the largest part of the economy.

Like its cousin the ISM Manufacturing Index, a reading below 50 suggests service-oriented businesses are contracting while a reading above 50 signals expansion. However, it’s not just the level that’s important but the trend.

Released this morning, the ISM non-Manufacturing Index rose 2.9 points to 43.7 in April, topping expectations of a 1.2 rise, according to Bloomberg News and reaching its highest level since October. Though companies in the service sector are still indicating that activity is falling, the pace of the decline continues to slow.

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More importantly, the new orders component in the index showed marked improvement. Employment also rose modestly but remains well below 50, signaling that businesses are reluctant to take on new employees.

Unfortunately, employment gains normally lag an economic recovery because businesses tend to be very cautious in ramping up hiring, making sure a rise in economic activity is permanent. Still, the data are the latest in a number of economic reports that suggest a bottom in activity may be near.

Bernanke cautiously optimistic

In his testimony on the economic outlook before the Joint Economic Committee in Washington, DC, Fed Chief Ben Bernanke said we are “likely to see further sizable job losses and increased unemployment in coming months,” echoing similar sentiment from the ISM survey.

But he noted that “recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing.” Bernanke added that activity is expected to “turn up later this year.”

The comments from the Fed chairman coincide with an improvement in consumer sentiment and an upturn in consumption spending in the first quarter.

With signs growing that 2009 will mark the end of the worst recession in over a half century, some pundits may warn that a new burst of inflation will greet 2010 because of the massive doses of monetary and fiscal stimulus still in the pipeline.

But Bernanke commented in his prepared remarks that he expects inflation will remain low given the slack in the economy and low cost pressure from oil and other commodities. However, he seemed to back away from fears about deflation, noting that stable inflation expectations should " limit further declines in inflation." Please see The deflation monster. If you have been following my remarks, this should come as no surprise.

Saturday, May 2, 2009

The deflation monster

There has been plenty of talk among Fed officials and financial pundits about deflation and the danger it poses to the economy. But what is deflation and why is it so scary? First, let’s define the term. Just as inflation is viewed as a general rise in the overall price level, deflation is the opposite – a general decline in prices.

Imagine renewing season tickets to your favorite sports team and paying less than the prior year or getting an upgrade for the same price. Or sitting down at a restaurant you frequent and being handed a new menu with lower prices. At first glance, it sounds like economic nirvana! Let’s be honest, who doesn’t like paying less?

But a general drop in overall price level has its dark side and could turn a severe recession into another depression. If falling prices take root in the economy, consumers would likely hold off on some purchases, further exacerbating the decline in economic activity. And businesses, faced with falling sales and profits, would respond by further slashing payrolls and/or cutting wages.

However, debt outstanding would remain intact and declining payrolls, combined with lower salaries, would likely push debt-strapped consumers further behind and into default. That would add pressure on an already-fragile banking system.

You can see how a downward spiral might get out of control.

Consequently, this economic scenario, which is akin to an economic black hole, is something the Federal Reserve and Fed Chairman Ben Bernanke are trying to avoid at all costs.

As many of us already know, wage growth has slowed considerably. But commodity prices, which virtually fell off of a cliff late last year, have edged off recent lows, while crude and gasoline prices have rebounded modestly.

Plus, the rate of deterioration in the economy appears to be slowing. Unless the rapid decline in economic activity continues, and the odds of this happening are starting to recede, the risk of deflation seems remote.

Other insightful articles can be viewed on my homepage at Examiner.com.

Friday, May 1, 2009

Economy slowly stirring

The ISM Manufacturing Index is a key factory report that takes and in-depth look at the health of goods producers. Weakness in housing and autos and the falloff in global trade have taken a huge toll on the sector but the latest numbers suggest the rate of contraction is slowing.

Last month, the index rose 3.8 points to 40.1, topping expectations and reaching the highest level since last September. A reading below 50 suggests that factory output is falling but the trend in recent months has been favorable. Weakness in new orders and production are starting to abate, while exports showed some improvement.

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Source: Institute for Supply Management

Much like the Consumer Confidence Index released earlier in the week, the University of Michigan's survey of consumer sentiment is also showing an improvement in confidence, rising to 65.1 in April from 57.3 in March. Sentiment among consumers now stands at the highest level in seven months amid the rally in stock prices.

The improvement is welcome because close to 70% of the US economy is powered by consumer spending. And if consumers are starting to feel a bit better, they may feel less uncertain about making future purchases.