Month: June 2014

U.S. Consumers Cautiously Raise Spending; Price Inflation Ramps Up

Personal consumption expenditures rose 0.2% during May (3.7% y/y) following no change in April, revised from the 0.1% dip reported last month. When adjusted for price inflation, however, spending slipped 0.1% (+1.9% y/y), the second consecutive down month. (…) Nominal spending on durable goods increased 0.7% (3.9% y/y) and recovered most of a 0.9% April decline. A 2.3% rebound (7.2% y/y) in motor vehicle purchases led the increase. (…)

Price inflation continued to firm last month as indicated by a 1.8% y/y rise in the PCE chain price index. That compares to a 0.8% y/y low in February and a 1.1% rise for all of last year. The latest was the third consecutive 0.2% monthly increase (1.8% y/y) in the price index. Faster growth in core prices powered the overall index with a 1.5% y/y rise. The May gain was the third consecutive 0.2% increase and followed eight consecutive months of 0.1% rise. (…)

Personal income increased 0.4% during May (3.5% y/y) after a 0.3% April rise. The gain was fueled by a 0.4% increase (3.8% y/y) in wages & salaries which followed a 0.3% gain. Rental incomes increased a firm 0.4% (5.6% y/y) for a second straight month while proprietors income rose 0.2% (2.3% y/y).  Disposable personal income gained 0.4% (3.7% y/y) for the second consecutive month. Adjusted for price inflation, take-home pay rose 0.2% (1.9% y/y) for a second consecutive month

Consumer finances are looking much better. Personal income is up 3.5% Y/Y and 4.9% a.r. in the last 3 months. Wages and Salaries are up 3.8% Y/Y and 5.3% a.r. in the last 3 months. Disposable Income: +3.7% Y/Y, +5.3% a.r.. These sharp accelerations are mainly coming from labor income.

Core PCE, the Fed’s preferred inflation gauge, is also accelerating at +2.4% a.r in the last 3 months but nominal income is rising fast enough so that real disposable income is up 1.9% Y/Y and +2.8% a.r. in the last 3 months.

So, even though real expenditures declined 0.3% in the last 2 months, the firing power is improving as we approach the important second half.

NBF digs deeper:

(…) True, May’s personal spending data was nothing to write home about ― real consumption spending is on track to grow just 1.2% annualized in Q2, i.e. barely better than Q1’s sluggish pace. But as today’s Hot Chart shows, the softness is entirely due to non-discretionary items, i.e. food, energy and health care.

That should be neither surprising nor alarming. After a harsh winter, which caused a spike in energy consumption, a giveback was always in the cards. Ditto for health care after the enrolment spike in the previous quarter to beat the Affordable Care Act’s March 31st deadline. Food consumption is also soft, curtailed perhaps by the sharp price increases especially for meat products. All of those are, of course, temporary. Another clue, perhaps, that consumption is stronger than it looks is the discretionary component which is growing in Q2 at the fastest pace since 2012Q1. That’s consistent with strong consumer fundamentals such as a much improved labour market, high confidence (e.g. Conference Board’s index is at the highest since 2008) and better credit scores which enhance the ability of Americans to borrow and spend.

U.S. Consumers Feeling More Upbeat on Economy

The important stuff from the survey is that the stats suggest that the labor market is tightening. “Jobs hard to get” is falling while “jobs are plentiful” is rising (chart from Scotty Barber)

Bullard: Markets think Fed is more dovish than it is

Financial markets think the Federal Reserve is more dovish than it actually is, said St. Louis Federal Reserve president James Bullard on Thursday.

In a speech in New York book-ended by a television interview and press conference, Bullard said investors, and even some Fed officials, are “stuck” in 2010 and don’t realize how close the central bank is to reaching its targets of low unemployment and stable prices. (…)

Bullard said he now expects inflation to move over the 2% target in 2015. The Fed will have to play its cards right to keep inflation under control, he said. (…)

Also my sense. Markit’s June flash Services PMI is clearly in booming area while the the manufacturing PMI is accelerating.

Fed’s Lacker: Rates Could Rise Even If Economic Growth Remains Subdued The Federal Reserve is likely to begin raising interest rates next year even if the U.S. economy doesn’t experience a substantial acceleration in growth, Federal Reserve Bank of Richmond President Jeffrey Lacker said.

U.S. Durable Goods Orders Suffer a Setback

New orders for durable goods declined 1.0% (+2.7% y/y) during May and reversed an unrevised 0.8% April rise. Fewer new orders for transportation equipment led the decline with a 3.0% shortfall (-0.9% y/y), the first down-month in four. It reflected a 4.0% drop (-21.6% y/y) in commercial aircraft & parts orders. Defense aircraft bookings gained 5.9% (19.9% y/y) while motor vehicle & parts orders increased 2.1% (4.7% y/y).

Nondefense capital goods orders declined 0.5% (1.8% y/y) but orders excluding aircraft improved 0.7% (4.0% y/y), making up most of the prior month’s decline.

Non-def cap. goods ex-aircrafts, the key variable for trend measurement, rose 0.7% following –1.1% in April and +4.7% in March.

Global capital expenditure still stalling Cash-rich companies reduce spending

Although companies worldwide continue to have historically high levels of gross cash at $4.5tn for the top 2,000 companies by capital expenditure in 2013, spending is likely to decline 0.5 per cent this year in real terms, according to Standard & Poor’s forecasts based on first-half data. That would come on top of a 1 per cent decline in 2013. (…)

Capex by emerging market companies, having fallen 4 per cent year-on-year in 2013, now seems likely to fall by a similar amount this year – the first significant reversal in the long-term uptrend since the various financial market crises of the 1990s. (…)

Energy companies made up nine of the top ten capex spenders globally in 2013, and, with the miners, accounted for 42 per cent of global corporate capex. (…)

Despite the findings, S&P said there were some reasons to feel optimistic about a future pick-up in investment including plentiful cash at many companies, ageing capital stocks and an improving global economy. The IT, healthcare and telecoms sectors were increasing their investment. The researchers also said market analysts consistently underestimated prospects for capex. (…)

Many of the low forecasts from past years were due to underestimates of the boom in energy and materials capex, but that seems unlikely to be repeated this year.

U.S. HOUSING

• KB Home: First-Time Buyers Back on the Radar

KB Home captured attention within the home-building industry on Friday with its disclosure that it has seen first-time home buyers resurface in certain markets, perhaps the earliest sign of a long-awaited resurgence needed to boost the industry back to its normal production rates.

(…) other big builders, including Lennar CEO Stuart Miller on Thursday, have said they see little evidence yet of first-time buyers returning in significant numbers.

Yet Mr. Mezger was resolute in his prepared remarks about KB Home’s results for the quarter ended May 31 that job growth in Dallas, Denver, Orlando and other markets has led to an increase in first-time buyers for KB Home there. He didn’t quantify that increase on the call. (…)

In this year’s first quarter, 52% of the mortgages that KB Home originated went to first-time buyers. The company hasn’t yet divulged its second-quarter percentage. (…)

Others are more cautious in their outlook for the entry-level market. David Goldberg, an analyst who tracks home builders for UBS Securities, described the return of first-time buyers and the easing of credit standards as “very marginal.” Rather, what is happening, he says, is that builders are beginning to cater a bit more toward entry-level buyers after realizing they’ve nearly tapped out the market for more affluent buyers.

(…) According to the builders’ association, first-timers have accounted for 16% of new-home sales so far this year, down from 25% to 28% from 2001 to 2007.

• Baby Boomers Staying Put The going wisdom says the number of homes for sale should surge in coming years as baby boomers—those born between 1946 and 1964—trade in large, detached single-family homes for condos or attached homes in more urban areas. But two reports suggest such downsizing has yet to materialize and may not to the extent suggested by some commentators.

(…) while boomers are working less and their kids are moving out, the share of boomers living in detached single-family homes was roughly the same in 2012, the most recent year for which data were available, as in 2006, Fannie said.

Boomers may be slow to downsize for several reasons, wrote Mr. Simmons. For one, they may like their homes. A 2010 survey by the AARP, the seniors-advocacy group, found 84% of boomers said they would prefer to live in their current houses for as long as possible.

Meanwhile, the scars of the housing bust and the Great Recession have prevented some from moving because they don’t have enough equity in their homes or are unwilling to sell at prices that are still down from their peak of the past decade. Also, some homeowners who have locked in low mortgage rates in recent years by refinancing may be reluctant to move now that rates are a little higher. (…)

Restaurants Respond to Higher Beef Prices

(…) Many are passing along the higher prices while embellishing their menus with new items, smaller-portion cuts and more sauces, toppings and side dishes. Others are seeking to control costs by locking in beef purchases at current prices as they envision further inflation to come. (…)

Wholesale prices for choice-grade beef—the main variety consumed in the U.S.—surged 11% over the 12 months through May as cattle prices reached all-time highs, according to the U.S. Department of Agriculture. The gains come as supermarkets gear up for the week of Fourth of July—typically the year’s busiest period for beef sales.

In many cases, companies are sticking consumers with that higher tab. Average retail fresh beef prices rose 12% to $5.45 a pound in May from a year earlier, according to the USDA, and were just shy of the all-time high reached in April. The government forecasts that consumer beef prices will increase as much as 6.5% for all of 2014, compared with gains of up to 4% for both pork and chicken. (…)

In the first four months of this year, U.S. beef sales volume fell 0.6% from a year earlier after rising in the last two quarters of 2013 at 18,000 grocery stores, supermarkets and other retail outlets tracked by market-research firm Nielsen Co. In contrast, sales volumes for chicken rose 1.9%. (…)

Euro-Zone Inflation Stays at Over 4-Year Low

The euro zone’s annual rate of inflation was unchanged at its lowest level in more than four years in June, while bank lending to households and businesses declined in May.

The European Union’s statistics agency said that the rate of inflation across the 18 members of the euro zone was unchanged at 0.5% in June. That marked the ninth straight month in which the inflation rate was below 1%. The ECB targets an inflation rate of just below 2.0%.

The rate of inflation was 0.5% in March, and rose briefly to 0.7% in April, largely as a result of higher prices for package holidays over Easter. Before March, the inflation was last as low in November 2009, when the economy was beginning to emerge from the deep contraction that followed the global financial crisis. (…)

Euro zone loans slump, ECB waits for new measures to kick in  Lending to households and firms in the euro zone contracted more sharply in May than a month earlier, highlighting the economic weakness in the bloc that the ECB sought to address with a bundle of measures earlier this month.

Lending to households and firms in the euro zone contracted more sharply in May than a month earlier, highlighting the economic weakness in the bloc that the ECB sought to address with a bundle of measures earlier this month. (…)

However, loans to the private sector fell by 2.0 percent in May from the same month a year earlier, ECB data released on Monday showed, after a contraction of 1.8 percent in April.

Earlier this month, the ECB introduced a series of new measures to encourage lending, including a cut in its deposit rate to below zero to discourage banks from holding money at the central bank. The May lending data would not have been influenced by theses steps.

Euro zone M3 money supply – a more general measure of cash in the economy – grew at an annual pace of 1.0 percent in May, up from 0.7 percent in April.(…)

 

Germany faces labour market shortage EU’s largest economy could need up to 2.4m workers by 2020

Research by Boston Consulting Group suggests that Germany, the eurozone’s largest economy, could experience a shortage of up to 2.4m workers by 2020, growing to 10m by 2030 as the labour supply shrinks from 43m people today to an estimated 37m. (…)

Germany’s unemployment rate was 6.7 per cent in May and signs of tightness in the labour market are appearing. (…)

BCG estimates that Italy and Spain will still have a surplus of workers in 2020. (…) By contrast, growth in the UK is not expected to be sufficient to absorb an expanding labour supply. (…)

“Policymakers are dramatically underestimating the scale of this challenge. By 2030 this will be a global problem.”

BCG examined workforce supply and demand in 25 leading economies, including the G20, which collectively account for 2bn economically active people, about two-thirds of the world’s population.

U.S. Could Face High Unemployment Through 2030, Consultancy Says

The U.S. is one of the world’s few economies that could struggle with high unemployment through 2030, according to an analysis The Boston Consulting Group will release Wednesday.

BCG calculated the U.S. could have a worker surplus equal to between 10% and 13% of its labor force in 2020 and of 4% to 11% in 2030.  It calculated Germany will have worker shortages in both years, while China could move from a surplus in 2020 to a shortage in 2030. (…)

Yuan Hits Strongest Level Since April

China’s yuan rose to the highest since April on Monday and recorded its best month in over a year as evidence accumulates that the economy is stabilizing after a slowdown at the start of 2014.

The currency gained 0.68% in June, a second month of gains that signals to some traders and fund managers that heavy losses from February to April that largely were engineered by Beijing may have come to an end.

The yuan climbed to as high as 6.1998 per dollar in Monday’s afternoon trading, its strongest since April 10 and the last day of trading for June. It ended at 6.2050 compared with Friday’s close of 6.2181. A lower number means a stronger yuan. (…)

Still, the currency is down 2.4% against the dollar so far this year and among Asia’s worst performers. (…)

Top North American CFOs Are Getting Bearish On China Chief financial officers feel pretty good about North America. It’s Europe and, increasingly, China where they see storm clouds, according to a new survey of CFOs.

Growth expectations weren’t much improved from the first quarter, but CFOs see prospects looking brighter in North America, according to Deloitte LLP’s second-quarter survey of CFOs. Some 40% described the North American economy as good, down from 42% last quarter. Some 60% believe it will look better in a year.

By contrast, just 24% of CFOs said China’s economy looks good, down from 37% last quarter. And just 21% think it will be better in a year. Only 7% said Europe’s economy looks good, and 27% expect it will be better in a year.

Sales growth expectations rose to their highest level in two years and earnings and capital spending expectations rose to their highest level in a year.

Meanwhile, domestic hiring expectations rose to 1.6% this quarter after 1% last quarter.

“Net optimism is holding steady, but lower earnings and capital spending growth expectations suggest U.S. CFOs are factoring bumps that were not on their radar screens three months ago,” said Sanford Cockrell, national managing partner of Deloitte LLP’s CFO program.

Manufacturing CFOs were more downbeat than the rest of the group. Some 39% expressed declining optimism, up from 18% last quarter, and more than double the level last quarter.

Deloitte surveyed 113 CFOs of North American companies in mid-May, with more than 80% from organizations that have more than $1 billion in annual revenue.

Stocks’ Biggest Gains Are an Inside Job What is the stock market’s biggest driver today? Corporate earnings? Interest rates? The Federal Reserve? Some say the answer is: companies buying back their own stock.

(…) Companies purchasing their own shares represent the single biggest category of stock buyers today, according to a study this month by Jeffrey Kleintop, chief market strategist at brokerage firm LPL Financial.

Only one other major group, individuals, is a net stock buyer now and individuals are buying less than corporations, Mr. Kleintop found. Of six major groups he identified, hedge funds, foreigners, insiders and investment institutions such as pension funds and insurance companies all are net sellers, he found. He used data from the Fed, the U.S. Treasury, FactSet, the Investment Company Institute and other sources.

The pullback by traditional investors helps explain why stocks have had trouble making progress at various points this year, money managers say. And the increasing prominence of corporate buybacks has drawn criticism from some in the investment world. (…)

Companies spent $598.1 billion on stock buybacks last year, according to Birinyi Associates in Westport, Conn. That was the second highest annual total in history, behind only 2007, Birinyi calculated. The pace picked up in the first quarter of 2014, when companies spent $188 billion, the highest quarterly amount since 2007. (…)

Mr. Kleintop of LPL Financial and Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking, both calculate that half of the first quarter’s S&P 500 per-share earnings gains came from declining share count, not from increases in actual earnings. (…)

Last year, owning the stock of companies with significant share-buyback programs was one of the most successful investment strategies tracked by Goldman Sachs, according to its research reports. As of June 20, buyback-related stocks had risen more than 115% since the end of 2012, Goldman found.

But almost all those gains came last year and buyback stocks have done no better than the S&P 500 this year. (…)

Some analysts project that 2014 could be the third-biggest buyback year ever. But there also are signs the buying could begin to wane, said research analyst Michael Amenta of FactSet Research Systems in a June report. Most of the 10 biggest big corporate buyers of their own shares slowed their buying pace in the first quarter and many indicated that they expect to further reduce spending as the year goes on, he said.

John Authers Value fears turn the tide against buybacks

(…) There has been a clear-cut change in corporate behaviour during the past few months. Companies are deciding, in numbers, not to buy back their own stock. TrimTabs, the US research group, shows that money spent on buying back stock in each of the last two months has been the lowest since January 2013.

Announced buybacks peaked in February 2013, and have trended lower ever since, before tumbling. The $22.2bn spent on buying back stock this June contrasts with $61.7bn in June last year.

Meanwhile the number of US companies announcing plans to buy back stock this month, 38, is the lowest since June 2011. Trends like this take a while to shift – but the experience of the last few weeks appears to confirm earlier signs that the trend is turning against buybacks. (…)

As for selling of shares by insiders, the classic sign that the people in the know think that their stock is too expensive, TrimTabs shows that it has risen sharply in recent weeks.

Against this, there is one sign of robust confidence, which is the return of mergers funded by cash (which generally means debt). They have exploded, and $74.4bn was spent on cash acquisitions in the last six weeks. This was the highest six-week total since June and July of 2007, when there was a flurry of dealmaking before the credit crunch set in. (…)

Another way to look at this, favoured by Ned Davis Research, is to compare growth in earnings per share with total cash earnings (without dividing by the number of shares). So far this year, EPS growth is lagging behind total profits growth by 0.3 percentage points. This reverses a trend in place since 2005, when dollar-based earnings have tended to lag EPS.

Ned Davis Research finds that the market tends to reward dollar earnings growth more than EPS growth; investors are more impressed by real economic expansion than by financial engineering. However, periods when EPS grows faster than dollar-based earnings (which have only happened about 20 per cent of the time since 1982) tend to occur just before periods of outright falls in earnings. While this is not imminent, Ned Davis Research suggests that it is “worth monitoring”. (…)

What many people are missing about buybacks is that most buybacks seek to offset dilution from convertible securities or stock options, or the issuance of stock for acquisitions. It is thus important to look at net buybacks as Moody’s does in this chart.

I remind you that data from S&P shows that buybacks, in aggregate, have only reduced total shares outstanding by 1.2% over the last 4 years. Shares o/s declined 0.5% Y/Y in Q3’13, 0.12% in Q4’13 and rose 0.12% in Q1’14 (Charts below from Factset).

BUY LOW, SELL HIGH

Spreading Unease in Corporate Bond Markets Spreads on corporate bonds have narrowed, and changes in their quality and market dynamics mean investors could be at risk.

(…) Credit quality has declined. Back in March 1997, the bonds in the index were rated single-A on average, Royal Bank of Scotland notes; now, they are rated single-A-minus.

And the duration of the index, a measure of how sensitive bond prices are to changes in yield, has risen to seven years from 5.8. Investors should demand higher risk premiums for both of those factors. So current spreads may actually be equivalent to those seen in the late 1990s.

Another risk looming large for investors is that of illiquid markets. Regulations designed to make the banking system safer have hit the ability and willingness of banks to trade corporate bonds. If investors were to try to sell en masse, the fallout could be severe. (…)

May I also point out that Treasuries are currently yielding 60 bps real when a normal premium over inflation is 200-300 bps. Seeds of double whammy…

A Recovery Stymied by Redistribution Public policy intended to make layoffs less painful actually made layoffs cheaper and more common.

This is adapted from remarks by University of Chicago economics professor Casey B. Mulligan on receiving the Hayek Prize on June 25 from the Manhattan Institute for his book “The Redistribution Recession”:

Why has the labor market contracted so much and why does it remain depressed? Major subsidies and regulations intended to help the poor and unemployed were changed in more than a dozen ways—and although these policies were advertised as employment-expanding, the fact is that they reduced incentives for people to work and for businesses to hire.

You probably heard about the emergency-assistance program for the long-term unemployed that ended only a few months ago after running for almost six years. But there is also the food-stamp program. It got a new name and replaced the stamps with debit cards. Participants are no longer required to seek work and are not asked to demonstrate that they have no wealth. Essentially, any unmarried person can get food stamps while out of work and can stay on the program indefinitely.

There were new mortgage-assistance programs. People who owed more on their mortgage than their house was worth could have their mortgage payments set at a so-called affordable level—in government-speak, that means that you pay full price for your house only if you have a job and earn money.

There were new rules for consumer bankruptcy, with special emphasis on the amount that consumers were earning after their debts were cleared.

All of these programs have in common that they, like taxes, reduce incentives to work and earn. The cornerstone of “The Redistribution Recession” is to quantify the sum total of these incentives and their changes over time. That’s what I call the marginal tax rate, by which I mean the extra taxes paid, and subsidies forgone, as the result of working. Waves of new programs increased the typical marginal tax rate from 40% to 48% in two years. (…)

I met a recruiter—a man whose job it is to find employees for businesses and put unemployed people into new jobs—and he described the trade-off pretty well. Stacey Reece was his name, and he said that in 2009 his clients again had jobs to fill. But he ran into a hurdle he hadn’t seen before. People would apply for jobs not with the intention of accepting it, but to demonstrate to the unemployment office that they were looking for work.

As Mr. Reece described it, the applicants would use technicalities to avoid accepting a position. The applicants would take Mr. Reece through the arithmetic of forgone benefits, taxes, commuting costs and conclude that accepting a job would net them less than $2 per hour, so they’d rather stay home.

People remain unemployed longer, as Mr. Reece saw with his own eyes. (…)

If we had more time to look at what businessmen had to say about the government’s fiscal stimulus, I would show you statements from those making decisions about layoffs. They explain how the new and expanded programs for the unemployed and poor were subsidizing layoffs—they were making layoffs cheaper.

Unlike state unemployment-insurance benefits that are sometimes a kind of liability for the employer writing the pink slip, the federal unemployment-insurance expansions were paid by taxpayers generally, which means that an employer could lay off as many people as he wanted without adding to his federal tax burden.

Maybe more vivid was the kind of ObamaCare experiment in the American Recovery and Reinvestment Act of 2009 that told unemployed people that “if you like the health plan you had on your old job, you can keep it,” and the federal government will pay. Before the Recovery Act, many employers used to voluntarily help employees with their insurance after a separation; these were expensive benefit programs for their employees. The employers had to consider that laying somebody off was going to end the value created by the employee but wasn’t going to end the health expenses the employee creates. But employers readily explain how the Recovery Act completely changed that calculus. Lay somebody off during the crisis and, for the first time, among other things, the employer wouldn’t have to pay for former-employee health insurance.

So public policy intended to make layoffs less painful actually made layoffs cheaper and more common.

It’s not just politicians or journalists who do not see the full economic picture. It’s the top economists in the world, from the International Monetary Fund to university professors, who promised that there was no trade-off and that, at this supposedly special time in history, redistribution would create jobs and grow the economy. The stimulus advocates rarely note the kind of thing that Mr. Reece talked about, and they never, ever, mention that redistribution is a subsidy to layoffs.