Yellen Sees Growth, but Housing a Risk

In testimony before Congress’s Joint Economic Committee on Wednesday, Fed Chairwoman Janet Yellen said the economy was on track for “solid growth” in the current quarter after a harsh winter that temporarily crimped business activity. But she held out housing as a potentially more lasting problem.

“The recent flattening out in housing activity could prove more protracted than currently expected, rather than resuming its earlier pace of recovery,” Ms. Yellen warned lawmakers, expressing an uncertainty about housing she hadn’t stated before. The development, she said, “will bear watching.”

By “recent”, she surely means the last 12 months…

Some economists say the affordability squeeze led buyers to step back from the market. But the effect of higher mortgage rates on housing activity typically fades after three to four quarters, according to research from economists at Goldman Sachs. If that is right, then the effects of last year’s rate increase “should finally be behind us” by the summer, said Goldman economist Hui Shan in a report Tuesday.

But there is a gloomier scenario. Some analysts have warned that the market’s health had been overstated by a sudden but short-lived release of pent-up demand from traditional buyers last spring, coupled with aggressive purchases by investors soaking up a glut of distressed properties.

These analysts argue that broader economic problems could hold housing back, including the failure of younger households to strike out on their own because their incomes are uneven and they have high debt loads. Continued tight credit standards have made it harder for these marginal buyers to obtain mortgages. (…)

EMPLOYMENT STATS AND OBAMACARE

Retail trade and food accommodation businesses account for 24% of total private employment in the U.S.. Together they provided 19% of the total increase in private employment since December. The only problem is that employee counts are rising while hours worked are declining, most likely the result of Obamacare’s 30-hour threshold. Employees are asked to work less than 30 hours which results in their employer creating another job. Meanwhile employees must seek another part-time job to meet ends.

      

    

U.S. Consumer Credit Growth Remains Strong

The Federal Reserve Board reported that consumer credit outstanding increased $17.5 billion during March following a $13.0 billion February gain, last month reported as $16.5 billion. 

Usage of non-revolving credit increased $16.4 billion (7.8% y/y) in March. Federal government loans increased 16.2% y/y. These constitute roughly one-third of total non-revolving credit. Finance company lending (27% of the total) edged up 0.5% y/y and consumer loans from banks (26% of the total) gained 7.5% y/y. Borrowing at credit unions (10% of the total) advanced 10.5% y/y.

First quarter student loan balances rose 7.5% y/y, down from nearly 15.0% growth in 2008. Motor vehicle loans outstanding increased 8.5% y/y, a new high and up from the 7.5% rate of liquidation in 2009.

Revolving credit outstanding edged up $1.1 billion (0.9% y/y) in March. Commercial bank & savings institution lending (81% of the total) gained 1.7% y/y. Finance company balances (8% of the total) declined 6.6% y/y while borrowing from credit unions (5% of the total) gained 6.8% y/y. Nonfinancial business accounts (3% of the total) was unchanged y/y, and securitized credit card balances (4% of the total) fell 6.9% y/y.

94% Of March Consumer Credit Was For Student And Car Loans

So where does the consumer credit growth come from? Simple: mostly student and to a lesser extent car loans, aka non-revolving debt. The same student loans which Janet Yellen earlier today lamented are the main reason for the slowdown in household formation, and by implication, the reason why the housing recovery is failing to stick for the fifth year in a row, and despite $2.7 trillion in liquidity injections by the Fed.

Finally, and perhaps most important, for all the talk about a surge in consumer bank loans, it bears highlighting that of all the consumer debt so far created in 2014, the Federal Government is by far the primary source at $36.8 billion. As for depository institutions, aka banks: negative $28.2 billion.

Cass Freight Index

Freight expenditures moved up again in April, with our expenditures index hitting its highest point in fifteen years. At the same time, North American shipment volumes rose to their highest level since June 2011. Although the performance of the economy overall was very weak, freight has continued to gain momentum, indicating that the second quarter should be stronger.

Shipment volumes inched up 1.5 percent from March, a growth rate much slower than the previous two months. That said, however, April freight shipments were 5.5 percent higher than a year ago, when volumes were moving in a downward direction. The trucking industry has edged even closer to 100 percent utilization, indicated by the substantial rise in the March FTR Trucking Conditions Index. The overall demand for spot market truck capacity has been very high as well. Reduced productivity caused by regulatory drag and the negative impact of the winter weather have pushed capacity to its limits.

Although the second quarter started with continued growth, most of the backlog related to winter weather has been cleared out and it appears that the early run of strong growth in freight will moderate in the second quarter. Manufacturing is coming back from its lull, but production edged slightly downward. New orders were flat, while the backlog of orders dipped 3.5 percent. Truck sales have been building: Class 8 truck orders grew 25.6 percent in March – the largest gain since mid-2012 – followed by another 5 percent rise in April. On the unemployment front, about 288,000 jobs were added to the economy in April, with the transportation and warehouse sector accounting for 11,300 of those jobs and trucking adding 6,800. Even more important for carriers is the 32,000 jobs that were added to the construction sector, as that industry’s employment hit a five-year high. As the volume of construction projects grows, so does the amount of freight moved to support these projects. Freight volumes are up 12.0 percent since the first of the year.

The tight capacity in the trucking sector has translated to rate increases, particularly in the spot market during the winter weather freight backlog. The fact that expenditures grew at almost twice the rate as volumes indicates that some ground was still gained in the rate arena. Higher rates are not coming fast enough, however, to save some trucking companies that are succumbing to higher costs. Avondale Partners reports that bankruptcies are on the rise again, having more than doubled from first quarter 2013 to first quarter 2014. First quarter bankruptcies were up 40 percent from the fourth quarter of 2013 and took almost 11,000 trucks out of the fleet. Increasing costs, especially in driver training and retention, without corresponding rate increases are pushing many companies to the brink.

FedEx to Charge by Package Size FedEx is changing the way it charges to ship bulky packages, jolting e-commerce companies with price increases for delivering items as diverse as diapers, shoes and paper towels.

(…) Under the new rate system the price of shipping an eight-pound, 32-pack of toilet paper between 601 and 1,000 miles would increase 37% to $13.81.

The change in pricing could dramatically affect either online shoppers or retailers or both. Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs.

Shipping is already one of the biggest and most rapidly increasing costs for big online retailers, a factor cited in Amazon.com Inc.’s recent testing of its own delivery service. (…)

Surveys show that shoppers abandon their online purchases at checkout when they see a big shipping fee. Instead, retailers may charge more for the merchandise to cover the cost. (…)

For the delivery companies, it comes down to efficiency. Lightweight e-commerce orders take up a lot of room in the truck, and Amazon and other shippers don’t always match the box size to what is inside. (…)

Bill Ashton, vice president of operations for Modnique.com, which sells apparel, shoes and handbags online, estimates that the shift to dimensional pricing will work out to a 30% increase on many items shipped by smaller retailers. (…)

Under FedEx Ground’s current pricing, a one-pound square package with 12-inch sides—which might hold several shirts—would be priced by weight and cost $6.24 to ship the shortest distance.

After the changes, FedEx will use the same calculation it uses for air shipments: the volume of the package divided by 166, a calculation based on the amount of space in the cargo area of a plane.

This way, the same 12-inch box would be priced at $8.83, a 41% increase. If an item is heavier than its “dimensional weight,” the customer will be charged the higher amount. (…)

ShipMatrix, which analyzed data from hundreds of millions of packages shipped from more than 50,000 U.S. locations, found that about 32% of all ground packages will be affected by the price increase, and the majority of those weigh less than five pounds. Other analysts agreed that more than 30% of shipments would likely be affected. (…)

The reality is that the trucking industry finds itself in the driver’s seat (). I am aware of a large trucking company approached by AMZN to handle its shipping. The CEO quickly walked away after realizing that AMZN has no intention to allow him to make a profit. 

U.S. Productivity Falls in First Quarter

U.S. productivity fell early this year and remains historically weak, underscoring a challenge to the economy’s growth potential as the Federal Reserve withdraws its support.

Productivity, or output per hour worked, fell at a 1.7% annual rate in the first quarter, marking the first drop in a year, the Labor Department said Wednesday. Unit labor costs surged at a 4.2% pace.

Both moves reflected an economy that nearly stalled during the winter due largely to severe weather. Output—or the goods and services produced in the economy—was flat as snowstorms and unusually cold temperatures hampered business operations and hurt sales.

But companies kept expanding payrolls slowly. As a result, workers’ hours rose faster than output, causing productivity to fall and unit labor costs to rise.

The broader trend reflects sluggish growth in productivity and labor costs. Compared with a year earlier, productivity was up just 1.4% from January through March. Unit labor costs, a key gauge of inflationary pressures, were up just 0.9% as growth in workers’ compensation remained tame. (…)

Productivity grew nearly 2.5% a year on average between 1990 and 2005. But from 2006 through last year, productivity grew an average of about 1.5% a year. It has grown just 0.8% on average the past three years. (…)

One factor in the slowdown could be weak business investment in equipment and software. A second possible factor, cited by Federal Reserve Governor Daniel Tarullo in a speech last month, is stagnation in the formation of new businesses, perhaps due to low tolerance for risk or a lack of financing.

Another possible factor: Workers aren’t gaining the right skills to help companies and the economy reach their potential. Some economists believe the weak productivity gains reflect a broader, secular slowdown in U.S. economic growth linked to an aging workforce and other factors. (…)

The central bank appears to be betting that productivity growth will pick up in the next two years, said Ian Shepherdson, chief economist of Pantheon Macroeconomics. The Fed’s forecast of stronger GDP growth coupled with a slowly declining unemployment rate appears to be based on the assumption that productivity will grow at a quicker pace, he said. (…)

A productivity slowdown is a challenge for the Fed officials to manage. In the short run, less-productive workers means slack gets taken up quickly, which could in turn create inflationary pressure and force the Fed to start raising interest rates sooner than expected. In the long run, something different happens. Lower productivity puts downward pressure on real equilibrium interest rates—the level of inflation-adjusted interest rates that would enable the most economic activity possible while keeping inflation low and stable. The Fed, in effect, risks causing inflation if it waits too long to raise rates, but also risks sinking the economy if it pushes them too high. (…) (Chart from Haver Analytics)

Eurozone retail PMI hits three-year high

April saw a rise in the level of retail sales in the euro area, according to the latest PMI® data from Markit. Although only modest, growth in sales was the fastest in three years and underpinned by gains in both Germany and France. Italy meanwhile posted only a marginal reduction in trade on the month, the rate of decline in the eurozone’s third-largest economy having eased markedly since March.

At 51.2, up from 49.2 in March, the Markit Eurozone Retail PMI – which tracks month-on-month changes in the value of retail sales – indicated a rise in actual like-for-like sales for the first time in three months. Moreover, the increase was the most marked since April 2011. Trade was also up compared with the situation one year ago, with the annual rate of growth similarly at a 36-month high.

Leading the expansion was Germany, where retail sales rose solidly and to the greatest extent in three months.
French retailers recorded a return to growth after stagnation in March and a run of six straight months of contraction prior to that, albeit the increase in the latest survey period was only marginal. In Italy, sales fell only marginally and at the slowest rate in the current 38-month sequence of decline.

April saw a further reduction in the rate of wholesale price inflation faced by eurozone retailers, to the slowest in three-and-a-half years. Cost pressures were weakest overall in Italy; and strongest in Germany.

Barclays axes 19,000 jobs, reins in Wall Street ambitions

Trade data relieve pressure on Beijing Export and import growth hint at stabilising economy

Total trade firmed in April, with both exports and imports growing by just under 1 per cent year-on-year. That could reassure Chinese policy makers worried that the country is facing a slowdown as it weans itself off a credit binge. Beijing has quietly adopted looser policies in spite of rhetoric about accepting a shift to slower, more sustainable growth.

The April export numbers represent an improvement on March when Chinese exports fell 6.6 per cent from a year earlier.

Stronger trade figures with Europe – up 8.5 per cent in the first four months of 2014 – and the US, which rose 2.4 per cent, point to a gradual recovery in the developed world after years of weak demand.

Russia Woes Hit U.S., European Companies A swath of European and U.S. businesses, from banks to brewers, are blaming big hits to their bottom lines on the uncertainty surrounding Moscow’s standoff with the West over Ukraine and Russia’s worsening economy.

(…) In the U.S., multinational companies that sell to consumers say they are getting hit by the steep drop in the ruble, which has cut sales of imported goods ranging from makeup to pharmaceuticals. Others, ranging from satellite operators to financial firms, are directly feeling the pinch of punitive sanctions and other measures that Washington has rolled out to pressure Russian President Vladimir Putin. (…)

Hedge Funds Extend Their Slide

Big stumbles by some star managers drove hedge funds to back-to-back monthly declines for the first time in two years, according to researcher HFR Inc.

The lackluster showing—the average hedge fund trailed benchmarks for both stocks and bonds in April—was a blow for an industry that charges more than other fund managers but pitches steady returns in both good times and bad.

Hedge funds on average dropped 0.17% in April, HFR said Wednesday, following a 0.33% decline in March. Funds hadn’t turned in two consecutive losing months since April and May of 2012, HFR said. (…)

The latest industrywide figures come the same week a survey by the trade publication Institutional Investor’s Alpha showed that the top 25 highest-earning hedge-fund managers collectively made $21 billion in 2013, an increase of more than 50% over 2012.

Most hedge funds charge some variation of the “2 and 20” model, in which the firm collects a 2% management fee and 20% of investment profits. (…)

Paul Tudor Jones, a billionaire veteran of the industry and founder of Tudor Investment Corp., this week called the trading environment “as difficult as I’ve ever seen in my career.” Mr. Jones’ main fund is down about 4% this year, according to investor documents. (…)