NEW$ & VIEW$ (16 AUGUST 2013)

Storm cloud  US industrial production stalls

US industry suffered a disappointing start to the third quarter, but there are signs that growth may pick up again as we move through the quarter.

Industrial production stalled in July, showing no change against expectations of a 0.3% increase. Manufacturing output fell unexpectedly, down 0.1% against June. Even when looking at the three-month trend, the picture is one of a stalling industrial sector. Production was flat in the three months to July, the weakest performance since last October and indicating that the economy has slowed sharply from the 1.3% three-month growth rate seen at the beginning of the year and the 1.0% rise seen in the first quarter.


This clearly represents a weaker than anticipated start to the third quarter, and will raise question marks over the solidity of the US economic recovery.

Fingers crossed  However, July may represent a low for the sector. The easing in the rate of growth over the course of the year to date has been signaled in imageadvance by Markit’s PMI survey and, reassuringly, having slumped to an eight month low in June, the PMI picked up in July, hitting a four-month high. The improvement in the survey data – which have provided a very reliable guide to the official numbers – suggests that the official data will pick up again in coming months.

Importantly, new order inflows gained further momentum during the
month, which should drive ongoing production growth. Manufactures are reporting that domestic demand is providing the main impetus to renewed growth, but perhaps the most important driver of new orders in July was the export market. With growth picking up in Europe, US firms are able to offset some of the weakness evident in emerging markets. July’s rise in export orders was the largest so far this year.


The survey’s broadest indicators for general activity and new orders were
positive for the third consecutive month, although they fell back from higher readings last month. Responses indicated flat shipments and only slight increases in overall employment this month. The surveyʹs indicators of future activity, although not as high as in July, continue to suggest that firms expect continued growth over the next six months.



These four charts illustrate how weak things are in the Philly Fed district. New orders did spike in the last 2 months but unfilled orders remain pretty low. Yet, employment rose in the last 2 months, even though the workweek is still not expanding.

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Open-mouthed smile  Jobless Claims in U.S. Decline to Lowest Level Since 2007

The number of claims for jobless benefits dropped by 15,000 to 320,000 in the week ended Aug. 10, the least since October 2007, according to Labor Department data. The Labor Department revised the previous week’s figure to 335,000 from an initially reported 333,000.


Inflation, up 0.2%, Moves Closer to Fed Target

Rising prices for a broad range of consumer items in July pushed overall inflation up from historically low levels, a development that could reassure Federal Reserve officials as they consider dialing back their bond-buying program in coming months.

The seasonally adjusted CPI for all urban consumers rose 0.2% (1.9% annualized rate) in July. The CPI less food and energy increased 0.2% (1.9% annualized rate).

According to the Federal Reserve Bank of Cleveland, the  median Consumer Price Index rose 0.2% (2.0% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.7% annualized rate) during the month.

Over the last 12 months, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.8%, the CPI rose 2.0%, and the CPI less food and energy rose 1.7%


The weakness in the U.S. economy is having little effect on inflation which stubbornly remains in the 2.0% range, however you measure it. Core CPI has advanced 0.2% in each of the last 3 months (+2.4% a.r.). The median CPI has also gained 0.2% in each of the last 4 months and 5 of the last 6 months. Only the 16% trimmed-mean CPI remains below 2.0%, rising at a 1.6% annualized rate in the past 3 and 6 months.

The Rule of 20 uses total CPI for its inflation component. Now +2.0%, it is up measurably from the +1.1% recorded last April but back to its February reading.


Homebuilder Confidence in U.S. Jumps to Highest Level Since 2005

The National Association of Home Builders/Wells Fargo index of builder confidence climbed to 59 from a revised 56 in July, which was lower than previously reported, the Washington-based group reported today.

High five  Prospective buyer traffic was unchanged at 45.

U.S. housing starts, permits rise in July but below forecasts

U.S. housing starts and permits for future home construction rose less than expected in July, suggesting that higher mortgage rates could be slowing the housing market’s momentum.

The Commerce Department said that housing starts increased 5.9 percent to a seasonally adjusted annual rate of 896,000 units. June’s starts were revised up to show a 846,000-unit pace instead of the previously reported 836,000 units.

Permits to build homes rose 2.7 percent in July to a 943,000-unit pace.

Last month, groundbreaking for single-family homes, the largest segment of the market, fell 2.2 percent to a 591,000-unit pace, the lowest level since November last year. Starts for multi-family homes jumped 26 percent to a 305,000-unit rate, reversing the prior month’s decline.

Permits for multi-family homes rose 12.6 percent to a 330,000-unit rate. Permits for single-family homes fell 1.9 percent to a 613,000-unit pace.

This chart from CalculatedRisk shows the impact that rising prices and rates are having on the singles market. Even the multi-family, mainly rental, seems to have peaked out.



Turtle  Wal-Mart Deepens Gloom Around Retailers

The WSJ today is writing about the apparent disconnect between official retail data and the actual trends reported by retailers. Yesterday’s New$ & View$ commented on that with this chart from Pictet illustrating the problem:image

Today’s WSJ article adds more details:

Wal-Mart Stores Inc., Macy’s Inc. and Kohl’s Corp. this week all reported weak results for their most recent quarters, raising concerns over whether shoppers will keep their pocketbooks open through the back-to-school and holiday seasons.

The disappointing results have left executives at retailers, restaurants and consumer-goods companies puzzling over the disconnect between the poor showing for sales and recent economic indicators that should point to a stronger consumer. (…)

But so far in this retail reporting period, those positive indicators aren’t showing up at the cash register.

Wal-Mart delivered the latest dose of bad news, reporting weak sales that it expects to persist into the fall.

The retailing giant said its fiscal second-quarter earnings rose 1.3%, but sales grew more slowly than expected, as consumers in both mature and emerging markets curbed their spending and traded down to lower-priced products. Wal-Mart, the world’s largest retailer, cut its forecast for sales and profit for the year as its low-income customer base remains cautious.

Sales at U.S. stores open at least a year fell 0.3% after Wal-Mart had said they would be no worse than flat. It was the second consecutive decline for the key retail metric. Wal-Mart expects flat comparable-store sales in the U.S. in the current quarter as well.

Wal-Mart’s release followed a disappointing report Wednesday from department-store chain Macy’s, which cut its profit forecast for the year and warned that its shoppers remain stretched.

Both retailers reported declining traffic, a worrying sign, and Macy’s said it would boost its marketing efforts to bring consumers back in. On Thursday, Kohl’s added to concerns about a weak back-to-school season when it said its fiscal second-quarter profit fell 3.5% and lowered its earnings forecast for the full year.

The downbeat trend has been widespread. Teen retailers American Eagle Outfitters Inc.  and Aéropostale Inc. warned this month their results will be worse than they had expected, and Thursday afternoon, high-end retailer Nordstrom Inc. lowered its profit and sales outlook for the year.

Bloomberg adds:

Li & Fung Ltd.— the world’s largest supplier of clothes and toys — also reported first-half profit that missed analyst estimates amid sluggish demand from U.S. customers.

Li & Fung’s U.S. customers — which include Wal-Mart, Target Corp. and Kohl’s — “have all adopted a more cautious view toward their winter sales this year” as the “retail environment is tracking with the slow pace of economic recovery,” the company said in a statement.

Part of the problem seems to come from the high pent-up demand for cars and other housing-related goods that stretched consumers can no longer postpone, forcing them to cut into other expenditures.


Car sales plateaued in recent months and the housing market may be feeling the effects of rising prices and interest rates, raising the danger of a pretty weak second half.

But don’t you worry, the higher-end consumers, in large part bankers, strategists and economists, are there to save us all!

Still, economists caution against reading too much into Wal-Mart’s results.

“Wal-Mart caters to people who shop from paycheck to paycheck, as opposed to people who go out and buy cars,” said Miller Tabak economist Andrew Wilkinson. “The tailwind from rising housing and stock values that is hitting the higher-end consumers doesn’t apply here.”

Consumer spending will continue its steady increase, he said, which is already around $50 billion above its prerecession peak of $375 billion a month.


On Thursday, even high-end department store Nordstrom said that its sales trends were softer than anticipated and reduced full-year guidance. (FT)

Here’s the reality of most Americans:

In a separate Labor report Thursday, Americans’ real average weekly earnings declined by 0.5%. The drop was due to a decline in average hourly wages, adjusted for inflation, and a decline in the average work week.

As of May, 47.6 million Americans, or one in seven, received food aid – highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010.

Ladies and gentlemen, fasten your seat belts, we have entered the twilight zone.

Incidentally, today’s FT publishes

99 percent badgeWhy inequality matters
Tim Harford on why rising unfairness hurts us all

(…) Between 1993 and 2011, in the US, average incomes grew a modest 13.1 per cent in total. But the average income of the poorest 99 per cent – that is everyone up to families making about $370,000 a year – grew just 5.8 per cent. That gap is a measure of just how much the top 1 per cent are making. The stakes are high.

I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But what really should concern us is that the two reasons are not actually distinct after all. The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them. (…)

And at some point, the poor react…

This comes on the heels of Bill Moyers’ chronicles of “Two American Families”, well worth the 83 minutes of your time. Moyers’ interview by Charlie Rose is also interesting.

Something to watch because this is unsustainable.


Rail-Truck Shipments Reveal Holiday Sales Clues

Total U.S. intermodal volume — goods shipped by more than one means of transportation — rose 4 percent for the four weeks ended Aug. 10 compared with a year ago, according to figures from the Washington-based Association of American Railroads. That’s the biggest increase since March.

The data will reflect a change in pace “before it becomes a broad phenomenon” and supplement commentary from trucking and railroad companies, Gayle said.

It seems that intermodal traffic has been pretty volatile lately. It fell sharply in the first half of July and bounced back thereafter but ended down 2.5% YoY in July. Trucking volume has been weaker lately as well. Here’s the Cass Freight Index which combines all freight, at the end of July:



Eurozone shows unconvincing rise from recession as GDP expands in Q2

Markit sets the record straight on Europe’s q2 GDP (my emphasis):

(…) However, the GDP increase looks likely to overstate the true health of the Eurozone economy in the second quarter. In particular, the increase looks to be based on unsustainable factors, notably a weather-related upturn and a record jump in car output. The upturn also sits in contrast to weaker business survey data (notably in France, where the largest question marks hang over the GDP data). This combination of
temporary-looking growth drivers and the contrast with the survey data suggests that the impressive performance may not be repeated in the third quarter. (…)

The variations in national performance underline the fragility of the upturn, especially when deeper looks at the data suggest that the strength of growth in both France and Germany looks somewhat unsustainable.

imageThe volatile industrial production was driven by a surprisingly strong jump in production of durable goods, led in turn by a 15.7% surge in car production – the largest ever increase seen since data were first
available in 1991. This increase not only looks unsustainable but is also at odds with the PMI data, which tend to give a better picture of the underlying health of the manufacturing sector as a whole.

imageReassuringly, however, although the manufacturing PMI data remained weak in the second quarter, a return to growth is clearly evident in July, suggesting the goods producing sector is on course to expand in the third quarter.

Perhaps most striking, however, are the jumps in GDP in austerity-encumbered Portugal and France, both of which leave question marks over what the underlying growth drivers were of such robust rates of expansion in these countries. (In fact, besides the volatility in the German numbers, almost all of the divergence between the weaker PMI signal for the second quarter and the contrasting GDP expansion can be explained by the variance in the French PMI and GDP numbers.)

Pointing up The robust French data in particular contrast markedly with PMI data which, although having bottomed-out earlier in the year, pointed to imagean ongoing deterioration of output in the second quarter. The government’s statistics body, INSEE, assigned the 0.5% GDP increase primarily to rising domestic demand and an upturn in inventories. Both of these could fade in the third quarter: INSEE themselves note that consumer confidence remains close to its all time low, and inventories will be cut unless demand moves higher.

Finally, there is also some evidence that the upturns in Germany and France reflected a rebound in domestic spending after adverse weather deterred shoppers at the start of the year; something which would not be
especially noticeable in the manufacturing and services PMIs and is again a growth driver that would be only temporary.

Euro-Area Exports Increase 3% as Inflation Holds Below 2%

Exports from the 17-nation bloc rose a seasonally adjusted 3 percent in June from May, when they dropped 2.6 percent, the European Union’s statistics office in Luxembourg said today. Shipments from Germany, Europe’s biggest economy, gained 6.3 percent, after a 9 percent decline the prior month. The euro-area inflation rate remained at 1.6 percent in July, a separate report showed.

Euro-zone imports increased 2.5 percent in June after a 2.1 percent decrease the prior month, and the trade surplus increased to 14.9 billion euros ($19.9 billion) from 13.8 billion euros.

Exports from France, the second-biggest euro-area economy, fell 1.7 percent, while Italian shipments rose 1.4 percent, today’s data showed. Spanish exports dropped 2.4 percent.


Dutch gloom as housing bubble deflates
Bankruptcies rose to highest level in last three months

(…) Household spending has been falling for three straight years, and it dropped again 2.4 per cent year on year in the second quarter, dragging the entire economy down with it. (…)

At the heart of the Netherlands’ persistent case of the blues, economists agree, is a slowly deflating housing bubble. Property values in the Netherlands rose as much in the boom years before 2008 as in peripheral European countries like Spain, leaving the country with a mortgage debt load larger than any other in the eurozone.

The bubble was fuelled by the fact that Dutch mortgage interest was fully tax deductible, a strong incentive in a country of high income taxes. Dutch banks developed a series of unique, complex mortgage products to help borrowers maximise the tax benefits.

Prices have fallen 21 per cent since their 2008 peak, leaving 30 per cent of all Dutch mortgage holders underwater, owing more than their houses are worth. Few experts think the bottom has been reached, and with their net worth falling, homeowners are spending less. (…)


Final Q2 ’13 Earnings and Revenue Beat Rates

(…) overall it was a relatively good season.  As shown below, the final earnings beat rate came in at 62.2%, which was the highest reading since Q3 2011.  The final revenue beat rate came in at 56.6%.  While top line numbers weren’t as strong as bottom line numbers, the revenue beat rate this quarter was still stronger than 3 of the past 4 earnings seasons.

Buffett targets cars, oil and satellite TV
Berkshire Hathaway invests the most money in stocks since 2011

Warren Buffett put money to work in cars, oil and satellite television in the second quarter as the chief executive of Berkshire Hathaway and his deputies invested the most money in stocks since 2011, according to regulatory filings.

Berkshire increased its holdings in General Motors, the carmaker recovering from bankruptcy and a government bailout, and made two new investments: in Dish Network, the broadcaster controlled by Charles Ergen, and Suncor Energy, a Canadian oil company. (…)

Mr Buffett now controls 40m GM shares worth $1.4bn, up from 25m at the end of the first quarter. Berkshire also disclosed that at the end of June it owned more than 17.8m Suncor shares worth more than $500m.

The new stake in Dish adds to Berkshire’s media holdings, as it already owns 6.8 per cent of DirecTV, worth $2.3bn, in addition to holdings in the Washington Post Company, and Liberty Media. However, the small size of the Dish investment, at $23m, suggests it is the responsibility of one of Mr Buffett’s two investment deputies, Todd Combs and Ted Weschler.

Mr Buffett also added slightly to his largest holding, in Wells Fargo, taking Berkshire’s stake to 8.7 per cent of the consumer bank, worth $20bn.

Berkshire reduced some holdings, exiting a stake in newspaper publisher Gannett, while reducing investments in Kraft and Mondelez, the snack group it spun out last year.

Berkshire’s biggest holdings are mostly consumer-facing groups with strong brands, including Coca-Cola, American Express and Procter & Gamble. The exception is Berkshire’s one technology holding, a $13bn stake in IBM.


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