November 2010 Personal Income and Outlays, Retail Sales and Consumer Debt

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Bureau of Economic Analysis data showed that disposable personal income (DPI) increased $37.8 billion (0.3 percent) in November, while personal consumption expenditures (PCE) increased $43.3 billion (0.4 percent). Real (i.e., inflation-adjusted) disposable income increased 0.2 percent in November, the same increase as in October. Real PCE increased 0.3 percent in November, compared with an increase of 0.5 percent in October.
 

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Retail sales rose by 0.8 percent during November, the fifth straight month of increases. The “Other” category posted the largest percentage gain (1.4 percent), while vehicle sales declined (0.8 percent).
 

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Consumers appear to be taking on more debt. Total consumer debt outstanding increased for a third month in November, at an annual rate of 0.7 percent. Revolving credit (i.e., credit cards) decreased at an annual rate of 6.3 percent -- the 27th consecutive monthly decrease, while nonrevolving credit increased at an annual rate of 6.8 percent. Once again, however, the report details tells a different story. In fact, virtually all of the increase was due to an annualized $43.2 billion (not seasonally adjusted) jump in Federal Government debt. Without the federal “contribution,” consumer credit would have increased by only $6 billion.

December 2010 Employment Report

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The U.S. economy added 103,000 nonfarm jobs in December, and the unemployment rate fell by 0.4 percentage point to 9.4 percent. Other positive elements from the employment report include an uptick (557,000) in the number of full-time employees, and a smaller decline (29,000) in the number of persons working part time for economic reasons.
 

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Payrolls expanded by 1.11 million jobs (1.33 million in the private sector) during 2010, but that came after the nation lost more than 8 million jobs in 2008 and 2009. As we have indicated repeatedly, at least 100,000 jobs need to be created each month just to keep up with population growth, so job creation ostensibly reached that milestone in December. Since nonfarm employment bottomed out last December, job creation has averaged about 92,500 per month. Thus, the pace of hiring will have to increase dramatically to not only keep up with new workers entering the work force for the first time, but also to once again make those 7+ million still-displaced workers productive.
 

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Although we do not want to dismiss good news if it is legitimate, we need to point out that much of the improvement in the December employment picture was the result of seasonal adjustments that “swamped” the original Bureau of Labor Statistics (BLS) estimates. Other disconcerting details from the report include another 0.2 percentage point drop in the civilian labor participation rate (to 64.3 percent, the lowest level since April 1984) and a stagnant employment-to-population ratio. Also, although the number of unemployed person decreased by 556,000 (the main reason why the unemployment rate fell), over 250,000 of that number involved people who gave up looking for work.

In the words of one analyst, “The U.S. unemployment picture [seems] unusually confusing these days.” Two conflicting reports added to that confusion on January 6: First, ADP reported an increase of 297,000 in private-sector employment (which, like the BLS estimates, may have been largely driven by seasonal adjustment). That was followed by a Gallup poll showing that both the unemployment rate and the number of part-time workers increased in December.

Dennis Jacobe, Gallup’s chief economist, attempted to explain the discrepancies as follows: “Because the Gallup unemployment measure is not seasonally adjusted, it tends to more accurately reflect what is actually taking place in the U.S. job market -- and may not agree with the government's estimate that is seasonally adjusted. Further, Gallup's data tend to be more up-to-date than the government's because Gallup polls on the unemployment situation continuously. Combined, seasonal adjustments and timing differences likely explain much of the disparity between Gallup's measures of underemployment and unemployment, compared with those reported by others.”

Regardless whose data may be the most accurate, all of the surveys agree that nearly one in five Americans continue to be unemployed or employed part-time looking for full-time work.

December 2010 ISM Reports

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With a 0.4 percentage point increase (to 57.0 percent) in its PMI, manufacturing expanded at a slightly faster pace in December, according to the Institute for Supply Management (ISM). "The manufacturing sector continued its growth trend as indicated by this month's report. We saw significant recovery for much of the U.S. manufacturing sector in 2010,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. "The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle. Additionally, manufacturers that export have benefitted from both global demand and the weaker dollar. December's strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go into the first quarter of 2011."

Wood Products reported no change again in December, while the only real bright spots for Paper Products involved rising employment, lower inventories and slowing imports.
 

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The pace of growth of the non-manufacturing sector also picked up in December, thanks to a 2.1 percentage point (to 55.0 percent) increase in its NMI/PMI -- the strongest reading since May 2006. Real Estate and Construction both shared in that expansion while Ag & Forestry contracted.

There were two disturbing aspects of both reports: First, employment grew at a slower pace in both sectors. Second, input prices increased noticeably. Price indices rose 3.0 percentage points for manufacturers and 6.8 percent for service industries; service-industry costs are now at their highest level since September 2008. Fuel, transportation costs, paper and caustic soda were among the relevant commodities up in price; no relevant commodity were down in price. Coated groundwood was described as in short supply.

November 2010 Manufacturers’ Shipments, Inventories and New Orders

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Shipments, inventories and new orders all posted gains at the total manufacturing level during November, according to the U.S. Census Bureau.
 

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Shipments, up three consecutive months, increased $3.4 billion (0.8 percent) to $424.5 billion. Durable goods decreased $0.3 billion (0.1 percent), led by transportation equipment. However, nondurable goods -- especially petroleum and coal products -- offset that decline, increasing $3.7 billion (1.7 percent).

Solid wood shipments increased by 0.7 percent (to $6.4 billion), but paper declined by 0.5 percent (to $14.3 billion).
 

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Data from the Association of American Railroads (AAR) and the Ceridian-UCLA Pulse of Commerce Index (PCI) help round out the picture on goods shipments. AAR indicated a continued decline in rail shipments during November, although the rate of decline was slower than in October. The PCI (which measures diesel consumption of over-the-road trucking) rose by 0.4 percent, but that increase was insufficient to offset the decline of 0.6 percent in the previous month, and not nearly enough to offset the 2.1 percent drop in the PCI since July.
 

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Inventories, up 10 of the last 11 months, increased $4.1 billion (0.8 percent) to $543.8 billion. Durable goods inventories increased $2.0 billion (0.6 percent), unchanged from October’s rate of increase; transportation equipment led the durables increase. Nondurable goods rose by $2.1 billion (0.9 percent), led by petroleum and coal products. Inventories of both Wood and Paper Products declined.
 

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New orders for manufactured goods, up four of the last five months, increased $3.2 billion (0.7 percent) to $423.8 billion in November. Durable goods orders decreased $0.6 billion (0.3 percent), led by transportation equipment, while nondurable goods rose by $3.7 billion (1.7 percent).

December 2010 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate crude oil jumped by $4.90 (5.8 percent) in December, to $89.04 per barrel. That price increase occurred despite a slightly stronger dollar, a noticeable drop in consumption of 568,000 barrels per day (BPD) -- to 18.9 million BPD -- during October, but coincided with an equally noticeable drop in crude stocks.
 

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The Environmental Protection Agency (EPA) announced on December 23 that it will regulate greenhouse gas emissions from power plants and oil refineries in 2011. The move highlights the Obama administration's intent to press ahead with curbs on carbon despite congressional resistance, and comes as part of a legal settlement with several states, local governments and environmental groups that sued the Bush-era EPA for failing to cut those emissions.

Collectively, electric utilities and oil refineries account for almost 40 percent of U.S. greenhouse gas emissions: Power plants generate more than 2.3 billion tons of carbon dioxide emissions each year, more than any other industry; oil refineries emit more than 200 million tons of carbon dioxide annually.

Under the settlement, EPA will propose new performance standards for power plants in July 2011 and for refineries in December 2011. Final standards will be issued in May 2012 and November 2012, respectively.

The economic impact of these regulations will not be known until the procedural details are proposed; nonetheless, we think it is fairly safe to assume energy prices will rise as companies pass the added regulatory costs on to consumers.

November 2010 U.S. Construction

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Overall construction spending in the United States increased by a seasonally adjusted and annualized rate of 0.4 percent during November, to $810.2 billion. The only category to experience a decline was private non-residential construction, which decreased by 0.1 percent.
 

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Apparently, most of the private residential spending referenced above went into brand-new projects (as opposed to those that have been underway for several months), because the number of total housing starts rose while completions fell.
 

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Total starts have been bumping along what we have dubbed the “background activity” level, averaging about 572,000 starts since January 2009. There seems to be a floor of 500,000 units, below which starts have fallen only twice during the past two years.
 

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The pace of new-home sales picked up in November, rising 5.5 percent relative to October. Even so, the ratio of starts to sales continued to mount; since starts include all building activity regardless of motivation, whereas sales measure only those homes built on a “speculative” basis (i.e., not on contract initiated by the eventual occupant), the rising starts-to-sales ratio may imply that a sizeable proportion of homes coming “on line” are being built under contract.
 

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Because sales are so depressed, even the slow rates of starts and completions are sufficient to keep the unsold inventory of new homes elevated. The number of months required to clear existing inventories has remained at/above eight months since April.
 

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Existing home sales also rose in November, returning to levels comparable to early 2009. With the uptick in existing home sales, new homes continue to decline as a proportion of total sales.
 

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Although existing home prices have been trending downward since July, they have not returned to the lows seen in early 2009 and again in early 2010. Nevertheless, the National Association of Realtors’ (NAR) housing affordability index rose to an all-time high in November. Of course, the median home price is not the only factor influencing affordability; mortgage rates and family incomes are also important variables in that calculation. Falling home prices are a two-edged sword: While they make housing purchases more affordable, in a perverse way they also discourage those purchases: Why buy a home if there is a high likelihood that continued price erosion will quickly wipe out whatever equity the buyer has in the home?

As if to drive home that point, the seasonally adjusted S&P/Case-Shiller home price indices retreated almost across the board in October. Only Denver and Washington, D.C. saw modest advances relative to September. Most metropolitan statistical areas (MSA) have seen prices erode on a year-over-year basis as well.
 

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David Blizter, chair of the Index Committee at Standard & Poor's, was quite crestfallen during the most recent press conference. “The double-dip [in housing] is almost here, as six cities set new lows for the period since the 2006 peaks. There is no good news in October’s report. Home prices across the country continue to fall.” Blitzer said. “The trends we have seen over the past few months have not changed. The tax incentives are over and the national economy remained lackluster in October, the month covered by these data. Existing homes sales and housing starts have been reported for both October and November, and neither is giving any sense of optimism. On a year-over-year basis, sales are down more than 25 percent and the months’ supply of unsold homes is about 50 percent above where it was during the same months of last year. Housing starts are still hovering near 30-year lows. While delinquency rates might have seen some recent improvement, it is only on a relative basis. They are still well above their historic averages, in both the prime and sub-prime markets.”
 

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December 2010 Currency Exchange Rates

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During December the U.S. dollar put in a mixed performance against the other currencies we track. The greenback gained 3.3 percent against the euro and 1.0 percent against the yen, but extended its weakening trend against Canada’s loonie (losing 0.5 percent). On a trade-weighted index basis, the dollar appreciated 0.7 percent against a basket of 26 currencies.
 

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Canada: The loonie benefited from news of a positive turnaround in Canada’s GDP (0.2 percent) during October, driven primarily by mining and oil and gas extraction. Rising commodity (especially those of oil and precious metals) prices continue to support the loonie. Additional support came from lumber exports to Asia; Canadian softwood lumber exports to China reached 236 million board feet in October, up 162 percent compared to a year ago and 26 percent from the record total in September. Volumes have set records for three consecutive months. Year-to-date exports to China climbed to 1.39 billion board feet, up 68 percent from the 2009 pace through October.

Europe: Weaker industrial production and GDP growth in Europe, along with threats of sovereign rating downgrades (especially France and Belgium), wore on the euro in December.

Japan: The yen was hurt by Japan’s narrowing trade surplus (import growth greatly outpaced the rise in exports in November) and expectations of slower GDP growth and continued quantitative easing -- even outright currency intervention -- during 2011.

“I still can't figure out why the Japanese yen has attracted so many investors,” wrote Chris Gaffney, VP of Everbank World Markets. “The fundamentals certainly don't support a strong currency, and growth prospects continue to be bleak… With yield differentials beginning to widen again, we could see another round of carry trades which would be bad news for the Japanese yen."