Economic Notes – August 12, 2013


Written by: Jon McGraw

(+) Like its manufacturing counterpart the previous week, the non-manufacturing ISM improved more than expected for July, from 52.2 to 56.0, outperforming the median consensus estimate of 53.1. Core business activity improved to over 60, coupled with gains in new orders; however, employment declined slightly. The reading points to continued and strengthening economic activity, as has been anticipated for the 2nd half of this year (at least relative to the first half).

(+) The U.S. trade deficit narrowed in June to -$34.2 billion, which was sharply narrower than the forecasted -$43.5 bill and its tightest level in four years. This resulted from an increase in exports (+2.2%), led by strong gains in consumer goods; and a decline in imports (-2.5%). The imports decline was largely due to increasingly lower purchases of petroleum (-13% over the past year) and electronic goods, such as cell phones. This better-than-expected export activity may serve as a slight boost to revisions of 2nd quarter GDP growth results.

(+) The July Federal Reserve Senior Loan Officer Opinion Survey of 73 domestic banks and 22 U.S. branches of foreign banks showed a continued easing in commercial/industrial lending standards—as well as an improvement in loan demand during the three months since the last survey. Banks generally reported an easing in standards to mid-to-large firms, as well as smaller firms (albeit the latter to a lesser degree). Most importantly, virtually no banks were tightening standards. (As a side note: this may be part of the problem with the recovery, in that smaller businesses have not been getting the benefits of a pass-through of credit to the same extent larger firms are, which has carried forward to a reluctance to expand and hire.)

Similarly, in commercial real estate, lending standards eased and demand rose strongly. On the residential side, lending standards eased a bit for prime mortgages but tightened in the sub-prime space. However, an underlying theme also showed that home equity loan standards haven’t eased and banks remained somewhat picky in reviewing home borrower creditworthiness (not a surprise post-recession). In other consumer loans, such as auto and credit cards, lending standards eased while demand increased just slightly. Overall, this report showed a general theme of higher business/consumer demand of most types of loans, while banks were continuing to show a tendency to ease standards—both of these trends are pro-growth. Based on other data, consumer credit card balances are see-sawing back and forth month to month with no clear trend—however, it appears most consumers aren’t significantly increasing their credit card use.

(-) Wholesale inventories for June came in weaker than anticipated, falling -0.2% versus an expected +0.4% increase. Additionally, May’s growth was also revised down by just over half a percent. The primary catalyst for this drop was in the ex-petroleum category. On one hand, this lower ratio of inventories-to-sales could signify better production numbers going forward, as needed to catch up with any sales increases that might occur.

(-) The June government JOLTS report of job openings and labor turnover was mixed, with more-than-expected job openings (3,936 vs. 3,895 forecast), but hiring was less robust and fell a few tenths of a percent relative to the previous month. Layoff and discharge rates declined to just over 1%, so were also headed in a positive direction and ‘quit rates’ were unchanged (the latter is something the Fed watches as a measure of employment sentiment).

(+) Initial jobless claims for the Aug. 8 week rose a bit to 333k from a revised 328k the prior week, but were lower than the expected consensus 335k figure. No special factors stood out in this release as the summer adjustments appear to be fading. Continuing claims for the July 27 week rose to 3,018k, higher than the 2,950k expected.

Market Notes

Stocks experienced a negative week, off of all-time highs, in a fairly light period in terms of volume (we’re now into the dog days of summer from a market standpoint). Materials and telecom were the best performing sectors on the week, while financials and industrials lagged. Lipper reported that U.S.-based equity mutual funds took in $4 billion on the week, registering the 31st consecutive week of inflows. Generally flows follow performance and can perpetuate it as late investors come in from the sidelines.

In foreign markets, peripheral European nations led, with gains in the low single-digits. Italian GDP for the 2nd quarter came in at a -0.2% rate of growth for the quarter, which was roughly half of the decline expected and represented the ‘strongest’ result in two years. For the full week, laggards were market of the Far East—namely Taiwan, the Philippines and Indonesia. However, reports of China’s July exports rising 5% and strong industrial production results beat expectations and offered emerging market investors hope later in the week.

Bonds had a decent week with a risk-off move away from equities, and rates dropped. Developed market international debt gained strongly—over 1.5%—while longer treasuries and TIPs also gained positive absolute ground. High yield debt generally lagged on the week, despite funds taking in just under a billion dollars of inflows (a fickle trend that has changed direction several times in the last few weeks).

Industrial/office REITs gained a percent on the week, which led all other sectors. Asian and European issues were largely flat, while U.S. retail lost about a percent in value.

In commodity markets, industrial metals copper, tin and zinc led, with gains of 4-5% led by China’s positive industrial production results. On the negative side, corn and wheat prices fell by several percent with continued expectations for a bumper crop this year. Year-to-date, corn and wheat prices are down -33% and -20% respectively, reflecting these predictions. Interesting, lumber (which isn’t a significant of most major indices) is also down -18%, despite strength in housing. Some of this is higher supply being brought on to market, but also reflects lower Chinese demand for North American lumber.

We mentioned this earlier in regard to the U.S. trade deficit, but the monthly petroleum deficit has dropped 40% in the past 18 months. Typically, such a decline is associated with recessionary environments, but it is occurring now as economic and job growth are improving—the underlying situation is a significant rise in U.S. oil production and decline in imported crude, as we’ve discussed at length in previous pieces.

Have a great week!