US Industrial Production Slowdown

The latest contraction in the ISM manufacturing report indicates the US manufacturing sector is slowing.  There have been signs this was happening for the last few months.  First, we've seen weak readings from some of the regional manufacturing reports.  For example, here is the latest Empire State report:

The May 2013 Empire State Manufacturing Survey indicates that conditions for New York manufacturers declined marginally. The general business conditions index fell four points to -1.4, its first negative reading since January. The new orders index also edged into negative territory, and the shipments index fell to zero. The prices paid index declined eight points to 20.5, indicating a slowdown in selling price increases, while the prices received index was little changed at 4.6. Employment indexes were mixed, showing both a modest increase in the number of employees and a slight decline in the length of the average workweek. Indexes for the six-month outlook were generally lower, suggesting that optimism about future conditions had weakened.    

And  the latest Philadelphia Fed Report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 1.3 in April to -5.2 this month. The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

Richmond also shows a slowdown:

In May, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — gained four points settling at −2 from April's reading of −6. Among the index's components, shipments recouped seventeen points to 8, the gauge for new orders slipped two points to finish at −10, and the jobs index subtracted six points to end at −3.

 We also see this slowdown in the overall industrial production numbers coming from the Federal Reserve.

The above chart breaks the US down into market groups.  In 4 of the last 7 months we've seen weak readings from the final products and non-industrial supplies sector.    Non-durable goods have printed weak readings in 3 of the last 7 months, and non-energy has printed weak readings in 2 of the last 3 prints.

Let's look at the anecdotal reports from the latest ISM report to get some more insight into this section of the economy:

• "Customers are anticipating resin price decreases and holding back orders." (Plastics & Rubber Products)
• "Slight uptick in overall business but not substantial." (Textile Mills)
• "Government spending has tightened, which has moved out program awards and caused some reduction in force." (Computer & Electronic Products)
• "Market outlook is relatively flat, with some promise of raw materials inflation relaxing." (Electrical Equipment, Appliances & Components)
• "General economy seems sluggish and pensive. Buyers are not buying much beyond lead times." (Fabricated Metal Products)
• "Downturn in European and Chinese markets is having a negative effect on our business." (Machinery)
• "We are having a difficult time hiring skilled employees." (Transportation Equipment)
• "Business continues to increase, but over the past 20 days we have seen the trend flatten." (Furniture & Related Products)
• "Market was holding strong until mid-month — then softened." (Wood Products)
• "Decline in sales for FYQ2 over same period a year ago due to softer demand [in] both domestic and exports." (Chemical Products)

Summing up the information we get the following points:

• The overall domestic economy is "sluggish and pensive" with a "flat' outlook and some markets have recently "softened."  Cuts to government spending are having an impact.
• The international slowdown is also hurting.  

In addition, consider the excess capacity in the system:

In another sign of recent weakness in the manufacturing sector, capacity utilization in the US has stalled, as demand remains soft. US industries are producing significantly below their capacity and "5.5 percentage points below long-run average" according to the Fed. We are certainly far under the 82-85% level at which economists believe that the traditional measures of inflation are expected to rise.

The sky is not falling.  But things are definitely grinding lower. 

Market/Economic Analysis: Colombia

From the latest Minutes of the Colombia Central Bank on May 31:

The latest information on the performance of the economy in the first quarter of 2013 suggests that this slowed down in comparison to what had been seen at the end of last year as was predicted in earlier reports.  The indicators for that period are influenced by the lower number of working days in February and March.

In the first quarter of the year, household consumption grew at rates that were slightly lower than the ones registered in the fourth quarter of 2012.  According to the figures from the Retail Monthly Sample (MMCM in Spanish) published by DANE in March, the annual growth of sales was 0.9% in the first quarter (less than the 3.3% for the last quarter of 2012).  This performance could be explained by an annual drop in the sales of vehicles (-11.4%).  In contrast, sales of other goods grew 4.0% in the first three months of the year.  

.....

With regards to the supply indicators, the news shows mixed performance.  Production of coffee continues to expand at favorable rates.  Energy related mining showed positive growth in petroleum production while coal production was affected by labor problems and environmental penalties.  The industrial sector registered significant deterioration during the quarter.  In March, the index of industrial production excluding threshing shrank 11.5% in annual terms.  Based on this rate, industrial production showed an annual contraction of 6.0% in the first quarter.  

So households are still spending, albeit at slower rates.  The real problem is in industrial production.  This exact same situation is playing out in the US.

As a result, the central bank has been cutting rates for stimulate growth:

Colombia sure likes to keep the markets on their toes.

On Friday, the country cut its benchmark interest rate for the fifth consecutive month. While previous cuts came in at 25bps increments, the central bank took out the axe this time around and chop rates by 50bps to 3.25 per cent – the lowest in Latin America.

So, let's take a look at the Colombia ETF's daily chart:

 Since the beginning of February, the market has been moving lower.  But remember that this move lower has been very disciplined.  There has not been a massive volume spike indicating a selling climax.  Instead we see a nice pattern of lower lows, followed by consolidation, followed by another disciplined move lower.  Prices are below the 200 day EMA are are using the 10 and 20 day EMAs as technical resistance.  While the CMF is indicating some volume moving into the market, momentum is negative.

The weekly chart shows that the current price level is around the 38.2% Fib level for the 4Q11-1Q13 price move. While we do see a slight uptick in volume over the last few months, it does not indicate a selling climax.

Could Economic Blogging Get Any More Boring?

Stop me if you're read this before.  The EU is in a recession, the US is in slow-growth mode and China is rebalancing its economy.  The sluggishness in developed economies is slowing the growth of emerging economies.  Well - you have read that before.  In fact, that's all anyone has been writing for the last year to year and a half.

Consider this paragraph from the latest policy announcement by the Bank of Korea:

Based on currently available information, the Committee considers the moderate economic recovery in the US to have continued but economic activities in the euro area to have remained sluggish, while emerging market countries such as China have shown slightly lower economic growth than initially anticipated. The Committee expects the global economy to sustain its modest recovery going
forward, but judges that the uncertainties related for instance to the possibility of an earlier-than-expected tapering off of US quantitative easing policy and to the implementations of fiscal consolidation in major countries remain as downside risks to growth 

Compare that statement to the release of December 2012

Based on currently available information, the Committee considers the moderate economic recovery in the US to have continued, but the sluggishness of economic activities in the euro area to have persisted. Economic indicators in emerging market countries have shown signs of gradual improvement. The Committee expects the global economy to exhibit a modest recovery going forward but judges the downside risks to growth to be large, owing chiefly to the euro area fiscal crisis and to the fiscal consolidation issue in the US.

And here's the September 2012 announcement:

Based on currently available information, the Committee considers the economic recovery in the US to have weakened somewhat and the sluggishness of economic activities in the euro area to have deepened. Growth has continued to slow in emerging market countries as well, due mostly to the impact of the economic slumps in advanced countries. The Committee expects the pace of global economic recovery to be very modest going forward and judges the
downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US.

Not much difference, is there?

And don't get me started on how often the Fed has used the word "moderate" in the Beige Book.  

I read a ton of central bank announcements.  They all contain a general outline of the then current economic environment.  For the last year and a half, they could all just say, "that thing we wrote last month?  Ditto."

I just wanted to mention from a writing about the economy perspective, it's just really boring right now. 

More Bad News for Australia

I'm bearish on Australia.  The latest auto sales news does not increase my confidence:

• Trend estimates: The May 2013 trend estimate (93 439) has decreased by 0.6% when compared with April 2013.
• Seasonally adjusted estimates: The May 2013 seasonally adjusted estimate (93 209) has increased by 27 units when compared with April 2013.

Moreover, the trend has been declining for six months.

Click the link to see the accompanying chart; it's not a pretty sight.

Rational Expectations Theory Debunked in a Minute

Barry had this up on his blog over the weekend.  It is one of the best economic lectures I have ever seen.  Blyth is brilliant, funny and deeply irreverent.

The lecture is a little over 50 minutes and worth every minute of your time.

Here's his explanation of the the "confidence fairy" which is from the video starting at about 45 minutes.

This is the confidence fairy thing,

Imagine the economy is falling around your ears; you don’t know if you’re going to have a job tomorrow, your partner is already unemployed, you really don’t know about the future, but you really worry about the debt, you just lie awake all night worrying about the debt as people do,

So the government credibly signals that it’s going to massively cut government expenditures and what you do using your rational expectations that are built into your head – well you know the true structural form of the equation governing the economy and the value of the co-efficients therein – big assumption, but put that to one side – you calculate your lifetime budget and lifetime expenditures in relation to the fact that twenty years from now that because of these state spending cuts now you’ll pay less taxes then.  Thereby you can retrodect how much extra money you’ve got now and everybody goes to Ikea and buys a couch and that cures the recession. 

I am not making this shit up.

Market/Economic Analysis: US

First, let's review last week's economic news:

The Good:

First, import prices declined: Prices for U.S. imports declined 0.6 percent in May, the U.S. Bureau of Labor Statistics reported today, after a 0.7 percent drop the previous month. Falling fuel and nonfuel prices contributed to the decreases in both months. U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March.  What's interesting here is that non-fuel imports have also been dropping.

Retail sales increased .6%: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.1 billion, an increase of 0.6 percent (±0.5%) from the
previous month, and 4.3 percent (±0.7%) above May 2012. Total sales for the March through May 2013 period were up 3.7 percent (±0.5%)
from the same period a year ago. The March to April 2013 percent change was unrevised from 0.1 percent (±0.3%)*. 

This is by far the best news of the week.  With manufacturing slowing consumers will have to provide more economic activity to keep the economy moving forward.  This report indicates they're more than up to the task.  Equally impressive was the .3% increase ex-autos. 


Neutral

Producer prices are right on the edge of being a concern for a one-month print. The Producer Price Index for finished goods rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.7 percent in April and 0.6 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.1 percent in May, and the crude goods index advanced 2.2 percent. On an unadjusted basis, prices for finished goods moved up 1.7 percent for the 12 months ended May 2013. 

Regarding PPI, most of the increases are due to large movements of single products that make up an index.  For example, fuel prices account for 60% of the increase in finished goods while a 41.6% increase in egg prices is responsible for over 60% of the increase in finished consumer foods.  Also note that 2/3 of the increased in the finished core prices are attributable to a .4% increase in light trucks and autos.  It's entirely likely that the prices related to eggs and autos are one-off events.  Energy is a bit more volatile, but there isn't much demand pull or price push pressure right now. 

There is no way anyone can say that inflation is an issue or even a potential issue in the current environment.  However, bigger moves in a single month's print of an inflation statistics is something to keep your eye on going forward.

Industrial Production was unchanged: Industrial production was unchanged in May after having decreased 0.4 percent in April. In May, manufacturing production rose 0.1 percent after falling in each of the previous two months, and the output at mines increased 0.7 percent. The gains in manufacturing and mining were offset by a decrease of 1.8 percent in the output of utilities. At 98.7 percent of its 2007 average, total industrial production in May was 1.6 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average.  

The good news is the print wasn't negative.  The bad news it the print was just barely good.  And the .1% overall increase in manufacturing -- especially on the heels of two straight contractions -- is pretty concerning.  It does appear that external events like the global slowdown and the sequester are starting to take a bigger bite out of manufacturing.

The Bad 

US Export prices dropped: U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March.  Lack of pricing pressure indicates that exporters may be under profit margin pressure over the next 3-6 months.

Let's turn to the charts.

hart

The daily chart (top chart) shows that prices are using the trend line connecting the early January and mid-April lows as technical support.  The high from early April in the 159-160 and 50 area is providing support as tell.  The technicals are bearish: the shorter EMAs are entangled with prices, while the MACD and CMF is declining.

The top chart is the 60 minute prices chart and shows that prices are consolidating in a triangle pattern.

The big story in the bond market -- and all markets at large -- is when will the Fed start to taper off its bond buying program.  Last week, there was an emerging concensus it would be soon -- leading to the sell-off in the bond markets.  However, traders started to change their minds about that assessment, leading the bell of the treasury curve to rally above resistance.  As it stands right now, the IEIs still have support at 122 and the IEFs at 105.

The dollar has broken support at the 38.2% Fib level with the new price target of ~21.5.  Any rally will hit resistance at the 10, 20 and 200 day EMAs as well as the 38.2% Fib level.

Market outlook for the week: slightly negative.  The dollar's drop indicates that traders are short-term bearish on the US, which is confirmed by Treasuries inability to make a sustained move below support. 

Weekly Indicators: interest rates warning edition

 - by New Deal democrat

May monthly data reported this past week included industrial production, which was flat, and capacity utilization, which declined. Retail sales, on the other hand, increased sharply again. Producer prices increased, due mainly to gasoline. Consumer confidence as to the present declined, but future expectations, a leading indicator, increased significantly.

Let's start this week's look at the high frequency weekly indicators with the recent activity in interest rates:

Interest rates and credit spreads

•  4.99% BAA corporate bonds up +0.09%


• 2.12% 10 year treasury bonds down -0.02%


• 2.87% credit spread between corporates and treasuries up +0.11%

Interest rates for corporate bonds had generally been falling since being just above 6% in January 2011, hitting a low of 4.46% in November 2012. Treasuries established a 2% high in late 2011, falling to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012. In the last month interest rates have backed up steeply, but until the last two weeks spreads were falling to almost a new low.

Employment metrics

American Staffing Association Index

• 92 unchanged w/w, down -0.1% YoY

Initial jobless claims

•   334,000 down -12,000


•   4 week average 345,250 down -7250

Tax Withholding

• $70.7 B for the first 9 days of June vs. $67.0 B last year, up +3.7 B or +5.5%


• $146.4 B for the last 20 reporting days vs. $136.9 B last year, up $9.5 B or +6.9%

In the last month, the ASA has deteriorated to being negative compared with last year. After having a great 20-day comparison two weeks ago, for the second time in a row this week tax withholding had close to its worst YoY comparison in several months. Initial claims remain within their recent range of between 325,000 to 375,000.

Transport

Railroad transport from the AAR

• -7800 or -2.8% carloads YoY


• +100 or +0.1% carloads ex-coal


• +6300 or +2.5% intermodal units


• -1600 or -0.3% YoY total loads

Shipping transport

• Harpex up 2 to 403


• Baltic Dry Index up 88 to 900

Rail transport has had four negative weeks in the last several months. This week was mixed.  The Harpex index has been improving slowly from its January 1 low of 352. The Baltic Dry Index remains above its recent low and increased smartly this week.

Consumer spending

• ICSC +2.7% w/w +2.2% YoY


• Johnson Redbook +2.8% YoY


• Gallup daily consumer spending 14 day average at $95 up $24 YoY

Gallup's YoY comparisons remain extremely positive, as they have been for the last half a year.  The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%.

Housing metrics

Housing prices

• YoY this week +7.2%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase made yet another 6 year record.

Real estate loans, from the FRB H8 report:

• -0.2% w/w


• up +0.1% YoY


• +2.3% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled.

Mortgage applications from the Mortgage Bankers Association:

• +5% w/w purchase applications


• +6% YoY purchase applications


• +5% w/w refinance applications

Although they rose this week, refinancing applications have decreased sharply in the last month due to higher interest rates, but purchase applications continue their slightly rising trend established earlier this year.

Money supply

M1

• +3.4% w/w


• +1.2% m/m


• +12.6% YoY Real M1

M2

• +0.2% w/w


• +0.3% m/m


• +5.9% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and had generally been easing off since, but recently has increased again.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It has increased slightly in the last few months and has stabilized since.

Oil prices and usage

•  Oil $97.85 up $1.82 w/w


• Gas $3.66 up +$0.01 w/w


• Usage 4 week average YoY -0.4%

The price of a gallon of gas, after declining sharply in March and April, rose again in May, and has steadied in the last couple of weeks. The 4 week average for gas usage remained slightly negative.

Bank lending rates

• 0.23 TED spread down -.01 w/w


• 0.190 LIBOR down -0.002% w/w

The TED spread is still near the low end of its 3 year range.  LIBOR has made a 3 year low.

JoC ECRI Commodity prices

• down -1.37 to 123.45 w/w


• +7.03 YoY

This week we again have the pattern of gradual deterioration that began in February. But checking one year ago today, I see that we were in the midst of our summer swoon, nearly at contraction. This week indicators were certainly mixed but not flashing any imminent danger signs.

Once again temp staffing is becoming a larger concern as it declined again and remains below last year's rate. This week it was joined by the worst possible combination of interest rate moves - declining treasury rates vs. increasing corporate rates - which is what I would expect to see on the cusp of a recession. Because spreads were neear 12 month lows in the last few weeks, we don't have that signal yet. Real estate loans and commodities were neutral. Gas usage remains negative but may continue to reflect increased efficiency. Gas prices increased significantly but we haven't moved into a constrictive price range yet. This week like last week tax withholding had its worst comparison in months. Rail was mixed, up or down slightly depending on whether you include or exclude coal shipments.

The biggest positive remains very strong consumer spending. Jobless claims remain positive as well. More positives included house prices, YoY purchase mortgage applications, money supply, and overnight bank rates.

For the third week in a row, the message for me remains that if the data were actually rolling over, I would want to see a sustained increase in jobless claims and a sustained deterioration in consumer spending. That still isn't happening.

Have a nice weekend.

Weekend Weimar, Beagle and Pit Bull

It's that time o' the week.  I'll be back on Monday; NDD will be here tomorrow.

Until then ...

What Is the "Shadow Insurance" Industry?

     Over the last month, international tax planning and captive insurance -- two areas of law and tax planning typically shrouded in mystery -- have come to the forefront of the news cycle.  Unfortunately, both areas are typically poorly reported on not because of journalistic negligence or incompetence but due to the sheer complexity of the topics at hand.  Tax law is typically only taught in detail at the graduate legal level and captive insurance is not taught at all.  Moreover, the legal issues involved with captive insurance span a very broad swath of law including contracts, business entities, estate planning, tax planning, and insurance – three of which (estate planning, tax law and insurance) are in and of themselves legal specialties.   

     Recently, superintendent of the New York State Department of Financial Services began an investigation into the use by large insurance companies of captive insurance companies.  The purpose of this article is to provide the reader with a basic explanation and outline of captive insurance – what it is, how it came about and the current state of the law.  In addition, at the end I’ll talk a bit about the recent New York regulatory situation.  I’d be remiss at this point if I didn’t engage in a bit of self-promotion by stating that if you’d like to learn more you can purchase my book U.S. Captive Insurance Law or visit my firm's website.  At minimum, it will cure you of your insomnia.

            A captive insurance company is an insurance company owned by the insured.  The case law defines a captive as a “wholly-owned insurance subsidiary.”  While it may seem like insurance is always available, it can actually be harder to get than you’d think.  For example, if you own property in an area prone to being hit by hurricanes you’ve probably discovered that insurance coverage is very expensive.  Here are two additional real-world examples: due to the large amount of tort litigation in the 1970s, product liability coverage was impossible to get and in the mid-1980s, Congress amended the risk retention act allowing doctors to form risk retention groups because medical malpractice coverage had become extremely expensive.  Both of these industries are obviously important to the US economy, but their inability to procure insurance threatened their economic viability.  

            Even though companies started using captives for legitimate business reasons, the IRS had their doubts about this concept due to a very important technical legal reason: they were concerned that for tax purposes the captive was a “reserve.”  The key difference between a reserve and an insurance company is payments to a reserve are not deductible while insurance premiums are.  This key tax issue obviously meant there was a great deal of money riding on the legal outcome of captive litigation, which can be chronologically divided into four: periods: the reserve cases from the early 20^th century, the early captive cases in the 1950s, the initial IRS victories from the late 1970s to the Humana case in 1987 and the IRS losses from Humana to the UPS case in the early 2002.  By the time of the UPS case, the writing was essentially on the wall that courts would accept certain types of captive structures.  At this point the IRS issued two Revenue Rulings which are essentially statements from the Treasury Department outlining how they will treat commonly occurring transactions.  In these rulings the IRS provided two legal safe harbors for captive insurance, essentially stating, “if you’re going to do this, here’s how you should do it.”

            While captives are typically associated with offshore tax planning, they are now an “onshore” phenomena: over 30 states have a captive insurance statute allowing for the formation of a captive in their jurisdiction.  While Colorado passed a statute in the early 1970s, Vermont’s statute passed in the late 1970s has become the de facto US model code or industry standard.  Some of the bigger captive jurisdictions are Vermont, Delaware and Utah.    

            So, let’s sum up so far.  Captives started in the 1950s because of deficiencies in the insurance market.  While the IRS challenged these structures for legitimate legal reasons, they were arguing against a historical tide.  Now, when properly structured and run, a captive insurance company is a valuable risk management tool used by over 5,000 US companies.

            Now let’s turn to the more recent events to see what’s going on.  The following excerpt is from Bloomberg:

Carriers in New York had $48 billion in “shadow insurance,” according to the report from Benjamin Lawsky, superintendent of the New York State Department of Financial Services. Lawsky has been investigating since July transactions that life insurers conduct with subsidiaries, known as captives.

Insurers use the captives to decrease the amount of capital they’re required to hold, Lawsky said in the report. The department said 17 New York-based firms use such transactions, without identifying them. The captives, which are typically based in other jurisdictions, are sometimes capitalized with letters of credit or intra-company guarantees, which can leave the parent responsible for claims if losses mount.

In essence, this is a question about capital and capital requirements.  According to the Third Edition of Barron’s Dictionary of Finance, capital is the “difference between the company’s asset and liabilities.”  This value protects the interests of the company’s policy holders in the event it develops financial problems.”  Ideally, capital should be in cash or a cash equivalent for fast access in the event it’s needed.  But while all US states allow a captive to use a letter of credit for capital, the real issue is the reserves backing the LOCs.  Under Basil II, the US requirement is 10% while for an offshore bank it’s between 1%-3%.  It is the difference in the reserve requirements among issuing institutions that has New York concerned.  And if a captive is backed by a personal or corporate guarantee you’ve potentially got bigger problems.

            So let’s play this out in a catastrophic situation.  Large US insurer has shifted some liabilities to a “web” of offshore captives.  While these captives are capitalized with letters of credit, the capital backing those letters is less stringent.  As a result, in the event a wave of liabilities hits the company, the possibility of capital being depleted increases.  This is the nightmare scenario concerning the New York authorities.

The issue here is not the use of a captive insurance company; it’s the capitalization of the captive that is concerning the regulators.  Captives are now an accepted and often used risk management tool.  However, this case does highlight the need (as with any financial tool) to use them correctly.  And it also shows that once again, New York state and its various institutions appears to be the real regulator of US markets while the FRB and SEC sit on the sidelines.

             

Gold Consolidating At Low Levels

The overall chart for gold is still extremely bearish.  Prices are below all the EMAs and are using the shorter EMAs for technical support.  Although rising, the MACD is still negative, as is the CMF.

But most importantly, prices are consolidating in a triangle consolidation pattern -- a pattern that has been forming for for the last month or so.

Slow Export Growth and Weakening Manufacturing

First, consider this graph of the monthly export totals from the US:

After dropping sharply during the recession, exports came roaring back.  However, their overall rise has really stalled first around the $130 million/month area.  Also note that in the latter half of 2012 the overall increase was weaker than before.  This time corresponds to the weakness in the EU.

On the ISM manufacturing index, note that we see a drop in early 2011.  There is a slight downtrend from that time to now, with the numbers now fluctuating around the 50 level.

Retail sales a welcome positive surprise; good initial claims too

- by New Deal democrat

May retail sales posted a very unexpected +0.6% increase over April. Since CPI probably increased about +0.2% in May, this means that real retail sales increased ~+0.4%. The dark cloud in that silver lining is that presumably the savings rate fell to a new post-recession low, but we won't find that out for another couple of weeks.

Meanwhile initial claims decreased to 334,000. Once again this is within the range of a normal expansionary reading. Since the recent weekly high of 363,000 initial claims passed out of the 4 week average, that now declined to 345,250. This is still about 10,000 above what I would want to see in a normal expansionary environment.

While growth has still been not nearly good enough, it remains surprising just how resilient the economy has been.

Employer Behavior is Still Weak

The following includes the latest JOLTs survey:

The red line shows total employer hires.  There are few important points about this data.  First, it really hasn't increased that much over the duration of this recovery.  It fell to 3.6 million at the very end of the recession while rising to 4.4 million in the latest report.  Also note the level has been stagnant for a little over a year -- not a good development.  An most importantly, the current level is the lowest level seen in the last expansion which was itself called a jobless recovery. 

The good news on the chart is that openings continue to increase.  But the current level is still at low levels relative to the previous expansions.

Short version: employers are just not in a hiring mood right now.

Little Upward Pressure on Oil Prices

From Bloomberg:

The International Energy Agency trimmed demand forecasts for OPEC’s crude in the second half of the year amid signs of slowing growth in China as output from the producer group rose to a seven-month high. 

The Organization of Petroleum Exporting Countries will need to provide an average 29.8 million barrels a day in the second half, the IEA said today in its monthly market report, lowering its assessment from the previous report by 200,000. That would require OPEC to cut output by 1.1 million barrels from the 30.9 million it pumped in May, according to the report. The agency kept its global oil demand estimates for this year unchanged. 

“While Europe’s economic woes are taking a toll on demand, there are mounting signs that China’s oil use, like its economy, may have shifted to a lower gear,” the Paris-based adviser to 28 oil-consuming nations said. 

On the oil chart, notice that the 96-98 prices level is still providing resistance.

Copper ETF Breaks Key Support

The JJC chart has two key levels right now. The first is is in the lower 43 area -- the price level established early last November.  Prices tried to advance through this level three times in May and June, only to fall back.  The second important price level is the 40-40.5 area which was prividing support for prices.  Prices moved through this level at the beginning of the week.  Also note the continued underlying weakness of the technicals: The MACD stalled at 0 and has had a neutral reading for the last month; prices are below all the EMAs, including the key 200 day EMA.  

Market/Economic Analysis: UK

The UK has one fundamental problem: incredibly weak GDP growth.  Here are two relevant charts:

The top chart shows the overall level of GDP which shows the UK economy's overall level of GDP is still below its pre-recession peak.  The second chart shows the reason for this slow growth: they're had five quarters of Q/Q GDP contraction.

The main culprit has been a continued decline in manufacturing and, as a result, investment:

The top chart shows manufacturing has contracted in 6 of the last 7 quarters while the top chart shows a continual decline in manufacturing.

As a result of manufacturing's decline, there is no need to make capital investments.  Hence we see that gross fixed capital formation has declined in 5 of the last 8 quarters.

However, there are signs that overall activity may be picking up.  The following is from the Bank of England's latest policy minutes:

13 The preliminary release of Q1 GDP had shown a 0.3% increase, all of which had been accounted for by the services sector. In line with the usual pre-release arrangements, the Governor informed the Committee that industrial production had risen by 0.7% in March, on the back of a 1.1% increase in manufacturing output. The level of production in February had been revised down, however.
Nonetheless, the pattern of growth over Q1, together with the increase in the April CIPS/Markit indices, suggested that the level of overall activity at the beginning of the second quarter was likely to have been higher than the Committee had previously anticipated, and Bank staff’s projection for the
preliminary estimate of Q2 growth was 0.5%, although there was a sizable margin of error around such a forecast. Looking further forward in 2013, there was the possibility of a stabilisation in oil production in the North Sea and in the output of the construction sector.

14 Recent indicators of expenditure had been broadly positive. Retail sales had risen on the quarter and, accounting for seasonal factors, there had been a 16% increase in new private car registrations in the three months to April compared with the previous three months. Broad money holdings of the corporate sector had increased by around 10% at an annual rate in Q1, perhaps as a prelude to greater business investment. And, in line with the usual pre-release arrangements, the Governor informed the Committee that both imports and exports of goods had risen strongly in March.

As the GDP chart above shows, consumer spending hasn't been a problem.  It's been positive for the last 6 quarters.  Manufacturing has been the economic stick in the mud.  But that might be changing.  First, is the news from the Markit survey

The UK manufacturing sector continued its positive start to the second quarter of 2013. After returning to growth in April, May saw operating conditions improve at the fastest pace in over a year, with growth of production and new orders both accelerating. The domestic market was the main driver of new order inflows, although new export business also contributed with a modest increase.
 
At 51.3 in May, up from a revised 50.2 in April, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted its highest reading since March 2012 and remained above the neutral 50.0 mark for the second straight month.
 
The expansion of manufacturing output was broad-based in May, with growth registered by the consumer, intermediate and investment goods sectors. The strongest performance was seen at consumer goods producers. UK manufacturers generally linked higher output to improved new order inflows, successful new product launches and efforts to clear backlogs of work.

Here are the charts from the report:

The top chart shows that the overall Markit number has again moved into positive territory.  However, it is the lower chart that shows all three manufacturing sectors -- consumer goods, investment goods and intermediate goods -- are again printing in positive territory.

This is corroborated by the latest UK manufacturing report.  Although the latest numbers show a .2% drop, this followed two months of increases:

Despite the April fall, the figure is stronger than it was at the start of the year and provides an early indication that manufacturing output, which makes up just over 10 per cent of the economy, will lift GDP in the second quarter.

“The fall in manufacturing output does follow large rises in February and March and the underlying position is probably one consistent with some small forward momentum,” said David Tinsley, UK economist at BNP Paribas, a bank.

Let's turn to the UK charts.

Overall, the UK ETF is still in an uptrend.  There are two trend lines supporting the current rally.  Prices are approaching both.  While momentum is dropping, the risking CMF is positive. 

It's still way too early to get excited about he UK.  We've only got a few months of data compared to a horrendous track record over the last three years.  Also remember this is an economy that is providing a great example of why austerity is a bad idea. 

Gas prices probably caused Americans to lose ground in May

. - by New Deal democrat

We now have final gas price information for May. While prices increased dramatically from the beginning of the month, the average price for May was only about 1% higher than the average price for April:



In order to get the range of likely outcomes for inflation as a whole for the month, we can divide by 10 (blue) or 16 (green) and then add 0.1%. Here's a graph showing that outcome for the last 12 months (CPI in red):



The above CPI reading is not seasonally adjusted, but in May the adjustment is minimal, so seasonally adjusted consumer price changes are probably the same. In other words, CPI is likely to rise +0,2% +/-0.1% for May.

We know that average wages rose less than 0.1% in May, and retail sales are predicted to rise only 0.1% as well. In short, gas prices caused average Americans to fall behind last month.